Has Fed Chair Janet Yellin Really Pulled The Plug On The US Economy?

Janet Yellin's Mona Lisa Smile

Janet Yellin’s Mona Lisa Smile

These days, the biggest news receives the least attention, and vice very much versa. We’re told that the Federal Reserve announced the end in November, of QE3; the Fed  will stop printing money out of the air. That is much bigger news than the interminable Ebola and ISIS reports, theories and opinions that pass for news instead. The Fed has not turned money spigots off  since William McChesney Martin famously took away the punch bowl just as the party was starting half a century ago. Evidence that the lack of newsfolk interest was not universal: Stocks fell and the Dollar gained on the report.

Why is this so important? we’re not supposed to understand; it would make politicians nervous. But it is simple: The 2008 crash came after too many years of Congress-pushed loans to poor credit risk  folks to buy homes. The hot real estate bubble created by the availability of nearly free money (Yours) drove prices up; the crash would normally have restored them to a lower normal, at great cost to those holding all the loans. So the government bailed them out, flooding the market with more nearly free money so that the drop in real estate prices would be minimized. As a result, real estate didn’t drop nearly as much as its real worth required and it is still overpriced today, because the Fed has been sending monthly billions of freshly printed money into the mortgage marked. As of today’s announcement: That flow is dried up.

The other chunk of this is, the Fed has been financing the U.S. Treasury by buying Treasury Bonds, again with magic money out of the air. That has allowed the Treasury to pay its endless deficits as the bills came due. (Or as close to that as the U.S. Treasury ever gets,) Now, that handy ever-filled purse is closed; how will the Treasury pay its bills? Available tax  revenue won’t cover it; that’s what “deficits” means. Hmnn …

The National Debt is limited by Congress, which has been having to raise that limit regularly. China isn’t lending us money anymore. How are the politicians going to pay the piper now? If they can’t come up with some magic, they’re going to have to cut spending in real life (horrors!), something they’ve been avoiding by every hook and crook they could think up. But when the money dries up, something’s gonna give. So, this is a Very Big Deal. (If it actually happens.)

If the stock market comes to believe in it, there will be a drop, proportionate to the level of belief. A large drop, reflecting a return to real market values, will bring on the next phase of our multi-part economic reversal. On Obama’s watch, as the GOP is (likely) taking over. We trust that new Fed Boss Janet Yellin has bars on her windows …

This moves the 2008-begun financial crash into its endgame, the 4th quarter is underway. We suppose the Fed would not have moved thus by choice; it sees something worse ahead if it does not do this now. And it may chicken out, though that seems unlikely to help from here. Look for a scary and expensive ride ahead; never mind Ebola and ISIS.

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About Jack Curtis

Suspicious of government, doubtful of economics, fond of figure skating (but the off-ice part, not so much)
This entry was posted in Economics, Federal Finance, Politics and tagged , , . Bookmark the permalink.

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