Tags: Faber | Central | Banks | Balance

Faber: Central Banks Will Never Trim Balance Sheets

Monday, 19 Mar 2012 07:47 AM

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The Federal Reserve and other central banks will never take steps to rein in the inflation-fueling liquidity stemming from their loose monetary policies, and they also won't reduce their balance sheets that have swollen via easing measures designed to jolt the economy, says Marc Faber, publisher of the Gloom, Boom and Doom report.

The Fed has cut interest rates to near zero and has also bought assets from banks in order to increase the amount of money in circulation with the aim of improving the economy.

That tool is called quantitative easing, and the Fed has done it twice, with the first round, known as QE1, involving the purchase of $1.7 trillion in assets from banks, namely mortgage-backed securities.

A second round of quantitative easing, known as QE2, wrapped up in June of 2011 and involved a $600 billion purchase of government bonds from banks.
Other central banks around the world have taken similar steps, and they should now focus on writing down those assets and take steps to mop up the excess liquidity in the economy, although they likely won't, Faber says.

"I do not believe that the central banks around the world will ever, and I repeat ever, reduce their balance sheets. They’ve gone the path of money printing and once you choose that path you’re in it, and you have to print more money," he tells chrismartenson.com, a finance site.

Furthermore, Federal Reserve officials base their decisions with not enough real-world experience.

"The Fed is about the worst economic forecaster you can imagine. They are academics. They never go to a local pub. They never go shopping — or they lie," Faber says.

Stocks do rise amid loose monetary policies, but the consequences of such policies, including rising inflation rates and asset bubbles, remains unknown.

"In the short term, it has been working to some extent in the sense that equity prices are up and interest rates are down. And, so companies can issue bonds at extremely low rates," Faber says.

"But every money printing exercise in the world leads to unintended consequences at a later point. And, this is the important issue to remember: we don’t know yet for sure what the unintended consequences are."

One noted market observer says inflation rates, still manageable at 2.9 percent on year, are showing signs of rising.

"Yes, inflation is rearing its head. We're seeing that in oil prices and other commodities, and we're seeing it in the numbers," says Bill Gross, founder of Pimco, manager of the world's largest bond fund, according to The Daily Ticker, a Yahoo blog.

"I believe there will be a QE3, and perhaps a QE4," Gross adds, referring to a third round of quantitative easing that the Fed hasn't ruled out.

While stock prices are up, without Federal Reserve intervention, financial markets and the economy will turn south anew.

"That's not a policy recommendation, it's simply a realization that the substitution of central bank monetary purchases will continue for a long time, as long as they [central banks] try to support private economies on a global basis," Gross says.

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