Quantitative Tightening: The Fed’s New Very Bad Idea
Posted May 25, 2017
The Fed intends to reverse Quantitative Easing beginning later this year. That is a very bad idea that could inflict severe damage on the economy and destroy your wealth. The new Macro Watch video lays out everything you need to know about Quantitative Tightening.
Quantitative Easing (QE) was perhaps the most important element in a policy that prevented the world from collapsing into a new Great Depression when the global credit bubble began to implode in 2008. It allowed the government to finance its multi-trillion dollar budget deficits at very low interest rates. By driving interest rates lower, QE pushed asset prices higher, thereby creating a positive wealth effect that drove economic growth. It was also enormously profitable. The Fed earned $676 billion between 2009 and 2016. It gave those profits to the government, thereby reducing the budget deficit by that amount.
If the Fed now carries through with its plans to unwind QE, interest rates are likely to rise, the price of stocks and property is likely to fall and the government’s budget deficit will grow much larger. There is no good reason for the Fed to inflict such unnecessary damage on the economy or to increase the burden on American taxpayers.
The Fed made headlines yesterday when it revealed “a possible operational approach to reducing its securities holdings.” When the Fed talks of “reducing its securities holdings” it means unwinding Quantitative Easing. The Fed refers to this process as “normalizing its balance sheet”. I call it Quantitative Tightening (QT).
In This Discussion of Quantitative Tightening…
- Why the Fed believes Quantitative Tightening is necessary
- How QT will be implemented
- When it is likely to begin
- Its potential size
- How Quantitative Tightening could impact the economy, the financial markets and your wealth
- And why it is a very, very bad idea.
The Fed does not need Quantitative Tightening to tighten monetary policy. There are other, better ways. The real reason for QT may be that the Fed would like to at least begin to “normalize” its balance sheet before the next recession starts – because, at that time, it is quite likely that the Fed will have to launch another round of Quantitative Easing. If it could even just begin to “normalize” its balance sheet before that time, that would help the Fed claim that QE is only a temporary expedient, rather than a permanent monetization of government debt. That way the Fed would meet with less political resistance when it launches QE 4.
In my opinion, nothing good can come from Quantitative Tightening.
Macro Watch subscribers can log in and watch this video now for a full discussion of this very bad idea. The video is 29 minutes long and contains 40 slides.
If you have not yet subscribed to Macro Watch, click on the following link:
For a 50% subscription discount hit the “Sign Up Now” tab and, when prompted, use the coupon code: tightening
You will find 35 hours of Macro Watch videos available to watch immediately. A new video will be added approximately every two weeks.
Please share this blog with your colleagues and friends.