Every day we hear the on again- off again chatter about the Fed tapering its $85b bond QE program early next year. This WILL not happen! Here’s why.
1. All signs of life in the US economy are a direct result of QE. Take it away and the economy would collapse. The govt relies on QE for 40% of its budget.
2. Treasury is now selling new bonds to pay for the maturity of old bonds as well as new bonds to pay for running the government. This is a catch 22 situation that guarantees ever higher bond selling by the government.
3. There is no free market any more out there to buy this ever growing mountain of bonds. The only purchaser is the Fed.
4. If the Fed actually did taper then interest rates would soar, with the market trying to find a real market price instead of the suppressed price we now see. The hint of tapering has already seen a jump of over 60% in interest rates.
5. This would create massive losses on the existing $4 trillion in bonds the Fed holds. This could bankrupt them.
6. If interest rates stayed high the Fed would have to sell bonds along with the Treasury to stay ahead of the interest rate curve. Two sellers and no buyers would spike interest rates even higher.
7. The imperialistic American government has a choice: A bond crisis, or a dollar crisis. A bond crisis should already have happened and has been aborted due to QE.
We will therefore have a dollar crisis. This will start once the Fed runs out of excuses not to taper. These have already begun. When the market calls it’s bluff, probably in 2014 sometime, we will begin to see the dollar crisis emerge when the whole world realises QE will not only keep going but will have to get bigger and bigger. The Germans have been here before. They know how this ends.