by Cato 10/16/14
We’re about to rediscover the joys and sorrows of market-sourced pricing for all assets, real and financial (read: commodities, housing, equities and bonds). For five years the Fed has been “supporting” asset prices artificially, and that is ending. The Federal Reserve is winding down QE this month to zero. Zero-bound interest rates are coming to an end, the only question being sooner or later. The ivy-cloistered, academic-resumed theorists and ideologues at the US Fed … we haven’t had a Fed Chairman with real world experience since William McChesney Martin … are ending this Keynesian policy pair not by design but out of grudging, painful recognition that both have become economically and financially counterproductive.
Markets are shocked … shocked, I tell you! … that the Fed is actually doing this. Wall St. trolls continue to hope against hope that the central banks in the US, Europe, China, and Japan will respond to the weakening global economy by printing even more money.
Unfortunately, as Japan has discovered, as Germany knows, as China is waking up to, and as the Bernanke-Yellen Gang has reluctantly half-admitted, printing money to facilitate $500Billion to $1Trillion a year in government deficit spending eventually creates more financial damage than it obviates, and allows politicians to delay and ignore needed fiscal and labor restructuring. We’ve reached that point of eventuality. QE in the US is maxed out and has not produced the Main St. economic expansion it was intended to create … an honest reading is that QE in fact suppressed a Main St. recovery. The Fed has ended QE3. There will be no QE4.
Japan in a lost cause, and will run QE regardless. Europe is shattering politically, so what they will do financially is imponderable, except to note that QE in Europe functionally equates to having Germany pay for the economic failures of most of the rest of Europe, France and Italy primarily. That the Germans will never agree to do. China is a wild card; a black hole of misinformation and military suppression; their version of the US Fed Chairman was just fired and replaced by a Party functionary.
The artificial nirvana the central banks collectively created is imploding. Reality is about to assert itself with a vengeance. The myth of the limitless power of the central banker is about to be exposed.
Cato blogs at Cato’s Domain.
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