By Matthew Piepenburg
Reason 1: The Taper Debate May Not be a Debate at All
Here, we look past the taper headlines and ask a simple question: Would a Fed “tapering” of QE really matter?
As we’ve written elsewhere, the Great Taper Debate is less of a debate than it is a pundit circus, forever fueling now classic yet complimentary debates on inflation vs. deflation, gold vs. the dollar and Fed-speak vs. honesty.
Of course, such topics, including the great “taper,” are all critical issues worthy of opposing views and somber discussions.
The world needs open, transparent and respectful (as opposed to tyrannical) debate, now more than ever.
If the Fed, for example, were to taper money printing, it’s logical to assume (and argue) that this would mean falling bonds, rising rates, deflationary forces, a stronger dollar and massive headwinds for risk assets like stocks and real estate.
But for many who are not otherwise deeply ensconced into the weeds of Wall Street (i.e., normal, smart and conscientious investors), what they may not know is this: The Fed has other tricks up its liquidity sleeve than just “QE.”
Stated otherwise, the taper fears as well as taper debate may not be as central to the central bank debate as one might think.
Why?
Hidden Liquidity Tricks and More Central Bank Fire Hoses
Because hidden within the backwash of the deliberately murky and mysterious (i.e., toxic) love affair between Wall Street and the Fed, lies unmarked little islands of hidden liquidity powers known as the Standard Repo Facility (SRF).
Specifically, we’re referring to the Reverse Repo Program (RRP) for domestic use and the FIMA swap lines (for foreign creditors) which allows the Fed to keep dumping liquidity into the system even during a QE “taper.”
The RRP program, for example, allows the Fed to help commercial banks avoid (i.e., cheat on) those otherwise laudable Basel 3 rules, thereby giving our seemingly immortal banks the hidden power to circumvent Basel 3’s reserve requirements.
Without diving too deep into this intentionally complex arena, RRP programs technically reduce liquidity, but the program’s fine print effectively allows increasingly less “liquid” commercial banks to sidestep Basel 3, which means they are not forced to become “less liquid” in actual practice—just more dangerous.
As we warned months ago, as debt conditions worsen, so too does transparency and truth; far more importantly, centralized control over (and support for) an otherwise grossly distorted banking system (and risk asset bubble) continues to rise behind the headlines.
In short, if investors are wondering why or how markets can and could climb despite “taper” headlines, the answer is hidden in plain yet deliberately complex sight. After all, distortion loves to hide behind complexity.
Like inflation, the real truth behind Basel 3 and the taper-debate is hidden behind deliberate obfuscation and mis-reporting—what normal folks call, well…lies.
This means, taper or no taper, the dollar liquidity will keep pumping within the fantasy islands of the RRP archipelago and hence the liquidity needed to help “inflate away” otherwise unconscionable and mathematically growth-killing sovereign debt will and can continue.
Such liquidity trends, of course, just mean the further debasement of fiat/paper money.
Reason 2: The IMF Signals More Liquidity
But if you think the Fed is the only monetary body growing more desperate and hence liquidity-clever by the day, let’s not forget those Wunderkinder at the IMF nor Forest Gump’s reminder that when it comes to dumping more paper money onto an already unsustainable debt pile, “stupid is as stupid does.”
Just one month ago, the IMF’s board of governors approved an allocation (its first since 2009) of Special Drawing Rights (SDR) to the tune of $650B (456B in SDR) in order to stimulate, you guessed it, more global liquidity.
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