Contact us
CALL US NOW 1-888-GOLD-160
(1-888-465-3160)

The Federal Reserve Is Driving the Economy into a Ditch

  by    0   0

To a large degree, the Federal Reserve drives the US economy, and it looks like it’s about to drive it into a ditch.

After pushing easy money policies for nearly a decade, the Fed wants to tighten things up. In 2015, it began nudging interest rates higher and it recently embarked on a policy of quantitative tightening to shed assets from its balance sheet. In other words, we’ve reached the peak of the credit cycle and we’re about to hit the downward slide. 

Peter Boockvar serves as CIO of Bleakley Advisory Group and editor of the Boock Report. In a recent letter to subscribers, Boockvar assets we no longer have economic cycles. We now have credit cycles, drive by central bank policy.

We must understand that we no longer have economic cycles. We have credit cycles that ebb and flow with monetary policy. After all, when the Fed cuts rates to extremes, its only function is to encourage the rest of us to borrow a lot of money and we seem to have been very good at that. Thus, in reverse, when rates are being raised, when liquidity rolls away, it discourages us from taking on more debt. We don’t save enough.”

An article at Mauldin Economics takes the analysis further, saying central banker and policy-makers have trained people for decades that running up debt is fun and easy.

Debt-fueled growth is fun at first but simply pulls forward future spending, which we then miss. Now we’re entering the much more dangerous reversal phase in which the Fed tries to break the debt addiction. We all know that never ends well.”

And here we are today.

Debt boosts asset prices. That’s why stocks and real estate perform so well during periods of QE. But when financing costs rise and buyers run short on cash, asset price will inevitably fall. With with the Fed pushing up rates and shedding assets from its balance sheet, those same prices are highly vulnerable.

Corporate debt has skyrocketed. As a result, we have a complete disconnect between stock prices and economic reality. As the Fed attempts to push interest rates up and the debt cycle sinks toward its trough, we will likely see a significant increase in corporate bankruptcies as the increased cost of debt service squeezes the life out of strapped companies.

Economist Hyman Minsky developed what is known as the Minsky financial instability hypothesis. He said exuberant companies pile on too much debt. This paralyzes them and then things start to unravel. This is basically what happened to Toys R Us. When this happens on a broad scale, the economy tanks. This is sometimes called a “Minsky moment.”

At the Minsky moment, the financial system shifts from stability to instability. When this happens, over-indebted borrowers begin selling off assets to meet other repayment demands. This pushes asset prices down – or as we generally say – the bubble bursts. According to Mauldin, we’re close to another Minsky moment.

The last ‘Minsky moment’ came from subprime mortgages and associated derivatives. Those are getting problematic again, but I think today’s bigger risk is the sheer amount of corporate debt, especially high-yield bonds that will be very hard to liquidate in a crisis. Corporate debt is now at a level that has not ended well in past cycles.”

As you can see from the chart, the corporate debt-to-GDP appears close to a peak. When it starts to fall, lenders will want to sell. But Mauldin raises the key question: to whom?

You see, it’s not just borrowers who’ve become accustomed to easy credit. Many lenders assume they can exit at a moment’s notice. One reason for the Great Recession was so many borrowers had sold short-term commercial paper to buy long-term assets. Things got worse when they couldn’t roll over the debt and some are now doing exactly the same thing again, except in much riskier high-yield debt.”

Minsky got the analysis right, but he missed the underlying cause. He failed to connect artificially low interest rates and government policy with unbridled exuberance. In fact, he said more government regulation was necessary to ward off the onset of instability. But government and central bank intervention is the problem and creates the instability.

The Fed has basically been driving fast along a winding road. It’s been fun, but now it’s trying to throw on the brakes. That’s about the time the car ends up in the ditch.

WhyBuyGoldNowBanner.070815.590

Get Peter Schiff’s latest gold market analysis – click here for a free subscription to his exclusive monthly Gold Videocast.
Interested in learning how to buy gold and buy silver?
Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!


Related Posts

Fake Accounting Creates Fake News

On Tuesday, US stock markets rallied. The Dow was up over 500 points. That led a lot of people to conclude that the recent declines were just a correction. But as Peter Schiff pointed out in his most recent podcast, bear markets have rallies. Just because the market goes up a few days doesn’t mean […]

READ MORE →

US Debt ‘Out the Wazoo’ as China and Japan Sell Off Treasuries

The US national debt increased by $1.27 trillion in fiscal 2018. If you expected the pace of borrowing to slow in fiscal 2019, you’ll be disappointed. In just the first 11 business days of the new fiscal year, the US government added another $138 billion of debt to the total. That brings the total national […]

READ MORE →

Report: Increasing Global Risk Highlight’s Gold’s Relevance

gold barsOn Oct. 10, the IMF released its Global Financial Stability report, highlighting increased levels of risk revealed by a number of global metrics. Just after the report was released, stocks in the US, Europe and Asia lost 4%, 3% and 4% respectively over three days. As a recent investment update released by the World Gold Council […]

READ MORE →

Hungary Increases Gold Reserves 10-Fold

Yesterday, the Hungarian central bank announced it recently boosted its gold reserves 10-fold. According to its website, the National Bank of Hungary (MNB) now owns 31.5 tons of gold, up from 3.1 tons. It was the first significant purchase of gold by Hungary since 1986. A statement by the bank said the increase in gold stocks was […]

READ MORE →

Peter Schiff: We’ve Had a Sale on Gold for a Long Time; It’s About to End

The stock market has been rocked over the last week but gold has rallied.  In his most recent podcast, Peter called gold “the real standout in the market.” The price of gold finally woke up — or traders work up and notice how cheap gold is.” Related

READ MORE →

Comments are closed.

Call Now