Monetary Crisis: A 2013 Update

AuthorJames A. Tackett,Fran Wolf
Date01 November 2013
Published date01 November 2013
© 2013 Wiley Periodicals, Inc.
Published online in Wiley Online Library (
DOI 10.1002/jcaf.21900
Fran Wolf and James A. Tackett
What is arguably
the most divisive debate
in the economic his-
tory of the United
States is currently
under way, namely,
the Federal Reserve’s
policy of quantitative
easing (QE) and its
impact on the health
of the nation. Fiscal conserva-
tives argue that U.S. national
debt is at a critical level, and QE
worsens the situation, pushing
the monetary system toward a
complete failure through hyper-
inflation. Federal Reserve Chair-
man Benjamin Bernanke has
taken the opposing side, argu-
ing the risk of deflation and a
major recession warrant the use
of extreme corrective measures,
including the current policy of
QE. Richard Fisher, president
of the Dallas Federal Reserve
Bank, has described QE as
“monetary cocaine,” expressing
his concern for what is becom-
ing a business and consumer
addiction to near-zero interest
rates. However, Dennis Lock-
hart, president of the Atlanta
Federal Reserve Bank, likened
QE to nothing more than a nico-
tine patch to help someone give
We are in the middle of possibly the most divi-
sive debate in the economic history of the United
States. Does the Federal Reserve’s policy of
quantitative easing (QE) make sense? Or is it,
as one prominent critic has charged, a form of
“monetary cocaine”—a dangerous business and
consumer addiction to near-zero interest rates?
© 2013 Wiley Periodicals, Inc.
Monetary Crisis: A 2013 Update
up smoking. Similar colorful
metaphors and similes abound
to describe the Fed’s current
unconventional monetary policy.
Vacillation in the expressed sen-
timents of the Fed occurs from
month to month, depending on
the latest unemployment num-
bers and rate of inflation.
In an apparent change of
course, some of Chairman Ber-
nanke’s June 2013 commentary
expressed the view that QE
would likely be curtailed later in
the year. This would be a clear
shift in policy from the Fed’s
current automatic purchase of
$85 billion of U.S. treasuries
every month. Bernanke’s com-
ments seemingly precipitated a
2-day 560-point sell-off in the
Dow Jones Industrial Average
and a sharp spike in interest
rates, the 10-year treasury yield
surging from 2.17% to above
2.5%. The proposed
reduction in QE
by the Fed may
be a result of the
slowly improving
U.S. economy, or it
may be caused by
a shift in the senti-
ments of some Fed
board members who
fear the prospect
of QE’s becoming
entrenched as a permanent fea-
ture of U.S. monetary policy.
Regardless of the explana-
tion for a shift in the level of
QE, there will be consequences
in the form of higher interest
rates, reduced bond values, and
changes in consumer spend-
ing. Moreover, if the Fed gets it
wrong, the U.S. economy may
drift toward excessive unemploy-
ment or inflation, depending
on the direction of their error.
There is also the disquieting
possibility that the U.S. national
debt has reached a critical mass
whereby dire economic results
will occur regardless of whether
QE is increased, decreased, or
ended. This article will evaluate
the probable economic results
of the Fed’s proposed decrease
in QE and provide recommen-
dations to corporate treasury

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