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Apr
21
Why is the Fed in Charge?

Posted August 28th, 2012 by bbsadmin & filed under General Business, Government.


I found this from Tyler Durden and I was in fervent agreement.


Anyone who has been following US fiscal policy over the past three years, which by implication means US monetary policy since Congress and the president have dumped everything in the lap of the Fed, which by implication means the Fed’s guide to investing in the Russell 2000, knows too well that it can be summarized in two words: financial repression. Read the attempt to force everyone out of “riskless” assets such as Treasurys and mortgages and into risky assets such as Amazon and its 200+ P/E. All else equal, there has been one huge error with this policy which is akin to the Fed attempting to herd cats: instead of pushing investors into other asset classes, all the Fed has achieved is to get everyone to front run it in buying whatever bonds the Fed has not committed to monetizing just yet as we showed before. The other problem is that all else is not equal, and as SocGen shows Financial Repression, even by construct assuming practice and theory were the same, will not be sufficient due to the following three reasons.




  • Firstly, countries that currently benefit from financial repression still have primary deficits that are inconsistent with debt stabilisation.




  • Secondly, the demographic time bomb means that a further deterioration of the primary surplus will appear in the future unless reform is undertaken.




  • Thirdly, we believe there is a limit to how far central bank asset purchases can go. If this were not the case, the government could in extremis stop collecting taxes and just let the central bank buy all the bond issuance required to cover public spending! This is reminiscent of the story of German hyper-inflation under the Weimar Republic (albeit not the only historical episode of hyper-inflation).




And assuming we ever get across the chasm, there is the other side to consider: what happens when central bank balance sheets have to be unwound?