Fin - Breakout - US

QE2 Is Over, Now What?

Jeff Macke
Breakout

"There's nothing else the Fed can do." This is the obvious yet still depressing observation of Bert Ely, the eponymous Bank Analyst of Ely & Co.

Echoing testimony he gave before the House Committee on Financial Services and observations shared by Barry Ritholtz at his must-read website, Ely told Breakout the Fed is out of ideas and ammunition. The dual mandates of stimulating employment while controlling inflation are in conflict with one another at this point. The stimulus didn't stimulate job growth but inflation is perking up it's head, suggesting QE3 isn't in the works and would be pointless anyway.

As is the case with so many of Wall Street's "conspiracy theories" the truth is directly in front of those who think. Remember all those icky toxic assets from the financial crisis? As it turns out, they didn't exactly disappear but rather were swallowed by the Federal Reserve. On the upside, sort of, the funding for a decent portion of the Federal debt comes not from Treasury but the banking industry.

Ely says "the banking industry, through it's deposits at the Federal Reserve, essentially is financing a not-insignificant portion of the Federal Debt as well as the Fed's other assets." By his calculation more than $1.6 Trillion of bank deposits are on the Federal Reserve's balance sheet.

Furthermore Ely's description of the interrelationships between the Federal Reserve and the banking industry have created a logic-loop akin to an Escher painting or the movie Inception. Trying yet another metaphor; America's Financial Overlords attempting to lift the economy up by it's own ears and calling it levitation, or "growth" as the case may be.

"Too big to fail" is now an adorable anachronism. Neither the Fed nor the banks can fail alone at this point, obviating the idea that the Fed will do anything it can to save banks as failing to do so would be suicidal. Like the gentlemen of the Titanic or the Billy Joel song, failure of the banking system, Treasury or the Federal Reserve means "we all go down together."

"We're in uncharted territory we've never been through anything like this before," said Ely. Sure we have. Ask the Romans, Egyptians, Mayans or Aztecs about the inevitability of cultural failure. Better yet, take 3-seconds to run a search on U.S. Central Banks. Every attempt has failed or been dissolved every generation, on average, in the 235 years since the birthday we'll celebrate on Monday.

In 2 years it will mark a century since Woodrow Wilson founded the current Federal Reserve. With every firework explosion you watch on Monday the current Federal Reserve will move slightly closer to its inevitable implosion.

Happy 4th of July!

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