Today marked another twist in the Quantitative Easing (Q.E) taper or not to taper debate. As news filtered through of the Federal Reserve September minutes it became evident to me that the Fed has finally come to the realization that it has backed itself into a trap, boxed in with no way out.
The fact is that even the immortal escape artist Houdini could not escape the dire situation that now confronts the Fed. The rounds of QE, operation “twist” has left the economy drug dependent, with each round of QE giving the addicted economy the boost it needed just to stay high. With QE and monetary policy involving the Fed buying USA treasuries to keep interest rates artificially low, the economy has entered a delusional
state again. The QE drug masking the truth, enabling the drug induced economy to cloud any sense of reality.
It also became evident that the Fed itself is wrestling with its own sense of reality. Some members of the Fed brought forward heated debate regarding Fed credibility, like they have any left after inflating the dot com bubble and the housing bubble and not realizing or acknowledging they existed until after they POPPED!
Some members of the Fed board turned up the heat on the potential loss of control over bond yields and the flow on to interest rates for the domestic economy. Remember the drug induced delusional recovery is based
on low interest rates. The housing market rebound and in particular the stock market have rallied for the simple reason that low interest rated give savers no other option than to speculate for better returns as bank
term deposits net you little if any return.
One point the Fed minutes made clear was that the decision to Taper or scale back asset purchases was data dependent. It is the single point the Federal Reserve has relied on to make continual excuses why they cannot taper. The Federal Reserve has admitted the economy is addicted to the QE drug. The wording “data dependent” means ONLY when the Fed feels the QE drug has worked will it wean the economy off it.
What I see happening to the economy is the worst case of economic Post Acute Withdrawal Syndrome (PAWS) as it is known in the medical field. PAWS is a physiological and psychological lag that is left behind after prolonged substance abuse. The fact is the longer the abuse, the longer the lag in the effects of Post Acute Withdrawal Syndrome.
PAWS is broadly defined as withdrawal symptoms that continue to bother a person after a withdrawel or detoxification of drugs has taken place. Post Acute Withdrawal Syndrome often includes symptoms such as confusion, anxiety and DEPRESSION. How severe and long lasting the Post Acute Withdrawal symptoms and side effects last depends on factors such as the level of substance abuse and how much physical and psychological damage was caused by the drug and the addiction.
PAWS could bring on side effects to the economy like a correction of 10-15% or perhaps more in the DOW. There may also be another big correction in property prices again in the USA. A huge spike in inflation coupled with a $US currency crisis could also be amongst potential side effects. With all of these dangerous and problematic situations that will need to be managed, each and every person needs to formulate an economic plan, support, and a safety net for when times get rough.
The fact is that the economy needs to take the bitter medicine pill. This will not taste good but will set it on the path to recovery. Doping the economy up with the QE drug and enabling the user to become more
“dependent” will just prolong the final rehabilitation time and magnify the side effects after withdrawal.
Right now Bernanke and the Fed are the enablers. Making excuses for the addict. The excuses are the data dependent numbers they are so rigidly sticking to. Like a drug addict proclaiming “I had a rough day at work so I needed to get high”, or the morbidly obese person saying “I will start my diet on Monday”.
Sometimes it is difficult facing reality but one day it will confront you head on. One day the addiction will become so strong that an overdose is inevitable. With this in mind I am taken to a line out of a song from a
band called The Verve which says “now the drugs don’t work, it just makes things worse”. It made me chuckle. If a rock band can see it, WHY can’t Bernanke and the Federal Reserve?
Perhaps Bernanke and the Fed would be best advised to get a copy and listen!
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