It's past time to worry about ending Fed's QE

By DAVID MOON, Moon Capital Management, LLC
November 24, 2013

Janet Yellen is the President’s nominee to replace Federal Reserve Board Chairman Ben Bernanke. In testimony before the Senate Banking Committee last week, she noted that the Fed's quantitative easing program had not irrationally affected asset prices and that she intends to continue the Fed's massive bond buying program when she is expected to become chair in January.

"I don't see evidence at this point, in major sectors of asset prices, of misalignments. Although there is limited evidence of a reach for yield, we don't see a broad build up in leverage."

Perhaps Dr. Yellen doesn't consider Treasury securities an asset sector. Or maybe she thinks that 90-day Treasury yields of 0.08 percent when the stated inflation rate is 1.2 percent is not a misalignment in prices.

Among private economists and investors, however, she is clearly in a minority. As I wrote last week, institutional investors are in almost uniform agreement that bond prices are artificially and irrationally misaligned—as the result of Fed easing.

During her two-hour testimony, Yellen said that the benefits of the bond-buying program still outweigh the costs.

Ben Bernanke spoke about the cost of printing money in 2002, before becoming Fed chair.

“The US has this technology, called a printing press, that allows it to produce as many US dollars as it wishes without any cost.”

Unlike the current one, at least the next Fed chief acknowledges there is at least some cost associated with printing as many dollars as the chair wishes.

Other than the investment banks and private equity firms, it is difficult to find an obvious area of the economy that has benefitted from the almost zero percent interest rates resulting from these bond purchases.

Any benefit to the housing market was maximized long ago.

Quantitative easing as a tool to reduce unemployment is based on the premise that lower interest rates will encourage companies to build new factories, resulting in a need for new employees to work in the factories.

Except that businesses build widget factories when they can’t meet the demand for widgets, not simply because money is cheap.

Companies have benefitted from borrowing more than three trillion dollars at historically low interest rates, then have used the proceeds to refinance older, higher-rate debt, resulting in higher corporate profits. Some companies have used the cheap money to buy back massive amounts of their own stock.

When a quantitative easing program is so large that a single entity is buying two-thirds of all new government debt with money it simply creates each month by making an accounting entry, ending it will be difficult.

Without expressing any sense of urgency, Dr. Yellen did acknowledge that, the longer we wait to ease or end the program, the more difficult it will be.

"This program cannot last forever...the longer the program continues, the more we will need to worry about risks."

I suggest worrying about those risks sooner rather than later. Almost any large problem could have been solved when it was a small problem.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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