With this latest round of QE, Fed Bank Credit has expanded up to the top of the range
in place since the programs started in 2008. FBC Chart (pdf) In turn, the longer term
trend of QE is actually running mildly ahead of the pace that was set over the 1932 - 46
period when the Fed let the monetary base expand very dramatically to counter the Great
Depression and to provide liquidity support for WW 2. So, although the current QE
program is not without precedent, it is still very large compared to the 1932 - 46 program
when the US economy was more deeply depressed. However, unlike the Great Depression
years, total financial leverage in the system, especially longer term debt, is now very much
larger on a relative basis. In short, economic demand is less suppressed, but leverage is
larger and of much longer duration.
If you pull up the FBC chart again, you will see that the Fed curtailed QE both in 2008
and 2011 after large spikes in the credit balance. And, as I have discussed, it is mid -
2013, and there is another spike up in place. there are many critics of the QE program,
and it is especially hard for Fed board members to keep up their nerve when FBC is
rising up to the top of the trend going back to 2008. The heavy pushback to QE has
arrived and it has been difficult for the Fed to be steely about it even though
unemployment is well above target and inflation is well below the Fed's goal.
The Fed's job has been made more difficult by the large back-up in bond yields which
increases the cost of longer term funding both for business operations and for construction,
naturally including housing. Bond investors, now concerned about all the pundit talk
regarding curtailing the QE program, have dumped bond holdings heavily. In fact, by
ingenuously reminding investors that a firm economy will bring an end to the QE effort,
the Fed has undercut its position and is watching matters backfire in the credit markets.
I think the curtailment of QE through much of 2012 damaged the momentum of the
economic recovery. The current "taper talk" is not helping now either. Moreover, the
Fed and the Gov. in DC may again need to be reminded how risky it is to pressure
economic demand in an economy that is still well leveraged and deflation prone.
Most have concluded that the Bernanke era at the Fed is about over. If so, it would be
nice for Ben to stand up soon and say "Nope, the economy is still too sluggish and
the risk of a deflation event is still too high....We need the liquidity and we need to
see our federal government take steps to get people back to work."
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!