Monetary Crisis: A 2013 Update

• Author: James A. Tackett,Fran Wolf
• Date: 01 November 2013
• DOI: http://doi.org/10.1002/jcaf.21900
• Published date: 01 November 2013

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© 2013 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.21900

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Fran Wolf and James A. Tackett

INTRODUCTION

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

managers.