Sunday, January 13, 2013

Is QE turning into "stealth nationalization"?

I am surprised this has not generated the level of discussion it merits. The Telegraph (via FT) reports of the new Shinzo Abe government's plan to lift the Japanese economy out of its long-slump,
Premier Shenzo Abe is to spend up to one trillion yen (£7.1bn) buying plant in the electronics, equipment, and carbon fibre industries to force the pace of investment... The plan to buy plant involves leasing back the assets to firms in trouble. Analysts say it is a means of funnelling industrial aid, a move sure to raise the hackles of global rivals. It may violate World Trade Organisation rules on subsidies.
As FT writes, this is a "stealth nationalization" of the economy. And it argues that this is a logical culmination of quantitative easing itself,

Whether it’s QE or government-debt funded stimulus, the two amount to the same thing. Both offer support to industries, companies and banks which might otherwise collapse. QE is simply a more generic funnel. Stimulus, on the other hand, involves strategic government choices with respect to which industries, companies and banks to invest in and support. Take this trend along its natural course, however, and you only get to one result. The nationalisation of almost everything.

Amazingly, for the last two years, in a last gasp attempt to revive the economy, the Japanese Central Bank has been priming the equity markets by purchasing exchange traded funds (ETFs), so much so that it is now "en route to becoming a majority holder in the country's primary equity ETF". 

This transformation of monetary policy has been stunning. A simple credit infusion program by opening a liquidity injection window, shifted gears to different versions of quantitative easing by initially purchasing government securities and then private bonds with increasing dilution of credit standards. The credit expansionary interventions moved into a different plane by then purchasing ETFs in the equity markets and is now echoing nationalization by proposing to directly take stakes in private firms.  

With governments reluctant or paralyzed from taking the strong steps required to reverse the course and preferring to take the easy route by passing on the buck to central banks, there will be increasing pressure on them to incessantly keep printing money so long as inflationary pressures remain invisible. If the economy does not recover with conventional QE, as looks increasingly likely in most parts of developed world, then the pressure on central banks to indulge in, apparently "costless", Japanese style "nationalization" will rise. Is the Fed and ECB going to follow the Bank of Japan?

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