By Philippe Herlin – Researcher in finance / Contributor to Goldbroker.com
So, the Fed has started tapering its QE. From $85 Billion a month, the monetary press slowed down to $75 Billion a month, last month, and then down to $65 Billion a month, last Wednesday. To understand what is going on, one must know that, when QE was cruising at $85 Billion a month, $45 Billion was going into buying Treasury bonds, and $40 Billion into buying mortgage-backed securities (MBSs). Only the Treasury bonds buying is being tapered, going from $45 Billion to $20 Billion, and the MBSs will continue to be bought at the same pace.
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The tapering of Treasury bonds buying can be explained by the lowering of the budget deficit, which has gone from the abyssal level of 10% of GDP in 2009 (proportionally like Greece, with more than $1 Trillion) to 7% in 2012, with an optimistic forecast of 4% in 2013-2014 (budgetary year starts in Septembre). On the other hand, not tapering on the $40 Billion a month of MBS buying just goes to show that banks’ balance sheets are still full of toxic real estate debt that only the Fed is willing to acquire.
We shall see if Janet Yellen follows in Ben Bernanke’s footsteps, now that she’s officially in charge of the Fed since January 31, because at this pace (- $10 Billion a month), QE would be down to zero, come this summer. But the rotten MBSs will still, in part, be there; will the banks be able to go it alone? The budgetary deficit will not have disappeared this summer, of course : will the State be able to get financing solely on the markets without causing the rates to rise? These are tough questions.
Furthermore, Bernanke justifies this QE tapering by a lower unemployment rate (6.7%), but everyone knows that this rate is less the result of jobs creation than the result of many unemployed leaving the work force and, thus, the statistics. This QE tapering is also justified by the return of growth, surpassing 2% annually, but still anemic. What is happening is that a « wealth effect » has been created by the rise of Wall Street, but the businesses haven’t started to invest again… this is all too fragile.
Ben Bernanke might have left his successor with a poisoned gift… Didn’t he taper so that he could leave the Fed with a positive image, all the while knowing it wouldn’t be tenable? Also, this hypothetical stop to Quantitative Easing would leave whole the problem of all this liquidity injected into the economy by these QE plans since March, 2009, that will have to be withdrawn some day (by selling these Treasury bonds and MBSs that the Fed bought). The Fed’s balance sheet is blowing through $4 Trillion, or a quarter of the United States’ GDP, from less than $1 Trillion in 2007, before the crisis. Those $3 Trillion in liquidity are threatening price stability and the whole economy as well. Furthermore, risks remain in banks’ balance sheets, in the Dow Jones bubble, and in the absence of any real recovery… and the emerging countries are in a crisis, which does not bode well. So, yes, I would say this looks like a poisoned gift…