Winding down quantitative easing
February 10, 2014
The Federal Reserve announced it will cut another $10 billion off its Quantitative Easing Programs, which you should know by now is just printing money from air and giving half of that amount to the banking sector in exchange for their toxic mortgages they still hold. The other half goes to Congress by way of the U.S. Treasury Department for more spending.
The Fed had been printing up about $85 billion a month for a few years now, and last month they tapered back to $75 billion a month. The latest announcement just out confirms they will reduce their purchases even further to $65 billion a month.
Some news analysts have referred to this tapering as a tightening of monetary policy but these reductions are just that, reductions, and not a tightening in the slightest of imaginations. This “tapering” is just slowing down the stimulus, sort of like telling a child he can only have three pieces of cake instead of four and calling that a diet.
It’s still a huge amount they are printing, and $65 billion a month would have been incomprehensible just a few years back. But we’re in a new universe here when it comes to monetary policy, with central banks now thinking the printing presses can solve everything and anything.
It is assumed that the Fed will continue to cut back $10 billion more at each Federal Reserve meeting going forward, which eventually will bring this round of QE to an end within the year.
I have my doubts as to whether they will complete the wind-down without causing severe market dislocations in the bond markets where this debt is traded.
As the Feds reduce their bond purchases, the question then becomes who will take up the slack.
The original $85 billion a month was no small potatoes, in fact it’s a whole truck load of potatoes, and thinking private investors can buy what the Feds will not is probably wishful thinking.
For now, the bond-buying has been soaked up by concerned investors fleeing foreign markets because new problems are reoccurring in the emerging market arena. Turkey is having its problems with corruption and an abused currency (excessive money printing), and contagion from that is spreading quickly to other emerging markets and currencies. This is causing investors to flee back once again to the perceived safety of the U.S. dollar and U.S. debt. Although severely abused itself, the U.S. dollar (for now) is still considered the safest bet on the planet, and when things get dicey over there, the money comes back here.
It remains to be seen if all this excess debt the Fed will not be buying can be absorbed by an ever increasing amount of new investors.
Once the fear from the foreign market contagion subsides, the excess may overwhelm the bond markets, which would likely cause an unwelcome increase in interest rates. That would spell very bad news for a world awash in debt.
This article expresses the opinions of Marc Cuniberti. He hosts “Money Matters” on KVMR FM 89.5 and 105.1 FM at noon Thursdays and is syndicated on more than 30 radio stations throughout the U.S. His website is http://www.moneymanagementradio.com.
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