United States GDP Growth Is Only Going to Get Worse (Video)
Peter Schiff explains the sharply lower GDP growth in the fourth quarter of 2014 and shares his predictions for 2015. Peter asks the ultimate question that everybody seems to be ignoring – How can analysts expect the United States to experience better GDP growth in 2015 when they also expect the Federal Reserve to raise interest rates and refrain from further stimulus? It’s the Fed’s monetary policies that stimulated this phony recovery in the first place.
Follow along with this partial transcript:
“The government released its first estimate of GDP growth for the fourth quarter of 2014. Remember, for the third quarter of 2014 we had that 5% number that got everybody excited. As I explained at the time, I thought that was an anomaly. I thought that was driven largely by a big build in inventories on anticipation of more robust consumer spending in the future, and because of the quirk involving expenditures on Obamacare, which were largely reflected in that third quarter. So I thought we would have a substantial slow down in the fourth quarter. In fact, that’s what happened.
“The government reported GDP growth in Q4 at 2.6%. That was well below the 3.2% that had been forecast. Of course, the forecast was higher earlier, but they had revised it lower to get down to 3.2 and it came out at 2.6. I think what’s even more remarkable is if you look at the inflation assumption the government made. Remember, they always have to deflate the nominal GDP to get a real number. Now, in the third quarter when it was 5%, the deflator was 1.4. So that meant nominal GDP growth was 6.4. When they took out the 1.4, we were left with 5. This time, the estimate was for 1% deflator. Instead, it was 0. The government assumed zero inflation on an annualized basis for Q4. So nominal GDP was also 2.4. If we had 1% inflation, like everybody assumed… Instead of reporting 2.6, it would have only been 1.6. If the inflation was the same in the fourth quarter as they assumed for the third quarter, it would have been 1.2.
“I don’t know what it is. I don’t believe any of the numbers. I think inflation is more than the even 1.4 that we got last quarter, which means the economy is still in contraction. But even if you believe the government’s numbers, you gotta scratch your head at the recent number being so much lower than people had estimated…
“The commentators I saw kind of shrugged it off, because they’re still optimistic that we’re going to get 3% growth in 2015… Why would we get 3% growth? We only got 2.4 for the entirety of 2014, and that was the best in five years… For all the hoopla about this great recovery and this plunge in the unemployment rate, we barely improved upon [2013’s] 2.2. Remember, we had QE for almost the entire year, and we had zero-percent interest rates for the entire year. 2015, according to the Fed, and according to what everybody believes, we’re going to have no quantitative easing… And sometime around mid-year, the Fed’s going to start raising interest rates. If that’s going to happen, [and] we can only manage 2.4% with the Fed throwing everything but the kitchen sink at the economy to stimulate it, how are we going to do better than that this year without any of that stimulus?
“Of course, I’ve always argued that stimulus doesn’t grow the economy. It actually retards economic growth. But it does goose the GDP. By encouraging us to borrow and spend money, and by propping up asset prices it does make the GDP go up. But at the expense of the real economy. The minute you stop the stimulus, all of the stimulus-related phony growth goes away. The reason the average man on the street doesn’t experience growth, is because phony growth doesn’t deliver genuine gains to most people. The minute you stop the stimulus, whatever you managed to achieve, whatever phony growth you achieve goes away. That’s what people still don’t understand…
“That is already happening. Look at the sharp deceleration between Q3 and Q4. Based on the economic data thus far in January, I think that the first quarter is going to be yet another reduction. In fact, we may only be 1 point something for GDP growth for Q1. Then where’s it going to be in the second quarter? Zero? Is the Fed really going to start raising interest rates as the economy is on the doorstep of a recession? I don’t think so… But people haven’t connected these dots yet. They still assume that the recovery is genuine, when it’s not…
“You can’t judge the success of quantitative easing and zero-percent interest rates until you’ve effectively ended the policy. That means you raise interest rates back to normal, and you shrink your balance sheet back to normal, and then take a look at where you are. Because if we did all that, we would find that we have dug ourselves into a much deeper hole than when we first started with these programs…
“The market initially kind of shrugged this off, but by the end of the day… the Dow was down about 250 points. This also was the last trading day of the month of January. So thus far in January, the Dow is now down 3.5%… S&P, a little bit better, only down 3%. They have something called the January Indicator, the January Effect. They say so goes January, so goes the year. I don’t know how much validity there is there. I don’t know how accurate that barometer is. I think it was more accurate in the past than it was in the last ten or twenty years. Regardless of the January effect, there are plenty of reasons to believe this would be a down year in the US stock market.
“Gold, on the other hand, had a much better January – up 8.4%. Silver up 9.8%. In other currencies, gold and silver were even stronger, because the dollar index was up 4% in January. That means the price of gold and silver were up a lot more in terms of other currencies. Gold stocks were up 23%… I can’t remember the last time you had this big a divergence at the end of January between gold stocks and the Dow… That might be significant, and indicate that something is coming…
“Ultimately what has to happen is that people have to connect these dots and get their arms around the fact that the US economy is not nearly as prosperous, that this recovery is not legitimate, and that it cannot sustain itself… If you believe that quantitative easing and zero-percent interest rates stimulated the economy, then how can you take away the stimulus and have the economy perform better without the stimulus than it did with the stimulus? You would have to acknowledge that if you take away the stimulus, you’re going to get less growth. That’s what’s going to happen, and yet everybody expects more growth.
“If you look at the most recent FOMC statement… the Fed was very upbeat about the economy and the unemployment situation. More upbeat than they’ve ever been. Yet here we have a big drop in Q4 GDP…
“Think about this. GDP growth was only marginally better in 2014 than it was in 2013. We went from 2.2 to 2.4. That’s not that big a jump, especially considering that we still had QE and we still had zero-percent interest rates. But the unemployment rate plunged. Yet all these employed workers didn’t do much to lift the GDP. Why not? The reason is we didn’t have a big jump in the number of employed workers, we just had a big reduction in the unemployment rate, because the people who used to be looking for work quit looking. Or some of the people that were holding out for full-time jobs took part-time jobs. These part-time jobs were not that production, and therefore they did not do much to influence the GDP…
“I do believe you’re going to see more talk from the investment community about why the Fed should not raise interest rates in 2015, or at least in mid-2015. They’ll blame it on the strong dollar. They’ll blame it on inflation being too low, or problems in Europe. All that is just an excuse… It doesn’t matter. Even if none of these problems existed, the air would be coming out of the US bubble economy anyway…
“I believe that this bubble is so big that merely not raising rates is not going to do enough. Because people are still going to be anticipating rate hikes at some point, that’s still going to be weighing on the market. I think the only thing the Fed can do to turn the situation around is launch QE4…
One of the reasons the dollar didn’t react more negatively to this much lower fourth quarter GDP was because we had the supposed bad news that came out of Europe earlier in the morning – that European inflation was once again negative. I think the headline number was a -0.6. But the core number, if you strip out food and energy was still +0.5. So prices are still rising in the eurozone, despite the fact that the economy is weak and you have lots of unemployed people… But because food and energy prices were down, the headline number was negative.
“Everything I read about this said it was of grave concern. The ECB is worried about these developments, and it validates why they did QE. Why? Why are you going to be concerned if gas prices go down? More importantly, let’s talk about food prices. Why should central bankers be worried if eating becomes less expensive? Everybody wants to pretend that they care about the poor. Food is the most important thing for the poor. They have to eat. There are some people who are so poor that they’re starving. What alleviates starvation? Inexpensive food. The more food there is, the less it costs. And poorer people spend a much higher percentage of their incomes on their food. Of course, if they can spend less on food then they have more money for other things. Then they can buy better food… Why should this worry central bankers? … This is ridiculous.
“Also, it’s utilities. Energy has to do with your heating bill or air conditioning. There are some people that are so poor that they cannot afford to turn on the heat. Maybe lower prices for energy will let them take off their sweaters and turn on their heat. But this is what is concerning the Europeans? This nonsense is getting to extremes. Yes, there is a weak economy in Europe. And yes, prices are not rising. But the fact that prices are not rising is not why the European economy is weak. If anything, it’s the other way around. It’s the weakness in the economy that is putting some downward pressure on prices. You can’t turn around the economy by forcing prices up. The lower prices actually act as a buffer to the weak economy, cushioning the sting…
“Here’s the interesting thing about deflation, or about falling prices that result from a weak economy. That only happens in the beginning of a weak economy. If you have a strong economy that gets weak, prices can come down. Why? Because businesses have more inventory that they need to liquidate… Initially you get a decline in prices. But the decline in prices is not causing the economic weakness. It is a result of it…
“The original effect of a weak economy could be to push prices down. But the longer-term effect is to send them back up. Once the inventory is liquidated… Once you diminish capacity and you reduce supply, then prices can then start to go up. The problem is you’ve got all these central bankers that are reacting to this slight decline in prices as if that’s the problem. Now they’re printing a bunch of money in order to create inflation…
“These governments that are creating money, creating inflation deliberately, because their weak economies are temporarily pushing down prices… They’re overreacting, and they’re attacking the symptoms instead of the disease. When this thing turns around, inflation is going to run out of control. They take on so much new debt in order to stimulate the economy, so to speak… that by the time inflation rears its ugly head, there’s too much debt for the central bank to fight it… The more debt that we accumulate to create the inflation, the less likely we are to be able to service the debt…
“I know everyone… has been saying, ‘Oh Peter Schiff has been saying this for years and it hasn’t happened.’ That’s right. It hasn’t happened. That doesn’t mean it’s not going to happen. What I’m tired of is all the people who say, ‘Stimulus is going to create economic growth.’ It hasn’t done that either. They’ve been doing all this stimulus for years and years and years and that hasn’t born any fruit, yet they want to claim credit for the stimulus working…
“If they don’t launch QE4 this year, the stock market will be down… and the real estate market will be down. Remember, both the stock market and the real estate market are the twin pillars upon which this phony recovery was built…”
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