These are the “the known knowns.” I have to ask why Bernanke doesn’t tell the public and Congress that these challenges lie ahead. But if one is going take Donald Rumsfeld’s advice to heart, “there are also unknown unknowns,” which every trader knows are the most perilous. Because of these, it never makes sense to manage something as big as the monetary system of the globe so close the edge. Keep some dry gunpowder available to deal with truly catastrophic situations, don’t use it during non-crisis periods.
Going forward, I am hopeful and confident. We have made much headway since 2008, taking a complete meltdown of the global economic system off the table. In recent weeks, gold has traded down (meaning the dollar and most currencies have traded up relative to gold) reflecting reduced tail risk. Tail risk has two sides—deflationary and inflationary. Gold’s recent weak price action suggest to me that the risk of a deflationary financial Armageddon (in which gold would likely be highly sought after), and the risk of double-digit inflation or more extreme hyperinflation (in which gold would also be highly sought after) have lessened.
Though Bernanke and the Fed dismiss the challenges of an exit strategy, we know they are not entirely ignorant that there will be some costs and challenges. And given more recent communications, markets seem to be aware that there is some, finite, limit to the extent of QE3, even if unemployment and inflation metrics don’t indicate it needs to end. Likewise, in Washington both sides acknowledge there is some limit the amount of debt the Treasury can issue. The debate between budget balance and stimulus, is therefore vibrant and active, with neither side advocating either nominal cuts in spending, nor real growth in spending.