For many months now, the mainstream financial press and market analysts have been anticipating some kind of violent reaction or a “taper tantrum”, based on what they described as “hawkish” statements from the Fed and other central banks. Removing the “crutches” from the economy, by hiking interest rates and stopping the asset purchasing programs, was often cited as a serious threat the economic recovery and was expected to have a severe impact on stock market performance. And yet, none of those fears materialized.
No taper, no tantrum
Earlier this month, the Fed concluded the November meeting of its Federal Open Market Committee (FOMC) and released a statement that, on the surface, appeared to justify the predictions of mainstream analysts. Indeed, the dreaded taper was on the way, or so it seemed. According to that statement, the central bank would start cutting back its asset purchases by $10 billion in Treasury securities and $5 billion in mortgage-backed securities, with further decreases planned for December. This “conservative” turn should have spooked the markets, if we were to believe the warnings of the financial press, and yet, nothing of the sort happened. In fact, the exact opposite occurred: major indexes popped and investors seemed to breathe a sign of relief.
The explanation for this reaction is really quite straightforward. All the “cutting back” that the Fed announced had to do with new asset purchases. There has been absolutely no mention of decreasing the size of the Fed’s existing $8 trillion–plus portfolio. To the contrary, there appears to be a strong commitment to keep the record-breaking, overburdened balance sheet intact. In other words, using the term “tapering” to describe the Fed’s “new” policy direction would be a misnomer at best and an outright attempt to misguide the public at worst.
The party goes on and on…
Naturally, the market reaction itself proves that most investors can see through the political narrative and the “packaging” of the central bank’s decisions. They realize they can depend on continued support and that there’s no reason to fear that the monetary expansionism of the last decade will be reversed anytime soon. And they are justified in their assumptions.
For one thing, it is economically and practically impossible to reverse course at this point and to actually tighten monetary policy. It was the huge asset purchases that kept the markets afloat, not just through the covid crisis, but ever since the last recession too. These “crutches”, instead of the temporary, “emergency” measure they were once supposed to be, have now become a permanent feature of our monetary and financial system. The same is true of artificially suppressed, ultra-low interest rates. Nations and corporations alike have become addicted to cheap credit and they now take “free money” as a given. There is simply no way to remove this support at this stage without risking a historic wave of defaults and very likely a much wider economic collapse.
Furthermore, reversing the monetary policy course of the last years and really “tapering” is also politically untenable too. The repercussions of the crisis this could trigger would have enormous political and social implications. Especially after almost two years of the covid disaster and the unprecedented destruction and widespread pain that government measures have caused to countless citizens, it is hard to imagine an amenable or understanding public response to yet another round of economic and financial turmoil. After all the promises of a “roaring” recovery and of things going “back to normal” soon failed to materialize, the US, much like most Western governments, know very well that they are already standing on very thin ice.
Of course, as might have been expected from the track record of central planners, this “strategy” is extremely short sighted. Keeping the money faucets open and persisting on maintaining an environment of extremely low rates is only postponing the inevitable. As conservative, rational investors and precious metals owners clearly understand and have seen coming for a very long time, this myopic approach might put off a recession over the next weeks or months, but it is has created much larger, deeper, systemic risks, ranging all the way from an inflationary crisis to the potential for actual currency collapse.
Claudio Grass, Hünenberg See, Switzerland