You all have heard by now of the Fed's so-called “tapering.”
It's the latest buzzword in the echo chamber of the mainstream financial press and is being used in a similar fashion as the much hyped “green shoots.” A propaganda phrase that Bernanke used back in 2009. In case you haven't noticed, the “green shoots” of a fundamental economic recovery haven't taken root yet 4 years later.
Propaganda is the technically correct use of the word to describe “tapering” and “green shoots.” As Jim Rickards has indicated, the FOMC spends roughly 10% of its time on actual policy and 90% on communication (i.e., propaganda).
This whole discussion is relevant to internationalization because “tapering” and “green shoots” gives the false impression that the economy is recovering. Hence people who are influenced by what the Fed says may believe there is less of an impetus to diversify internationally since the US government is not as desperate as it seemed.
This view is not only misguided, but the exact opposite of reality.
A fundamental economic recovery has not taken place in the 5 years since the 2008 crash. However, through the use of propaganda and monetary trickery, the Fed has been successful in creating the hollow appearance of one.
The US government is more desperate than ever, and the need to insulate yourself from their shenanigans through internationalization will continue to grow.
Jeff Thomas has the details, and with that, I will turn it over to him.
See you on Wednesday for the International Man Weekly Update,
Will the Federal Reserve Taper Off on QE?
Recently, US Federal Reserve Chairman Ben Bernanke announced that he and the Fed “actively seek economic conditions consistent with sustainably higher interest rates.” The implication, of course, is that the Fed may choose to taper off the monthly stimulus known as Quantitative Easing (QE).
Although Mister Bernanke is already backpedaling a bit on his announcement, it has created a mild panic in the markets, as those who are heavily invested in the markets believe that tapering off QE may well cause a crash.
Are they correct?
Well, yes, actually, they are. And not surprisingly, those who are heavily invested in the markets would consider this to be the worst of all possible moves by the Fed.
Would this be the case?
Yes and no. For the immediate future of investors, it would indeed be the worst possible move. However, for the long-term interests, it would be the best thing to do.
In the old laissez faire system, which was based on classical economics, it was assumed that, when a financial institution was failing, the best solution was to let it fail, to allow the blood to flow. Upon its death, the economic system would begin its recovery.
And this system worked well.
Depressions (or “panics,” as they were then called) were short in duration. The deaths of banks were quick, and then the recovery began.
But, in 1933, incoming US President Franklin Roosevelt had a different approach: intervention into the economy by the Federal Government. His approach was reinforced by the 1936 publication of The General Theory of Employment, Interest and Money by John Maynard Keynes. Keynes stated that in recessed times, a government should spend whatever amount is “necessary” to restart the economy and create renewed prosperity. Since that time, the US (and much of the rest of the world) has adopted Keynesian economics as the solution to economic downturns.
And yet, the Keynesian solution has shown itself to be a failure. It leads to prolonged recessions/depressions. In spite of that fact, Keynesian economics retains its glow for most governments and, in fact, most economists.
Those who oppose Keynesianism tend to follow the Austrian School – a less popular, but more realistic theory of economics, which is based in classical economics.
When QE was begun by the US in 2008, those of us who were of an Austrian persuasion said it would fail, as the solution to over-indebtedness cannot be further indebtedness. Not surprisingly, as this view was by far the minority view, it was regarded by most as quackery.
And there could be no doubt that, initially at least, QE would most certainly delay an eventual crash. But, at some point, the crack in the dyke would be great enough that the man on the street would begin to realise that QE was not working – that, although debt was constantly growing, there was no real recovery. At this point, the powers that be would need to get him recommitted to QE as a solution.
It may be that we have reached that juncture.
But, why on earth would Mister Bernanke announce at this time that the Fed might taper off on QE? After all, Mister Bernanke is a committed Keynesian. Further, he is an ardent fan of President Roosevelt and his economic “solutions.”
So, what's up?
It is highly unlikely that the leopard is changing his spots. Rather than assume he has, we might want to consider that his recent announcement to taper off on QE is a mere smokescreen – a tactic that will create a scare sufficient to give the Fed license to print like never before.
For this to be the case, the playbook would go something like this:
- Tell the public that QE is going to be tapered off, as the economy seems to be brightening.
- Immediately, the markets, which know that the only thing holding up the house of cards is QE, start to worry, sending interests rates up and markets down.
- Let everyone in the markets sweat for a while, then make the announcement that, “The markets have shown us that QE is still of vital importance to the restoration of prosperity. In fact, restoration can only occur if QE is continued.”
The Fed then moves forward with a license to print like there is no tomorrow, resulting in the debt junkie demanding further injections of monetary heroin. And they do it with broad public support. From that point on, any objections from Austrian economists will be treated with vehement derision by all, as they have been “proven” wrong by the brief tapering from QE.
For those readers who, at this point are still firmly on board the Austrian train of thinking, all of the above assures that, any small hope for a soft landing would then be over. Quite the contrary. The landing is likely to be the hardest that history has ever seen.
In his seven-plus years as Chairman of the Fed, every “recovery” prediction Mister Bernanke has made has proven incorrect. This present one may be his last… and worst. If he has been so consistently incorrect, why should he be believed now?
The current debt level is beyond any other debt level in history. The debt will not disappear on its own; yet, at this point, it is too large to ever pay.
That leads to only one possibility: default.
This can be done by a simple refusal to pay, or it can be done more surreptitiously by the creation of dramatic inflation as a result of debt monetisation. Either way, the result will be the same: the destruction of the dollar as a viable currency.
For the investor, the above supposition would mean that he might wish to keep an eye on the Fed. If they do recommit to QE in a major way, this may serve as the final warning to exit the markets, as both they and the dollar may well be set for a crash.
Tags: austrian economics,