Hardly anyone thought the Fed would fulfill their plan to stop monetizing the country’s debt – and absolutely no one thinks they’ll succeed if they do – but the Fed is acting like it’s serious. The Fed has stopped adding and started subtracting – the money supply is falling – but will this cause the stock market to begin to tank like it did on the last two attempts causing the Fed to relent?
By John Rubino (dollarcollapse.com) in an article* originally posted under the title Wow, They Really Are Tapering.
Take a look at the graph of the monetary base below showing the amount of new currency that has been created and pumped into the banking system. The trajectory since the 2008 crash tells you all you need to know about the “recovery” (the Fed printing money and a few mostly rich people spending some of it) but check out the far right edge where the line turns negative. Not wildly negative, but still, negative.
This kind of tightening would normally coincide with — or cause — rising interest rates, but that’s not… [expected to occur until the last quarter of 2015 (two separate 0.25% increases), so even in the face of manifestly tighter money, interest rates have been allowed (or forced) to decline.
The pressure of tighter money has to be released somewhere, however, and in this case it’s been the foreign exchange market. The euro, for instance, has tanked since mid-year.
Every other major currency is down as well, which is the same thing as saying that the dollar is up big, and a rising currency is functionally the same thing as higher interest rates. Consider: If you borrow money you have to pay back the principal plus interest. A higher interest rate obviously makes the loan harder to repay but so does a rising currency because in order to pay dollars to a creditor you have to get those dollars, and if they’ve become more valuable in the meantime you have to pay up.
[Given the above]…the U.S. is experiencing two of the three symptoms of tighter money:
- a falling money supply and
- rising currency
with rising interest rates, [as mentioned above, expected to come in the final quarter of 2015. Should that, indeed, happen it] would be interesting to say the least. To understand why, let’s revisit the monetary base chart, with the addition of arrows showing what the stock market did during the previous two attempts at tapering. It tanked — or at least started to tank — and the government relented.
Note that during those other two taper attempts the monetary base didn’t fall much if at all, and the dollar didn’t rise to anything like its current level. In other words, the Fed didn’t actually tighten, it just stopped loosening. This latest iteration is already more serious than the two that came before.
Either another stock market scare is coming, and soon, or the economy has finally achieved the fabled escape velocity in which it can grow under its own power without help from performance-enhancing monetary drugs. We should know the answer soon…[but, in my opinion,] the sound-money crowd is right. This ends very badly.
[The above article is presented by Lorimer Wilson, editor of www.munKNEE.com and the FREE Market Intelligence Report newsletter (sample here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. This paragraph must be included in any article re-posting to avoid copyright infringement.]
*http://dollarcollapse.com/monetary-policy-2/wow-they-really-are-tapering/ (Copyright © DollarCollapse.com)
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