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Originally Posted by tabs

The following was an email sent to CNBC on 2/22/13 when FED president Bullard was a guest and read the following in real air time.

An Adverse Shift

Starting with the Financial Crisis in 2008 the United States Treasury embarked on a policy of massive deficit spending resulting in a now 6T USD increase in it's debt level, bringing the upfront debt to roughly 16.5T USD. The Federal Reserve on the monetary front lowered interest rates and instituted a number of Quanatative Easing to increase the liquidity of the financial system in order to at first stabilize the system and then to promote economic growth in that system. The increase of liquidity to the system through Federal Reserve purchases of US debt instruments is roughly 3T USD. In September of 2012 the Federal Reserve embarked on OE3 whose tenets included the purchase of 85B a month in US debt instruments and mortgage backed securities with an open ended time frame of the US economy having a 6.5% unemployment rate.

What the concern in this is are the dislocations that these policies have caused in the stability of the global economy and the attendant political, social and cultural strata. Here one can postulate that as US debt levels climb, it destabilizes the above mentioned strata. This is because of several factors which include that the United States is the largest economy in a globally intertwined economy and that the USD is the Reserve Currency of the World. Being the Reserve Currency for the world means that every nation must hold reserves of USD in order to purchase oil. Further the USD being not only the Reserve currency but having a 200 year history of being a stable and thus responsible currency has made it the favored currency to be held by private concerns and individuals. This has been especially true in times of distress either globally or on a foreign national level. This has recently been a factor in the USD strength in the past several years as there has been a flight to the USD and US debt instruments in the face of a potential meltdown of the European Union due to the amount of leverage it has incurred and its slow response to rectifying it's problems.

However with the "unlimited" nature of both the European Central Bank and US Federal Reserves recent QE programs which for all intents and purposes means an unlimited printing of money to purchase sovereign debt, dislocations in the various economies are now beginning to appear which is resulting in their currencies seeking a new equilibrium. This is caused by a defacto devaluation of the large amount of USD being held either by foreign governments, held by private concerns or individuals which then puts pressure on those local economies. Further the real danger lies in the fact that as the USD becomes evermore diluted/devalued/debased those foreign holders of USDs will feel increasing pressure to divest themselves of those USDs or face continued pressure on their economies. Or going beyond this as Y. Aksoy and T Piskovski state in the conclusion of their paper "Foreign Holders of Dollars And The Information Value Of US Monetary Aggregates,"

"That if the leading role of US dollar as an international currency will be challenged by long term
adverse shifts in the preferences of the foreign holders, the US Federal Reserve may face serious
obstacles in the conduct of monetary policy to stabilize the US macroeconomic environment."

Thus in conclusion the Federal Reserves recent "unlimited" QE program has the potential unintended consequence of being a WMD which could create an economic tsunami that would sweep the world with catastrophic consequences.

Keeping An Eye On The Horizon


When the Fed acts it has to keep an eye on the horizon. As the USD is held so deeply in the worlds economy , because of its historic stability and Reserve currency status. If the the US erodes the worlds confidence in the USD it creates an economic undercurrent which has political and social repercussions felt around the world. For example it was a Street Vendor in Tunisia that lit himself on fire over governmental harassment that started the Arab Spring, in other words it was not a Librarian that started himself on fire. Also one should have noted the correlation in the releasing of the Fed minutes expressing a possible abrogating of QE3 and the almost instantaneous strengthening of the USD on the world market.

The worrisome part of Fed policy is that by creating a Trillion USD's a year to buy US debt instruments and mortgage backed securities the the Fed is rapidly diluting the value of the USD. What is quite ironic is that with the dislocations in the global economy which are partly caused by US economic policy both fiscal and monetary that the USD remains the flavor of choice? This is because of an ON THE BEACH MENTALITY (remember the 1960 movie of the same title?) or a highest ground in a flood mentality. One has to remember that it is emotion that rules peoples hearts and as such with increasing dilution of the USD it creates an increasingly uncertain economic environment which creats increasing economic political and societal instability.

On the other hand the question still remains, that if the Fed steps back from "packing monetary punches" that the US economy will not falter on its own ? This will unfortunately be true if the US debt levels continue to climb as that debt not only is putting a drag o the US economy but is creating evermore instability in the political and social structures. So basically the Fed is caught in a Catch 22 situation. One thinks that 3% growth is highly unlikely and that a continuing muddling through of 1.5% to 2.5% is going to be the new long term NORMAL. Here one should consider that the US economy is only growing at the rate of population increase of apx 1.6%. This would mean that all the Kings Men and all the Kings Horses have not put Humpty Dumpty back together again? If that is true the Gods truly are laughing at us.

Do you think that proves something? What?

I get the situation is less than ideal, but is being managed by competent career professionals whose livelihoods depends on successful navigation. I trust them much more than the random TV Talking Heads, Keyboard Jockeys and Armchair QBs reading tea leaves, stoking fear and praying for disaster they think will give them relevance.