Not unexpectedly, the Fed committed to much greater amounts of new money printing at Wednesday’s meeting. In 2013, the Fed will change its orientation from the “sterilized” Operation Twist, in which short maturity debt has been sold to offset the amount of long maturity debt purchased. Instead, the Fed will resort to outright purchases, which serve to “monetize” the debt–a euphemism for money printing. Given its proposed acquisition schedule, the Fed will purchase 52% of the marketable U.S. treasury securities to fund 2013’s anticipated deficit. If those transactions are not unwound, more than half the deficit will be neutralized by newly printed money.
As has been the case with prior announcements of quantitative easing (QE), the stock market bounced. The immediate reaction was an 80-point pop in the Dow. As has also become the case, however, the longevity of the rallies has progressively diminished. All of the gains were given up before the close of Wednesday’s session, with most major equity averages closing essentially unchanged.
Not likely coincidentally, but for uncertain reasons, The Wall Street Journal ran a front-page article titled, “Inside the Risky Bets of Central Banks,” on Wednesday morning preceding the Fed’s announcement. Author Jon Hilsenrath has recently been considered the most prominent journalistic mouthpiece of the Fed. Many suspect that he is the anointed leaker of upcoming Fed action trial balloons. It seems all the more confusing that Hilsenrath would pen an article calling into question the propriety of Fed actions when the Reserve Board was about to announce another stimulus action. Hilsenrath characterized central bank actions as a “high-stakes experiment.”
Attributing criticism of central bank actions to the Bank for International Settlements (BIS), the Journal article expressed concerns with the “massive scale” of monetary stimulus. “Another worry: Boosting stock markets and easing credit costs allow rational governments to postpone difficult political decisions to fix such problems as swelling budget deficits.…” Expressing a concern voiced previously by other Fed critics, the BIS stressed that: “Central banks cannot solve structural problems in the economy.”
Even fellow Fed Governors have voiced their doubts about the Fed’s ability to withdraw the massive amount of newly printed money when its objectives are met or when inflation becomes a significant concern. The BIS agrees that “…pulling back so much money, at exactly the right time, could become a political and logistical challenge.” On Dec. 10, Financial Times pointed out that assets in fixed income hedge funds are about to overtake those in equity-oriented funds for the first time ever. Those assets could well be heading for the exits as soon as the Fed tips its hand about lightening its own balance sheet, making the Fed’s job far more difficult.
Hilsenrath concluded his article by saying that: “…the central banks may again be steering toward long-term troubles in their elusive quest for short-term growth.”
Harvard economics professor Ken Rogoff, co-author of “This Time Is Different,” adds his caution: “They are taking risks because it is an experimental strategy.”
These commentators typically have a stake in maintaining a relatively high degree of public confidence in central bankers and their actions. As readers of my previous posts and articles know, I have no such mandate. I believe and have stated repeatedly that the Fed and other world central banks are betting much of the world’s economic future on a grand experiment in money creation. On a personal level, there is no evidence that Ben Bernanke beats his family or his pets, and by all accounts, he appears to be a kindly gentleman. Should his grand experiment fail, however, and generations to come suffer severely diminished economic wellbeing, he will deserve history’s mantle of “worst central banker ever.”