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Why the Fed Won't Taper

And, finally, the exhibit which must scare the Fed the most, and, by itself, foretells a highly unlikely scenario in which the Fed would taper while this measure drops like a stone in the ocean; it's the money multiplier statistic calculated by the Fed to assess levels of credit expansion within the economy.

Exhibit E - M1 Money Multiplier


According to the exhibit E, money entering the banking system isn't multiplying by way of subsequent new loans issued via a system of fractional banking.  In other words, business and consumers don't have enough disposable income or confidence in future income prospects to increase debt levels.


In short, given the components of GDP, where GDP = private consumption + gross investment + government spending + (exports minus imports), or GDP = C+I+G+(X-M), weak private consumption, weak capital expenditures and a trade deficit leave only government spending to replace the weak components.

And while there appears to be no political will in Washington to drastically cut spending, the Fed must accommodate Treasury's need to fund itself.

The two top creditors, China and Japan, have not kept pace with the rate of increase to the accumulating federal debt of $17 trillion (cash accounting).  Therefore, the slack in demand requires another buyer to pick up the marginal drop in overseas purchases of US debt.  That buyer must be the Federal Reserve, typically referred to as the lender of last resort. But, today, in this case, the Fed is now the buyer of last resort.

There will be no taper any time soon.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Jason Bond is an American stock trader, entrepreneur, and small cap expert. Jason teaches small cap swing trading at Jason Bond Picks. He is best known for his 2013 swing trading performance tripling the S&P 500 in the portfolio he manages. Jason's small cap swing trading ideas are widely published on numerous financial sites and blogs. Prior to teaching small cap swing trading in 2011, Jason taught for the Webster Central School District in NYS from 2001 - 2011. Jason's trading strategy attempts to capture gains in a stock within one to four days. He uses technical analysis to look for stocks with short-term price momentum. Jason is interested in the fundamental value of stocks but puts emphasis on price trends and patterns.
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