Jack Rasmus, author of Obama’s Economy: Recovery for the Few, has published a new article entitled From ‘Taper Tantrum’ & ‘Token Taper’ to ‘Taper Tomorrow’: Fed Policy in Crisis.
In his article, Rasmus explains the potential crisis facing the Federal Reserve:
This past week the US central bank, the Federal Reserve (Fed), opted not to change its current 3rd Quantitative Easing (QE) policy providing $85 billion a month in bond purchases from bankers and investors. The Fed’s QE3 policy has been in effect for about a year, injecting in excess of $1 trillion in subsidized money into the US and global economy. Since QEs began in 2009, the total injection will have exceeded $4 trillion by the end of this year.
Consensus was strong in recent weeks that the Fed would at least slightly reduce that $85 billion, by a token $5-$10 billion a month. That would have provided a mild, second signal it would begin reducing its $85 billion a month money injection.
Last May-June 2013, the Fed’s chairman, Ben Bernanke, initially signaled to the markets the Fed might soon start ‘reducing QE. That set off what has been called the ‘taper tantrum’ by investors. Almost immediately in response to the Fed’s suggestion, rates on bonds in the US began to escalate, including mortgage rates, corporate bond rates and US Treasury bonds—all of which surged by more than a full 1% in a matter of weeks.
The outcome of the rapid rate rise was the tepid US housing market recovery almost stalled, stock and bond prices began to tank, and investment into ‘emerging markets’—where much of the total $4 trillion in QEs since 2009 has gone—began to reverse and flow back from abroad to the US and Europe. Emerging markets’ currencies in turn began to decline, the global currency war ratcheted up another notch, and capital flight from those economies to the west accelerated.
Faced with the ‘taper tantrum’ by global high net worth investors and their institutions—aka ‘the markets’—the Fed and Bernanke quickly changed their tune by early July, reassuring investors and speculators that s significant retraction of QE3’s $85 billion wasn’t really their intention. The ‘markets’ quickly sighed with relief and stock, bond, property, and other financial asset prices rose again.
He concludes by outlining the risks of this, and its effect on the economy:
Thirdly, it all means it will be even more difficult for the Fed to ‘taper tomorrow’, which is apparently its latest message being delivered by select Fed governors. Emerging markets may react even more volatilely to the next taper iteration by the Fed, producing even more currency volatility, capital flight, and economic slowdown. More hot money will flow into China’s increasingly fragile local property markets via its growing ‘shadow’ bank network there. Financial asset bubbles, having returned in the interim, will pose an even greater risk of too rapid asset price contraction at some later date.
Apart from problems of feeding financial speculation, asset prices, and continuing financial bubbles, the US and global real economy will now become even more ‘super-sensitive’ to QE withdrawal and resulting interest rate hikes.
To read the article in full, click here.
You can buy Jack Rasmus’ book, Obama’s Economy: Recovery for the Few, by clicking on the cover image below. Buy before tomorrow to get 40% off in our Back2Uni sale! Just go to bit.ly/back2uni to claim the offer!
“Everybody else talked of the Lehman crisis as a blip, but Rasmus got it right: his concept of ‘epic recession’ describes what happened, in America and in the Western world. In this trenchant critique of Obama’s stimulus measures, he asks searching questions about the scale of the actions taken and the suitability of their design. With orthodox economics coming under strain, Rasmus’ unorthodox economics is a refreshing counter-argument to the mainstream.”
Paul Mason, BBC Newsnight Economics Editor and author of Meltdown
“Obama was elected because he represented hope and the expectation of change. But as Rasmus shows, little changed for tens of millions of unemployed, homeowners, and those dependant on government services. Rasmus describes in detail how Obama was the most conservative and business-oriented of the Democratic candidates in 2008, and how his first-term economic policies reflected that orientation.”
Chuck Mack, International Vice-President, International Brotherhood of Teamsters Union