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The Myth of the Fed’s Exit Strategy
The “Exit Strategy” the Fed’s Bernanke is contemplating is nothing less than a total, unadulterated myth. This is the fairy tale you read to your young children at night where the government cuts back its spending and the Fed shrinks its lending. The private economy then picks up the slack, and the rest of us live happily ever after.
Unfortunately, this time there will be no Prince Charming riding in on a white horse. In 2009, the US ran an unprecedented $1.5 trillion budget deficit, financing the shortfall by issuing Treasury bonds. The Fed happily obliged by soaking up this tsunami of paper, either directly, or indirectly through mortgage purchases.
This boosted its own balance sheet from $800 million to a mind boggling $2 trillion in the process, or about 14% of GDP. Were there any other takers of new government debt? China bought $100 billion, and another $200 billion went to a hodgepodge of assorted foreign central banks and sovereign funds, barely 20% of the total.
Back out the Fed as the buyer of last resort, and where are we? The private demand isn’t there, especially if the Fed plans on raising interest rates at the same time. I can already hear the excuses the foreign buyers will be fobbing off on Tim Geithner; I’m sorry, but I’ve got to rush off to a Peking duck dinner; it’s Ramadan; I have a date with my mistress; the dog ate my homework; etc; etc; etc;. The $3.8 trillion budget Obama proposed for this year, with another kick in the groin, $1.6 trillion deficit and $1 trillion in tax increases, isn’t encouraging me to back off from this ledge.
There are only two possible outcomes to the greatest financing gap in history. Interest rates have to soar to unimaginable levels to attract recalcitrant investors, or the plunge in spending sends us into a postponed Great Depression II.
Let me know which one it is, will you? I’ll be hiding out in my camouflaged underground bunker in the desert. And if you do come calling, be a peach and bring me some MRE’s, a five gallon bottle of water, and a case of 9 mm ammo, will you?
For more iconoclastic and out of consensus analysis, you can always visit me at www.madhedgefundtrader.com , where the conventional wisdom is mercilessly flailed and tortured daily. You can also download past interviews with industry heavyweights on Hedge Fund Radio.
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One of the reasons the govt. loves the income tax is that we lose financial privacy.
Land is the only thing that can't be hidden. The only tax that protect privacy is land tax.
39/70? why not 49/70?
If you agree that the crisis of 2008 was a SOLVENCY crisis, you have no choice but conclude that there is no exit strategy.
And even if the TBTF had become solvent by now (which I doubt), that doesn't make them buyers for the crappy paper sitting on the Fed's balance sheet.
Bernanke must be scared to hell, and at times it gets difficult for him to hide that.
You got it, Toyota.
I wouldn't be so sure of such a scenario: the Fed may not have to fund USTs through MBS purchases if the retiree annuity plan goes through--which it may very well may with a well timed market crash, which might accidentally happen during the time the Treasury Dept is hearing opinions from the public concerning such a plan.
And the Japanese Post Bank saying that they might begin buying USTs?
Also, read the new HAMP changes: it appears they may be planning a liquidation of the housing market.
In my opinion, which I admit is not worth much, but your assessment seems to be very hap hazard. I would agree that the Fed may/will keep the liquity in the system going, but not along the MBS strategy.
Let's not forget the new money market requirement to hold 95% in Treasuries. The market crash will ease the pain of that rule as well
So people are just going to stand by and let their non-retirement assets go in the shitter and not even utter a whimper? I don't think so.
A market plunge will light a fire (that has been smouldering) that will engulf congress and Washington, DC. I don't think our current government could withstand such an inferno.
Could they orchestrate a market event that would result in people willingly converting their assets to government annuities? Possibly, but I think it exceedingly difficult in the current atmosphere. Possibly, the government could offer annuities to people as an "option" for people. If it were based on 12 month high watermark account values it may be palatable to some, but to make this work to fund deficits it would have to become mandatory for all retirement accounts.
First it will be 401ks; then 403bs/457s and then they will move from defined contribution plans to IRAs; it will be the traditional and rollovers and then finally ROTH accounts. Any such effort will have to have "look-back" provisions so that anyone who took money out of such plans will have to pay it back.
Sooner or later they reach the point of over-reaching that will ignite the public. Governments always misjudge that point and this will be no different. I see nothing good that can come out of 2 trillion dollar annual deficits and 15 trillion dollar debt ceilings.
The ancient wisdom has always been, "you don't cut spending in the middle of a recession." However, as most adages do, this one has a limit too. At some point you have to bite the bullet to preserve longer term health. I wonder if the GD I would have ended by 1934 if Hoover had resisted a little longer passing big spending bills? Maybe the adage would have been, "the best way out is through."
I like your crystal ball Turnstile. The coming market crash may not be engineered by tptb, but it will certainly provide a convenient excuse to "save investors from Wall Street" by for forcing them into Treasuries.
I no longer have a dime in retirement funds. All funds were removed several weeks ago. Easy for me since I'm over 59.5. No 10% penalty and tax rates at the lowest we'll see for years to come.
Please make more predictions.
Thank you madhedgefundtrader, excellent.
The guys down under are certainly on top of things...
In a Seven News: News Flash, a Macquarie Bank worker can be seen looking a nude photos in the background during a live cross to Martin Lakos of Macquarie Private Wealth.
http://www.youtube.com/watch?v=v1m8a4Jl4ZI
Interest rates are not the only thing rising!
He was probably just reading one of Robo's posts.
For all their academic brain power the Fed is too stupid to realize they're creating their own deflationary cocktail by not providing an interest rate to savers. Sane people's reaction to zero interest rates, believe it or not Fed people, is to save even more aggressively.
Probably the first time you've ever made sense!
Or the first time you've been sober!
in a bunker with a five gallon bottle of water...
you're a real party animal he? :)
plus, I think that "I have a date with my mistress" is a eligable excuus to cancel appointments. ;)