Dr. Faber on the Fed's QE Program

Dr. Marc Faber, who is a valued friend of ours, has recently been interviewed on CNBC regarding his views about the markets and the Fed (see this article at Zerohedge for details as well as the video). The other guests were incredulous, arguing 'how can he say things are bad when clearly, the 'data' are getting better?' After perfunctory declarations of 'respect' for his views, they launched into tirades evincing no such respect whatsoever.

So he is once again among the handful of lone voices warning that the current mirage of prosperity cannot last. It is of course quite typical that the number of people issuing such warnings diminishes as the seemingly 'good times' bought with massive monetary inflation roll on, and it is also typical that their views are derided by those who will later be comfortably ensconced in the 'no-one could see it coming' crowd.

However, we want to draw attention to one particular point made by Dr. Faber, namely his contention that 'QE' will probably never end. The question was discussed due to the upcoming FOMC decision, which may include a small 'tapering' of the asset purchase program.

This would amount to what Dr. Faber refers to as a 'cosmetic change' in the interview, and we happen to agree. In fact, we agree also that once such cosmetic changes have been tried, we will at some point arrive at a moment when 'QE' will be larger than ever before.


Once a central bank embarks on such a program to keep the consequences of its previous inflationary policies from fully playing out, there is no going back, ever. A recent example of this has been provided by the BoJ. The BoJ embarked on several 'QE' programs over the years. It frequently stopped the policy intermittently, and there was even one occasion when it tried to reverse its balance sheet expansion. This happened in 2006, with the BoJ in the process lowering Japan's monetary base by almost 25%.

So where is the BoJ today, seven years after this attempt to reverse 'QE'? It is engaged in the biggest QE program of its entire post 1949 history. In fact, it took only a little over two years to 'reverse the reversal' in its entirety, and the programs have done nothing but increase ever since.

There is no reason to expect anything different from the Fed. The reason for this is that the current echo boom requires not only monetary inflation, but accelerating monetary inflation to stay on the rails. Given that the banking system has not increased its inflationary lending – and is unlikely to do so, as this would incur a large risk of not getting paid back, given the wobbly state of the real economy – the central bank remains the main source of monetary inflation.

A mere cosmetic change to 'QE' may already suffice to deflate elevated asset prices, and thereby remove what the Fed considers prima facie evidence that its policies are 'working'. As absurd as this belief is, it was enunciated by Ben Bernanke in one of his first post FOMC press conferences, when he cited the rise in the 'Russell Index' (why he picked that index we have no idea) as a sign that the Fed's monetary pumping was succeeding.


Monetary Eras-US -TMS-2a

US broad money supply TMS-2, by economic categorization. Three monetary eras – click to enlarge.



Once the inflationary policy is slowed down, money supply growth will soon fall below whatever the current threshold for sustaining the bubble edifice is. We obviously don't know where exactly this threshold currently is, but given the weakness of the economy, it is a good bet that it is higher than it was in 2006-2008 (the last crash was preceded by year-on-year money supply growth declining below 3%). 

And we hold with Dr. Faber that there is no way that the Fed will sit idly by when the echo bubble deflates again – hence, in the end, there will indeed be 'substantially higher asset purchases than today' (paraphrasing) and they may well involve a much wider range of assets (regarding the possibilities in this context, take a look at Ben Bernanke's 2002 'anti deflation' speech).



Chart by Michael Pollaro




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7 Responses to “In For A Penny, In For A Pound”

  • Mark Humphrey:

    The rate of growth of money has been falling for two years, according to Frank Shostak’s measurement of the (narrow, I think) Austrian Money Supply AMS. http://mises.org/daily/6546/Fed-Could-Delay-Tapering-Until-After-December

    This is important. The growth rate had been cut in half as of October, 2o13, from September, 2011, from 15% to roughly 7%, and the duration of the decline had been two years as of October. Now fed tapering and the ongoing clampdown on capital by banking regs makes a further slowdown plausible.

    The other days, I noticed a graph somewhere that illustrated operating margins of the SP 500. They have been falling since the start of 2011, coincident with the decline in growth rate of Shostak’s AMS.

    The slowdown in money growth preceeding 2008 was four years. Everything is more fragile, leveraged and distorted now than ever before. Will loss of integrity in our economy make us more suseptical to slowing of the rate of money supply growth?

    Meanwhile, interest rates march higher, because of high nominal profit margins and low long term rates. Corporations have been issuing record amounts of new debt–more than any time ever. It makes sense to borrow at low rates–even to buy back stock–against profit margins that have been artificially elevated as a direct result of money printing.

    Of course, climbing long term rates will further reduce artifically high margins, and speed up the rollover of the housing boom. And much else.

  • No6:

    So they tapered (even though their forward guidance numbers were not met)
    which means less liquidity for the bubbles.

    Crash should be just around the corner. I will stick my neck out and go for Jan 14.

  • jimmyjames:

    Increase in taper.. good for stock markets.. bad for gold-

    Decrease in taper.. good for stock markets.. bad for gold-

    This is all you need to know-

  • Solon:

    From the FOMC release:

    The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.

    So let me get this straight… A lack of inflation risks economic performance? So the Fed believes the corollary that inflation causes economic performance? They don’t believe that their type of inflation isn’t instead a symptom or a result of economic performance? Fucking madness.

  • Sunonmyface:

    Lets assume the premise that QE will not stop and the rate of purchases will likely increase. If this is true, how long does it take for the experiment to blow up and what is the probable outcome? Martin Armstrong appears to be of the opinion that the ” shit will hit the fan” in 2032. Does this seem reasonable?

    • Vess:

      Martin Armstrong has put out so many dates, that you can pick and choose whatever you like. Till recently I thought that he meant “the big one” to be in the last quarter of 2015. Unless, of course, “the cycle inverts”. What the heck does that mean? That the stock market will accelerate higher and gold lower?!

      2032? I don’t care. I probably won’t be alive by then anyway.

  • zerobs:

    So in light of the feeling that QE will never end and that the only question is QE’s ebbs and flows of expansions and incomplete contractions, coupled with the bubble in art, my question is: How long should Detroit wait to auction pieces of its collection?

    Forget Detroit’s mistakes in the past. Going forward, isn’t there a fiduciary responsibility to the remaining residents of Detroit to start auctioning a few pieces immediately? I fear that Detroit will make the same sell-low mistake that the BOE did with its gold – they’ll wait until after the bubble has completely stopped and put so many pieces into the auction that they will suppress their prices even more by flooding the market. (Not to mention FedGov stepping if too many pieces get sold to “foreigners” thus further suppressing prices.)

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