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Thursday, 01/07/2021 3:40:31 PM

Thursday, January 07, 2021 3:40:31 PM

Post# of 240
It sounds like the Fed's plan for eventually tapering QE (which is currently running at $120 bil/month) may be aided by the arrival of the free spending Dems and their MMT fiscal spending plans. This will take up the slack in stimulus as the Fed tapers QE. So that's another reason for the Feds to favor a Dem sweep in this election.

Using fiscal policy (increasing deficit spending and decreasing taxes)
would be similar to the 2014-15 period when the Fed was fairly desperate to start tapering down QE and reduce its own bloated balance sheet. They got House Speaker Paul Ryan to reverse course and end the 'Sequester', and begin running much bigger deficits. Then a few years later came Trump's big tax cuts.

The stimulating effect from these bigger budget deficits and the tax cuts provided cover for the Fed's attempt to normalize interest rates and reduce its balance sheet. Nice try, and it almost worked, but the economy began weakening, made worse by Trump's trade war with China, so the Fed had to throw in the towel on rate normalization. Then the 'repo' problem appeared in the Fall of 2019, and the Fed had to restart QE. Of course then came Covid and mega QE.

Using the spendthrift Dems and MMT while the Fed tapers QE might work for a while, but how long can the US run deficits of 2-3 trillion/year before faith is lost in the dollar? Clearly the system is circling the drain, but they can probably keep it circling for a number of years before there is a final crisis. All the trillions in liquidity may keep the stock market buoyant, but looking longer term it seems best to start transitioning to hard assets like gold, land, rural real estate, etc.

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