Why It Is Wrong for the Fed to Continue To Buy So Many Bonds

The U.S. economy is doing better. In spite of that, the Federal Reserve is keeping money cheap. That cannot come to any good, because it won’t remove the addiction.

All of this is not healthy. One of the best economists of the United States has exited the race for the head of the Federal Reserve and the traders on Wall Street are lighting fireworks. Why? Because he would have perhaps returned to normal monetary policy earlier than his opponent.

So it happened at the beginning of the week. The economist is named Lawrence Summers; no one doubts his expertise, but many find the man too overbearing. Therefore Barack Obama dropped him. The favorite for the job is now Janet Yellen, who stands further to the left and believes that the Federal Reserve should accelerate growth with the long-term policy of very cheap money.

Many have already forgotten how cheap. The Fed is not only holding its interest rate near zero, it is also bringing an additional $85 billion into circulation every month by buying government bonds and real estate securities. And what does it do last night? They decide to continue to do exactly the same for the time being.

Eighty-five billion dollars, month after month, maintaining interest rates at the zero line. The departing chairman of the bank had indicated that the cash flow would soon be curtailed, but for now it will continue unabated.

As much as the financial markets are celebrating, the danger for the economy is immense. Wherein does the risk lie? That kind of cheap money will drain the economy like cocaine does an addict. As everyone becomes accustomed to the drug, it will unleash new hysteria in the financial markets — and as a consequence, further crises. The Federal Reserve will then react with even more cheap money. And at some point, the economy will descend into inflation.

The storm of cheers from Wall Street this week is tainted praise for the lax Federal Reserve bankers in Washington. The stock traders are not interested whether new bubbles will sometime burst and all of our money will be devalued. They simply want the party to continue. Here and now. Like all addicts, today is disproportionately more important to them than tomorrow.

But politicians and Federal Reserve bankers cannot think this way. It is bad news, then, that the present Fed-elite has undertaken nothing against the flow of cash. And it is even worse news that Lawrence Summers has withdrawn as a candidate and the stock market is rejoicing because of that.

The American economy is growing around two to three percent a year, the unemployment rate is on the way down, the stock prices are at record levels and immense wheels of the economic machine are once again rotating on the banks. A great crisis will not look like this.

The time is coming for a change; for a clear signal that says: Results, whether on the stock market or in the national economy, must be earned again. Economic management on the zero interest pump simply cannot go on. It has to stop: first in America, then in Europe. Otherwise, perhaps a short-term new prosperity will develop that proves to be an expensive illusion in the long run.