Since the beginning of the year the Fed has been talking about cutting back on its quantitative easing (“QE”) program that has been in effect for nearly five years. That talk has been increasing in recent months. QE involves creating money out of thin air in order to purchase US Treasuries and Mortgage Backed Securities (MBS’s) – securities for which there is limited market demand and the Fed is the primary buyer.
The reason for QE is to lower interest rates and stimulate demand for stocks and real estate. Fed Chairman Ben Bernanke is currently touting his low interest policy as the reason for the recent upswings in the housing and stock markets which are doing well in spite of the generally sluggish economy. Mr. Bernanke has also claimed that the Fed’s low interest rate policy did not contribute to the housing bubble, its subsequent bursting and financial crisis of 2008. The Fed’s policies only help, never hurt.
Next Fed Trick-“tapering” -Making Dollars Created Out of Thin Air, Vanish into Thin Air
Since the beginning of the year the Fed has been talking about ending their QE adventure or at least to start “tapering” their $85 billion a month of purchases of US Treasuries and MBS’s. The Fed needs to temper its purchases with tapering talk lest investors think that QE is forever. Such a thought would undermine confidence in a dollar that could be printed in infinite quantities forever. So the Fed will continue talk tapering while continue to prime the pump with QE. This is an effective strategy as the Fed knows that the markets pay attention as much to what they say as to what they do.
Say One Thing do Another- Talk Taper, Print Paper
This South Park clip gets the point across.
Do You Feel Lucky?
The Fed has a question to ask itself: After pushing CTR P for five years to boost the economy, can it just hit backspace and delete without any significant consequences?
NO FED EXIT
The Fed has an existential “no exit” dilemma “If they pull the stimulus, the economy will collapse. If they continue with quantitative easing eventually they will finish blowing up the biggest sovereign debt (along with real estate and stock market) bubble in history, certain to burst with even more devastating consequences than the consequences of the last housing bubble. The former option would be a brave move; a self inflicted wound that would allow the economy to restructure naturally and probably more quickly than pumping the bubble until it burst.”
In a recent interview Michael Pento of Pento Portfolio Strategies gave an extensive analysis of the bind the Fed is in. It’s definitely worth a listen.
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