These days, central banks are on a very dangerous monetary policy path. Paper money printing has become the norm. Major central banks around the world are taking the same actions; they have learned the phrase "quantitative easing" well. Economy's soft; no problem! We'll just print more money so our currency falls in value and our exports rise! (If only it were that simple.)
Two central banks are at the forefront when it comes to implementing paper money printing: the U.S.'s Federal Reserve and the Bank of Japan. And it isn't a secret how poorly these two nations are faring despite their quantitative easing efforts.
In these pages, I have been very critical of quantitative easing.
With that said, to date, I have only heard one senior financial politician and one central bank head criticize the use of quantitative easing.
Canada's Finance Minister, Jim Flaherty, at a private dinner with his G20 equals this week, criticized the use of quantitative easing by the U.S. central bank. The following day, he said, "It's not good public policy." He said the U.S. should have never implemented quantitative easing, but "Now that they've done it, they should get out of it as quickly as they can." (Source: "'Not good public policy': Flaherty appears at odds with BoC, G20 as he criticizes U.S. quantitative easing," Financial Post, October 16, 2013.)
The governor of the central bank of Canada, Stephen Poloz, has a similar take. He said, "[we] certainly agree that quantitative easing is one of the last things we want to be in a position to have to use." (Source: Ibid.)
Finally, a finance minister and a central bank governor who have come out against quantitative easing! But no one is listening!
The Federal Reserve continues to print money through quantitative easing as it tells people it hopes to bring the unemployment rate down and stimulate the economy. But it's not working! Banks are getting bigger, richer, and stronger because of quantitative easing, and the stock market is rising because of the easy money. As for jobs, they are being created in low wage-paying industries.
Yes, the big banks and Wall Street have benefited immensely from quantitative easing, but the average American Joe continues to struggle, as the poor get poorer in America and the rich get richer—that's not how an economy is supposed to recover after a major recession.
The statements of Canada's finance minister and the governor of Canada's central bank have renewed my bullishness on the Canadian economy and its currency—it's an economically strong country that isn't printing its way out of its problems.
Michael's Personal Notes:
More evidence consumer confidence in the U.S. economy is plunging…
The monthly Bloomberg Consumer Comfort Index, a consumer confidence indicator that shows the expectations of Americans about the U.S. economy, plunged to its lowest level in October since November of 2011. The index stood at -31 in October, down from minus nine in September. (Source: Bloomberg, October 17, 2013 .) This index ranges from +100 to -100 (very optimistic to very pessimistic).
At the very core, consumer confidence gives an idea about consumer spending in the U.S. economy. The better the consumer feels, the more they spend: it's just that simple. If someone doesn't have a job but has expenses that need to be paid, they will not go out and buy that new flashy car or the house with the greener grass. They are more likely to keep what they have, and cut back on their discretionary spending.
The extent of bleak consumer confidence doesn't just end here. In these pages, I have been talking about how companies in key stock indices are showing dismal revenues, but one sector is showing the opposite trend—discount stores.
Consider the corporate earnings of Family Dollar Stores, Inc. (NYSE/FDO); the company's profits increased 27.5% in the fourth quarter of its fiscal year 2013 (ended August 31). Sales at Family Dollar Stores increased 5.8% compared to the same quarter a year ago. (Source: Family Dollar Stores, Inc., October 9, 2013.)
If all the pieces of the puzzle come together as expected (bleak consumer confidence leading to even lower consumer spending), I would not be surprised to see the gross domestic product (GDP) of the U.S. economy decline.
The main factors that drive growth in the U.S. economy are suggesting there isn't much light at the end of tunnel. And I continue to question the so-called economic recovery we have been witnessing since the financial crisis.
The third-quarter corporate earnings season is underway and it doesn't look good for the majority of public companies; expect their misery to continue well into the fourth quarter.