Back in June, as the official unemployment rate continued to fall, Federal Reserve Chairman Ben Bernanke indicated to the public that the Fed might begin to scale back its easy-money policies sometime before the end of this year. As the Fed met this past week, many economists and analysts expected it to announce that the central bank would indeed begin tapering its current $85-billion-per-month bond-buying scheme known as Quantitative Easing 3.
But these are also the same pundits who have been claiming for five years that the U.S. economy is in a state of recovery. They are either disingenuous or totally clueless
I had no doubt that Bernanke would not begin tapering QE3 now. In fact, QE3 may never end.
In the first place, for five years now the Fed has injected over $2 trillion into the economy through QE 1, 2, and 3, and the real unemployment rate is still north of 14%. More Americans are on food stamps than ever before. Middle class incomes are down and poverty is up. At this point, Bernanke’s largess is a life-support system for the economy. It will not cure the patient, just simply prolong the agony until the day of reckoning.
And the day of reckoning will come when long-term interest rates climb to the level where the current QE-induced housing and stock-market bubbles pop. The carnage from that, however, will be minor compared to the destruction left behind from the mother of all bubbles — Treasury Bills. The point is, in June when Bernanke simply mentioned the Fed might begin tapering, the stock market tanked 550 points and T-bill and mortgage interest rates instantly rose. Imagine the impact if the Fed really pulled the plug on the economy’s life support. Additionally, because T-bill and mortgage interest rates have been rising that could mean Bernanke has lost control of long-term rates. The only tool he has for combating rising rates is more stimulus. Thus, instead of taper talk, analysts should be asking when the Fed will increase its amount of bond purchases per month.
Lastly, perhaps the biggest reason why the Fed may never be able to cut back on its monetary stimulus, is that to do so would accelerate the insolvency of Uncle Sam. Realize that even though the current national debt is almost three times what it was in 1996, interest payments on the debt after adjusting for inflation are lower today than they were then. The difference is the rate of interest the federal government is charged. Bernanke has no choice but to keep printing. If he tapers, rates will go up, interest payments will become a bigger share of federal expenditures, and he will have to print even more to keep things going. The hyperinflation that will result will finish off what’s left of the U.S. economy.
Many will say the above is nothing more than doom and gloom. But the above scenario is real. Bernanke has steered Fed policy down a dangerous path in 2008. Instead of allowing the market to liquidate the mal-investments from the preceding boom, he chose the politically correct path by attempting to re-inflate the bubble. Instead of letting those that were reckless and brought on the crisis lose their shirts, Bernanke launched a massive program of bailouts and bond purchases. He has printed himself (and us) into a corner and thrown away the key. To keep things from crashing he has no choice but to continue printing. Even then, the end will ultimately come and the devastation will be so much worse than 2008’s crisis.