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The Fed, The Future, And The Rest Of Us

Discussing central banks and what they do is not necessarily the currency of a stock research company but we ignore them at our peril. Their decisions affect us in the way income is distributed, access to finance, the way the financial system operates, and even the solvency of government.

To many, the expansion of the Federal Reserve's balance sheet is the harbinger of hyperinflation. Those on fixed income are incensed with low interest rates, and almost everybody is angry about the bank bailouts. Yet, the fact that central banks saved the world from the second great depression is disregarded. Martin Wolf said it best in today's Financial Times. "Nobody gains credit for eliminating a hypothetical event."

What then happens when central banks reverse course and begin selling assets into the market and reducing bank credit as lending recovers? We really don't know but hope they do it carefully and over time. The greatest danger is a premature exit. It will only be in the mid 2020's before we likely know how this all turns out. During this period, central banks will be faced with balancing their traditional role of maintaining financial stability with managing monetary policy to control the rates of inflation. How this all works with financial regulators having a seat at the post - crisis table remains to be seen. At least we can be sure of one thing - markets will ruthlessly measure their success or failure in doing so.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.