Is Barnanke About To Upset The Apple Cart?

Everybody, including yours truly, has been saying that the Fed will have no choice when their QE 2 winds down in June but to announce QE 3. Well maybe we have all been wrong. Maggie’s Notebook has the story.  Maggie’s article relates to a LewRockwell.Com interview with David Galland, Managing Editor of The Casey Report. Here are some quotes from the interview:

L: David, in recent editorials you’ve warned of what could be an important shift in Fed policy – can you fill us in?

David: That the shift, and it is imminent, will not change the larger trend, but it has the potential to be quite disruptive over the short term.

L: Explain.

David: In terms of the larger trends, the fundamentals that have caused so much pain and economic woe over the last ten years or so remain intact. If anything, they’ve gotten worse. We’ve gotten currency debasement, not just in the U.S., but especially in the U.S. dollar, which is not just any currency, but the world’s reserve currency.

There is growing evidence that in the next month or two, we will head into a very dangerous period. The Fed has been extremely supportive of the U.S. government’s insane spending, polluting its own balance sheet by buying up toxic loans by the hundreds of billions and by pumping enormous quantities of cash into the money supply.

You don’t have to look very hard to understand why we have seen some small recovery in the economy, much of which has been driven by the financial sector that has been the recipient of so much largess – it was bought and paid for by the government, working hand in glove with the Fed.


But there is about to be a fundamental change in this arrangement. It appears that the Fed has decided that it’s time to take a step back from its monetization – or quantitative easing (QE), as they now term it – in the hopes that the market will step in to fill the large gap it will leave.

Based on a lot of statements from a number of the voting members of the Federal Open Market Committee, the change just ahead is that they are serious about stopping QE in June.

L: Are you saying, no QE3 at all?

David: No. I think there will be a QE3, but it won’t materialize until after a relatively lengthy period during which the Fed stands aside in order to give the market the opportunity to adapt and adjust to their exit from the Treasury auctions. In other words, once they stop, I wouldn’t anticipate them jumping right back in at the first sign of trouble – say, if the stock market crashes.

In time, however, as the ponderous problems weighing on the economy come back to the fore and return the economy to its knees, the Fed will be forced to reinstitute the monetization, though they will likely try to come up with a moniker other than quantitative easing to describe it.

 Wow! If this is true, that the Fed will stop “Quantitative Easing” even or a while, this is very big news. And Maggie found some more good stuff. She has this quote from Richard Fisher, President of the Dallas Fed that she found at The Big Picture:

But here is the essential fact I want to emphasize and have you think about today: The Fed could not monetize [print dollars] the debt if the debt were not being created by Congress in the first place.The Fed does not create government debt; Congress does. Deficits and the unfunded liabilities of Medicare and Social Security are not created by the Federal Reserve; they are the legacy of Congress. The Fed does not earmark taxpayer money for pet projects in local communities that taxpayers themselves would never countenance; only the Congress does that. The Congress and administration play the dominant role in creating the regulatory environment that incentivizes or discourages job creation.

It seems to me that those lawmakers who advocate “Ending the Fed” might better turn their considerable talents toward ending the fiscal debacle that has for too long run amuck within their own house.

Folks, I have to tell you, I’m excited.  Whatever the Feds motivation to stop monetizing the debt, I don’t care. My point is that even if they only stop for a month or two, this would rock the boat big time. It could serve as a shot across the bow of congress telling them to get their act together and stop adding to this already unsustainable debt. I may be reading too much into this. I hope not. What do you think?

14 thoughts on “Is Barnanke About To Upset The Apple Cart?

  1. What is someone did an audit and found that the books were cooked so much that the real results showed that we have been bankrupt for a very long time. I agree with Sarah Palin, we just need to stop. Out of the chaos will come clarity and we can start fresh without the lies and manipulation that we have had so many years.

  2. When they stop Jim, who’s gonna buy US debt? The bankrupt UK? Bankrupt and bleeding Japan? How about China? Or the middle east? The private sector? banks?

    There are no buyers. The world is broke. I pray like hell the FED stops in June. This will be great entertainment.

    1. You’d almost think that the world over governments have spent too much money, wouldn’t you? Too much concentration on governments getting bigger and doing more, and too little attention on actually producing wealth… which, of course requires LESS government intrusion.

  3. Maybe we should have a test to qualify for President. You must have balanced a budget, even if it is just a household budget, and if you go over, it comes out of your pocket. Of course you would have to make exceptions for wars, but I read somewhere else that we should make the losers pay. It worked in the past and we spend far too much in time and money trying to make people like us. Let’s just bring back “to the winner goes the spoils” and truly fight to win.

  4. This is the best news I have heard in a while Jim if it is true. Yes this will lead to higher interest rates, but we need to give the free market or what’s left of the free market a chance to correct course. We also need to repeal the financial reform law. It will weigh down any recovery of the dollar and the economy.

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