Applaud the End of Quantitative Easing

 | Feb 21, 2013 | 1:00 PM EST  | Comments
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Stocks got a case of the jitters on Wednesday because some people didn't like what was in the minutes of the January Fed meeting? Really? That sounds crazy, but that's what I'm hearing. Investors dumped shares when it was discovered that several more Federal Open Market Committee (FOMC) members voiced concern over quantitative easing, believing that it would lead to rising inflation. That's all it took for the market to believe the whole thing was about to end.

For those who understand monetary operations it is a silly reason to be concerned. And for the Fed committee members who still believe that QE or other monetary operations cause inflation, please resign because if you don't understand the operational realities of QE by now, then you're never going to understand.

For the rest of you, here's a quick refresher course: The only thing monetary operations do is change the composition of the financial assets held by the public. If the Fed does quantitative easing (QE) or targets rates lower, the only thing that happens is that the private sector holds fewer bonds and more cash. That's it. No net new financial assets (money) are created, so it's not inflationary. It cannot be inflationary. Look at gold: It's been getting crushed since the recent new iterations of QE.

The stock market's angst is just plain silly. I get the fact that the Fed's actions have brought rates down and I also get that low rates have helped stocks from a "multiples/valuation" standpoint. What I don't get is how everyone sees this as stimulus. It's not.

How could it be? The Fed's activities have removed a vast amount of interest income from the economy. More than $400 billion in income have been removed since the Fed started conducting these measures back in 2008. That is money that would have been earned by the private sector, but instead it got siphoned off to the Treasury. No wonder the economy has been sluggish! Take $400 billion away from people and see if it doesn't affect them. In essence, QE can be thought of as a tax, because that's exactly how it functions. The funny thing is that a lot of people who support lower taxes also support QE as "stimulus." I think it would shock them to know that what they're really asking for is higher taxes.

While the threat of QE ending may spook uniformed investors, it should make informed investors happy. That's because they get a chance to buy good stocks on the cheap as the uninformed crowd dumps them. If and when the Fed does end QE and if and when it does raise rates, I'm going to be in there with a bushel basket, buying up stocks as they get tossed.

Frankly, I find all this talk of QE and "stimulus" to be frustrating. Let's face it, it's not doing anything for the real economy and it's making the stock market rally more and more difficult and narrow. Trading now requires very precise stock and industry selection whereas broader economic growth, which would come about as a result of rising incomes through that interest channel, would make it far easier for investors. It would float all boats.

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