Since the latest FOMC statement, it is surprising how little impact there has been. With the Fed starting QE4, or whatever we want to call it, there has not been a strong reaction from the stock market. In fact, the market ended up down today (Thursday), the day after the announcement. So a day after the latest QE (so-called quantitative easing) is announced and stocks, bonds, and gold are all down.
I have always liked the analogy of injecting monetary stimulus into the economy to a drug user shooting up and getting high. Just like the economy, the drug user has to continually inject more drugs into his body. If he doesn’t, he will have severe withdrawal symptoms. But the more he injects, the more severe the pain will be down the road.
There gets to a point where the drug user injects even more and it doesn’t even give him a high. It seems to have little effect. So while he doesn’t feel any better from the latest injection, he has made his condition even worse and will suffer an even more painful withdrawal in the near future.
This is what has happened with the latest Fed monetary inflation announcement. With past QE announcements, at least the stock market went up. This time, it is not even doing that. No matter how hard the Fed tries now, it can’t give a boost to the economy. But it is making the conditions worse for a more painful downturn in the future.
It has been a struggle between recessionary forces and inflationary forces for a while now. Think of a tightrope walker who is losing his balance. He keeps tipping from one side to the other. In order to prevent himself from falling, he has to overcompensate and then ends up leaning too far to the other side.
The Fed is fearing another deep recession and is trying to overcompensate with monetary inflation. If it “succeeds”, then we will have massive price inflation ahead. If its QE schemes are not enough, then we will go into recession anyway. If it somehow finds the right balance, then it will prolong things a little while longer. But eventually it will run out of rope. We could end up with a scenario of the 1970’s where we have high price inflation and recessionary conditions at the same time. Unfortunately, if we see a repeat of the 70’s, we should consider ourselves lucky. It will probably end up being worse.
I really believe that Bernanke and the Fed don’t know what they are doing at this point. Nothing has worked and they keep making things worse. While I think that ultimately the legal tender laws should be repealed and the Fed should be stripped of its monopoly power over money, we at least need someone like Paul Volcker right now. The monetary inflation must stop and Congress should be forced to cut spending in the face of rising interest rates. Until then, they will only continue to damage the economy and make the coming economic troubles worse.