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Federal Reserve announces taper, currency debasement continues

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On Dec. 18, the Federal Open Market Committee issued a statement saying that they would begin to reduce the $85 billion monthly debasement of the US dollar, which is carried out by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term treasury securities at a pace of $45 billion per month. This will be decreased to $75 billion per month beginning in January, and will consist of purchasing additional agency mortgage-backed securities at a pace of $35 billion per month and longer-term treasury securities at a pace of $40 billion per month. The Committee also decided to keep the target range for short-term interest rates at 0 to 0.25 percent for at least as long as the unemployment rate remains above 6.5 percent.

“The recovery clearly remains far from complete,” Bernanke said in his final scheduled news conference. “We’re still going to buy assets at a high rate. ...My expectation is for similar moderate steps going forward through most of 2014.”

Stock markets reacted positively on the afternoon of Dec. 18, with the Dow Jones Industrial Average gaining 292.71 points (1.84 percent) to 16,167.97, a record high. The S&P 500 index rose 29.65 points (1.66 percent) to 1,810.65, also a record high. The NASDAQ Composite Index rose 46.38 points (1.15 percent) to 4,070.06, its highest level since 2000. Precious metals reacted modestly, with spot gold rising $2.84 (0.26 percent) to $1,220.46, silver falling $0.11 (0.56 percent) to $19.61, platinum rising $2.50 (0.19 percent) to $1,333.50, and palladium falling $1.25 (0.18 percent) to $694.25. Crude oil rose $0.58 (0.60 percent) to $97.80 per barrel. Bitcoin and other cryptocurrencies continued their downward slide, though this appears to have much more to do with recent crackdowns by Chinese regulators than with anything the Federal Reserve is doing.

Other details released on Wednesday show that the Fed's inflation of the monetary supply is not having their desired effect of increasing prices at a rate of 2 percent per year, with their latest projections predicting increases of 1.1-1.2 percent for 2013, 1.4-1.6 percent for 2014, 1.6-2.0 percent for 2015, and 1.8-2.0 percent for 2016. The projected annual growth in gross domestic product (GDP) for 2013 was revised upward from the September projection, rising to 2.2-2.3 percent. The 2014 projection was given more uncertainty, being revised from 2.9-3.1 percent to 2.8-3.2 percent. Longer term projections were revised slightly downward.

These projections would seem to indicate that the current policies of the Fed are not helping the economy to recover, and are merely sustaining it artificially. The Keynesian school of economics explains this through the concept of a liquidity trap, while the Austrian school of economics explains this through the concept of malinvestment.

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