On Wednesday June 14, while trying to make it look like it clearly was telegraphing its intentions to cut its $4.2 trillion in holdings of Treasury bonds and mortgage-backed securities, the Fed left some bits of the process intentionally ambiguous.
In details about its plans to wind down quantitative easing, the Fed said it initially would set a cap of $6 billion a month above which it will reinvest proceeds from the repayment of principal for Treasury bonds under its asset purchases program. The cap will be raised by $6 billion every three months until it reaches $30 billion per month.
This will work for the Fed for a while because of the dollar's "exorbitant privilege" as the world reserve currency. The U.S. simply can export its problems by increasing or reducing the supply or dollars, and the world will just have to take it.
Over the long term, however, this could be the dollar's undoing. The greenback is still seen as the safest store of value among all other currencies out there, but abusing this status will end up undermining it.
http://realmoney.thestreet.com/articles/06/15/2017/fed-normalizes-money-printing-marking-dollars-eventual-demise?puc=yahoo&cm_ven=YAHOO&yptr=yahoo
Quote from: Mackin USA on June 15, 2017, 12:17:31 PM
In details about its plans to wind down quantitative easing, the Fed said it initially would set a cap of $6 billion a month above which it will reinvest proceeds from the repayment of principal for Treasury bonds under its asset purchases program. The cap will be raised by $6 billion every three months until it reaches $30 billion per month.
By doing a paced and measured & adjustable way & telegraphing general intent well in advance they mitigate some of the potential shocks to the system.
But there is no way they suck out that much liquidity without hitting asset prices.
https://market-ticker.org/akcs-www?post=232129
They'll pause in the process much like they did with raising rates or winding down the addition of QE.
Quote from: Mackin USA on June 15, 2017, 12:17:31 PM
This will work for the Fed for a while because of the dollar's "exorbitant privilege" as the world reserve currency. The U.S. simply can export its problems by increasing or reducing the supply or dollars, and the world will just have to take it.
This concept is not new & dates back to the 1960s. It is called the Triffin Dilemma.
https://en.wikipedia.org/wiki/Triffin_dilemma
"the conflict of economic interests that arises between short-term domestic and long-term international objectives for countries whose currencies serve as global reserve currencies. This dilemma was first identified in the 1960s by Belgian-American economist Robert Triffin, who pointed out that the country whose currency, being the global reserve currency, foreign nations wish to hold, must be willing to supply the world with an extra supply of its currency to fulfill world demand for these foreign exchange reserves, thus leading to a trade deficit. The use of a national currency, such as the U.S. dollar, as global reserve currency leads to tension between its national and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account, as some goals require an outflow of dollars from the United States, while others require an overall inflow."
Now that central banks are buying EFTs & hold billions in individually traded names
https://www.bloomberg.com/news/articles/2016-08-03/snb-s-u-s-equity-holdings-hit-record-61-8-billion-last-quarter
the pain can be redistributed globally if asset prices crash.
Quote from: Mackin USA on June 15, 2017, 12:17:31 PM
Over the long term, however, this could be the dollar's undoing. The greenback is still seen as the safest store of value among all other currencies out there, but abusing this status will end up undermining it.
Abusing the privileged is what they were doing with implementing QE (and looking the other way at financial scams while they were blowing asset bubbles in Internet stocks & then housing).
Unwinding QE isn't really abusing the privilege & they are forced to begin to attempt an unwind in order to maintain the illusion these measures are temporary rather than permanent.
There is already discussion over what size QE will need to be implemented when the next recession hits. Even Fed members admit this.
http://www.businessinsider.com/fed-official-qe-is-inevitable-when-the-next-recession-hits-2017-5
It is also worth noting the roll of the petrodollar & what has happened to major oil exporting countries which have attempted to price their oil in something other than Dollars. Almost nobody wishes they were in Iraq or Libya right now.
https://www.rferl.org/a/1095057.html
https://news.vice.com/article/libyan-oil-gold-and-qaddafi-the-strange-email-sidney-blumenthal-sent-hillary-clinton-in-2011
The big issue with the Dollar cycling between scarce & plentiful is at some point the masters of the "free market" economy will at some point clamp down too much & cause too deep a recession, then open up the spigot too much, causing the rapid flight into the Dollar to be quickly followed by a rapid flight out of the Dollar. A guy named Eric Janszen runs a site named iTulip, where he describes this process of overwhelming inflation following disinflation as Ka Poom Theory.
http://www.itulip.com/kapoomtheory.htm
With each round of distortions things get a bit more crazy, but they can stay crazy longer than you can stay solvent. Especially if you live somewhere where $100k a year is considered low income. ;)
http://www.mercurynews.com/2017/04/22/in-costly-bay-area-even-six-figure-salaries-are-considered-low-income/
modular homes to the rescue
https://www.wsj.com/articles/google-bets-on-modular-homes-to-fill-housing-demand-1497448838
The likely outcome of monetary policy getting too crazy would eventually be a re-negotiation of the structure of the international monetary system. But they have many, many rabbits to pull out of the hat.