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Quantitative Tightening: The Fed’s New Very Bad Idea

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…

We consider:

  • 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.

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  1. I haven’t seen it yet.

    But I am sure it is great as usual.

    No time for any more comments…

    I have to watch Macrowatch “Quantitative Tightening: The Fed’s New Very Bad Idea”

  2. Yes, don’t shoot the messenger. I agree, I use to get upset about government debt. Now I’m only upset about how the fed and government mishandle policy that creates the wealth gap. Sounds like the most likely outcome is some deflation then inflation.

  3. Hi Richard
    I think part of the reason Fed wants to normalize the Balance sheet is because I found in the financial industry, there is this common view about the urgent need to “normalize” . As when the debt accumulated to a larger degree, it becomes the burden. and mathematically impossible to repay. Your view on “Quantitative easing is debt cancelling is quite true, but not accepted by many people., or perhaps mostly not accepted by the crowd and the politicians who try to please the masses. ”
    Set aside the debt cancelling issue, the other threat for money printing is inflation. You did explain the over capacity of cheap labor (globalization) eased the pressure on inflation, I agree also but I think there will be a time that all those tricks will eventually run out and we will be hit by a time bomb on all those debt. when and how , no idea . But as Keynes famously said ” in the long run, we are all dead.” If say the gold standard can be abandoned to cause a whole new change in the financial system, then maybe we could be migrated to Mars and start anew.

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