Eric King: “Art, you’ve been warning recently about the great danger, the fact that the Fed is employing so much leverage. KWN published a piece of yours which included comments from a couple of individuals, including Peter Tchir. Can you talk about the danger of this leverage that the Fed is employing for the listeners (and readers) globally?”
Cashin: “The Fed has bought up significant amounts of some of the (Treasury) issuances, particularly the 10-Year, in trying to affect rates further out. They’ve become a dominant factor. And I wonder how they can get to tapering because they have become kind of addicted in these purchases.
The Japanese are not buying (US Treasuries) at the rate they were buying a year ago. The Chinese are not buying Treasuries at the rate they were buying a year ago. So you begin to wonder, how can the Treasury manage if the 3rd leg of the stool, which is the Fed, comes apart? So, there will be a good deal of pressure there. They talk about, ‘Tapering is not tightening,’ but the markets may see it another way.
Now, that having been said, they have induced the banks, who can’t get in a full lending cycle, to take the money that the Fed gives them when it buys the bonds in its quantitative easing program, and they are leaving them in the vault at the Fed under their name. And that’s in the trillions of dollars.
Now there is no inflation at this time because that money has no velocity. It’s locked up. But the great concern here is should that money begin to gain velocity, that could turn into a sudden and sharp inflationary pressure, virtually coming out of nowhere.
And I do not believe the Fed would be able to stop that by raising rates. I think they would have to take more drastic measures, perhaps raising reserve requirements, which would be like hitting the economy in the head with a two-by-four.”
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