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Kicking the Can Down the Road

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We got more signs that the economy is slowing down this week. And yet pundits and policymakers keep insisting everything is great.

In his latest podcast, Peter Schiff says he thinks people like Donald Trump and Larry Kudlow know deep down that things aren’t that great, but they want to keep kicking the can down the road for political reasons.

US manufacturing remained flat in March after two straight months of declines. It was the first quarterly drop in production since Pres. Trump took office.  Economists had expected a slight rise in manufacturing in March.

Factory production dropped at a 1.1% annualized rate in the first quarter.

According to Reuters, “Soft manufacturing and slowing economic growth reflect the ebbing stimulus from a $1.5 trillion tax cut package and supply chain disruptions caused by Washington’s trade war with China.”

Factory employment fell in March for the first time since July 2017.

Industrial production also dropped last month, falling 0.1% and missing Wall Street expectations of a o.1% gain.

Capacity utilization was also off. It was at 79 in February. Analysts expected an improvement to 79.1. Instead, it fell to 78.8.

Peter noted that Larry Kudlow said he doesn’t expect another Federal Reserve interest rate hike in his lifetime. And of course, Trump has actually been calling for more monetary stimulus. Why? Because they know that the economy isn’t really in very good shape and the want to keep the bubble inflated so Trump can get reelected.

How can Donald Trump be saying on the one hand that we have the greatest economy in the history of the world, on the other hand, we need the same emergency monetary policy we needed in the depths of the Great Recession? That doesn’t make sense. We have the greatest economy, but we need emergency quantitative easing. Well, the reason it makes sense is because Trump knows we don’t have a great economy; he knows we have a great bubble. He knew we had a bubble as a candidate. He criticized the Fed for doing quantitative easing — for inflating the bubble. But now that he owns the bubble, he needs the Fed to do more QE to keep it from popping before the next election.”

Peter said one thing everybody is ignoring is inflation. The conventional wisdom is that there is no inflation. But there is. Federal Reserve money printing is inflation. Just because we haven’t seen it in the government consumer price numbers doesn’t mean it doesn’t exist. Inflation is all around us – in the stock markets, in the bond markets, in real estate and in a lot of prices.

This is why everybody is so sanguine about interest rates.

See, the Fed can only keep rates low so long as there’s no inflation threat. So, that’s why initially they’re saying, ‘Well, we’re OK with inflation more than 2%. We’re OK if it’s symmetrical.’ … The reason they keep lowering the bar is because they can’t do anything about it. They have to keep pretending that inflation is not a threat because if they ever admit it’s a threat, what are they going to do? Nothing! They can’t raise interest rates. That is the problem. The reason they had to stop raising interest rates, the reason Larry Kudlow is so confident that we’re never going to have another rate hike, is because he knows the whole economy would implode.”

Simply put, if the Fed brought rates back to 4, 5, or 6% — where they historically have been — the entire house of cards would collapse.

Peter said the Fed will eventually have to raise rates because inflation will spiral out of control in the midst of a recession.

That’s stagflation.

The Fed is going to have to raise rates to protect the dollar, to prevent high inflation from becoming runaway or hyperinflation. That is the choice the Fed is going to have to make.”

Of course, raising rates and allowing the bubble to deflate will be extremely painful.

Every time they make the problems bigger by kicking the can down the road, there’s more political motivation to kick it again. Because the worse the problems are, the more painful is the resolution and of course, nobody wants to be blamed. Nobody wants to be the messenger that gets shot full of holes because they deliver the bad news.”

In this podcast, Peter also talks about income taxes and explains why the entire system is unconstitutional.

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