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The Fed Retreats from Tapering, Five Reasons WhyGary Dorsch Nowadays, the sitting members of the inner circle at the Federal Reserve are nothing more than political lackeys - conducting the nation’s monetary policy, at the beset of whatever political party happens to hold the upper hand in the legislature. In his May 29th speech, titled “Central banking at a Crossroads,” former Fed chief Paul Volcker lamented that the Fed had been hijacked by the Treasury and the White House. In calling for the Bernanke Fed to begin rolling back QE-3, Volcker said, “There is something else beyond the necessary mechanics and timely action that is at stake. The credibility of the Federal Reserve, its commitment to maintain price stability and its ability to stand up against pressing and partisan political pressures is critical. Independence can’t just be a slogan,” he warned. Today’s reality is however, the Fed has become the “fourth branch of the US-government.” Acting in strict secrecy, the Fed determines “target rates” for unemployment and inflation, manipulates interest rates, grows the money supply, rigs the value of the stock market, and regulates the nation’s banks. And there is no longer any pretense of an allegiance to “Moral Hazard.” Congress and the American people are left in the dark. Nowadays, the ruling leaders of the Democratic Party are utterly opposed to auditing the Fed, because they realize the central bank is the goose that lays the golden eggs. The Fed is buying $45-billion of US Treasury notes each month, and thereby financing the US welfare state, at low interest rates. Whoever the President picks to run the Fed should be expected to act in accordance with the wishes of the White House and the Treasury. On Oct 1st, US President Barack Obama told NPR News, “Ben Bernanke’s done an outstanding job. He’s maintained confidence. And whoever I appoint will continue many of the smart policies that Ben Bernanke’s made.” The code words “maintaining confidence,” refers to the Fed’s ability to keep the “Least Loved Stock market Rally” climbing higher along an upward trajectory, even amid anemic economic growth. Bernanke has engineered the fourth biggest Bull market in Wall Street’s history. There’ve been pullbacks and short-lived corrections along the way, but the Fed has always kept its foot pressed firmly on the monetary accelerator, and thereby keeps the speculative juices flowing. Over the past 1-½ years, the Fed has increased the high octane MZM money supply by +10% to an all-time high of $12-trillion. In turn, traders have bid-up the combined value of NYSE and Nasdaq listed stocks to a record $22-trillion. That’s great news for the Richest-10% of Americans that own 80% of the shares on the stock exchanges. (1) Financial Suppression - As for Bernanke’s successor, - the only qualification is a readiness to monetize the Treasury’s debt, and to funnel even more money into the financial markets, through its clandestine activities. The CBO has warned the ruling political class and the Fed that if Treasury yields move back to their averages in the 1990’s, it’s a scenario that would add $1.44-trillion in interest costs over 10-years. Thus, the first reason the Fed balked at Tapering QE, it needs to keep the cost of financing Washington’s debt as low as possible. However, the higher the stock market climbs, - the greater the chance of a sharp correction along the way. On October 2nd, the US Treasury chief Jacob Lew and President Obama with the key members of the “Plunge Protection Team” (PPT), at the White House, in an effort to plot future strategies on how to deal with any possible shakeouts in the stock market, when Bearish news arrives. The meeting included the elite of the financial aristocracy, - the CEO’s of JP-Morgan Chase, Goldman Sachs, Citigroup, Deutsche Bank, and Bank of America, Morgan Stanley, and Wells Fargo. The PPT aims to have a rescue plan in place, if upcoming negotiations over the debt ceiling with the House Republicans get deadlocked.
Still, the wealth that’s building up on Wall Street is not “trickling down” to the struggling masses on Main Street. Pushing up equity and home prices is mostly benefiting the wealthiest of Americans. The Fed’s own Survey of Consumer Finances in 2010, the last year for which data are available, explains why. It shows that the Top-10% of US-income earners had financial assets totaling $550,800, or 20-times the holdings ($27,550) of the other 90 percent. The Top-10% of the wealthiest Americans own 80% of the shares listed on the NYSE and Nasdaq, while the median equity holdings of the rest of the population was only $17,700, hardly enough to make a difference in one’s lifetime. That’s because half of the US-citizenry owns no equities at all and can’t participate in the Fed’s easy money give-away. Thanks to QE, wealth inequality in America is at its widest since the 1920’s, in both relative and absolute terms. Last year, the real median household income in America was $51,017, a -5% drop from 2008. On the flip side, the Top-1% owns 42% of America’s wealth and raked in 95% of all income gains since 2008, while scoring an average income of $717,000 per year. Corporations and wealthy individuals are increasingly using political campaign contributions to control the government. Their PAC contributions exploded during the 2012 elections, virtually hijacking Washington and moved politicians towards a government of “the Ultra-Rich, by the Ultra-Rich, and for the Ultra-Rich.” However, “An imbalance between rich and poor is the oldest and most fatal ailment of all republics,” - Plutarch Prior to the era of “Zero Interest Rate Policies” (ZIRP), central bankers mostly preferred to operate under the cloak of obfuscation, - keeping traders confused and guessing about their next adjustments of the overnight loan rate. A select clique of Treasury bond dealers was usually privy to the inner thinking of the central bank, since they took great risks in underwriting the government’s debt. Bond dealers are tipped off first, and only afterwards, are leaks released to the financial media, and disseminated more widely to the general public – with a vague clue of what might happen next.
The “Tapering’ Trial Balloon, - And so it was on May 12th, with the yield on the US Treasury’s 10-year T-note hovering around 1.65%, - the Fed leaked a story to the Wall Street Journal, - hinting that it was thinking about how to wind down its massive purchases of $85-billion per month of Treasuries and mortgage-backed securities (MBS’s). “Officials say they plan to reduce the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The start time has yet to be determined,” wrote the WSJ’s Jon Hilsenrath. That story lifted 10-year T-note yields about +50-basis points (bps) higher to just above 2%-percent. One month later, on June 7th, former Fed chief Alan Greenspan jolted bond yields higher, by telling listeners to CNBC that the Fed should start tapering its QE-3 scheme without delay. “My view is the sooner we come to grips with this excessive level of assets on the balance sheet of the Federal Reserve, which everyone agrees is excessive, the better,” he said. “I think a gradual withdrawal from QE is adequate, but we’ve got to get moving. I think we’ve got to do it even if we don’t think the economy is strong enough.” The resulting speculation that the biggest buyer of T-bonds could soon begin to withdraw from the marketplace, triggered an upward spiral in the 10-year T-note yield to as high as 2.25% the following week. The notion that Greenspan was acting as a mouthpiece for the Fed, was given extra credence on June 19th, when Fed chief Bernanke ended weeks of speculation by saying the US-central bank would likely slow its bond-buying program later this year and end it next year if the economy continues to improve. Bernanke said the reductions would occur in ‘‘measured steps’’ and that the purchases could end by the middle of 2014. By then, - he thought unemployment would be around 7%. Bernanke tried to explain that any reduction in the Fed’s $85-billion-a month in bond purchases would be like a driver letting up on a gas pedal rather than applying the brakes. He stressed that even after the Fed ends its bond purchases, it will continue to maintain its vast bond portfolio, to help keep bond yields down. The sudden and unexpected threat of Fed Tapering of QE rocked the global bond markets, sending yields significantly higher in the developed markets and sharply higher in the Emerging markets. Government bond yields in Australia Britain, Canada, Hong Kong and US all moved upwards by +135-bps to +170-bps, and in close synchronization. Ten year bond yields in mainland China rose +85-bps to as high as 4.25%. Despite repeated assertions by Fed officials that they are committed to ZIRP for the foreseeable future, hints of QE tapering triggered sharp losses in Emerging-market currencies and capital markets, - a harsh reminder that if the Fed unwinds its super easy monetary policy, there are large unintended spillover effects on capital flows to Emerging markets. To read the rest of this article, please click on the hyper-link located below: http://sirchartsalot.com/article.php?id=181 ### Oct 3, 2013 321gold Ltd |
