QE Forever

Michael Pento writes on the condition of the US:

… the overleveraged condition which brought the economy down in 2008 still exists today – only worse. For all the suffering and displacement that has gone on, all we have accomplished is an unprecedented transfer private debt onto the Treasury’s balance sheet. Now that the Fed is (hopefully) just months away from taking the printing presses off overtime, the paramount question is how fast interest rates will climb. The Fed has been able to keep yields this low through relentless devaluation and a propaganda campaign that convinced the majority of investors that deflation was a credible threat (kinda like those phantom Iraqi WMDs).

Mr. Pento alludes to the fraud in all of this, using overly polite terms such as “phantom,” “propaganda” etc.

He identifies the critical issue(s):

Once the Fed steps aside from buying 70% of the Treasury’s current auctioned output, it will leave a gaping hole. And for those Pollyannas who claim we are in an economic recovery, I would ask them the following questions: Who will supplant the Fed’s purchases of Treasuries at current yields? Since the level of debt in the economy has grown since the recession began, why won’t rising rates place us back into an economic funk? Can the Fed unwind its balance sheet before inflation ravages the country? And, if the Fed isn’t able to raise rates significantly, what will stop the dollar from collapsing?

The Fed and the Administration know the answer to this question:  No one “will supplant the Fed’s purchases of Treasuries at current yields” and that is probably correct at any reasonable level of yields.

Furthermore, the Fed has no way to unwind its balance sheet! The only way they can do so is by selling the trash they paid top dollar for back to the private sector. Some of these “assets” are probably unsellable at any price. Others might be sold at steep discounts.

That is why QE will not stop until markets collapse from hyperinflation.

A more detailed treatment of this issue was provided in Quantitative Easing: Our Tiger by the Tail.