To engage our minds and sharpen our perspectives, it’s worthwhile to start with a classic conundrum…
The ancient Greek philosopher Eubulides of Miletus posed a thought-provoking question: “A man claims he is lying.” Is this assertion true or false?
Consider for a moment… If his claim about lying is true, then he is indeed lying, making the statement false. Yet, if he is not lying, then his assertion must be true.
This logical dilemma leads us to a perplexing contradiction. How can his statement be simultaneously true and false? It simply cannot. Thus, we arrive at an impasse known as the Liar Paradox.
Recalling this paradox serves a purpose. It encourages us to think critically—a practice not often embraced in recent times. Moreover, it sets the stage for examining today’s monetary policy…
To Taper or Not to Taper?
Through both bold actions and missteps, the brilliant minds at the Federal Reserve have maneuvered the economy into a puzzling predicament. Their extensive interventions in credit markets have left them cornered. As they approach their centennial, they’ve reduced their options to one perplexing question: To taper or not to taper?
Keep in mind, “tapering” doesn’t imply the Fed would cease its monthly infusion of $85 billion into the economy through treasury and mortgage bond purchases. Instead, it suggests a slight reduction in this practice to gauge its effects. For anyone tasked with maintaining the stability of the dollar, this seems like a prudent step to consider sooner rather than later.
However, the Fed has been mulling over this idea since September. Initially, they proposed scaling back their asset purchases to about $70 or $75 billion per month. Yet, they have not followed through. Instead, they’ve shielded their indecision behind the distractions of government shutdowns and debt ceiling discussions.
There always seems to be a rationale the Fed can invoke for continuing its current course. The unemployment rate is one such metric, a figure that many believe is manipulated by the Census Bureau. Although it has dipped to 7 percent, it remains too high in the Fed’s eyes to even consider tapering.
In truth, the Fed is fearful of making any moves towards tapering. They worry that doing so could trigger a panic in the stock and credit markets, reminiscent of the turmoil that arose when tapering was first mentioned. Presently, the markets have become heavily reliant on the Fed’s easy-money policies. Removing this support could lead to significant instability.
Fed Policy Reduction
It is this predicament that the Federal Reserve finds itself in, largely due to its own decisions. Quantitative Easing (QE) aimed at lowering long-term interest rates to foster borrowing, job creation, and investment has, however, failed to deliver on its promise of stimulating job growth. Instead, it seems to have merely inflated stock market values.
Furthermore, Fed officials are at a loss on how to proceed. Their discussions have regressed to debating whether to taper or not. Additionally, consensus remains elusive…
“I’ll be open-minded,” stated Charles Evans, president of the Federal Reserve Bank of Chicago, in a recent interview with Reuters Insider when discussing the possibility of trimming the Fed’s stimulus at the upcoming policy meeting on December 17-18.
“Everything else being equal, I would like to see a couple of months of positive employment numbers. But this was an improvement.”
In contrast, Evans’ colleague, Charles Plosser, president of the Federal Reserve Bank of Philadelphia, asserted that the November jobs report should prompt the U.S. central bank to end its bond-buying program.
“The sooner we can end this, the better.”
At Economic Prism, we find ourselves siding with Plosser over Evans. Nonetheless, we acknowledge that the repercussions of past actions cannot be avoided. The Fed’s decisions have been imprudently reckless. Unwinding this situation may create an even greater mess than if they had never intervened in the first place. The potential consequences are staggering.
Sincerely,
MN Gordon
for Economic Prism
