Do NOT Taper
As difficult as it was at the time, quantitative easing (money printing) has now become an acceptable weapon in the Fed’s arsenal. Throughout my life, I was always taught, wrongly so, that printing money always leads to inflation and sometimes hyperinflation. And that all we needed to do was look at the Weimar Republic or Argentina or most recently Zimbabwe for examples of a currency gone rogue.
When the Fed cut rates to essentially zero, critics and Doomsdayers came out of the woodwork crying that Bernanke was “out of ammunition” and that “the Fed was now impotent”. The initial decision to print money must have been one of the most difficult debates that any Fed has ever faced. I imagine that the FOMC meetings were only a small part of the spirited discussions that went on during late 2008. But in the end, after rates are zero, Bernanke & Co. used QE as a way to effectively continue cutting rates until the economy and markets began to stabilize and turn.
Having been in the deflation camp since 2007 and remain there today, I have always said that printing money would not even slightly increase the risk of problematic inflation. I can’t tell you how many times I did interviews on CNBC, Fox Business and Yahoo Finance where I defended this very minority view against the masses. And when I boldly declared after QE I that the Fed’s balance sheet would eventually approach $5 TRILLION, I was literally laughed at and dismissed as a nut job (well, part of that may be true!). Furthermore, as longtime readers know, I turned very bullish on the dollar, long-term, in early 2008 and have stayed that way ever since. It was such an easy argument to say that all this money printing would devalue the greenback, but the truth of the matter is that the U.S. dollar bottomed in March 2008 and with almost $5 trillion being printed since, it has never gone lower than that level. Once again, the masses were wrong.
Once a Fed, or anyone else in my opinion, does something that is so distasteful, like having to print money, the hardest part is over, the first act. It makes the next and the next and the next much easier. After QE I ended and people argued against any more printing, it wasn’t a stretch to believe that a whole lot more was on the way. In fact, I would and have argued that once a Fed begins the process, they absolutely MUST see it through to the end, much longer than anyone imagines.
For the fifth time since Bernanke first hinted at tapering in May, the Fed will have the opportunity to begin the scaling back of asset purchases today. I firmly believe they should NOT taper! While the employment picture is certainly much improved, it is far from “escape velocity” with the participation rate at extremely low levels. After a “normal” recession, GDP growth should be double where it is today and remains frustratingly below trend levels. And that says nothing about the inflation rate and money velocity which indicate we should be worried more about deflation than any kind of problematic inflation. No sir. The Fed should NOT taper now or any time in the near future.
Let’s not repeat the mistakes made by FDR in the late 1930s when the government caused part II of the Great Depression by pulling stimulus and raising taxes. And let’s not let the Japanese debacle of starting and stopping and starting and stopping QE become our pattern. From my usual minority seat, my thesis is that the Fed should not begin to taper until we get to the other side of the next recession. Said another way, the Fed shouldn’t consider scaling back their asset purchase program until at least 2015 or later. Doing so now or early next year will jeopardize the flailing recovery and have a very negative impact on the financial markets over the intermediate-term.
I have heard plenty of people say that “tapering isn’t tightening”. I vehemently disagree. If a crack addict smokes 12 times a day and then is cut to 10 and then 8 and then 6 times a day, his body will certainly feel the reduction. As I have said many times before, our markets have become addicted to QE and are not healthy enough on their own to survive without it.