Posted Aug 19, 2013 by Martin Armstrong
QUESTION: Will the Fed still taper?
ANSWER: The Fed ‘tapering’ will happen but it is not truly impacting the economy. That is the whole fallacy about what is going to happen. Buying the mortgage back securities does nothing for the economy. This has neither been inflationary nor stimulating.WHY? The theory is the Fed is actually injecting cash into the system. WRONG!!!!! The Fed is injecting cash into the banks buying shit they want to get rid of. They then ASSUME the banks will increase their lending. HUGE MISTAKE #2. All the banks are doing is still requiring 110% collateral for a loan and instead have been investing the money and trading. There is no requirement if we buy this you lend that. It is INDIRECT like fining you wife for not making the guy next door put out the trash. You can fine her all day long. That will not force the next door neighbor to put out the trash. There is no DIRECT relationship between tapering and increasing consumer loans. There is absolutely no way for the Fed to “stimulate” or even create inflation absent regulatory direct controls.
The Fed always acts indirectly. But the Fed is NOT going to taper because the economy is “too” strong or because we have “sustained core (wage) inflation”, or because we have “full” employment or sharply declining unemployment. Absolutely, none of these conditions will cause the Fed to actually react. The ONLY time I get questions on the Hill about economic direction is when the STOCK MARKET declines. That alone impacts the 401Ks of politicians. Not housing, unemployment, or inflation. When there is inflation, everyone is happy for they are making more money in nominal terms so the voters are happy and so are the politicians.
The Fed is going to taper simply because they will see the stock market rise and will fear that their stimulation will cause excessive speculation creating a bubble top in assets. This is what the Fed really will watch and pay attention to the trend in the Dow.
The Fed is getting very fearful that the stock market has been rising and all inside sources are confirming that is the issue most concerning. The Fed will react to a rally in the Dow and that will result in tapering. This is actually what they have been worried about all along and ONLY when the stock market rises will the Fed worry about creating the bubble. Historically, they will ALWAYS raise interest rates with every stock market rise.