Firstly, the whole concept of the central bank printing money out of thin air never made sense to me because the money isn't backed by anything. The Federal Reserve says that starting in January, it will print 11% less in new money. In 2014, instead of printing more than $1.0 trillion in new money, it will print (or "create," if you prefer) $900 billion in new money.
But—and there is always a but—the Federal Reserve, through Bernanke's press conference following yesterday's meeting of the Federal Reserve governors, said it would adjust the amount of money it creates based on how the economy is faring. I take this to mean that if the economy slows again, the Federal Reserve could, and likely will, start printing even more money than it currently does.
And there is the question of the $4.0 trillion in new money the Federal Reserve's balance sheet says it has created. How does the Fed get rid of the $4.0 trillion? I don't think it can. I don't think the Federal Reserve will find anyone out there who can take the $4.0 trillion, mostly in bonds, off its hands.
What really threw me for a loop yesterday was that when the Federal Reserve said it would start printing $10.0 billion less in new money each month, the Dow Jones Industrial Average rallied 300 points. Yes, we had one of the biggest days for the stock market this year on the news that the Federal Reserve would pull back on printing! Does that make sense?
In the past, whenever the Fed talked about "tapering," the stock market would dive. Now the stock market is rallying on the news? (Is the market rigged or what?)
Dear reader, economically speaking, we are living through the most interesting times in our history. We have the greatest number of people living below the poverty line and the greatest amount of people using food stamps in American history...and a stock market that's making those participating in it richer (almost daily) if they simply ride it higher. Corporate earnings growth disappearing? Who cares anymore? The Fed's still printing $900 billion a year in new money...and that's all that seems to matter.
Why did the stock market rally yesterday on the Federal Reserve's announcement that it would taper? It rallied because Bernanke cemented what Wall Street wanted to hear; no matter what, if things get tough again, the Fed will print even more money. That's the take-home message here. The Federal Reserve will increase or decrease the amount of new money it creates depending on which the way the economy goes. It can't get better than that!
But the question as to how long a stock market can rise solely on the coattails of money printing is another story. In fact, it's a story that will not end well. Every major indicator I follow, except for the increasing money supply, is now flashing red for the stock market. The higher this market goes, the bigger the bust will be and the more damage it will cause to an already bruised consumer confidence level. In other words, this next bust is going to be a doozy