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     May 12, '14

No clear exit
Commentary and weekly watch by Doug Noland

Could things possibly be any more fascinating?

Representative Kevin Brady on the US Congress Joint Economic Committee after hearing testimony by Federal Reserve chair Janet Yellen last week: "I'll conclude with this. My main concern, having served on the committee in the early to mid-2000s, your able and very highly respected predecessor [Ben Bernanke] sat where you sat and assured the committee that maintaining low interest rates for an extended period wouldn't cause general price inflation or inflate an unsustainable asset bubble - which didn't prove to be the case.

"After the credit-fueled housing bubble burst in 2007, your predecessor assured the committee that the resulting weakness would be confined to the subprime segment of the housing market and the damage would be limited to about $150 billion, roughly the cost of the Savings & Loan crisis.

"Following the financial crisis in the fall of 2008, we were

repeatedly assured the Fed had the strategy to exit from the large expansion of its balance sheet to normalize monetary policy, including the federal funds target. Yet, the goalposts have been moved time and time again - and now removed. And today, you've assured the committee once again - and I so appreciate your testimony - that the Fed is confident it can exit without sparking high inflation; but that we can't know the details or the time-table; but that the Fed and the FOMC have it essentially handled. I don't expect the Fed to be perfect.

"Yours is a tough job. Theirs is a tough job. But it just strikes me this over time 'don't worry be happy' monetary message isn't working - at least, in my view, for the committee and certainly not for the economy at this point. I know my colleagues will ask about today's Wall Street Journal where noted economist, Federal Reserve historian Dr Alan Meltzer, makes the point never in history has a country financed big budget deficits with large amounts of central bank money and avoided inflation.

"My worry is that the track record of central banks, including the Fed, in identifying these economic turning points and acting quickly to prevent inflation, that track record is not as good as we would like. So, forgive me for being skeptical. I believe we need more specifics and a clear timetable on the comprehensive exit strategy.

Good luck with that, Congressman. There will be neither specifics nor a timetable. The Fed has pretty much painted itself into a corner. QE3, in particular, fueled dangerous bubbles in equities and corporate credit. Meanwhile, it ensured another two years of global (largely Asian) over- and mal-investment.

Today and going forward, the Fed will have little clarity as to the soundness of the financial markets or real economy. It will have minimal grasp on prospective inflation rates. So long as the financial bubble inflates, economic output will appear OK. Yet market bubbles guarantee intractable financial and economic fragility. Market tumult would, in short order, darken economic prospects. Very few appreciate today's dilemma. More ...

Doug Noland is a market strategist for the Prudent Bear Funds.

(Republished with permission from PrudentBear.com. Copyright 2005-2014 David W Tice & Associates. All rights reserved.)




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