Unleash the “taperie”

January 13, 2014 08:55 AM

Last year was no doubt quite a bad year for gold investors. The huge sellout was a primary reason for this. Yet despite this major change in long positions, the outlook for gold does not seem bad. In the second part of 2013, a big debate about the central bank’s policy was initiated. It was all about Bernankish interventions in the financial market, which resulted in the explosion in the Fed’s balance sheet from billions to trillions of dollars. Since 2008, it was no doubt a huge transformation, and one that had a long lasting influence through the present day.

As we last presented our Market Overview the Fed decided to adjust its activity in the financial markets. As we’ve also seen, the decision was much in the spirit of “how much do we have to change in order not to change anything?” The very serious issue to be discussed was the so called “tapering.” And apparently it finally happened. The Fed decided to back out from its policy of expansionary buying programs. What does this backing out look like today? We can read in the Federal Open Market Committee statement in December 2013: “Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month.”

In other words, every month the Fed will print $5 billion less than in the past to buy additional government securities, and $5 billion less each month to buy additional private assets. That gives us total of $10 billion each month less than in the past, $120 billion less printing every year. “What a great sum of money, what a major shift in policy” – one would be inclined to say, wouldn’t he? Now the Fed is going to print $75 billion, not $85 billion as it used to. But wait a minute…

That’s like saying that a bath tub is getting empty, because the water is coming in at a 10% slower pace. Which would obviously be nonsensical. A reduction in future buying of government and agency assets can be considered as some form of reduction, but let us not be misdirected. The Fed is still promising to print and will print $75 billion each month to bid the prices of government securities and private assets. That will give us a total of $900 billion for the whole year – those additional green backs being churned out in order to stimulate the economy. This is no tapering at all. This is a very small friendly creature, which should rather be called “taperie.”

About the Author

Matt Machaj, PhD, is an economist whose research is focused on the monetary policy, the gold standard, and alternative monetary regimes. Matt is a university professor, blogger, publicist, founder of the Polish Mises Institute branch, member of Property and Freedom Society, and laureate of Lawrence Fertig Award.