QE may soon become a lot more interesting than most people expect. Thanks to public sector union-busting Republicans, Washington's "Build America Bonds" program -- a critical subsidy for basket-case states such as California and New Jersey -- is expiring imminently and, as far as anyone can tell, will not be renewed. Some experts think that the Fed will need to step in to prevent a full-on state- and municipal-bond market collapse, and the widespread misery and social chaos that would ensue. However, Republicans might have some issues with that.
Please keep in mind that this is an existential matter for the GOP. Its members have been itching to stick it to the bureaucrats and teachers' unions since forever. What better way to wipe out these Democrat fundraising machines than to stop bailing them out? If the Fed commences large-scale state- and municipal-bond purchases, it will be directly challenging the long-term viability and success of the Republican party. We have never seen monetary policy (if it can be called that) get so political. Could Bernanke take the heat?
I think not. Judging by his intensely quavering voice and lack of conviction or enthusiasm during his latest 60 Minutes appearance, Bernanke is in bad shape. If this was a job interview, he would not have gotten the job. No manager would hire someone who projects such insecurity. If this is how the man performs during a staged infomercial on CBS, how will he survive a Ron Paul committee hearing? In short, Bernanke is in no shape to take on the entire Republican party. But I cannot say that he won't make some probing moves in that direction. This could get very interesting!
Whatever the case, I contend that the era of massive stimulus and reasonable credit for states and municipalities is almost over. The Republican Congress will not allow it. For them, it is payback time -- and so the fiscal can will not be kicked any further down the road. 2011 is decision time; expect to see some Irish-style austerity at the state and municipal levels.
By the way, this is in line with my SeekingAlpha prediction from May 2009 that the social safety net will largely unravel in a number of the more troubled states by 2012. In fact, this is already happening -- although you wouldn't know it if you work on Wall Street.
As an aside, I also note that my prediction regarding the sources of federal debt-financing has come true. The Fed is now the #1 owner of U.S. Treasury paper, ahead of China, and at the current rate of QE activity -- as well as global de-dollarification -- will match all other foreign holders combined in as little as two years, by my calculatons.
Additionally, although the details turned out a little differently, I correctly predicted that the Fed would launch an all-out, blatant attempt to juice the stock market which, though failing to drive the market substantially higher, would allow insiders to cash out completely. According to Bloomberg data cited on Zero Hedge, a recent week saw insiders selling over 8,000 times more than they bought.
We do live in exciting times.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.