How the Fed Has the Economy Hooked on Its "Monetary Cocaine"
By George Leong
The debates continue on whether the Federal Reserve should or should not begin to take its foot off the money-printing pedal. We will likely find out on June 14, which is when the Fed meets.
I know those seeking income from bonds want higher yields because it’s hard to survive when you are making only about one percent from a five-year U.S. government bond.
For those who have amassed a significant amount of debt during this money-printing spree, including the U.S. government, they probably don’t want to see interest rates rise just yet.
Have you seen the national debt level recently?
It’s at $16.88 trillion and spiraling out of control. And to make matters worse, there has been no discussion on it in the media; it will likely remain this way throughout the summer months, which is scary. It’s like pushing the problem under the carpet in the hope that it will go away. Sorry, but it won’t go away—it will come back and haunt the future generations.
“We cannot live in fear that gee whiz, the market is going to be unhappy that we are not giving them more monetary cocaine,” said Richard Fisher, president of the Dallas Federal Reserve Bank. (Source: “Fed’s Fisher: We Cannot Live in Fear of ‘Monetary Cocaine’” Reuters, June 5, 2013.)
The use of the “monetary cocaine” reference is fantastic because it clearly embodies what is happening with the direction of the Federal Reserve and the money flow.
If you noticed, the current action of the stock market is largely dictated by the speculation on what the Federal Reserve might decide regarding bond buying when it meets at its June meeting. In fact, 30-year mortgage rates are edging up on the speculation.
The reality is that the rapid ascension of stocks, the housing market, and consumer spending have been driven upward by the uninterrupted flow of easy and cheap money into the U.S. monetary system by the Federal Reserve and its President Ben Bernanke.
In fact, the dependence is so great that it has likely turned into an addiction, which is why the reference to “monetary cocaine” was used by Fisher.
The economy is hooked on the availability of cheap money. Take the easy money away, and just like an addict, the immediate withdrawal response will likely be rough, volatile, and complete with the jitters and sweats.
The Federal Reserve should anticipate this, and it will need to act very quickly.
It has to be done and over with. Yes, it will be difficult at first, but the move to start to dwindle down the Federal Reserve stimulus will help in the long run as the economy adjusts.
Of course, stocks, the housing market, and anything else that is dependent on the level of interest rates will feel the short-term pain. So maybe it’s time to take some profits.
This article How the Fed Has the Economy Hooked on Its “Monetary Cocaine” was originally published at Investment Contrarians
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