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Officially the Federal Reserve System has a dual mandate: Promote price stability and maximum employment. Now it has admitted to a third one. More on that in a moment. First, a quick review …
Two weeks ago I took on the modern central bank propaganda that wants us to believe inflation is the increase in the general level of prices of goods and services in an economy over a period of time due to positive growth.
As I wrote in that January 19 column, that’s a blatant lie — an attempt to conceal what really causes inflation.
Inflation is simply an increase in the money supply. And rising prices are but one of three possible symptoms of money supply growth. The second is speculative bubbles. And the third is an unstable economic structure.
This third symptom is probably the least understood.
Increases in the money supply seduce entrepreneurs into investments that appear profitable only because of artificially low interest rates. As soon as the central bank is forced to reverse course — usually due to rising prices — these malinvestments become obvious and have to be abandoned.
When the economic boom brought about by the central bank’s money supply increase comes to an end, a recession begins. The larger the money supply growth, the larger these malinvestments, or imbalances, that will sooner or later have to be corrected.
And now …
The Fed Has Laid the Cornerstone
for Another Severe Recession
The current economic cycle is built on the Fed’s largest increase in its monetary base in history. And interest rates have been held near zero since December 2008 — indeed, a very long time.
This policy of quantitative easing and near zero interest rates is highly inflationary. Its effects will become visible with time lags. Malinvestments will blossom, and huge imbalances will indeed develop.
They will likely come when rising prices become a problem in the U.S. and Europe — like they already have in China and other emerging economies. Or when the next asset bubble becomes more obvious. Or when the next recession gets going and turns out to be even more severe than the last one.
No matter which event brings the kettle to a boil, one thing is for sure: The Fed has fertilized the ground for the next severe crisis.
What the Fed Has Not Achieved …
The current economic rebound is a very weak one. Compared to other post-WWII business cycles the current boomlet is far behind, no matter which economic indicator you use: GDP growth, retail sales, industrial production or durable goods orders. And if you look at housing market related indicators or the labor market, the picture is getting very bleak.
So with all the Fed’s money pumping and the enormous budget deficits, our politicians have bought us the weakest economic rebound ever. And with unemployment rates as high as they are now you have to conclude that the Fed — and the accompanying fiscal stimulus programs — have failed miserably.
Just look at the following chart from the U.S. Bureau of Labor Statistics. It compares the development of employment to population after the past five recessions.
As you can see, the current period is dreadfully weak. You can also see we are on the verge of hitting a new low in this important indicator of economic well being.
For Main Street the employment situation marks the difference between boom and bust. In this regard the largest fiscal and monetary stimulus program ever has fallen flat on its face.
But there is also another major negative: The government’s debt binge.
Budget deficits have gone through the roof with absolutely no end in sight! And they have the potential to wreak havoc not only with the current economic rebound but in the future as well. The longer we wait to address this problem the more hardship it will finally bring.
What the Fed Has Delivered
Fed Chairman Ben Bernanke made a rather pitiful impression during a recent CNBC interview. Steve Liesman announced he would ask a few hard-core questions. Well, to a certain degree he did.
But he did not ask how money printing could ever create wealth — or employment. He also didn’t ask how anyone, besides the market, could ever know the “right” interest rate for a whole economy. Nor did he bother to ask about the Fed’s role in pumping up the housing bubble.
But he did ask how Bernanke could claim QE2 was a success since both interest rates and commodity prices have risen considerably since he first announced it.
Bernanke’s response:
“Policies have contributed to a stronger stock market just as they did in March 2009, when we did the last iteration of this. The S&P 500 is up 20% plus and the Russell 2000, which is about small cap stocks, is up 30% plus.”
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So finally it is official. The Fed has secretly adopted a third mandate by aiming directly at making stock prices rise via its quantitative easing policy. Obviously, Bernanke and his brethren haven’t learned a darn thing from two successive bubbles and their aftermaths. Now they’re actively going for the next one.
If the stakes weren’t so high, I could actually smile in the face of so much ignorance. But these wrong-headed policies are massively influencing the well-being of the whole country, your wealth and your financial future.
How to Protect Yourself and Profit
from the Fed’s Inflationary and
Destructive Long-Term Policies
First, look into adding gold to your portfolio. Gold is currently in a normal and healthy correction, and it might not be over yet. But in light of the Fed-induced unstable economic structure that’s bound to collapse, you might consider a gold exchange traded fund, such as GLD.
And second, if you want to learn more critical background information about money printing, asset bubbles, opportunistic central bankers, and government debt and what this all means for your financial health, I suggest you get a copy of my new book, The Global Debt Trap. Click on your choice of bookseller to order it online — Amazon, Barnes & Noble or Books-A-Million — or stop by your nearest bookstore.
Best wishes,
Claus
Claus Vogt is the editor of the German edition of Safe Money. He is the co-author of the German bestseller, Das Greenspan Dossier, where he predicted, well ahead of time, the sequence of events that have unfolded since, including the U.S. housing bust, the U.S. recession, the demise of Fannie Mae and Freddie Mac, as well as the financial system crisis. Claus is currently the editor of Million-Dollar Contrarian Portfolio and has just completed his book The Global Debt Trap.
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Claus, you connect the dots in a logically flawless way. Good piece.
One of the best mini-papers written on the connection between debt, the business cycle, the welfare state and gold. It fits right inline with your comments, above. The irony is that it was written by Alan Greenspan.
http://www.constitution.org/mon/greenspan_gold.htm
Claus,
You said, “So finally it is official. The Fed has secretly adopted a third mandate by aiming directly at making stock prices rise via its quantitative easing policy.”
I believe Republicans in Congress, and perhaps the White House, are also secretly aiming to make speculative stock prices rise – e.g. by privatizing Social Security – to help pension funds at risk of insolvency, increase the value of troubled banks’ reserves , regain recession-lost household and institutional wealth, and consumer confidence/spending.
So, when you say, “Obviously, Bernanke and his brethren haven’t learned a darn thing from two successive bubbles and their aftermaths,” I’m choosing to also include those in Congress and the White House as “brethern.”
BTW, I have purchased and read your enlightening book, The Global Debt Trap, and am recommending it to others.
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I don’t know Claus, my feeling is that yes, there is a secret agenda by the Fed, but the booming stock market is just a smokescreen for its real intentions. I think the primary objective of the Fed is to monetize the American National Debt and restructure the economy. Of course, this is disastrous for savers and those living on fixed income who count on traditional solutions for their retirement needs such as government bonds for income.
One thing we do agree upon is that America is Bankrupt. And the high unemployment numbers are handing the Fed a perfect excuse to print up a ton of money. The problem as I see it, is that in many respects the Fed has no choice but to proceed with their quantitative easing policy. If they hadden’t done so the American Economy would have suffered a far more painful recession. Probably even a depression. And as you rightly point out debt is the problem. So what would have happened if the American economy was driven into a depression? The debt problem would have created the equivalent of a financial black hole. A condition where the American economy was in a permanent moribund condition.
On the other hand you have the political class, who have always behaved in a decidedly irresponsible manner. Leadership is supposed to be their mandate, but getting re-elected and representing a small percentage of special interest groups is their real agenda. And it doesn’t matter whether they are Democrat or Republican. When was the last time that you saw any American politician demonstrate any real leadership or values. The Republicans would say it was Reagan, I personally feel it was Kennedy, who point blank refused to get drawn into a shooting war with Cuba during the Bay of Pigs, and the Cuban Missile Crisis despite overwhelming pressure to do otherwise.
In any event, you are right. The die is cast, the Fed has set the table for massive inflation. Nobody can really predict exactly when it will happen, but it will happen. And yes, you are probably right, the policies in place now now will probably create the next great recession. The question is by that time will the debt been inflated as a percentage of GDP enough to set the table for a sustainable recovery in the future?
Could the primary reason for the Fed’s quantitative easing simply be to ensure that the government”s massive budget deficits get fully funded. Wouldn’t Treasury’s inability to sell sufficient treasures to fund the anticipated $1.5 trillion F/Y 2011 tax revenue deficit lead to a fiscal crisis beginning with a credit rating downgrade?
Claus, I agree with everything you have said. The Fed is the disease not the cure for our troubled economy. All this money the Fed is pumping into the economy keeps ending up in places where it’s not needed. That’s probably why we’re not creating many jobs. I wonder what needs to happen in order to keep the Fed from intervening. I know Bernanke fears deflation, but unfortunately his predecessor has already sealed the fate by encouraging everyone to go too far into debt, assuming that the cashflow will be there when the bill arrives. In 2007 the bill arrived with the mortage crisis, and soon the bill will arrive for this expensive “recovery”.