It seems like this same story surfaces every few years. But is the Fed serious this time? What if it is?
CNBC reported yesterday on the plans of the Federal Reserve:
Federal Reserve officials said the shedding of the $4.5 trillion in bonds the central bank is holding on its balance sheet will begin this year.
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The consequences of such a move will be severe. But it’s not the first time this story has surfaced. Last time, in 2010, it was just huffing and puffing. Nobody’s house was blown down. But is this time different?
REVERSING THE GREAT RECESSION
In unprecedented and multiple rounds of mass-purchasing of mortgage and Treasury bonds from 2008 to 2015, the Federal Reserve expanded the monetary base from around $800 billion to $4,000 billion, or $4 trillion.
There was no economic theory that supported such a drastic measure. It defied the logic of Keynesian economics, which is the stuff you learn in high school and college. In other words, it was a Hail Mary, a miracle play intended to reverse what was seen as the deadliest economic threat to grip the United States since the Great Depression.
As a consequence of this, the mortgage meltdown was reversed. The banks were saved. And America entered the worst-performing, post-recession “recovery” in its history. Wages are down. More people than ever before are still out of work — many of them just quit looking altogether, so they’re no longer counted as unemployed. That makes the statistics look better. The headline unemployment rate, as of February 2017, is 4.7%. But if you include the people who are so discouraged that they aren’t even looking for work anymore, that number rises to 9.2%.
So, here we are, the worst economic “recovery” in history, with unemployment still high, with GDP falling, with government debt the highest it has ever been, and household debt already returning to the levels they were at in 2008 before the last crisis hit…
…and the driver of it all, marginal as it was, was Federal Reserve inflation. The most dramatic increase of the money supply ever recorded.
And now, there’s talk that they want to “unwind” their $3.5 trillion in post-2007 purchases? What kind of effect will this have on the economy?