The modern-day role of the Fed is to distort these prices, effectively to disrupt the economy’s guidance system. The purpose is to fool you into making improper decisions. This deception threatens social harmony and individual well-being. Distorting prices, especially systematically, is the equivalent of drugging a person and then having him make major life or financial decisions. Drugs and price distortions have the same effect on decision-making - the mind is unable to properly receive and process information. The Fed’s behavior of distorting prices is deliberate dishonesty calculated for government advantage. The policy is designed to deceive others to behave in a manner which is ultimately harmful to these individuals. It is outright fraud! A government that can only survive via fraud has reached the desperate stage. It can create great harm in its death throes but its survival is unlikely.
What magic Chinese rabbit has been pulled out of the hat now?
Moral: You can fool too many of the people too much of the time. (Thurber)
China’s central bank issued a statement that the Chinese banking system had liquidity levels that were “reasonable” today. There by hangs a tale. ‘Reasonable’ is that which may fairy and properly be required of an individual (a case of prudent action observed under a set of given circumstances).
Government Hypocrisy Is the Core Problem
The mere mention that tapering was even possible, combined with the Chairman's fairly sunny disposition (perhaps caused by the realization that the real mess will likely be his successor's problem to clean up) was enough to convince the market that the post-QE world was at hand. This conclusion is wrong. Although many haven't yet realized it, the financial markets are stuck in a "Waiting for Godot" era in which the change in policy that all are straining to see, will never in fact arrive. Most fail to grasp the degree to which the "recovery" will stall without the $85 billion per month that the Fed is currently pumping into the economy. Of course, when the Fed is forced to make this concession, it should be obvious to a critical mass that the recovery is a sham.
That pesky marketplace (Bernanke vs Obama) - a political fable...
Moral: When the financial markets no longer reflect the human condition, authorities must answer to true power – the marketplace.
Some have been asking for quite a while now what Ben Bernanke will be up to when he finally gets to close his office door at the Federal Reserve for the last time? Will he be sunning it on some Cayman Island beach?
The Fed has created a Doomsday Machine. The Fed has nurtured moral hazard in every sector of the economy by unleashing an abundance of cheap credit and low interest mortgages; the implicit promise of "you can't lose because we have your back" has been extended from stocks to bonds (i.e. the explicit promise the Fed will keep rates near-zero forever) and real estate. An abundance based on the central bank spewing trillions of dollars of cheap credit and free money (quantitative easing) is artificial, and it has generated systemic moral hazard. This is a Doomsday Machine because the Fed cannot possibly backstop tens of trillions of dollars of bad bets on stocks, bonds and real estate. Its power is as illusory as the abundance it conjured. This loss of faith in key institutions cannot be fixed with more cheap credit or subsidized mortgages; delegitimization triggers a fatal decoherence in the entire Status Quo.
The FOMC lives in a fantasy world. The economy is not improving materially and deflationary pressures are rising as the bulk of the globe is in recession or worse. The problem is that the current proposed policy is an exercise in wishful thinking. While the Fed blamed fiscal policy out of Washington; the reality is that monetary policy does not work in reducing real unemployment. However, what monetary policy does do is promote asset bubbles that are dangerous; particularly when they are concentrated in riskiest of assets from stocks to junk bonds. However, if you want to see the efficiency of the Federal Reserve in action it is important to view their own forecasts for accuracy. The reality is that Fed may have finally found the limits of their effectiveness as earnings growth slows, economic data weakens and real unemployment remains high. Reminiscent of the choices of Goldilocks - it is likely the Fed's estimates for economic growth in 2013 are too hot, employment is too cold and inflation estimates may be just about right. The real unspoken concern should be the continued threat of deflation and the next recession. One thing is for certain; the Fed faces an uphill battle from here.
Neither the ending nor its timing can be forecast with any accuracy. Markets may continue higher as this drama plays out with future Fed announcements and deceptions. Markets, however, cannot levitate forever. Eventually they coincide with reality, which in this case probably means another major market correction. Continuation and expansion of Fed liquidity may hold markets up or even drive them much higher. At some point the entire scheme crashes, probably when enough people recognize that the greater fool theory is in danger of exhausting the quantity of fools. All Ponzi schemes have limits. Participating in these markets is akin to playing a version of Russian roulette. If the chamber is empty, you make money. If not, you financially die.
One of the enduring analogies of the Federal Reserve's quantitative easing (QE) program is that the stock market is now addicted to this constant injection of free money. The aptness of this analogy has never been more apparent than now, as the market plummets on the mere rumor that the Fed will cut back its monthly injection of financial smack. (The analogy typically refers to crack cocaine, due to the state of delusional euphoria QE induces in the stock market. But the zombified state of the heroin addict is arguably the more accurate analogy of the U.S. stock market.)But like all highs based on addictive substances, the stock market high cannot be sustained without an increase in the drug. But there is a diminishing-return dynamic to ever higher doses of QE smack--the higher doses are no longer generating the same highs. The addict (the stock market) has become desensitized to the QE free money injections, and higher doses no longer generate the desired state of bullish euphoria. The more Ben talks about eventually decreasing the injection of financial smack, the more panicky the addict becomes.
For the past several years, a firmly entrenched psyche of ‘win-win’ for risk-taking behavior has dominated. The thinking has been that the Fed would either help achieve a sustained recovery (allowing distorted prices to be validated by economic fundamentals), or the FOMC would provide more price-boosting liquidity. Now, faith in this proposition is slowly being eroded. Global central banks have collectively provided $11 trillion in liquidity over the past several years. The initial moves were taken to spark domestic demand, but some recent external actions have been retaliatory in nature, implemented as a means to influence currency levels. These new forms of hostilities are indications that the external ramifications of QE policies may no longer be passively tolerated.
In what year was the following written:
The Federal Reserve appears on track to buy the entire [amount of] government debt it has committed to purchase, barring a sharp, unexpected shift in the economy's prospects. If anything, lingering weakness and renewed concerns about global credit markets may lead top officials to lean toward doing more rather than less. A recent batch of better-than-expected economic data, including a relatively upbeat reading on the job market, has raised questions about whether the Fed acted prematurely in pulling the trigger... The Treasury market has been selling off sharply, in part as a response to the somewhat brighter landscape.
President Barack Obama stated yesterday that Federal Reserve Chairman Ben Bernanke has stayed in his position “longer than he [Bernanke] wanted”. Some will be probably agreeing with Bernanke (and Obama) more than he might have expected after having said that. Although he should have stopped short of adding (for fear of hurting Helicopter Ben’s feelings?) that he has done an “outstanding job”.