STAFF NEWS & ANALYSIS
Sure We'll Unwind, Don't Worry …
By Staff News & Analysis - May 16, 2013

'Dreaded' Unwinding Easier Said Than Done … It ought to be the clearest sign yet that the crisis is over. The Wall Street Journal's Fed-Watcher-In-Chief Jon Hilsenrath has told us that the U.S. central bank has 'mapped out' a way to dial back its mighty $85 billion- a-month bond-buying program. We don't yet know precisely how and we don't conference in Chicago, Friday, May 10, 2013. J.P. Morgan said in a note this morning that unwinding was "one of the world's most dreaded systemic events", and billionaire investor Stanley Druckenmiller said at the Ira Sohn conference last week that it would signal the end of the bull market. – MoneyBeat/WSJ

Dominant Social Theme: When the times comes to readjust the economy we're up to the task …

Free-Market Analysis: Even top execs at JP Morgan dread the "unwinding" that Ben Bernanke has always said the Federal Reserve is capable of.

We don't believe it. Just as Fed bankers don't know how much money is too much, so they don't know how much is too little.

Central bank monetary tampering is a terribly blunt tool. It is certainly possible to expand and diminish the money supply, but the same people that have brought us what is basically a worldwide depression are now reassuring us that they can rectify an overabundance of money by removing some of it.

If this is really the case, why do nation-states need taxes? Why can't central banks simply print the money they want and then remove at will?

The whole system of monopoly fiat money is shot through with so many contradictions that anyone who wishes to apply logic to it will soon give up on the effort. Those close to the money spigot grow impossibly wealthy. Those farther away are left with bitter inflationary dregs.

And for this reason, central bankers are absolutely paranoid about inflation, which stabs at the heart of the system by raising popular discontent. And so at regular intervals the specter of an unwinding is raised and discussed. We are supposed to believe it is merely a part of an effective central bank's brief, a standard methodology of doing business.

Here's more from the article:

We know something else too: once started, quantitative easing can be a maddeningly difficult habit to kick. Its modern history is dominated by Japan, a country that started the presses rolling in the early 2000s and not only hasn't stopped them yet, but has just speeded them up. Back in April its new government announced a program of monthly bond buying which, relative to GDP, dwarfs even the Fed's.

Now you may think that Japan doesn't offer much of a template for the newly shale-oil-rich U.S. Its demographics, savings culture and economy are too different. And perhaps you're right. Perhaps the Fed will be able to take the punchbowl away in due course without the decades of relapse that haunt Tokyo.

But it doesn't take too much imagination to see what the Fed's problem might be. In the post-crisis period, QE has gone from dangerously novel experiment, sure to lead to Weimar-style inflation, to just another part of the monetary furniture. Markets aren't only comfy with it, they're addicted, say some.

It's been successful, too, as far as anyone can see. The U.S. economy has rising from the wreckage of the banking system's collapse on a magic cushion of money. And you still don't need a wheelbarrow full of debased greenbacks to buy a loaf of bread, with inflation kept in check.

… QE has become the normal, expected response to a weakening economy. Whoever is tasked with putting it back in the emergency response kit–don't forget Fed chairman Ben Bernanke is off in January–had better pray they don't get an economic downturn while they are trying.

One can feel the dread leaking between the lines here. Is there really evidence of an upturn in the general economies of Britain, Europe or the US? Doesn't seem so. What is evident, however, is considerable price inflation.

First, the money stock expands and then the money circulates and debases all the rest. Prices rise. This must be happening or central bankers wouldn't be discussing a "dialing back."

And how will they know how much to "dial back"? Really? Is monetary activism such a precise science that our good, gray men will know beyond a doubt how much to diminish their money flows?

Perhaps Ben Bernanke is leaving for a reason. He's utilized the one tool the Fed can effectively implement – monetary expansion. But contraction is another matter.

How do central bankers know how much to print? And how do they know how much to contract?

History does not provide comfort. There are NO forward-looking indicators. Alan Greenspan himself admitted that during his tenure. He used the price of gold, but given the evident and obvious manipulations of paper gold, that price seems a doubtful one to count on.

In any event, the price of gold, too, is a BACKWARDS indicator. There are no forward indices. None.

The Fed is flying blind. If it does remove funds, get prepared for another overshooting, this time on the negative side.

After Thoughts

A "recession" on top of the current Great Recession would likely be the best we can hope for. And one that might significantly reduce equity averages, as well.

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