As Americans were anxiously waiting to see the season finale of “The Fiscal Cliff” and who would survive the tax-attack, nobody noticed Bernanke’s speech on December 12 in which he announced the launch of Quantitative Easing, Round IV.
Fed. Chairman Bernanke justified the need for the continuation of his unlimited bond-buy back program based on the imminent danger of a fiscal cliff in addition to slow economic growth and high unemployment.
According to Mr. Bernanke, the negative effects of the looming fiscal cliff are already visible and can be measured in the downturn of consumer confidence and consumer spending even though the tax rates or budget cuts would not take effect until January 1, 2013.
In preparation of a fiscal cliff or budget slope, as some reporters and economists call it, the Federal Reserve has decided to launch an open-ended bond buy-back program at $85 billion per month. This is twice the size of the previous Federal Open Market Committee announcement but did not seem to come as a surprise to economists nor did the financial markets react negatively on the news.
It is also clear that should the fiscal cliff hit the US consumers and the average American that the Federal Reserve has no tools available to counteract the negative effect on US economic growth, US inflation or unemployment.
The notion and resulting uncertainty surrounding the fiscal cliff and Congress’ “lame duck” approach was reason enough for the Federal Reserve to justify turning three rounds of quantitative easing into a perpetual intervention without the usual shocking reaction of Congress or the markets.
In essence what 2013 and the years beyond will bring is a possible reduction of annual budget deficits and outstanding debt while at the same time growing the Federal Reserve’s balance sheet at the same or higher rate thereby negating the financial health of the US monetary system as a whole.
Congress tries to generate more revenue through higher taxes while curbing spending.
The Federal Reserve increases its buy-back program of US Treasuries and collateralized mortgage obligations that generates interest payable by the US Treasury who in turn raises the debt ceiling to pay the bills and to now close the vicious financial circle; the Federal Reserve pays the excess earnings back to Congress so they can spend more.
Granted that this elaborate scheme has been in existence for 100 years but all it took to expand and grow the circle was the creation of a fiscal cliff panic attack to open the door for unlimited quantitative easing.
Reporters were eager to contribute to the mass panic attack as if rationing food would keep us all afloat but only a few noticed the adder in the grass.
Congress fell of the fiscal slope but the Federal Reserve used its parachute for a soft and prosperous landing.
Written by Nick Doms © 2012, all rights reserved.