As Certain As Death and Taxes

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A third round of quantitative easing by the Federal Reserve is as certain as death and taxes. The markets, based on the Fed minutes last week, seemed to believe that QE 3 was off the table. It is not. It cannot be. The markets, believing in this fallacy, had five down days in a row. While quantitative easing is a major factor holding this market up and propelling it higher, it is not the market that is now most reliant on quantitative easing. The most reliant addict of quantitative easing is and has been the Federal Government. We recently learned that the Federal Reserve printed money out of thin air to purchase 61% of the U.S. government debt issuance in 2011. In other words, the Federal Reserve is financing the majority of our $1trillion plus deficits because the Chinese, Japanese, and Arabs have seriously lost their appetite for U.S. debt, and the domestic investors will soon follow as well. We are moving toward a day where the Fed will have to purchase 90-100% of the U.S. annual deficit. In other words, instead of borrowing money to go into debt, we’ll just print that debt out of thin air, which is what we already do with 61% of our new debt. Without quantitative easing, interest rates would be much higher and the economy would tank. Banks would collapse. QE is the only tool the Federal Reserve has left. Operation Twist, where the Fed sold its short-term securities to buy long-term U.S. government bonds is now at an end because almost the entire Federal Reserve Balance sheet, which has tripled since late 2008, is now in long-term assets. There are no short-term maturing assets left to sell or mature in order to jump into longer-term assets. Put simply, more money printing is now needed. The Fed and Federal Government wouldn’t mind a nice correction in the stock market in order to justify more quantitative easing because it has become politically unpopular. If the Fed did more QE now, it would look like they were merely supporting President Obama and his irrational, disastrous deficit spending. As long as the Federal Government is running $1trillion plus annual deficits, quantitative easing is as certain as death and taxes. As long as the stock market and economy can’t stand on their own two feet, which is impossible since the market was never allowed to clear and reset fully in the first place, quantitative easing is guaranteed. The ultimate result will be a significantly devalued dollar and a debt crisis at best and a total destruction of the currency system and full on debt implosion at worst.

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