The Fed’s Hobson’s Choice: End QE and Zero-Interest Rates or Destabilize the Dollar and the Treasury Market

Though the Fed is doing its best to mask its abject failure and lack of choices with public relations, the reality is it has no choice but to taper and eventually end its endless spew of credit and its unprecedented and destabilizing purchases of assets.

Many smart observers assume the Federal Reserve (and other central banks) can print money and buy assets like bonds, mortgages and stocks unconstrained by any limit. Indeed, at first glance, it seems like a closed circle: print the money and use it to buy bonds, mortgages and equities, which are booked as assets.

The more the Fed buys (or enables proxies and financiers to buy), the greater the assets value, as buying pushes prices higher.

After all, look what quantitative easing (i.e. buying assets like Treasury bonds and home mortgages) and zero-interest rates have done for the stock market: to the moon, baby!

And to housing: thanks to the printing press and buying mortgages, the Fed inflated an echo-bubble to soften the inevitable crash of the previous bubble:

On the surface, there are no intrinsic limits to QE and central bank money-printing:in other words, there appears to be nothing stopping the Fed from printing essentially limitless money and buying up the majority of Treasury bonds, mortgages and stocks.

But we must be mindful that the economy is not linear. Pushing asset prices higher via unlimited credit at zero-interest rates has not trickled down to wages or consumer spending. That is, the wealth effect is missing in action despite a $20 trillion increase in household net worth. (Most of this increase flowed to the top 10%, and within that, most flowed to the top 1/10 of 1%.)

Meanwhile, risky credit bets are soaring: subprime auto loans are now common, margin debt has skyrocketed and purchases of junk bonds have gone through the roof.

The Fed’s printing and asset purchases do not occur in a vacuum. Fed printing and asset purchases affect the reserve currency, the U.S. dollar, and the Treasury market, which the Fed now dominates via its purchases.

Keeping interest rates near zero has removed any financial incentive to buying Treasury bonds other than flight to safety. As Stephanie Pomboy observed in her excellent Wine Country Conference 2014 presentation, (and I paraphrase here): “every day they continued QE, they chased away more and more of our foreign creditors.”

The Treasury must sell bonds to fund the Federal deficit, which is running about $500 billion a year. The Treasury must also sell new bonds to replace the immense amounts of T-Bills that are maturing.

The more T-bills the Fed buys to keep interest rates at zero, the more it drives foreign and domestic buyers out of the Treasury market.

This is also true of the U.S. dollar. This sets up the Fed’s Hobson’s Choice, which is the term for an illusory choice, i.e. a choice in which only one option is offered.

If the Fed continues QE, it destabilizes the Treasury market that funds U.S. government deficits, and the hegemony of the U.S. dollar. If it ceases QE, interest rates will rise as non-central bank buyers will demand an actual return on their capital.

Rising rates will crush the echo bubbles in housing and the stock market, which has been propped up by dividend-paying stocks and speculative issues purchased with Fed-supplied “free money.”

For the Deep State, there is no choice: dollar hegemony is paramount. Rising interest rates and the fate of financiers who have over-leveraged the Fed’s free money are not even secondary.

Who Gets Thrown Under the Bus in the Next Financial Crisis? (March 3, 2014)

The Dollar and the Deep State (February 24, 2014)

Is the Deep State Fracturing into Disunity? (March 14, 2014)

The Fed believed that five years of free money and incentivizing risk would heal the economy. They were wrong. The real economy is more fragile and dysfunctional than ever due to the distortions created by Fed policies, while the top 1/10th of 1% have feasted on the asset bubbles inflated by these same policies.

Meanwhile, beneath the crony-capitalist celebration of new asset bubbles, the foundations of the nation’s fiscal security–the Treasury market and the U.S. dollar–have been undermined and destabilized by these same Fed policies.

Those who focus solely on the Fed assume the ruling Elite is monolithic: unified in worldview, strategy and goals. I believe this is overly linear and overly simplistic: there are competing elites, and nations fall when their elites experience profound disunity.

Though the Fed is doing its best to mask its abject failure and lack of choices with public relations (“Pay no attention to what’s behind the curtain!”), the reality is it has no choice to tapering and eventually ending its gargantuan spew of credit and its unprecedented and destabilizing purchases of assets.

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  • Warren Celli

    Charles Smith said; “Those who focus solely on the Fed assume the ruling Elite is monolithic: unified in worldview, strategy and goals. I believe this is overly linear and overly simplistic: there are competing elites, and nations fall when their elites experience profound disunity.”

    They are monolithic in their desire to rule. The factional competition in the elite class is now one of policy; profit vs destruction. We are living in an undeniable herd thinning. Xtrevilism has the upper hand. Nothing will get better until it is recognized and addressed.


    “Abstract: The less than 1% of the population who control the greater population are afflicted with an aberrant disease of the mind with many readily identifiable characteristics that negatively affects their morality. It is known as Evilism. In the post WW II years the disease has mutated. The old fashioned form of Evilism, which had developed over the past two to three hundred years, was relatively stable and came to be identified as “Vanilla Greed for Extraction”. It has been overtaken by a newer more virulent form of Evilism called Xtrēvilism, which is now identified as, “Pernicious Greed for Destruction”.

    Evilism , the original disease, (the old fashioned Vanilla Greed for Extraction), expresses itself as a parasitic form of cannibalization that sustains its host victim for future cannibalization. It is a milder form of the disease.

    Xtrēvilism , the new mutation (Pernicious Greed for Destruction), expresses itself as a parasitic extreme form of cannibalization that minimally sustains or eliminates its host victim with no concern for future cannibalization. It is an extreme form of the disease.

    Xtrēvilism relies on; the Noble Lie, the corporate structure, scam finance, ownership of media, and the trusting gullibility and complicity of its victims for its propaganda based divisive control. The effects of Xtrēvilism have caused governments around the world, once marginally responsive to the will of the people, to now betotally NON responsive to the will of the people. The goal of Xtrēvilism is a two tier ruler and ruled world with the ruled engaged in a spirit exhausting perpetual conflict of controlled elimination. Ironically the goal of Xtrēvilism includes stripping the assets of the once powerful old fashioned Vanilla Greed For Extraction class and subsuming it into the ruled class of perpetual conflict.”

    Deception is the strongest political force on the planet.

  • edwardrynearson

    maintaining petro dollar hegemony is paramount > the dollar is not controlled by America

  • Thomas

    It is all too simple. There is a bill in committee right now that will cut up public pensions into 50 billion dollar blocks paying 8.5% annually. Agents of the Federal Reserve will run them. In other words, the seemingly mindless purchase of assets is backed by public pension deposits. They just do not know it yet. Given the right circumstances, the Public Retiree’s Investment Act of 2009 can be pulled out of committee, amended, voted on, sent to the Senate, conferenced, voted on and sent to the President. How ’bout them apples?

  • HS

    “A Tale of Two Dows” clearly demonstrates how the elite have bought our democracy out from under us. Every equities market bubble is little more than a thinly veiled asset transfer mechanism. The first bubble (1985-2002) was blown when the US government implemented one of the most greatest scams ever perpetuated against a populace for the benefit of Wall Street, known as the 401(k) fund. The second bubble (2003-2008) was created when banks eliminated all prudent lending practices and the federal gov’t subsidized it with securitization via Freddie Mac and Fannie Mae. In hindsight, it’s fairly obvious that this credit bubble was engineered with the goal of creating a very predictable collapse, in order to provide the justification for QE. Which brings us to the current bubble, (2009-present) that was created through QE, where the Fed and US Treasury printed trillions and jammed them in the equities markets.

    Sooner or later this bubble, too, will implode, but, as usual, the elite will already have sold and the usual bagholders (401(k)) participants will be destroyed, yet again.