Sunday, June 22, 2014

Exit Strategy From QE Remains Elusive


 Exit Strategy From QE Remains Elusive
Regardless of what you name it the "Federal Reserve Nightmare" or the "Yellen conundrum", the box Ben Bernanke made when he painted both himself and the Federal Reserve in a corner remains. Bernanke has by passing the chairmanship to Yellen escaped from the QE trap but left the rest of us fully in its grasp. With a policy of loose and cheap money and an inflation target of just 2%, the Federal Reserve continues to please those gambling that not fighting the Fed guarantees profits. As many Americans are forced to pay higher food, rent, and health insurance premiums, I wish someone would let the Fed know we have already exceeded their target. Any thought that inflation is not higher has come from the false illusion brought from lower payments on things like auto loans and mortgages, this is a one off and will not continue. 

America imports around five hundred billion dollars more from other countries every year than they export. This means we have a giant trade deficit, when we add this to our enormous government deficit it is easy to see that we are living far beyond our means. The Fed has been superbly entrepreneurial when it comes to Ponzi schemes or pseudo-economics hocus-pocus that has allowed the current situation to develop. The Fed must at some point begin to ponder a real exit strategy and end the massive and corrosive stimulus that the economy has come to expect. To make matters worse little has been done to address our structural problems and make America more competitive, this will massively thwart growth going forward.

The Federal Reserve has failed to make any serious efforts in pushing the government to take the necessary reforms needed to move the economy forward. Policy makers aided by the media thrive at presenting simplistic answers that solve both economic and society’s problems with little or no effort required from the masses. What started as a program to support and prop up the economy has morphed into the main driver of economic data. Between the low-interest rates that have propelled investors into high-risk assets in search of a positive return on their money, and money being pumped into the system, the markets have become distorted and disconnected from the economy. The idea that investors will continue to pour money into the sky high equity market is flawed.

Even as many people have grown comfortable with the status quo this does not change the fact the Fed is in a difficult corner. A serious exit strategy from QE  that normalizes interest rates remains elusive. With higher interest rates the cost of mortgages will rise. The low-interest rates that have discouraged savings and encouraged people to take high risks comes at a cost and does not lead to a healthy economy, but rather a story that will end in tears and regrets. When interest rates rise, as they will at some point, the value of these risky investments will decline, and these investors will be hurt. Also, as a double whammy, interest payments on the public debt will rise, increasing the budget deficit, which has averaged well over a trillion dollars a year for the past six years.

If all the money dumped into the economy would suddenly change direction and rush into hard assets, the shift would be devastating to our struggling economy. This thought also raises other questions, what can we define as a hard asset, what is really available, and in what quantities? This may be where inflation raises its ugly head. An unknown and surprising fact about inflation is how fast it can take root. With such a shift, interest rates would move higher and investors would flee government bonds. The crash of the bond market and a popping of what many have called a Bond Bubble will become a reality. It is abundantly clear Janet Yellen has shown no interest in coming up with a plausible exit strategy and even after developing such a scheme making it work will be easier said than done.


Footnote; This post dovetails with many of my recent writings. Other related articles may be found in my blog archive, thanks for reading, your comments are encouraged,
              

7 comments:

  1. As long as Dollar remains a dominant currency in international markets, Fed can expand balance sheet without much damage to currency value. Central banks all over the world are increasing Dollar reserves and are helping Fed by avoiding Dollar glut which Fed created. And that is like no interest loan to US Govt., no returns for the holders of dollar bills (when compared to pennies earned on treasury). Even though situations are changing, it is still years away before a serious contender is born. By then, Fed would have changed its game; else the next generation will pay a hefty price.

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  2. Bruce,

    I believe that the "exit strategy" for the FedRes has already been planned and involves SDRs--"relational currency." SDRs are based on a basket of fiat currencies, and possibly precious metals, all related in some arbitrary way to the whole basket. If one currency drops to zero value, the rest adjust accordingly.

    The FedRes know/knew that they would never be able to backstop their previous thefts AND unwind things later, so I believe that they plan on switching out the TP-dollar with SDRs when the time comes.

    Normally when the value of a currency goes to nothing, the underlying debts go to zero value as well. The banksters don't like that too well. When the TP-dollar goes poof, they will just use their puppets of violence, government, to mandate that all TP-dollar debt is now payable in SDRs.

    Most American sheeple will one day find that their paper-investments and cash have dropped to zero value, that they have lost their jobs, if they had one in the first place, but that they still owe on their now SDR valued debt.

    A situation well designed for the guillotine.

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    1. http://usawatchdog.com/disorderly-reset-coming-dollar-goes-to-zero-egon-von-greyerz/#more-14404

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