Authored by Lee Quaintance and Paul Brodsky, QBAMCO,
The Fed’s Exit
The markets have begun to wonder whether the Fed (and other central banks) will ever be able to exit from its Quantitative Easing policy. We believe there is only one reasonable exit the Fed can take. Rather than sell its portfolio of bonds or allow them to mature naturally, we believe the Fed’s only practical exit will be to increase the size of all other balance sheets in relation to its own.
This “exit” will be part of a larger three-part strategy for resetting the over-leveraged global economy, already underway. The first stage is policy-administered monetary inflation – QE in which the Fed is de-leveraging bank balance sheets by adding bank reserves. The second phase will be policy-induced price inflation – hyper-inflating the general price level enough to diminish the burden of debt repayment and gain public support for monetary system change. (Imagine today the Fed proclaims all one dollar bills are ten dollar bills. Goods and service prices would increase 10x, more or less, as would wages, asset prices, revenues, costs, etc. The only item on the balance sheet that would not increase 10x would be the notional amount of systemic debt owed.) We believe the third phase of the strategy will be a monetary reset that recaptures popular confidence following the hyper-inflation.
Below, we list a progression of facts and reason supporting these conclusions:
As the Fed monetizes Treasury debt (or, as it claims, temporarily adds Treasuries and MBS to its balance sheet prior to selling them or letting them mature sometime in the future, thereby draining reserves), the obligations of the US Treasury (i.e., obligations of US taxpayers) to the US banking system are increasing dollar for dollar.