Will there be an end to QE? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 20 October 2014
Will there be an end to QE? A  A  A

Nashville, Tennessee

Dear Diary,

We were down in Nashville this weekend, along with Ron Paul, Porter Stansberry, Jim Rickards and others. The question on the table was 'what's ahead for the US?'

Dr. Paul took up the question from a geo-political point of view. He told the crowd that the military/security industry had Congress in its pocket. As a result we can expect more borrowing, more spending, and more pointless and futile wars. They may be bad for the country and its citizens, says Ron, but they are good for the people who make fighter jets and combat fatigues.

"We've been at war in the Mideast for decades," he said. "We supported Osama bin Laden against the Soviets in Afghanistan...and the result of that was the creation of Al Qaeda. Then, we supported Saddam Hussein against Iran. Saddam and bin Laden hated each other, but after 9/11 we attacked Saddam, using a bunch of lies to justify it. We sent over billions and billions of dollars' worth of military equipment, which is now in the hands of ISIL...which is another enemy we created...and a far more dangerous one."

Ron Paul is such a pure-hearted soul. What was a man like him doing in Congress? It must have been some sort of electoral accident. Good men rarely run for public office. And when they do, it is even rarer for them to win.

Poor Ron is retired from Congress now...and spending his time trying to 'get the word out.' He thinks that if people only realized what was happening they would vote for more responsible leaders and more sensible policies.

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Alas, that's not the way it works. The further the country goes in the wrong direction, the more people there are who have a financial interest in staying on the same road.

Once, we visited Ron in his office on Capitol Hill. He held a breakfast meeting with a small group of fell Congressmen, trying to convince them to vote his way; we don't remember what was at issue.

It was an uphill battle. Only a few members of Congress attended. And those few worried that their districts would lose money...or the labor unions wouldn't like it if they voted no...or they might not get a plum committee assignment if they bucked their own party leadership. Ron was alone.

Politics favors blowhards, hustlers, and shallow opportunists, we concluded. Which makes us wonder how Ron Paul ever got elected to Congress in the first place. But not only did he get elected...once in Washington, he never sold out, neither to the right nor the left. He opposed zombies, malingers and bullies wherever he found them.

Which brings us to the subject of our own presentation to the Nashville crowd. We were following the money.

"James Bullard let the cat out of the bag last week," we explained.

"He opened the bag again, after John Williams of the San Francisco branch, just to make sure the cat had made a getaway."

The Financial Times reports on Bullard telling Bloomberg:

    "I also think that inflation expectations are dropping in the U.S. And that is something that a central bank cannot abide. We have to make sure that inflation and inflation expectations remain near our target. And for that reason I think a reasonable response of the Fed in this situation would be to invoke the clause on the taper that said that the taper was data dependent. And we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December. So... continue with QE at a very low level as we have it right now. And then assess our options going forward. ..."
We didn't think it would happen so fast. We thought the central bank would wait...We expected a little more hypocrisy...a bit more posturing...a little more phony resistance...a few denials...

...the Fed should have played it cool...coy...elusive...hard to pin down, making investors really sweat before coming to the rescue.

We knew where the Fed would end up...but we didn't know it would go there so quickly and easily!

In effect, the two Fed governors had admitted to a staggering act of vanity and hypocrisy. In the land of free minds and free markets, apparently only the Fed knows what prices equities should fetch.

Henceforth, it will approve all price movements on Wall Street. The Dow bounced up 263 points on Friday.

To bring you fully into the picture, dear reader, the US central bank has the whole economy and the markets hooked on cheap credit and printing press money. It has been supplying both on a grand scale for the last 5 years.

But it had promised to stay away from the playground, beginning this month. Now that the economy is recovering, goes the storyline, the Fed will back away from its emergency measures and allow things to return to normal. QE ends this month. Higher interest rates are expected next year.

No bubble has ever been created that didn't have a pin looking for it. And nobody likes it when the two meet up.

Last week, it looked like the Fed's bubble and Mr. Market's pin were coming closer. Then, quick action by two Fed governors helped push them apart on Friday.

It's now been 5 years of zero interest rates. And this is the third QE program. Stocks, houses, bonds and interest rates have all been perverted. Stocks are worth more than twice what they were at the bottom of the crisis. The average house is worth $60,000 more.

So, now QE is ending. And that means a lot less money gushing into asset markets. Instead of increasing at a 40% rate as it did in 2012, excess liquidity will go up only 6% this year. Next year, there will be even less.

With less new money coming from the Fed...and still no real recovery ...something's gotta give. No matter what Fed governors say. And since stocks periodically go down anyway, this seems like as good a time as any.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "Will there be an end to QE?"

ramchandra varma

Oct 20, 2014

Sir,Will there be an end to QE?It is very good and informative and knowledge increasing article.

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