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The Fed’s Mission Impossible

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The markets were giddy Friday after a much better than expected jobs report boosted optimism for a quick v-shaped recovery as the economy opens back up. But in his podcast Friday, Peter Schiff poured some cold water on this notion. He said given the amount of stimulus that the Federal Reserve and the US government have pumped into the economy, unwinding it all will be mission impossible.

Friday’s Labor Department unemployment report was a real shocker. Analysts expected another big month of job losses in May. Instead, the economy added just over 2.5 million jobs. The unemployment rate fell from 14.7% to 13.3%.

We know there were a significant number of layoffs in May. New unemployment claims averaged around 2 million a week. But apparently, a lot of the 20 million-plus people who lost their jobs in April were rehired in May.

How do we make sense of these numbers?

Peter said he thinks a lot of the rehiring was incentivized by government programs.

Remember, one of the reasons is the government is paying companies either to not fire people in the first place or to rehire them. Remember, when you took out a loan, the PPP loans – Payroll Protection Program – it’s a grant if you don’t fire anybody. And if you fire people, as long as you bring them back, then you don’t have to repay the loan. So, there probably was a lot of pressure on a lot of businesses to rehire people that they probably don’t even need. But if they don’t bring them back, they’re going to have to pay back the PPP loan, so they brought them back anyway. “

If this is true, then a lot of the people who got rehired may well end up getting refired.

You don’t have to keep these people on the books permanently in order not to repay the loan. You just have to get them back on the books long enough to get the loan forgiven. And remember, there’s a lot of other companies, like the airlines, for example, who got a lot of bailout money upfront on the condition that they didn’t lay people off. Well, there’s a date where now they can start laying people off. So, I think we have a lot of artificial incentives or interference in the market.”

On top of that, the government is spending a lot of money it doesn’t have. Deficits are exploding. The Federal Reserve is printing trillions of dollars. All to keep people employed.

How great would these [unemployment] numbers be if it wasn’t for these massive deficits and all this money printing that is simply postponing a lot of the layoffs that were going to happen eventually anyway? In fact, we may end up exacerbating the number of layoffs because we may be financially weakening a lot of these companies with the incentives that we put into place.”

Peter said that it’s ironic that even with the surprising jobs report, President Trump is calling for more stimulus.

If the economy is so strong, why do we need to stimulate it even more?”

The unemployment report sent US stock markets soaring and gold tumbling as investors became even more optimistic about the so-called v-shaped recovery. But Peter raises an important question for people who believe the worst is behind us and the economy is about to come roaring back.

How is the Fed going to withdraw all that liquidity? The Fed put all this liquidity into the economy. It created all this money based on a more substantial downturn – a longer-lasting deeper recession/depression. And to be preemptive, they just basically threw out the kitchen sink in terms of money printing. And they printed all this money, and bought up all these bonds, and all these corporate bonds that they now own, but what if they panicked? What if now everything is fine? How does the Fed withdraw that liquidity? It’s impossible! How are they going to turn around and start selling all the bonds they bought? How are they going to raise interest rates  when the whole supposed snap-back is 100% a function of all the money they printed?”

If the recession is over, even the Keynesians have to concede inflation is a threat. If prices start to rise, is the Fed just going to let that happen?

What happens to the so-called recovery if interest rates and consumer prices go up? So the whole thing is impossible. To believe that we’re going to have a recovery this quickly is impossible given what that would do and what that would force the Federal Reserve to do, which means there goes your recovery.”

It’s important to remember that the economy was not healthy before COVID-19. The Fed was already engaged in rate-cutting and QE. The federal government was already on track for a $1 trillion deficit.

This recession began with a bang, but it is not over. We’re having a little bit of a bounce now. You have some false optimism about a recovery around the corner. But the economic damage existed before COVID-19 and now it’s even greater.”

Peter went on to analyze the stock market reaction to the jobs report.

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