reveals that the FED is trapped in a corner should it continue to
pursue its TAPERING strategy…the next FED meeting is this week, and
the conventional wisdom believes that the FED will withdraw another $10
billion of monthly stimulus, but if the Emerging Markets are reacting so
violently to TAPERING, then this poses a serious dilemma for the FED…
be clear that Emerging Markets are greatly leveraged by the carry-trade
induced by the FED’s Quantitative Easing Program. The FED buys long
term US Treasury debt and US Mortgage paper thus keeping the interest
rates artificially low. Big investment firms borrow money at the
artificially low interest rates and then loan money to emerging market
economies where interest rates are much higher, thus taking advantage of
these profitable margins. However, as the FED tapers its bond buying,
the amount of excess liquidity dries up, and the large investors feel
compelled to call in their loans as well as end any new loans–thus this
causes the Emerging Market economies to suffer a reversal in market
rencontre 78 ado If the FED feels forced to put Tapering on hold….or even reverse its course, how can gold not shine in such a situation?
term, if the FED finds it cannot TAPER without disrupting world
markets, what does this mean for the US dollar? If the FED’s balance
sheet continues to expand because it will feel compelled not to taper,
then this brings into question the FED’s ability to control the supply
of dollars flooding the markets.
Furthermore, the potential
inability of the FED to continue or end its tapering plans exposes its
balance sheet to further scrutiny by currency markets. If the Fed’s
balance sheet grows too large, it brings into question the capacity of
the FED to remain solvent. As it stands now, I understand that the FED’s
capital reserves to assets (“assets” are actually debt paper in
banker-speak) is less than 2%. If the Fed were held to the same high
standards of most commercial and community banks, its leverage of
greater than 50-to-1 would be considered dangerously high.
course, the FED could continue down the path of TAPERING regardless of
how it thinks the emerging markets might react, but the great imbalances
forced on emerging market currencies could cause a systemic reaction in
the developed world, as past examples such as the 1997 Asian meltdown
remind us. I am not sure that outgoing Chairman Bernanke or incoming
Chairwoman Yellen wants to risk that disruption? They might decide to
taper one more month in next week’s meeting, but Bernanke might issue a
“wait-and-see” comment on future tapers as he departs the Fed?
own belief is that the FED will have to stop its Tapering program at
some point if the emerging market economies continue to collapse or if
the shadow banking situation in China should grow ugly.
then gold and precious metals make a whole lot of sense as a place to
park one’s money…and don’t believe the establishment Wall Street
brokerage houses whose “experts” continue to try to talk down the value
of precious metals to targets near $1,000. At least for me, when I think
about the likely outcomes over the next few months, I am not buying
into any establishment institutional gibberish!
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