To Taper Or Not To Taper...Is That the Only Question?

87
Tue, Aug 20, 2013 - 7:04pm

Tomorrow at 2pm the Fed issue's it's minutes for the July meeting and we are assured there will be some serious MOPE and economic psych-ops as the Fed will likely try to signal that Wall Street needs to break it's liquidly habit-when it tapers or I like to call taper- operation QEDerma-patch. Ok, maybe that's a stinker.

We are already seeing the reverberations of the mere threat of tapering in Asian markets as 20 of the biggest emerging market currencies took a significant hit and most notably the Indian Rupee hit successive record lows. So how does a crashing Indian Rupee effect us?

A precipitous fall in the value of the rupee will create a sell off in Indian assets which will likely find a home in perceived safer havens like the US Dollar and possibly US equities. Remember India is one of 5 of the BRICS countries and with China already experiencing slower growth, India exports have taken a nose dive and emerging markets could find themselves in a mess creating a bigger global financial pickle.

But Will He Really Do It?

Well, we sure as heck have an idea what he'll say based off his previous taper tantrums. He'll remark on the astounding recovery in the markets since the inception of QE with the stock market up 20% since January despite a slow recovery. As usual, the report will contain some discussion of the list of economic factors that will play into their September decision including whether or not there has been any improvement in labor markets. Watch out for the release of the the initial US jobless claims on Thursday.

Despite whatever rhetoric is contained in those reports, Bernanke knows what you know. If he really tapers, he'll throw the US and global economy into a tail spin. The mere mention of taper has interest rates rising and the actual act of tapering will be bad. Really bad! And what does the Fed do to get us out of a recession? It adds more liquidity to the market. A vicious circle. Little ole me realizes that and so does the Bernanke. Does he have any other options??

Ok, here is where the whole taper/not taper scenario gets a little messy. I'd suggest the issue is not as black and white as some are suggesting. And folks, please realize this is all speculation for I can't read into the future but I think there is some information that you might want to consider. The comment forum below is the place you provide your own speculations or politely raise counter arguments to mine. I'm open to suggestions

Story line 1. The Fed Mopes us to death and finds reasons in September to keep the QE going.

Story line 2. He tapers back the QE as promised and throws the economy into a deep recession.

Story line 3. HINT What has Santa been talking about all summer?

Consider another factor in this whole taper mess, and that is the mandate which the Fed receives from the BIS. And you thought the Fed was accountable to no one? Briefly, The Swiss bank of International Settlement is a consortium of Central Banks that issues "guidance" and that's putting it mildly to all Central Banks. It is the Central Bank of Central banks that is it's own sovereign entity and is accountable to nobody. NOBODY. Do they have any say in the matter of QE? You betcha!

Here is a June article by Investment weekly discussing the warning BIS issued to the Fed that a spike in the bond yields could trigger a global financial crisis.

https://www.investmentweek.co.uk/investment-week/news/2276792/warning-of...

Here are some pertinent quotes from the article to consider.

  • "It warned losses could range from 15% to 35% of GDP in the UK, France, Italy and Japan and even greater damage in a number of other countries."
  • "Such a big upward move can happen relatively fast," BIS said, referencing the 1994 crash.
  • "However, BIS said authorities must still proceed with monetary tightening regardless of these bond worries, warning QE and zero interest rates are already doing more harm than good, according to the Telegraph. The warning from BIS comes after the US
  • "Federal Reserve set off the most dramatic spike in US borrowing costs for over a decade by hinting at an early exit from quantitative easing"

Allow me to summarize. QE is not working. It's a failure. The economy has NOT recovered. We have given you a mandate to stimulate employment and stabilize prices. It hasn't worked. Continued QE could result in dire consequences. Stopping QE could result in dire consequences with a rise in bonds. Get your economy back in gear and start tapering QE and deal with rise in bond rates.

If you want to read the original document issued by the Bank of International Settlement back in June issuing the Fed its mandate, here you go.

https://www.bis.org/publ/arpdf/ar2013e1.pdf

Allow me to once again highlight a couple more points. I highly recommend you read these carefully.

"Six years have passed since the eruption of the global financial crisis, yet robust, self-sustaining, well balanced growth still eludes the global economy"

"Monetary stimulus alone cannot provide the answer because the roots of the problem are not monetary. Hence, central banks must manage a return to their stabilization role, allowing others to do the hard but essential work of adjustment.

"Regulators have to adapt the rules to a financial system that is becoming increasingly interconnected and complex and ensure that banks have sufficient capital and liquidity buffers to match the associated risks."

"How can central banks encourage those responsible for structural adjustment to implement reforms? How can they avoid making the economy too dependent on monetary stimulus? When is the right time for them to pull back
from their expansionary policies? And in pulling back, how can they avoid sparking a sharp rise in bond yields? It is time for monetary policy to begin answering these questions."

So what exactly is the BIS saying Green Lantern? The fed will really taper? Well. Yes, No and Maybe. The fed will have to save face and tell the markets that it is still looking to taper. That's the near term plan as they continue to buy just a little more time. But the masters, masters' are growing impatient.

But time for what Lantern? If you read carefully, thee buzz words were "stabilization" and "adjustments" So if money stimulus alone cannot "stabilize" or make the proper "adjustments" What will? If you said bail-ins, you guessed right. As I mentioned in my last post, "the bail-in model is based on an agreement between the Bank of International Settlement (there they are again) and endorsed at a 2011 G 20 summit."

The same people who wrote the bail-in model, are telling the Fed, it ain't working and it's time to stabilize and do it sooner rather than later.

Ok one other thought for your consideration? The Basil III regulatory framework (BIS Yet Again), banks must maintain assets as a buffer against a liquidity crisis. Without QE, the banks will not have adequate buffers. Hence the BIS warning of a dire crisis and telling the FED. Go Fix It!! I can only think of two ways of doing that. Continue QE against their masters wish and keep pretending there is a recovery. Or start bailing in.

Ok folks, remember, this is just little ole me thinking out loud. What do I know? I'm just a guy in a Green suit patrolling the Universe for common ordinary thugs!

About the Author

Green Lantern

  87 Comments

Byzantium
Aug 20, 2013 - 7:43pm

QE

I'm of that school of thought that refuses to take any official data seriously.

People analyse how much QE has happened and when, and the trajectory and the implications of tapering. But the Fed/Treasury can print as much money as it likes, without needing to announce it. Any TBTF bank that teeters and thereby threatens the system, will be saved with ease, it is just a Ctrl P operation.

It won't create immediate inflation (if at all) in a shrinking economic landscape, and when merely replacing existing money 'destroyed' by a default process.

We have no idea how much they have printed so far. The BIS is playing its own game; God knows who they are and what they really represent.

Something is definitely up with these WH meetings, and thieves are falling out. It looks like the whole world economy is about to crash, and the winners will be those that cope with that crash the best.

pbreed
Aug 20, 2013 - 7:48pm

End Game...

For awhile now I've thought that when the Fed held the majority of the Federal Debt, the debt functionally ceases to exist. They just send the interest payments back to the treasury and buy all rolled over debt. This is 100% functionally identical to having the Fed just forgive all of the Debt, while giving the Fed the added power to hold it over the U.S. government to get whatever concessions the banks owning the FED want...

This will work until the world gives up on the dollar as a means of international trade...

Green Lantern
Aug 20, 2013 - 7:55pm

If you read "The Creature

If you read "The Creature From Jekyll Island" and enjoyed it. You might want to consider this one.

there is reason nobody knows who they are and what they do and it barely gets mentioned. Maybe it's time we start talking about them?

Tower of Basel is the first investigative history of the world’s most secretive global financial institution. Based on extensive archival research in Switzerland, Britain, and the United States, and in-depth interviews with key decision-makers—including Paul Volcker, the former chairman of the US Federal Reserve; Sir Mervyn King, governor of the Bank of England; and former senior Bank for International Settlements managers and officials—Tower of Basel tells the inside story of the Bank for International Settlements (BIS): the central bankers’ own bank.

Created by the governors of the Bank of England and the Reichsbank in 1930, and protected by an international treaty, the BIS and its assets are legally beyond the reach of any government or jurisdiction. The bank is untouchable. Swiss authorities have no jurisdiction over the bank or its premises. The BIS has just 140 customers but made tax-free profits of $1.17 billion in 2011–2012.

Since its creation, the bank has been at the heart of global events but has often gone unnoticed. Under Thomas McKittrick, the bank’s American president from 1940–1946, the BIS was open for business throughout the Second World War. The BIS accepted looted Nazi gold, conducted foreign exchange deals for the Reichsbank, and was used by both the Allies and the Axis powers as a secret contact point to keep the channels of international finance open.

After 1945 the BIS—still behind the scenes—for decades provided the necessary technical and administrative support for the trans-European currency project, from the first attempts to harmonize exchange rates in the late 1940s to the launch of the Euro in 2002. It now stands at the center of efforts to build a new global financial and regulatory architecture, once again proving that it has the power to shape the financial rules of our world. Yet despite its pivotal role in the financial and political history of the last century and during the economic current crisis, the BIS has remained largely unknown—until now

Libero
Aug 20, 2013 - 7:59pm

QE 3 and interest rates go up

and gold goes down, not exactly what we expected right? So why would we think that a "taper" message will tank everything down? Predictions are useless. I've been waiting for years for the "money supply" growth to cause inflation, -like waiting for Godot.

I would think the Fed will continue to do what it does best, straddle the fence, the market will hear what it wants to hear and life will go on much the same way it has since 2009... Slow growth and lower standard of living for us in the industrialized West while the rest of the world catches up, which will put demand on materials.

Precious metals will explode only if people of wealth decide that they can make money this way as opposed to stocks and bonds.

treefrog
Aug 20, 2013 - 8:00pm
litterbox
Aug 20, 2013 - 8:09pm

lets see what rolls out

PAPER OR TAPER

litterbox
Aug 20, 2013 - 8:31pm
Aug 20, 2013 - 8:38pm

Great stuff, GL!

It's going to be an interesting end to the week, that's for sure...

Monedas
Aug 20, 2013 - 8:48pm

Very Polite !

Thanks for not taking any .... weird, gratuitous slams at the US .... like, kids are goats .... not children .... BTW .... where is Gold Dog (worth his weight in gold and possesses more than his weight in gold) .... where is Klinky (bluegrass, blueblooded patriot) .... where is I Run Barter Town (wise business man) .... where is Grigeo (Supreme Court material) .... we can't keep quality people like that around here .... you little cult of personality darlings of the blog .... stop running off good people .... I send out a casting call .... come home all yee quality posters .... don't let the heritage poster clique run you off .... Monedas will defend you .... especially Gold Dog .... he was a prince of a feller .... we are diminished by their absence ! Monedas 1929 Comedy Jihad I Will Wrap You In My Barbecue Apron And Protect You World Tour

Down Range
Aug 20, 2013 - 8:49pm

How about

the new $100 bills come out in October?

The old ones will only have a 2 for 1 value for 30 days. After that they are worthless.

Would piss off a LOT of BAD people and put a BIG dent in the deficit!

PS Anyone been thrown off Zero for dropping a F bomb, disparaging the president or leaving quotes for the NSA?

Dawg

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