There is no Exit Plan

Europe is on the verge of collapse. The US is still regarded as the safe haven but despite years of zero interest rate policy and a massively expanded Federal Reserve balance sheet the economy is again on the verge of disaster. Yet the only solutions being discussed are more easing and stimulus.

Regardless of the results, monetary expansion remains the only tool in the central-bank tool kit. Global markets have not revisited the type of chaos experienced after the Lehman Brothers failure, but that’s simply because the problems have been avoided and pushed into the future. In America the federal debt is expanding as rapidly as the Fed balance sheet. And while government and central bank officials constantly remind the public about the disaster that was avoided, they rarely mention how these short-term solutions will eventually be unwound.

These are mainly Treasury and mortgage securities. These are both interest rate sensitive assets. Their value moves inversely to interest rates, meaning that as rates go down they become more valuable. Of course the problem is that as interest rates rise they lose value. The Fed claims that as conditions improve it will begin unwinding this book of securities. But in this environment, interest rates will be rising, which means that the Fed is going to be selling assets that are losing value.

           ................... Chris Marcus