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The Fed’s Tightening Pipe Dream

Posted by Gonzalo Schwarz
March 5, 2013

 

Does the Chairman really believe that the Fed will be able to just sit back and watch the money supply unwind itself?

by Peter Schiff

Testifying before the US Senate this past Tuesday, Fed Chairman Ben Bernanke made an extraordinary claim about its bloated balance sheet: “We could exit without ever selling by letting it run off.” What Bernanke means here is that the Fed could simply hold its Treasuries and agency bonds until they mature, at which point the government would then be forced to pay the Fed back the principal amount. Through this process, the Fed’s unprecedented and inflationary position will be gradually and placidly unwound.

Growing rumors last month of a potential “tightening” of monetary policy – seemingly confirmed by the Fed minutes released on Feb. 20th – have spooked the precious metals markets, leading to a 5.8% correction in gold and 10.2% in silver.

However, these fears are preposterous on two counts.

First, the Fed just spent the past year and a half extending the maturities of its entire portfolio. That was the entire purpose of Operation Twist. The average maturity of the entire portfolio is now over 10 years. That means any wind-down using the strategy Bernanke outlined would play out over the course of decades – not months or years.

Fortunately for hard asset investors, it is unlikely to play out at all.

The second reason these fears are unfounded is that there is no exit strategy. Listening to Bernanke’s testimony, it was clear that here was a man simply speculating about when an exit might be undertaken – or perhaps if it would ever be taken. Senator Corker from Tennessee accused Bernanke during the hearing of being “the biggest dove since World War II.” “I think it’s something you’re rather proud of,” the Senator continued. The Chairman’s response to the charge of recklessly endangering the nation’s currency? “In some respects, I am.” …

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 image: flickr/clearlyambiguous