Economic Cheerleading: The Latest Excuses from the Fed (Video)
Peter Schiff shares his thoughts on the Federal Reserve’s meeting that concluded yesterday. He also takes a look at the official first quarter GDP figure, explaining the misleading data behind it.
Highlights from the Schiff Report:
“Earlier this morning, we got the government’s first look at the GDP numbers for the first quarter of 2015. If you’ll recall, when the quarter first got underway, there was a lot of optimism surrounding Q1. After all, the fourth quarter was a lot weaker than had been expected at 2.2%. Everybody was looking for a rebound in Q1, and of course the Fed was going to be raising rates because the economy was so strong. So they were looking for a number north of 3%. But as the quarter progressed, and we were inundated with one bad economic report after another, the analysts were forced to ratchet down their estimates for the first quarter GDP…
“What we ended up getting was jus 0.2% – two-tenths of 1%. One-fifth of what the economists were looking for. So Q1 much weaker than anticipated, but it actually gets worse. 0.2% doesn’t tell the whole story…
“Here’s number one: the deflator. The government always deflates nominal GDP by the inflation rate, because they want to take inflation out of the numbers to see what is really going on. That’s real GDP… So you subtract your deflator from your nominal GDP to arrive at your real GDP. Not this time, because the government assumed inflation was a negative 0.1. Negative! Meaning that prices dropped. So instead of taking the nominal number and deflating it, they took the nominal number and inflated it. They raised it by 0.1…
“The last time there was a quarter when the deflator was negative was the second quarter of 2009. We were still in the Great Recession at that time, and we had our first negative quarter. If you want to go and get another one earlier than 2009, you got to go all the way back to 1949…
“I don’t believe this number. I think the true rate of inflation is higher than minus 0.1. If it’s higher than plus 0.1, then GDP was zero or negative… 0.1 was what they claimed for fourth quarter of last year, when we had [a GDP] of 2.2%. They said that inflation was just 0.1. I didn’t believe that 0.1, and I’m certainly not going to believe this negative 0.1.
“Another little detail that they don’t want to look at is the inventory bill, which continued to happen in the first quarter. It’s unbelievable that you have this optimism on the part of business about a recovery that doesn’t exist. The inventory build was one of the main reasons that you had a recovery in GDP in the second and third quarters of last year… Businesses are already loaded up with inventory. They have excess inventory. They can’t sell it. They’re not going to buy anymore. But assuming they had figured this out in Q1 and didn’t build the bloated inventories any further… then GDP in Q1 would have been minus 2.6%. That’s even with the negative rate of inflation. So it’s all this false optimism that powered the GDP all the way up to a plus 0.1%…
“They’re saying it’s about the weather. It’s always cold in the wintertime. There’s always snow. If the reason that Q1 GDP was so weak was because of the cold weather, why didn’t they build that into their original estimates? After all, it’s not a surprise that it was cold in January and February and that it snowed… Why do they always overestimate what the GDP growth is? Everybody is completely dismissing this and they are optimistic about the rest of the year, especially the Federal Reserve…
“They just concluded their two-day policy meeting. They released their official statement on interest rate policy. Of course, they didn’t move interest rates; they left them the same. Nobody thought they were going to hike rates, and rates are still at zero. One thing they did do is they removed from their language the fact that interest rates will not rise at their next meeting. Prior to this meeting they said, ‘We are unlikely to raise rates in April.’…
“What they did say is that assuming the economy continues to improve, at some point in time they will raise rates if the labor market also continues to improve. Which it won’t. But the Fed went out of its way to dismiss all of the bad news that we’ve seen in the first quarter. It did acknowledge that the economic data was softer than they expected. But they dismissed it all as being ‘transitory.’ Meaning they blamed the weather…
“The dollar just had its biggest two-day decline in six years… Before the Fed statement came out, we almost got to $1.12 on the euro… You have some huge moves in certain currencies. Swiss franc way up. Even the Swedish kroner was up 2% on the day. The dollar was getting clobbered, and then the Fed came out and just put a smiley face on the whole thing and all of a sudden the dollar rallied. It didn’t recover all of its losses… But if the Fed had come out with a more realistic statement, the dollar would have extended its decline. But instead, people looked at this as if, ‘Oh, everything is okay, because the Fed isn’t worried.’
“The Fed is never going to confess that they’re worried. That’s not their job. They’re propaganda. They’re cheerleaders for the economy. So they have to pretend that everything is going to get better in the second quarter, so they can pretend they’re going to raise rates. When things don’t get better, they’re going to pretend it’s some kind of surprise…
“One of the things I keep hearing people talk about is the gas price. The fact that consumers are going to have a windfall from cheaper gas prices. People still expect this… Oil prices hit a new high for the year today… In fact, oil prices have risen every week in the past month. They’re going to go up again. So oil prices, while they’re still lower than they were a year ago, they’re going to be a lot higher than they were a few months ago. Consumers are going to pay higher prices for gasoline in the second quarter than they did in the first quarter. So if consumers spending didn’t get a boost from cheap gas prices in the first quarter, why should it get a boost in the second quarter when the prices will be even higher…
“We’re not going to get saved by Obamacare and inventories like we did in 2014. 2015 is going to be a different story. I think the markets are already sensing this. That’s why you see this very, very sharp decline in the dollar. Gold prices didn’t react today. In fact, when Janet Yellen came out with her smiley face on the economy, gold sold off. It was flat on the day… I think it closed down $6 or $7, but gold was up $35 the last two trading sessions. So we’re back above $1,200. I think it’s poised for a break out, just like the dollar is poised for a break down…”
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