Monday, June 21, 2021

The Case For An Immediate Taper

 The Fed is buying $120 billion in Treasurys, MBS etc debt every month, ie it is monetizing (printing) about that much monthly, ballooning its balance sheet by the same amount. The Fed’s reasoning is that the economy is still not healthy enough, yet it is obvious to anyone who can fog a mirror that the main result is a manic bubble in everything from stocks and real estate all the way to NFTs.

Naturally, everyone is trying to guess when the punch bowl will be removed, even partly, aka taper the purchase program.  I strongly believe that the Fed should do so right away, and here are two related charts to support my opinion.

In the first chart we see that the Treasury’s account at the Fed (basically, the governments “wallet”) has been emptying fast as the money it “printed” is sent to just about every American - helicopter money.  The decline is approx. $900 billion.  That money immediately finds its way into the money market as bank deposits and money market fund assets. But, banks and funds can’t find enough actual demand for loans/securities, at least not enough that meets their credit criteria.

So, what do they do with the flood of money? They give it back to the Fed as an overnight reverse repo at 0.05% (just raised from 0%). This amount just hit yet another record today at $765 billion, second chart. 

By accepting all this enormous amount of cash, the Fed is tacitly admitting that its  QE is no longer needed since the $765 billion is 6.5 months worth of QE that can’t find any use in the real economy. And there is more cash coming from the Treasury too, as it continues to draw down its account. It's a mess created by the Fed and the Treasury and it needs to be dealt with, right away. 

Think of all this cash as a lake of highly combustible fuel.  We already see the flames of nearby fires (commodity, transport and asset inflation)... how long before it reaches the lake and sets consumer inflation raging?

My bet/hope is that the Fed is looking at all this money coming right back at it and is wondering… ummmm, do I still need to print so much of the stuff? What’s the use?

Someone is throwing around taper dates and numbers at the Fed, for sure. Soon, too, I hope.


  1. Attempted translation:

    On the palace table the food rots;
    On the streets the frozen corpses lie.
    What use are words,
    If wealth and death are brothers.


    朱门酒肉臭, Zhu men jiu rou chou,
    路有冻死骨。 Lu you dong si gu.
    荣枯咫尺异, Rong ku zhi chi yi,
    惆怅难再述。 Chou chang nan zai shu.

    Inside the red gate wine and meat went bad,
    Out on the road there were bones of those who died of cold.
    A foot away from prosperity is exhaustion,
    I am too disconsolate to say anything more.

  2. very long...

  3. to reference the topic at hand, I don't see the cycle as being useless... it allows
    the fed to keep interest rates (apparently) low, while taking money out of the system; it has to do so because of the huge and growing budget deficit...

    the repo rate is the new interest rate; but it will take the world some time to realize that.

    1. One of the Fed governors is already talking about tapering being more attractive as an option right now, instead of increasing interest rates. I fully expect tapering to commence well before end 2021. Maybe even before summer ends.