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How Is Quantitative Easing Going to Get People Borrowing?


You can lead a horse to water, but you can't make it drink. The Fed can give money to banks to lend, but they can't make consumers or companies borrow it.

As for inflation, it has been relatively subdued, mostly because all of that liquidity the Fed has created has not been getting used in the form of new borrowing. If people were actually increasing their borrowings to consume, we'd see inflation. And lots of it. But between people not wanting to borrow to buy houses or cars like they used to, and the negative social mood around banks that still persists, we may not see a big uptick in inflation anytime soon. Food and gas prices have never responded to monetary policy and they probably never will. That's one of the biggest reasons why the Fed looks at inflation excluding food and gas. But having said that, rising gas prices are a tax on consumers and when gas breaches $4/gallon, growth slows.

But the question that hangs on many people's minds is simply this: If the Fed is doing this now, where there is no sign of a recession at the moment, what will they do when we are confronted with one? That answer isn't so clear. I guess they can ramp up purchases of assets and seek to liquefy the markets even more than they already have or keep rates lower even longer. But I don't know how much good it will do then. It's not that the Fed is out of ammunition; they can choose to liquefy as many assets as they want. The question is one of effectiveness. At some point, the business cycle might just stare down Bernanke the way The Matrix's Neo stared down Agent Smith, hold its hand up, and stop all the Fed's bullets in midair. Then what?

Friday, I heard Jim Cramer say on CNBC that you have to "suspend disbelief" about a recession looming on the horizon and just push your chips into the middle of the table and go all-in on stocks. I think that's a good way to describe what is happening out there and what is being demanded of markets now. But that doesn't make it a prudent way to view risk and return. While this may benefit stocks for now, the question is where will returns come 12, 18, or 24 months from now. Predicting the future has always been less than exact, but with the announcement of this new round of Fed actions, that knot in the pit of your stomach may have just gotten a little bit bigger.

Todd Harrison is fond of saying, "The path we take is more important than the destination we arrive at." At this place and time, both the path and destination seem to be awfully foggy, especially since the Fed's tools have been – and still are – blunted by our changing views on the value of credit.

Twitter: @japhychron
No positions in stocks mentioned.
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