Yields retreated significantly on the Fed’s recent announcement that it will likely keep its QE program rolling until January 2014 – the same time, coincidentally, when Chairman Ben Bernanke is scheduled to retire. (What a coward. A courageous man would begin untangling the mess he created before he left office. Instead he’ll leave that task to his successor, assumed right now to be Janet Yellen.)
Stocks held steady on that same news. Below is a picture of the current trend lines.
Bernanke’s most recent validation for continuing QE is because the economy is still weak – unemployment is still way too high, growth is mute, and fiscal viability is getting worse, not better. So it’s time to call all the chatter about the economy getting stronger exactly what it is: a marketing ploy by the Wall Street establishment to lure idle capital off the sidelines from investors who are rightfully skeptical.—And Bernanke is helping them make that case.
As mentioned in Vital Questions, “The net effect of QE to the American market is artificially lower interest rates and theoretically stronger investment banks – not necessarily a stronger dollar or market economy.”
Indeed, QE has made Wall Street banks stronger (How could trillions of free new dollars not do so?) However, QE has made the Federal Reserve weaker because it is assuming toxic assets from banks in exchange for a portion of the QE money. Transferring bad investments from one bank to another doesn’t create monetary strength. It creates the illusion of strength, as the Federal Reserve cannot be audited. As such, the toxic assets it acquires simply vanish from public view, and as the old saying goes, out of sight is out of mind. But these bad investments still exist. And as long as the Federal Reserve keeps purchasing bad loans and investments made by the Wall Street establishment, Wall Street will keep making them.
This is misplaced incentive.
This can be validated by the fact that banks still aren’t lending to American businesses; and the reason they’re not lending is because there’s no money in it – interest rates are too low, and QE is driving them lower. In other words, banks are not applying their new found strength to expand the economic base because they could make more profit by investing that money, which is the reason broader market stock averages like the Dow and S&P 500 are near all-time highs in spite of the very weak underlying economy.
The definition of insanity is doing the same things over and over again and expecting a different outcome. If trillions of monetary “stimulus” – not to mention trillions more in fiscal spending appropriated by Congress – has been unable to correct economic conditions over the last several years, what makes Bernanke think that extending QE will suddenly do so this time?
And further, what makes Bernanke think that banks can correct Markets?
It’s time to take stock of government programs that aren’t working and immediately end them. Evidence of failing policies is easy to see. QE for instance, is producing a contrary condition to its stated objective. It is hindering bank lending, not expanding it (because interest rates are too low.)
The same is true on the fiscal side of governance. Ahead of the implementation of the Affordable Care Act (ACA), company after company continues to move employees off company sponsored plans and into government sponsored exchanges. Last week Walgreens moved 160,000 workers from their company plan; Home Depot shifted 20,000 out of theirs. People are losing healthcare benefits in droves as a result of a healthcare law intended to expand the Consumer base – a contrary condition to its stated objective.
Employees shifted out of company sponsored healthcare programs must now go to government sponsored exchanges that aren’t yet established. Because of this dynamic, it is then possible for people to actually lose healthcare coverage until viable alternatives present themselves. What their costs will be are still complete unknowns, however – and as we know – prices generally spike or collapse in times of Market chaos.
The ACA is quickly turning into the disaster many didn’t expect to arrive for at least ten or twenty years. Like QE, it must be tapered out of existence and terminated as soon as possible. And time is of the essence!
The major problem with politicians from both Parties is that they’re attempting to correct the fiscal imbalances of government way too slowly. For example, the House of Representatives recently passed a bill to cut $40 billion from the food stamp program over ten years, a mere $4 billion per year. Are they kidding? Last year 48 million Americans received food stamps, a whopping 15% of the population, costing taxpayers $82 billion per year. That’s way too much! – especially when the Bureau of Labor Statistics reports that just 3.6% of the population (11.3 million people) are unemployed.
America is in big trouble unless it acts – and acts fast.
This makes the debt limit an interesting debate.
Think of it this way…
The U.S. Treasury, a department directed by the President, is responsible for financing government deficit. Deficit is a condition where government spending is greater than the tax revenues it collects. The U.S. Treasury issues bonds (a.k.a. debt) so that it can spend more than it collects in taxes. The Treasury can only issue debt securities up to the level authorized by Congress.
Because demand for U.S. Treasury securities has been weak (a condition that drives yields higher) the Federal Reserve has been filling the gap with QE to keep yields low. To put it another way, the Fed prints new money and hands it to the Wall Street establishment, who then purchases U.S. debt with a portion of the newfound QE money. This added demand keeps yields artificially low (that’s why yields spike every time Wall Street thinks QE will end.) I say artificially low because the Federal Reserve must print new money to create demand for U.S. Treasury securities that otherwise doesn’t exist in the marketplace. (Yields rise with excess supply so to entice investors to buy them as opposed to stocks or commodities.) QE offsets that excess supply by printing new money.
If Congress doesn’t increase the debt limit the Treasury won’t be able to issue additional new debt. This causes a shortened supply of government bonds. The effect of this is easy to see once the basic theory of supply and demand is applied: a decrease in the supply of government bonds along with the added demand from QE will force yields to move higher because demand is increasing when supply is decreasing. This causes the incentive to invest in bonds (yields) to increase. QE, therewith, will produce a contrary condition to its intended objective when supply tightens; it will raise yields.
While tying the debt limit to defunding another unaffordable government program like the ACA may gain some level of popular support, defunding the Wall Street establishment and QE has a much wider base. Not raising the debt limit will force the central government into a balanced budget (and it’s high time for that), and it will also force the Fed to abandon QE (because yields will be on the rise).
Here’s the fundamental problem with QE: the Federal Reserve is in the business of accommodating the central government, not the American People. And as a result, their policy will always lean in favor of government, not We the People.
The purpose of Congress is to serve the American People. If their policy is to favor Us then Congress will scale-back spending and terminate QE by capping the debt limit. It’s like killing two birds with one stone, and seemingly, the only way a paralyzed and corrupt American government can correct course.
Cap the debt! And say no to increasing the debt limit…
Stay tuned.