I try to write about things you may not be consciously following, but that fundamentally affect your life, particularly when they change.
Which is why one of the things I follow closely, is the QE number. For those of you on another planet for the last few years — who don’t know what the QE number is — it’s the amount of debt the Federal Reserve is creating each and every month through “asset” purchases. This money is fueling a huge asset bubble (mostly equities). The Fed has tapered the number (it was as high as $85B month) amd was supposed to end the program altogether in October.
I would explain the Fed’s rationale, but it was so loopy, I think I should quote it instead.
From todays Board of Governors report:
“The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases.
Beginning in October, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $5 billion per month rather than $10 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $10 billion per month rather than $15 billion per month.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.”
What does all this barely coherent and contradictory verbage mean?
- IF they had ended the QE support in October, as planned, the stock market would have begun a descent, probably sudden. Think 1929.
- If they continue to buy at $25B to $30B per month, the bubble will grow and monetary velocity will not increase and the economy will remain moribund.
- This leads to their choice, cut the baby in two, continue to fuel an asset bubble at the rate of $15B per month indefinitely as I read it, at the not stated but implied greater risk of a deflating GDP.
- Until they focus on velocity instead of liquidity, we’re in trouble.