Fed Taper, Fed Crash
Monday, 2/03/2014 20:47
"Oh you're so negative. Why shouldn't Fed tapering work out fine...?"
LAST WEEK the Bank of Janet Yellen said it would continue to "taper" QE,
writes Bill Bonner in his Diary of a Rogue Economist.
Instead of counterfeiting $75 billion every month, it will counterfeit only $65 billion. At this rate, it will be out of the counterfeiting business completely by the end of summer.
Then on Thursday, the United State Department of Commerce said the US economy was growing at a 3.2% annual rate, which is satisfactory. Until you look at it more closely.
The Fed had little choice. It has to pretend to go straight at least for a month or two more. Otherwise, it won't have a shred of credibility left. And so far, so good. It looks like stocks will close the month of January down only 3%. Not catastrophic.
For what it is worth, our "Crash Alert" flag...the ol' black and blue...flies over our worldwide headquarters. We say "for what it is worth," because it hasn't been worth very much. Not the last three years.
We brought it out on several occasions. The wind whipped it. The sun bleached it out. The rain soaked it. The markets didn't crash. Finally, we brought it in because we felt sorry for it.
But it's back on the job today – even though we expect the crash will come later.
The Fed will continue attending its Counterfeiters Anonymous meetings – until the market really cracks. Then it will roll up its sleeves and get out the paper and ink. Janet Yellen will not want to preside over a crashing market any more than Ben Bernanke did.
Yes, the Fed has broken the US economy and its markets. Now, it owns them. It can no longer permit the stock market (and bond market, for that matter) to do what comes naturally to them – correct their mistakes.
And that means the mistakes will get worse.
"Oh, you are so negative," writes a helpful dear reader. "The economy has some traction already. Can't it withstand a gradual withdrawal of QE?"
No, is our answer.
The Fed's zero-interest rate "wealth effect" is what keeps the economy's head above water now. A real "poverty effect" would sink it.
Just take a look at this chart. It explains why consumer prices are still so sluggish...even with the Fed at work.
Money, like grease, gels up when an economy goes cold. When it heats up, on the other hand, it flows like water.
As you can see, the grease is stiff. The economy is cold. And our "Crash Alert" flag is on its pole.
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