There’s been a lot of focus on the Federal Reserve lately.
Earlier this month, the central bank launched efforts to shrink its balance sheet after years of quantitative easing. Most analysts also expect one more interest rate increase this year. Then there is rampant speculation about who will take the reins at the Fed when Janet Yellen’s term ends early next year. Many observers think Trump will pick a more hawkish Federal Reserve chair who will increase the pace of “normalization.”
But Peter Schiff has said ultimately the Fed doesn’t want to do anything to upset the status quo. And at this point, the central bank is between a rock and a hard place. It can normalize, which will ultimately pop the bubble, or it can continue with its easy money policies and wreck the dollar. Peter has said the Fed will ultimately sacrifice the dollar on the altar of the stock market.
In a recent article published on the Mises Wire, economist Ryan McMaken weighs in, arguing along these same lines. He says the Fed won’t do anything that will spook the markets. That means we can expect more “easy money.” But this raises a question – what happens when the next recession rolls along?
The price of gold has fallen four straight weeks, primarily driven down by anticipation of Federal Reserve monetary tightening. The kickoff of the Fed’s balance sheet normalization program and the expectation of rising interest rates have helped spark a dollar rally. But few people seem to be paying any attention to the pitfalls of quantitative tightening. In fact, the Fed’s policy to push interest rates higher could turn out to be a havoc-wrecking juggernaut.
The Federal Reserve Open Market Committee will meet this week. There is virtually no expectation of a rate hike this time around, but there is widespread anticipation that the Fed will outline its strategy for shrinking its massive balance sheet.
In his most recent podcast, Peter Schiff made a pretty good case that the Fed won’t be able to shrink the balance sheet at all. I fact, he says the central bank will end up having to expand the balance sheet even more when it’s all said and done. The deteriorating economy is one factor, but an even bigger problem for the Fed is the exploding national debt.
With the stroke of Pres. Trump’s pen, the national debt officially surged past the $20 trillion level. That number alone is staggering, but the increasing debt has further ramifications analysts seldom talk about. For every dollar the debt increases, the amount of money the government has to fork out every year just to service the interest payment goes up as well.
We’re talking staggering amounts of money.
Bankers and investors around the world have started to express concern about the rapidly inflating stock market bubble, and its future impact on the world economy. You can add Tiger Management co-founder Julian Robertson to that list.
Robertson appeared on CNBC with Kelly Evans and unequivocally called the stock market a bubble. Not only that, he said it was the Federal Reserve’s fault.
During the interview, Peter made some observations about gold that go a bit against the conventional narrative.
As gold finally pushed through the $1,300 resistance level , most analysts viewed it a direct result of geopolitical tensions, especially North Korea’s continuing belligerence. That’s certainly a factor, but Peter made a pretty strong case that gold’s strength isn’t primarily due to safe-haven buying. It’s about monetary policy.
When central banks manipulate interest rates, they disrupt normal patterns of savings and investment. They pump up economic bubbles that ultimately pop and kick off economic crashes. We saw this vividly in the 2008 financial crisis. Low interest rates, along with government policies, encouraged unsustainable investment in housing. When the bubble popped, it nearly brought the entire economy down with it.
There is another problem with central bank interest rate tinkering that exacerbates bubbles.
It hides inherent risk.
We recently reported that bankers around the world have started to express concern about the rapidly inflating stock market bubble, and its future impact on the world economy. While many in the mainstream banking world agree the problem exists, they see different causes and call for different solutions. Some worry the Fed might raise rates and end expansionary policies too quickly. Some fear the central bankers may not do it fast enough. These contrasting concerns reveal the tight spot the Fed finds itself in. Yellen has put herself between a rock and a hard place. If she tightens, she risks bursting the bubbles. If she doesn’t, she risks inflating bubbles further, leading to an even bigger crash when they finally burst.
The following article by Thorsten Polleit was originally published by the Mises Institute Fed Watch. It offers some in-depth analysis on the options the Fed faces along with a gloomy conclusion. No matter what, it will remain on a course to trouble.
Federal Reserve chair Janet Yellen spoke to Congress yesterday. She talked. But she didn’t say a whole lot.
Most analysts seemed to view Yellen’s speech as “more dovish.” She expressed concerned that inflation my not be rising fast enough to meet the mythical 2% target, and that could slow the pace of rate hikes.
It’s premature to reach the judgment that we’re not on the path to 2% inflation over the next couple of years. We’re watching this very closely and stand ready to adjust our policy if it appears the inflation undershoot will be persistent.”