Last time Ben Bernanke suggested that it might be time to start tapering QE3, markets freaked out and tight money types took it as evidence that he needed to start tapering right away. Clearly, they said, markets had become hooked on easy money and it was time to take their drug of choice away, no matter how much it hurt. Besides, they said, how could anyone possible know when it we could taper safely. Better to taper now and get it over with.
Well, now Bernanke has started his taper and markets are cheering, presumably because they take it as his endorsement that the economy is getting stronger. All of this should be taken as a sign of when it will be safe to taper.
When market engage in bizarre perverse, through-the-looking glass behavior, it is a sign that all is not well. When they cheer bad news as a sign that the Fed will engage in more monetary expansion and become alarmed at good new because they fear the expansion will stop, it is a sign that the economy is too weak for monetary expansion to stop. When they start behaving normally -- cheering good news and becoming distressed over bad news, it is a sign that things are returning to normal and taper may be safe. When you discuss possible taper and markets panic over having their support withdrawn, it is a sign that taper is premature. When you discuss taper and markets cheer it as a sign that the economy is getting stronger, it is a sign that taper is safe.
When you discuss taper, or reject taper and hard money types freak out, it is a sign that hard money types are being typical hard money types and should be ignored.
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