Submitted by Brandon Smith of Alt-Market blog [30],
It is undeniable that America is thoroughly addicted to fiat stimulus. Every aspect of our economy, from stocks, to bonds, to banks, and by indirect extension main street, is now utterly dependent on the continued 24/7 currency creation bonanza. The stock market no longer rallies to the tune of increased retail sales, growing export markets or improved employment expectations. In fact, “good” economic news today is met with panic and market sell-offs! Why? Because investors and banks still playing equities understand full well that any sign of fiscal improvement might mean the end of the private Federal Reserve’s QE pajama party. They know that without the Fed’s opiate-laced lifeline, the economy dies a fast and painful death.
All mainstream economic news currently revolves around the Fed, as pundits clamor to divine whether the latest signals mean the free money will flow, trickle, or dry up. [31]
Most expect the central bank to make an announcement today on the details of its reduction in stimulus initiatives. Generally, the Fed does not have a tendency to slip information to the media on the possibility of a policy change unless they plan to follow through. Every bailout and QE announcement over the course of the past five years has been preceded by weeks and even months of “rumors” acclimating the mainstream and the markets to the idea of each action long before it was ever implemented. If the Fed avoids clarity on the taper in the coming week, I expect that they will still assert stimulus cuts before the end of this year.
Certain developments, though, are giving false hope to the markets that the stimulus fantasy will go on forever. The resignation of Larry Summers from the “running” for Fed Chairman (as if Obama isn’t being told exactly who he is to pick for the position) has so far put a dash of cheer into the Dow Jones. Strangely, investors seem to believe that without Summers, continued quantitative easing is assured. The reality is that the decision to cut stimulus has likely already been long established and the face of the new chairman will have little relevance.
The idea of the Fed being divided by “hawks” and “doves” is absurd propaganda designed to give the public a false impression that central bank decisions follow some kind of democratic course. Central banks are highly centralized and highly coordinated corporate entities, not governmental councils prone to “debate.” And like any corporation, it is certain that decisions are handed down from the top of the pyramid in totalitarian fashion.
Who is at the top of the pyramid when it comes to the Fed? Only a FULL audit would reveal the truth, and a full audit has never been enforced in the 100-year history of the bank (the only meaningful partial audit ever conducted examined the TARP bailouts, uncovering over $16 trillion in crazed currency printing in that program alone). The point is, the Fed is not a public institution (nor “quasi-public”), it is private, and this private bank is now dominating every miniscule fluctuation in the health of our financial system, openly.
Two questions loom like a black cloud over the stock exchange picnic:
1) Will the Fed cut stimulus soon, and if so, by how much?
2) If the Fed continues stimulus, how long can it last before the dollar’s value is decimated?
As I have been saying since the bailouts began in 2008, the Fed has conjured a perfect Catch-22 scenario for the U.S. economy. If the Fed cuts QE while conditions remain tenuous, the stark reality that we have been living on borrowed time will be revealed. If the Fed continues stimulus the catastrophe will take longer to unfold. But eventually, foreign creditors will finish their strategy of dumping the dollar in bilateral trade and our economy takes a dive anyway. Cancel stimulus and we croak. Continue stimulus and we croak.
Obviously, given the total dependency the investment world has shown towards QE, the markets will plummet without stimulus. Some predict a “manageable” break in stocks, while others predict freefall. In any case, those who think QE reductions are already priced into the markets are fooling themselves. Keep in mind that before QE3 was announced in September of last year, the Dow was struggling due to a lack of any credible recovery signals within the system. Nothing has changed since. There are no new developments that give clear indication that our economy is any better off than it was a year ago, let alone five years ago.
One thing I have learned in my time as an analyst is to never underestimate the power of blind human optimism. With a QE taper announcement this week, it could take months before the general public and the investment sector finally grasp the fact that the carpet has been pulled out from under them. The slide of the Dow would be slow, but cumulative.
There are many people out there who actually believe the recovery hype being promoted in the mainstream, and I have to say, things are getting a little schizophrenic. Some pundits are focusing on negative data because they think it will influence the Fed to keep QE alive. Other organizations appear to have a different agenda. Ratings and analytic firm Moody’s, for instance, has recently released a report [32] claiming that all risk of returning recession has been essentially eliminated in the U.S.
This is, of course, news to most of us in the field of alternative economics, being that according to the fundamentals, we NEVER LEFT the original recession which officially began at the end of 2007. I would also point out that Moody’s was one of the same agencies that played a considerable role in the derivatives collapse. Would you trust a company that stamped every toxic derivative it examined a few years back with a AAA rating to tell you what shape our financial structure is in today?
Now, maybe it’s the “conspiracy theorist” in me, but I find the release of this Moody’s report rather suspicious, just as I have found the majority of the Labor Department’s overly optimistic (skewed) unemployment reports suspicious. It is highly likely that these fabricated numbers hailing green-shoots recovery are being released in order to give the Fed false precedent to begin cutting stimulus while distancing themselves from blame over the eventual catastrophic results. In fact, I guarantee that the Fed will cite reports like those produced by Moody’s in order to vindicate taper actions.
So, why would the Fed use erroneous data to justify QE cuts today (or the next few months), knowing that our system is addicted to fiat and will shrivel like a raisin in the sun without it? Here’s the thing: The world is changing rapidly, and the course of the next decade (if not the next century) may be decided before this year is out.
The Syrian crisis is far from over. In fact, Russian diplomatic measures have only raised the stakes. Russia’s overt involvement proves beyond a doubt that any military action on the part of the U.S. will create escalation. Both the U.S. and Israeli governments have stated openly and unequivocally that their goal is not just chemical disarmament, but the toppling of Assad [33]. Russia has recently position three more ships to their fleet near Syria [34], to double the amount of U.S. ships in the region. The conflict is no longer only about President Barack Obama vs. Bashar Assad. Now, it is the U.S. vs. Russia, Syria, Iran, China, etc. If diplomacy fails (the White House and Israel appear intent to ensure it fails), the dire results will be clear to the majority before this winter is over.
Even more disturbing is the build up towards the final debate on the U.S. debt ceiling. Barack Obama has now stated that he will NOT negotiate with Republicans on the terms of an increase in the level of allowable national debt [35], meaning, it's his way or the highway. Republicans have responded with the threat of government shutdown [36]. Perhaps this is yet another coincidence, but the Fed's possible decision to taper QE perfectly parallels with the government debate over increased federal spending. Of course, if the government reaches an impasse over debt, the call for a considerable portion of Fed stimulus ends. On top of that, the uneducated public will be utterly confused as to who is actually responsible for the gridlock, the fed or the politicians (hint - they are BOTH responsible).
There are many who believe that neither the government nor the Fed will ever willingly stand in the way of endless fiat creation. However, if the goal is to kill the dollar's world reserve status quickly, or to manipulate the masses into demanding further Fed action, a taper of QE makes perfect sense in the mid-to-long-term.
SEC regulators have called for the institution of "exchange kill switches”, which will be finalized over the course of this winter. A recent Nasdaq shutdown caused by what regulators label a “software glitch” is being used as the excuse for this centralized kill option which will remain in the hands of… nobody knows yet. I would note though that a streamlined kill switch option for stocks would be useful in the event that a market crisis occurs and the establishment wishes to control [37] how much value in equities is lost from day to day.
China has recently announced that a “second economic revolution” will be set in motion this coming November. While the details of this policy shift are not yet certain, the Chinese have established that they plan to move away from export reliance and place more energy into consumer growth. This means FAR less interest in the U.S. consumer and the U.S. dollar as a world reserve currency. [38]
Ben Bernanke’s term as Fed Chairman is set to end in January of 2014, and it is my observation that detrimental policy changes commonly take place while the responsible organizations are in transition, or just past transition. Any debilitating consequences of QE cuts can be placed at the feet of Ben Bernanke, while the Federal Reserve as a whole remains shielded from reproach. And why should he care? Old Ben will be sitting on a beach in the Caymans sipping mojitos while the rest of us are suffering through dollar devaluation and market chaos. Also, a very important question is being wholeheartedly ignored lately; who, exactly, will take the Fed's place as the world biggest buyer of U.S. debt (and U.S. stocks) once the Fed reduces or cuts QE? The fact is, there is no foreign buyer that will fill this void. In the end, the "taper", regardless of how quickly it is implemented, will eventually lead to financial tragedy within our nation.
In the meantime, the Syrian crisis continues to quietly grow, and the U.S. may be in the midst of global economic war, or a shooting war in the near future, drawing all attention away from the central banks as the culprits behind America’s fiscal demise.
Ultimately, QE cuts will be detrimental because they are MEANT to be detrimental, and this is in pursuit of one of only two possible goals: Either the Fed is seeking to deliberately undermine the U.S. economy in order to set in motion a final collapse, or, the Fed wants to create just enough desperation in order to force the American people to beg for more stimulus, and thus force us to accept partial responsibility for the eventual inflationary demise of the dollar. In either case, the Fed's tactics serve one purpose – to secure the globalization of America by any means necessary. A wounded America is more liable to embrace centralization and abandon sovereignty than a strong America. I’ll let George Soros explain one more time just to drive the point home:
The process of globalized economic and political governance has been a long and carefully planned one, and the existence of a prosperous U.S. is not a part of the program. There have been many events over the past several decades that we can look back on objectively and understand the role they played in the destruction of the U.S. as a sovereign nation. At the edge of the Federal Reserve’s 100th anniversary, it is vital that we see the current developments for what they really are – history changing, in a fashion so violent they are apt to scar America forever.