The Taper: Reality and Myth
By Staff News & Analysis - October 18, 2013

Analysis: Washington budget battle may delay Fed taper until 2014 … The Federal Reserve may have to wait until early next year before it sees sufficient strength in the U.S. economy to begin scaling back its bond-buying stimulus, after a destructive Washington budget battle that may take a bite out of growth. Complicating the Fed's task, a 16-day government shutdown choked off the flow of much of the economic data on which it relies and could undermine the quality of the reports covering October. – Reuters

Dominant Social Theme: Tapering – it's critical and its timing needs to be precise.

Free-Market Analysis: Seldom in any modest-sized article do we find so many dominant social themes presented in such a rapid-fire way. Ostensibly, this Reuters article excerpted above is simply an examination of the tapering timeline. But such a simple subject yields up one problematic assumption after another.

To begin with, the whole idea of printing less money is kind of a non-starter. If the Federal Reserve seriously cuts back on dollars being printed, the few brighter parts of the economic picture would soon lose their luster – specifically the stock market and its related financial industries.

The US has little industrial might compared to its heyday after World War II and even its service businesses are increasingly sketchy – hiring part time people without benefits whenever possible. So what is going to impel the economy forward if not money printing, stock inflation and Wall Street fees?

But this is the only the beginning of questions that one might have regarding this squib of an article. Let's examine some of the other assumptions embedded within:

Lawmakers voted on Wednesday to end the shutdown and lift the U.S. debt limit, averting a potential default that many economists had warned could tip the United States back into another severe recession. The deal clears the way for the release of delayed updates on the health of the economy, including data on employment, retail sales and factory output for September.

But the shutdown will probably hurt the quality of some other indicators covering activity this month that rely on surveys which were not conducted because government staff were furloughed. That will mean readings on the state of activity in October will be unusually suspect. On top of this, the harm potentially done to U.S. growth by the wrangling in Washington could encourage policymakers to wait a little longer to monitor whether the softness in hiring that worried them in September was only temporary.

Economists polled by Reuters since the October 1 shutdown found the median estimate of the drag on fourth-quarter U.S. growth was 0.3 percent annualized. They now see growth in the quarter at just a 2.3 percent annual rate, which might not be enough to lower the jobless rate further.

Analysts said there were a number of factors the Fed would need to consider in deciding when to pare its $85 billion in monthly purchases of Treasuries and mortgage bonds. "October is out of the running. December is not an impossible scenario but seems increasingly unlikely. I think the debate is revolving around January versus March," said Eric Lascelles, chief economist with RBC Global Asset Management in Toronto, referring to the Fed's upcoming policy meetings. "Each has its charms, and each has its challenges."

From the first graf above, we see further assumptions embedded. The idea is that the decision-making process regarding money can begin again now that the US government is funded and can produce the requisite data. Apparently, without such data, the Fed is effectively paralyzed. Hey, does that mean the US economy shuts down? The entire US$16 trillion GDP? … That seems to be the implication.

Moving on. Because the shut-down was extensive, US data is not going to be as accurate as it usually is, which will mean that responsible policy-makers will be a bit hesitant to use the data to make "decisions." Our take: When has US data ever been accurate? Who believes US government numbers? As for policymakers being hesitant to act on those numbers – well, that's probably a good thing. Policymakers haven't exactly "gotten it right" in the past half-decade.

The Reuters article references a poll of economists and offers up the results of a "survey." The only trouble is that economics is not a science and neither is the poll. Secondly, just because one is able to define a "median" based on these opinions doesn't mean the median has any more validity than the original opinions. To treat it as some sort of significant data point doesn't make much sense.

Finally, in the last graf, we come back to one of the most enduring of all dominant social themes, which is that Federal Reserve bankers can actually decide on the interest rates and value of money week-to-week and month-to-month. They can't. They don't. The article assures us they do.

So many assumptions in so few words! To summarize our humble perspective: US government numbers are nearly useless, especially when they are first issued. Inevitably, they are revised. But by now they've been subject to so many politically-motivated adjustments that even with revisions they're hardly trustworthy.

The idea that a survey of economists can somehow provide us with an accurate forecast is about as logical as the idea that Fed bankers themselves can forecast the future based on past indicators. Again, they can't and they don't.

The idea that they've been effectively paralyzed by a lack of government data is surely pernicious nonsense. Fed bankers could have the greatest data in the world and they still wouldn't be able to come up with accurate financial forecasts on which to base their monetary decisions. Past performance is no guarantee of future results.

This one tiny Reuters article is shot through with assumptions derived from dominant social themes. Even its thesis is wrong: The US will not significantly "taper." It is impossible. Or if there is a significant taper at some point, prepare yourself for an economic environment possibly worse than the Great Depression.

After Thoughts

Our bet is that the power elite behind these manipulations is going to boost the money supply even while denying it. They're getting ready for one more stock market blow-off before the gloom descends. What other choice do they really have?

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