Kudlow’s Money Politics

Fed Storm Cloud Ahead

I’d like to take a brief moment to discuss Fed head Ben Bernanke’s recently released monetary-exit testimony.

Here’s an initial question: How in the world is Bernanke going to reduce the Fed’s swollen balance sheet and ultra-easy zero-interest-rate monetary explosion? How is he going to do it?

And here are some questions with big ramifications: Have financial markets, including stocks, become totally addicted to the Federal Reserve’s zero interest rate and huge money build-up? And when the time finally arrives to implement an exit strategy — whenever that is — is there going to be a total stock market train wreck as the money stimulus is reeled in?

Stocks got the jitters as soon as the Bernanke testimony was released. That may very well be a harbinger of future financial market problems. This is one of those ominous storm clouds out there that we’ve got to keep our eyes on. We must consider this potential threat.

The price of gold has jumped nearly 40 percent since late 2008 when the central bank started pumping up money to the tune of around $1.5 trillion. So far, stock and bond markets have cheered. But what happens once all that cash is drained from the system? It could be a major market problem. It may very well be a major economic-recovery problem.

Further complicating matters, if the Fed doesn’t drain the excess cash, there could be a major inflation problem as well. 

Larry Kudlow — Larry Kudlow is CNBC’s senior contributor. His new book is JFK and the Reagan Revolution: A Secret History of American Prosperity, written with Brian Domitrovic.

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