FED will cut the QE, but not due to the employment or economy...

Jobs data marked some more positive than expected values and much analysts questioned on the future of the bond-buying program of FED. This discussion goes for already some weeks carefully fueled by FOMC members’ verbal interventions. Seemingly FED will cut the money print in an answer to the economic recovery.

But all these hypotheses are in a wrong direction. It is not the economy the main reason for the money-print. It is the Obama budget. This year – as a result of automatic spending cuts and tax raises, the deficit is to go down. It will be about $650 billion, while in 2012 it was about $1 trillion. So the previous strategy of FED to buy bonds for about $85 billion per month was in answer to the expectation for the same deficit this year. 85X12=1020 billion.

But now it seems so much money will not be needed. If the deficit is 35-40% less, so it is logic FED to buy 35-40% less bonds. I.e. the size of the money-print program must fall to about $50-55 billion. And this has nothing with the economy.

At current moment the government is helped in its avoid-default fight by the inflation tax that is the result of the money print. The prices and wages are going up in nominal value, so the taxes are also going up. At the same time the old debt is in pre-inflation dollars, and due to FED activity, the interest rates are symbolic. I.e. the old debt is devalued and investors are losing part of their money.

This is the old and tested many times in history money-print technology, well explained in books for 1st year students.

The problem is that this system kicks out of the market the real investors in debt, as no one likes to lose money while real inflation is much higher than the interest rate. So this way FED is to remain the only buyer of government bonds. So it is obvious the quantity of the QEs to be almost equal to the size of the budget deficit.

In long term, despite of current improvements, it looks like USA will never end the deficit. But the overall debt is already too big, and de facto impossible to be repaid. So even with reduced deficit the debt will continue to go up nominally, driven by low but existing interests, and by the new deficits. All this pumps the economy with enormous quantity of uncovered money that may explode suddenly in a hyperinflation spiral. FED can control only the initial quantity of dollars, but not their speed of circulation. Now the speed is limited due to economic inactivity. But if the economy starts again and really to rise, then it will reach again the pre-crisis speed of circulation. And compared to then the existing dollars will be may be 3 times more. So 200-300% inflation will be inevitable. And no one will be able to stop it.

So the real sign of economic improvement is not the official statistics, used just for an excuse for one or another policy (and manipulated for this reason – often when Obama needs money, the unemployment is going bad and FED starts stimulus), but the real inflation. If you see accelerating inflation this means the economy is reviving. At least till the inflation itself hits it…

June 7th 2013

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