Fed impotence, in the face of another economic downturn, could become an issue for investors/traders in 2019.
Economic reality suggests that the downturn could gain momentum this year with bearish data currently outweighing bullish data, a trend that seems likely to continue going forward. The retail apocalypse which saw 3,800 store closures across the US in 2018 is showing no signs of abating this year.
The retail sector ended on a bearish note with Sears (American chain of department stores founded in 1893) declared bankrupt in late December.
Economic data from US housing is equally gloomy. In short, the world’s largest consumer economy is stumbling.
Fed impotence to tackle the next economic recession/depression could be a concern going forward
But just how valid is this concern of Fed impotence (due to an expended monetary policy) to tackle the next economic/financial crisis?
Some of you may remember Richard Fisher Former Fed President who said that the Fed has “no ammunition left” back in early 2016.
Richard Fisher Former Fed President appeared on a business cable network and said that the Fed’s quantitative-easing stimulus program “front-loaded” the market after the 2008 financial crisis. Richard Fisher then said that the Fed has no way to deal with the fallout from the policy.
The “Fed inappropriately distorted markets since the crisis,” said Richard Fisher.
Since then the Fed has been active in deflating the bubble of everything while at the same time taking care not to create a systemic crisis which could threaten its fiat debt paper empire. My fifty cents worth is that the Fed is not too worried about monetary tightening causing a bear market in stocks and risk assets which would be part of a normal healthy market cycle. What probably stresses the current Fed Chair Jay Powell out the most is how to normalize monetary policy in this current economic climate without creating a systemic crisis.
Richard Fisher’s Fed impotence view to deal with the excesses of monetary easing was made three years ago so is it relevant today?
Since 2016 the Fed has been stockpiling ammunition (using Richard Fisher’s analogy of a Fed without ammunition. In the last 12 months, the Fed has transitioned from monetary easing to monetary tightening. Near zero interest rate policy has been abandoned with the Fed’s Federal Open Market Committee (FOMC) making four rate hike last year, closing at 2.5 percent.
Moreover, the Fed has started tightening its balance sheet. Quantitative tightening (QT), the inverse of Quantitative easing (QE) picked up last year.
Put another way the Fed has (officially) sold almost half a trillion USD, 400B, of assets since the QE apex.
The Fed impotence view needs to factor into the equation that the world’s largest western central bank has been priming monetary policy for the next downturn
The Fed’s QE, the creation of liquidity, could, in theory, continue to infinity making a US Federal Government default on its debt theoretically impossible.
“Make no mistake about it, there is no reason for the federal government to default or monkey with any debt because they can literally print the currency…” , said Investment advisor and former Assistant Secretary of Housing Catherine Austin Fitts.
Think about it. What happened to the $21 trillion in “missing money”?
$21 trillion is more than the entire year’s economic activity of goods and services of the world largest economy the US which has just vanished!
Is the Fed using agents to buy its own paper treasuries using shell companies in offshore jurisdictions, or are they funding private armies? Nobody knows, except for a tiny few, the rest are kept in the dark. No external audit of Fed accounts are permitted and the identity of owners of assets in shell companies in offshore jurisdiction is a secret. The pinnacle of western finance is conducted behind a veil of secrecy.
But back to whether the Fed impotence view holds validity
Here comes the zinger: “The question is how do they make sure whatever they are printing really holds any kind of store of value. I think the reason you are seeing them re-engineer the federal bureaucracy and financial transactions infrastructure is that they want much greater and tighter control to do whatever they do,” said Fitts.
A nasty downturn in the economic cycle could expose the Emperor with no clothes, Fed impotence could trigger a run on the dollar and dollar leveraged assets
The ultimate safe haven asset, gold could take a moon shot. Fed impotence would mean that the Fed could become powerless to rig gold to the downside in the derivatives market with their infinite paper money.
With Fed fund rates below 3% and QE exhausted the Fed could be running out of ammunition.
Fed impotence would mark the end of USD hegemony, USD as the world’s reserve currency, and end of the US paper Empire
Another global kingpin, China would quickly rise to the challenge and fill the global power vacuum. But threatened Empires have itchy fingers. Before Fed impotence reaches critical mass and investors believe that there is an alternative outside the dollar sphere the military monetary industrial complex tend to get together whenever they think it is necessary too.