The Fed’s Exit Strategy Is All Talk And Pure Myth
September 23, 2013
Last week’s highly anticipated announcement from the Federal Reserve was no surprise to myself and others outside of the mainstream corporate media. The Fed announced that they would not be scaling back their program of $85 billion in monthly asset purchases. This is despite the fact that in the weeks leading up to their announcement the general consensus on CNBC and other mainstream news channels was that the Fed was going to begin tapering these purchases. Many predicted that they would be reducing their asset purchases anywhere from $10 to $15 billion. This Fed announcement caught the corporate media propagandists completely off guard and made the vast majority of these people look incredibly stupid in the process. It is painfully obvious and should be even more so to people who follow the markets for a living that the U.S. economy is completely reliant upon the Fed’s asset purchases which are artificially propping up the bond and stock markets. All of this talk about the Fed having an exit strategy is nothing more than propaganda. The only exit strategy they have is to talk about the possibility that they will taper or end their asset purchases.
For years the Fed has talked about having an exit strategy but has done nothing substantive to reverse their low interest rate policies or debt purchases. They are in a box because if they end these policies yields on U.S. Treasury bonds will skyrocket and the U.S. government will no longer be able to service its enormous debt burden. Although this would allow the market to reset itself from all of the Fed created imbalances this is viewed as being politically impossible. On the other hand if they continue down this path of endless monetary stimulus the U.S. Dollar will be devalued into worthlessness. The Fed simply creates billions of Dollars out of thin air to purchase these assets. With more Dollars in existence it effectively makes each Dollar less valuable.
At some point the Fed will actually be forced to expand their asset purchases since real demand for U.S. Treasury bonds is in the toilet. China and Japan which are two of the largest foreign holders of U.S. debt are attempting to scale back their holdings. The same can be said about other foreign countries which are diversifying out of U.S. related debt instruments. This leaves the Fed as the only entity generating any demand for these bonds and this demand is completely artificial. This may prevent interest rates from going higher in the short term but in the long term the Fed will have devalued the Dollar to such an extent that nobody will want to hold Dollars let alone debt instruments denominated in Dollars.