Good-bye quantitative easing

The Federal Reserve, DC
The Federal Reserve, DC

WASHINGTON, September 29, 2014 – “With summer over and fall beginning, the market may be ready to turn a new leaf – and a big, green bullish leaf at that,” commented Alex Rosenberg in a recent column for CNBC titled “why traders are betting on a big finish to 2014.”

Most accept that the action of the Federal Reserve has played a major part in the performance of the stock market not just in America, but globally. The Fed has provided extra ordinary liquidity since the beginning of the great recession in 2007.

Many experts expect quantitative easing to come to an end in October, although nobody can really be sure with the secretive Federal Reserve.

“The effectiveness of quantitative easing is largely debatable,” says Norbert Michel and Stephen Moore writing for the Heritage Foundation in an article entitled “Quantitative easing, the Fed’s balance sheet, and central bank insolvency.” “In fact, by the Fed’s own admission,” they write, “it’s expansionary programs have not sufficiently boosted economic activity. The Fed would not have implemented successive rounds of QE if the previous rounds had worked.”

Communism is an ideology that did not bring about prosperity because of the nature of human beings. Quantitative easing is the ultimate tool of trickle-down economics, and it is not as successful as desired, also because of the nature of human beings. The banks did not lend out the money as expected. Instead, they pocketed the far easier profits they could derive from putting the money into equities in America and around the world. Hence, they restored their own balance sheets (and bonus checks) while not much assisting average Americans from restoring theirs.

That is precisely why those who understand economics insist the government has no business supporting some businesses over others. Governments should stick to a minimalist role of ensuring the market confronts as little government interference as possible. Quantitative easing was ultimately a policy is supported by economists who had hopes of being hired by the banks where they themselves could make small fortunes.

If the Fed actually ends QE in October as promised, one should expect greater volatility in equity markets in response to a massive amount of easy money being effectively removed from the system. The end of QE will choke the USA, forcing policy makers to look at reality as it is without the illusion of merely printing money.

Ending QE means dollars that left America to invest in global equity markets must now return to America, as there will be less easy money in the U.S,, causing the dollar to rise (as it has been) while increasingly discouraging exports. That is the price the U.S. pays for being the de facto global currency, a position no country should envy.

Ideally, a global currency should be neutral, which is why those who believe in humanity wish bitcoin and other crypto currencies well.

With the end of easy money, at least according to Rosenberg, one could reasonably expect that currently underperforming fund managers will seek to justify their huge salaries by taking aggressive actions as the third quarter draws to a close.

After October, however, this situation will change dramatically. The Federal Reserve will not be supporting the market as it has done in the last 7 years. The Fed’s systematic intervention was largely behind the relative stability in the stock market after the effects of 2008-2009 began to die down. But now, with the Fed no longer directly involved, the market’s outcome is unclear.

The Fed, of course, will be ready to jump in in case the banks become less profitable. But it will have to be more aggressive than it was during the last QE rounds.

Instead of purchasing bonds, the Fed will have as its best remaining choice the ability to pump money directly to the banks. China recently took that action, directly lending $80 billion to its five largest banks. One suspects China took this action in response to the Fed winding down QE. Obviously, the global economy is not performing as expected if China is forced to take such extra ordinary monetary measures.

If America is not to go down the path of the decaying Roman empire, those who still believe in personal and economic freedom must vehemently oppose further extraordinary measures from the Fed, forcing the banks to survive on their own. Allowing the people and not the large banks to determine a new path forward will help the U.S. come out stronger and better adapted for the future.

All QE has done is preserve the power structure of the past and all the baggage that comes with it. The world has no use philosophically or ideologically for a U.S. that unambiguously supports an elitist structure as is clearly evident from the way Washington has tackled the Great Recession. Funnelling further taxpayer support to America’s banking elites will just be another thrust in support of tyranny and serfdom in the world, a situation far removed from the shining light that the likes of George Washington, Lincoln, Coolidge, Eleanor Roosevelt, and Malcom X towards his end had been hoping for: a society that respects the rights of the individual.

How on earth can there be financial innovation when the government, through QE, has supported an archaic structure whose time has clearly gone? The banking structure should have collapsed in 2007. QE is just a result of fear of innovation and loss of control over other human beings.

It is best we stop fearing the minds that make up a society. In Communist China, such an approach is perhaps understandable, but in America one cannot understand it. One cannot shout “freedom” yet at the same time protect elitist power structures just because a President wants to have a big library after leaving office, built by donations from bankers.

America is broke. Get the government out of the way and let the free market repair the problem.

Good bye QE, good bye central banks. Humanity will survive without these modern evils. The result could a great bull run in stocks once the current mess is sorted out by a market freed from direct government interference.

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  • There hasn’t yet even been any tapering