Authored by Jeffrey Snider via Alhambra Investment Partners,
It’s funny how these things work. He didn’t actually say the word “taper”, at least not when the frenzy first started. The very idea of the “taper tantrum” was the media’s work, the easy slogan that could be used as shorthand for the conventional explanation. The economy was improving, everyone was told and easily believed, therefore what was supposed to be open-ended QE begun the prior autumn couldn’t be unending forever.
In response to a question from Congressman Kevin Brady, Chairman of the US Congress Joint Economic Committee, about when normalizing monetary policy might happen Federal Reserve Chairman Ben Bernanke responded with “step down” rather than “taper.” This was May 22, 2013.
Chairman Bernanke. If we see continued improvement and we have confidence that that is going to be sustained, then we could in the next few meetings, take a step down in our pace of purchases.
It’s more than a little fuzzy in how we go from “continued improvement” to a major global currency crisis in the summer and then the hell that broke loose in 2014. It doesn’t really make much sense, though it does sound eerily familiar to our 2018 ears. Taper was, supposedly, tightening and that was why the world suddenly fell apart in 2013 only to suffer a worse fate starting 2014? We really were supposed to believe things were going to be so good they were bad.
Not quite.
Before understanding the “rising dollar” we first have to back up and explore the deflationary wave that swept up into it. That means rewinding our review all the way back to the recovery’s shallow and unsatisfying peak in 2011.
It was a crisis practically no one expected and certainly not to the severe proportions presented to the global monetary system in short order. Especially not with $1.6 trillion in bank reserves, money supposedly having been printed by not one but two QE’s to that point.
Regardless of conventional views, in late July 2011 there was major trouble. It grew worse until September when things started to break everywhere, especially in Europe.
Eventually and belatedly (as always) central banks would begin to respond only after shaking off their total disbelief. It was the ECB that went biggest in December 2011 offering two massive (they said) LTRO allotments, the first scheduled for settlement on December 22. The ECB wasn’t alone in its actions, as several of the major central banks announced coordinated efforts that included dollar swaps with the Fed.
These didn’t work, though in every single news story published about the LTRO’s the word “liquidity” appeared in each; as in the ECB is providing ample liquidity via its current and deposit accounts (bank reserves).
It wasn’t until July 26, 2012, when Mario Draghi was forced into issuing his...