Peng: Fed Tapering to What?

NEW YORK ( TheStreet) -- Fed Chairman Ben Bernanke's Congressional testimony Wednesday left the market gyrating in schizophrenia and confusion. In his opening remarks, he seemed to emphasize that the recovery is still fragile and QE has been helpful, thus implying continued QE. Equities ( SPDR S&P 500 Index ETF ( SPY)), bonds ( iShares 20+ Year Treasury Bond ETF ( TLT)), and gold ( SPDR Gold Trust ETF ( GLD)) all exploded.

Then, during Q&A he started talking about discussing scaling back asset purchases in the coming FOMC meetings. All markets promptly turned tail and closed in red. In order to parse Bernanke's seemingly self-contradictory remarks properly, it helps to take a step back first and set up the proper context.

Here's how QE is supposed to work: you inject liquidity, or, as in the case of Abenomics QQE (Quantitative-Qualitative Easing), liquidity and base money, into the economy, force up inflation expectation and intimidate people into spending. Never mind the poor folks without means of effective inflation protection, e.g., retirees relying on life savings and workers with little bargaining power.

Or, as Japanese Deputy Prime Minister Taro Aso put it with menacing candor in January, those useless people should just "hurry up and die." From there it becomes a self-fulfilling prophecy: everybody spends and/or invests, actual inflation goes up, economy goes up, everybody spends more and so on. Simple enough. Can't fail.

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