Dow Jones Industrial Average: The Long-Term Effect Of The Fed’s Printing Program

printing QEMichael Lombardi: If you want to see how this all turns out in the end, I’m talking about the Federal Reserve’s program of printing over $1.0 trillion a year in new paper money (something that’s never happened in history), we need not look any further than the Japanese economy.

Why? Because the Japanese economy collapsed about 15 years before our credit crisis collapse of 2008. What we are doing now (artificially low interest rates, deep government debt, and money printing), the Japanese did years ago.

But unfortunately, when I compare the “Japanese experiment” to what our government and central bank are doing now, I don’t like what I see. In fact, I question the long-term benefits and effectiveness of quantitative easing.

Did quantitative easing help the Japanese economy? Turns out the answer is, NO. Since 1990, when troubles in the Japanese economy began, until 2011, the average annual growth rate (as measured by GDP) of the third biggest nation in the global economy has been less than 1.1%. (Source: Federal Reserve Bank of St. Louis web site, last accessed October 4, 2013.) In 2012, the Japanese economy didn’t perform so well and fell back into recession.

This year, the Japanese economy grew one percent in the first quarter and then declined to 0.9% in the second. (Source: Trading Economics web site, last accessed October 4, 2013.) Albeit a generalization, if quantitative easing and low interest rates were working, the Japanese economy would not be suffering like it is.

Which investments made money for the investors in the Japanese economy during its post-boom era? To say the very least, just don’t count on the stock market.

While the American stock market has moved slightly above its 2007 boom-time peaks, the main stock market in the Japanese economy has done horribly. The main index in the country, the Nikkei, is well below its record high, as the chart below illustrates.

NIKK Tokyo Nikkei Average Chart

Chart courtesy of www.StockCharts.com

Since its peak in 1990, the Nikkei is still down about 60%.

Last month, we heard the U.S. Federal Reserve won’t be slowing down on its quantitative easing. The Federal Reserve said it will start to slow quantitative easing when the unemployment rate in the U.S. economy reaches 6.5% and the inflation expectation increases above two percent—two events that can be more than one year away, if not more.

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