You Pay a Hefty Price for Central Bankers’ Folly

Maybe you didn’t see it.

But in Japan, sales taxes will rise to 10%.

Why? Because the government is sickly.

And the only way to keep the country afloat (in their minds) is to tax the public. But this is nothing new.

A bit of spending here, a bit of spending there and all of a sudden there’s no more government surplus.

Rather than cut spending or policies that actually hinder a nation, they ask for a hand out from the taxpayers.

Japanese taxpayers have seen the sales levy rise twice before.

Increasing the sales tax is important for Japan’s credibility in addressing government debt,’ says Yuki Masujima.

But Yuki has got it backwards.

Decades of cheap cash, welfare policies and an aging demographic is why Japan has to increase the sales tax…again.

And Japan pays a hefty price for the former.

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How much do central bankers make?

How much do you think central bankers make?

Go on, give me your best guess?

Most of these people are rich before they ever enter the role.

And when they leave, they accumulate even more wealth as a consultant, book deals, etc.

It’s much like the President/Prime Minister position.

Politicians take a huge pay cut from their past business endeavours. Well, everyone but the Clintons.

The same is true for central bankers.

The current head of Japan’s central bank, Haruhiko Kuroda, rakes in about $416,100 each year.

Now, that might sound like a big sum. But Kuroda could easily go off and be a consultant to a couple of mega corporations and make many times more than that.

Head of the US Federal Reserve Jerome Powell makes $277,700. Leader of European Central Bank (ECB) Mario Draghi takes home $605,900. And our own Philip Lowe of the Reserve Bank of Australia (RBA) makes a little over a million.

The latter is the highest paid central banker in the world.

And on their own, all of these sums are massive. That’s until you compare it to the Jamie Dimons of the banking world, who takes home more than $37 million annually!

Yet I’d argue the latter is justified, and the former is not.

Are they worth that much?

How can you measure the effectiveness of central banking policies? Is there a model that will show you how things would have turned out if interest rates were higher, lower or on hold?

Yet much like a bargain stock, I don’t think we need precise measurements to know whether past decisions were successes or failures.

Not entering a recession is not success, sorry Philip. A stagnating economy is not success, sorry Kuroda. A region chock full of debt, forcing people to continually spend is not success, sorry Draghi.

I know it must be hard.

The men above have only interest rates and market purchases to affect a whole economy.

Yet surely continual cheap money is not the answer?

Years of cheap cash is what’s pushed property prices, stocks, bonds, and most investable assets sky high. And this is not to mention, all the debt taken on in these periods of cheap money.

So when central bankers put their foot on the brake, or even hint about putting on the brakes, those prices fall, sometimes very rapidly.

You’re seeing it happen in the stock market right now. Although I don’t think we can solely blame the Fed for recent shocks.

And doesn’t this sound reasonable, paying for results? Why not develop a ‘good enough’ system to judge the performance of central bankers and then pay them depending on that performance?

You, the taxpayer, are paying their salaries after all.

But how can I defend a salary like $37 million? Surely no one is worth that much?

Clearly, they are. And there are others worth a whole lot more. Take Dimon for instance. Since 2004, Dimon has been at the top of JPMorgan Chase & Co. [NYSE:JPM].

OK, so he’s not filing papers and working alongside the tellers. But he’s make the strategic moves that will either make or lose the US bank billions.

From 2004 to 2017, JPMorgan has been able to generate US$352 billion in cash for owners (shareholders).

This is the cash left over, after accounting for all of JPMorgan’s expenses. Think of it as the cash that the owners could take out of the business without causing any harm to JPMorgan.

On a per share basis, it works out to a cumulative US$105 per share over the 14 years.

And I’d assume Dimon had a hand in that US$352 billion figure. He entered the company when it was losing about US$10.5 billion a year.

During the same time Dimon has been at the helm, JPMorgan’s stock has also risen 200%.

It’s not an amazing return.

But it’s turned each dollar for owners into three. And all they had to do was pay Dimon one cent per share annually for a lot of those results.

Seems like an OK deal to me.

Inflation may destroy us all…

So what will the overpaid central bankers think of next?

Most likely they’ll play follow the leader, with Powell leading the pack.

Eventually, interest rates here in Australia have to go up. Lowe cannot continue keeping them on hold forever.

If he does, inflation might destroy us all.

And when those interest rates do start climbing, Aussie stocks will actually have a reason to fall, instead of mimicking US pessimism.

Your friend,

Harje Ronngard,
Editor, Money Morning

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Harje Ronngard is the lead Editor at Money Morning. With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation. There are two questions Harje likes to ask of any investment. What is it worth? And how much does it cost? These two questions alone open up a world of investment opportunities which Harje shares with Money Morning readers 5 days a week.. Harje also contributes his insights in Total Income, headed by income specialist Matt Hibbard. Harje loves cash-rich businesses, so he feels right at home among Matt’s incredibly exciting income plays.


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