After watching Japan suffer through their lost decade, I have to wonder if the United States has learned anything from their situation. The Federal Reserve continues to keep short term interest rates at zero with no movement in sight while buying $85 billion a month of securities through quantitative easing. Our Country is now half way to the same fate as Japan as both Countries put off hard decisions and reforms for the seductive ease of loose money. This extreme monetary policy has taken all of the pressure off of President Obama to create sound fiscal policies. Therefore, we find ourselves in a scenario where over-regulation, the Obama Care fiasco and tax uncertainty have dampened the potential stimulus from the incredibly loose monetary policy. Five years out from the Financial Crisis, each additional dollar of quantitative easing now has negligible benefits and future costs that cannot fully be measured, but will have to be paid. Regardless, the Fed is forced continue QE3 at the same pace for the sole purpose of delaying the alarm that occurs when the markets are faced with losing their liquidity induced steroids.
After Ben Bernanke mentioned reducing the pace of QE3, the markets quaked and interest rates surged over 100 basis points in a matter of days. Ben Bernanke quickly back pedaled and continues to try to talk the markets into reducing QE, while assuring extended periods of zero interest rates. Like a mouse trapped in a maze, the Fed does not see a way out. The question is how painful will the un-wind be when we have had no real growth in the last five years, just easy money. Although the S&P 500 is now 15% above its pre-crisis high in October 2007, the S&P's EBITDA per share is actually lower today with any increased S&P earnings coming from decreased interest expense and tax benefits from crisis era NOLs. This means that the equity and bond markets are even more beholden to the Fed than many people realize and that path forward for the Janet Yellen has become even more treacherous and politicized. Without pro-growth regulation, reasonable tax policy, deficit reduction and entitlement reform and healthcare stability, the United States will not have a firm foundation to build real growth and will continue to rely on monetary magic. President Obama's obsession with creating equal outcomes by taking pie from the rich and feeding it to the poor has done nothing but shrink the pie and make income inequality worse. The President needs to focus on growing that same pie by offering every American equal opportunity. Equal opportunity can be achieved through education and job training, while at the same time implementing limited regulation, reasonable taxation and infrastructure spending to create jobs.
As Janet Yellen takes over at the Federal Reserve, I see no end in in sight to extraordinary monetary policy as the mere mention of reduced QE spooks the market. In addition, our President has shown no will or competency to institute pro-growth policies that would allow for an end to these policies. The thought of increased short term rates seems to make bond holders feel faint. At every turn the Fed finds itself with few options to reverse its easy money policies as the markets are now fully addicted. Therefore, loose money will continue until asset bubbles, future inflation, rising rates or a new President forces a change from the path of least resistance. Ben Bernanke may feel that he built a better mouse trap with his current QE3, Operation Twist and Zero Interest Rate Policies, but I wonder when he will begin to realize that he is the mouse.