Two Down, One to Go, and the Fed is Stuck: My most important economic predictions have come in rock solid
Two Down, One to Go, and the Fed is Stuck: My most important economic predictions have come in rock solid by David Haggith for The Great Recession
Two of my biggest and longest-term predictions for 2018 and 2019 proved resoundingly true this week, and my sole prediction for this year — a prediction of recession bolder than anyone else’s — moved a big step closer to coming true.
Prediction #1: The Fed will prove to have no exit plan from its recovery program
The oldest prediction on my blog, repeated like a refrain throughout the writing of this blog, has been that the Fed would discover as soon as it tried unwinding from its recovery program that it cannot do it. I’ve claimed over and over we’ll all discover the Fed has no exit plan that will work for the simple reason its recovery plan was never sustainable. It is important to prove now that that claim was clearly laid out and is, once and for all, established fact because if people don’t get their head fully around that fact they have been denying for years as I have been writing this blog, then we are destined to repeat this delirium forever.
For years the Fed promised that it someday would unwind its balance sheet and that this process would be “as boring as watching paint dry” or that it would happen “on autopilot,” but I pointed out the end-game problem for quantitative easing clear back in 2012 when the Fed first began its QE program:
Regardless of its objective, the debt IS what The Fed has been buying with the money [from QE]. With the Fed now as its ready buyer for long-term bonds, the U.S. government is assured of auctioning all its bonds at very low interest rates. Apparently the Federal Reserve as a whole has decided this is only a bad game if you keep playing it, but what is the end game so that you can stop playing it?
I stated again in 2012 that there was no actual exit strategy from quantitative easing:
The political leaders of this world — U.S. and European both — will continue to run the presses at full velocity because the cost of admitting they are money-printing and that they are on a bad course is too high politically. They will stay with their present plan, hoping they are buying enough time for an exit to emerge.
In 2013, I predicted in a similar vein that the QE-based recovery would only hold so long as some form of QE held (which would mean you can certainly never unwind it):
While luminaries like Marc Faber predicted a great economic collapse in 2013, I decided the government has a lot of energy to keep powering through a bad plan…. My economic predictions at the start of 2013 [were] the leaders of the world would continue to believe they could resurrect the dinosaur economy by trying to pump it up with debt. It is what worked before and what worked before that, so it is all they know, and all they’ll try. They will do all they can to save the economy through low interest rates, designed to entice people to to buy homes and take on debt again…. Since quantitative easing has never righted the situation for good, it should be evident that is nothing more than a prop … a crutch…. I have said from the time the first quantitative easing was promised by the Fed, that it would fail to have any lasting result, and each round has failed as soon as it stopped….So, I predict the dinosaur economy I have written about will continue to breathe awhile longer, but … what we have seen in recent years is not a recovery at all. It [is] merely the intoxicating effect of trillions of dollars mainlined into banks for free. It lasts as long as the drug lasts and is not, in the least, sustainable.
In December of 2015, I noted again that it continued to be evident the Fed had no end game after it equivocated all year on starting its rise in interest rates: