I recently had a particularly interesting conversation with Cris Sheridan of Financial Sense Newshour.
I highly recommend it.
The topic? The most extraordinary Monetary Policy U-Turn in the Fed’s 105-year history; and its implications for investors and for government policy.
One year ago, the Fed was hiking interest rates and destroying $50 billion a month through Quantitative Tightening. Moreover, it was expected to continue hiking rates and destroying Dollars at the rate of $50 billion a month well into the future.
Since then, not only has the Fed stopped increasing the Federal Funds Rate and ended Quantitative Tightening altogether, it has cut rates three times and resumed creating $60 billion a month by launching a new round of Quantitative Easing, QE4.
This was a Monetary Policy flip-flop on a monumental scale.
The stock market could not be more pleased. That is because when the Fed creates money and injects it into the financial markets, asset prices tend to inflate. That is what is happening now. All the major US stock market indices are at new record highs.
In this interview, Cris and I discuss:
• The developments that forced the Fed into this embarrassing about-face;
• The crisis in the Repo market, its causes and the Fed’s response to it; and
• My estimates for how much money the Fed is likely to create next year through Quantitative Easing, and what percent of the government’s $1 trillion budget deficit that new money is likely to finance.
It is enormously important to understand what is driving Fed policy now, and, in particular, how long QE4 will continue and how much money the Fed intends to create in total.
The more money the Fed creates, the higher stock prices are likely to go.
Even more importantly, now that the Fed is once again monetizing a significant part of the government’s large budget deficit, it opens up an extraordinary opportunity for the United States to invest aggressively in its future in order to sustain its global technological, economic and military preeminence.
Cris and I explore all these issues and more.
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