We talk a lot about how central banks serve as the primary force driving the business cycle. When a recession hits, central banks like the Federal Reserve drive interest rates down and launch quantitative easing to stimulate the economy. Once the recovery takes hold, the Fed tightens its monetary policy, raising interest rates and ending QE. When the recovery appears to be in full swing, the central bank shrinks its balance sheet. This sparks the next recession and the cycle repeats itself.
This is a layman’s explanation of the business cycle. But how do the maneuverings of central banks actually impact the economy? How does this work?
The Yield Curve Accordion Theory is one way to visually grasp exactly what the Fed and other central banks are doing. Westminster College assistant professor of economics Hal W. Snarr explained this theory in a recent Mises Wire article.
US equities are at an all-time high. Investors are bullish about the future. A lot of people are excited about the potential for economic growth with the passage of GOP tax cuts. There’s a lot of optimism.
In a recent interview on The Street, Peter Schiff said he thinks 2018 may start out the same, but he sees clouds on the horizon, especially when it comes to the dollar.
When I was a kid, my mom always went shopping on the day after Christmas. She wasn’t going out to spend her Christmas cash on some goody Santa failed to leave under the tree. She went out with the express purposes of buying Christmas cards, wrapping paper and decorations.
But why go out and buy Christmas items the day after Christmas? After all, you’re not going to need that stuff for about 11 months.
So what are we to make of the continuing stock market climb?
Peter Schiff summed it up succinctly in a recent interview on Fox Business.
Well look, I think it’s a bubble.”
On Sept. 22, Peter Schiff spoke at the Nexus Conference in Aspen, Colorado, and argued that the financial crisis in 2008 was just the opening act. The real crisis will result from the way the government and the Federal Reserve responded to the 2008 crash.
I don’t think 2008 was the crisis. I think that was kind of the overture to this opera.”
Pundits and government officials keep telling us the economy is strong. Everything is great. After all, GDP is growing.
But a lot of people recognize things aren’t all that great. Some prominent economic analysts have said a major crash is looming. Nobel Prize winning economist Robert Shiller called stock market valuations “concerning” and hinted that markets could be set up for a crash. Several other notable economists have recently expressed concern about surging stock markets, particularly in the US. Marc Faber has predicted “massive” asset price deflation – possibly of a drop of as much as 40% in stock market value. Billionaire investor Paul Singer recently said the financial system is not sound. And former Ronald Reagan budget director David Stockman said we should get ready of “fiscal chaos.”
So, how is it that some see a meltdown on the horizon while most of the mainstream sees nothing but unicorns and roses? If the economy is growing, how can anybody things recession is right around the corner?
Well, what if the mainstream doesn’t understand a recession?
America is partying like its 1928 – right before the crash the kicked off the Great Depression. Some analysts believe the next crash is looming on the horizon. What will spark it? That remains to be seen. But no matter what the catalyst turns out to be, Mark Thornton says the cause will be the same as the last several collapses – Federal Reserve policy. Therefore, we should dub it the Bernanke-Yellen Bubble-Depression This article by Thornton was originally published on the Mises Wire.
In a recent article I advocated for a new way of naming business cycles. The new approach emphasizes the cause rather than the effect. So instead of the “housing bubble” and “financial crisis,” we should refer to the Greenspan-Bernanke Crisis. Here we will turn our attention to the current situation.
Economist and investor Ronald-Peter Stöferle is bullish on gold. So much so that he’s authored a 160-page report titled “In Gold We Trust.”
Stöferle recently appeared on Palisade Radio to talk about the current state of the economy. He said he thinks recession fears coming up within the next couple of months will be the big trigger and the big catalyst for gold.
I think that this complacency we’re seeing in markets, this will probably lead to a major crisis, and this will probably make 2008 look like a kindergarten party. In this environment, it just makes sense to hold portfolio insurance in the name of gold.”
The June Federal Reserve rate hike wasn’t a surprise. Most analysts expected Yellen and company to boost rates by 0.25 points. The only thing that was a little surprising was the hawkish tone the central bankers took at the most recent Federal Open Market Committee meeting. The Fed is hinting it will continue to push forward with interest rate normalization and begin to shrink its balance sheet. This raises an important question.
As we have pointed out, the data simply doesn’t support the hawkish stance taken by the Fed. Even some mainstream analysts have made this observation. So what gives? Why is the Federal Reserve so desperate to hike rates?