• 287 days Will The ECB Continue To Hike Rates?
  • 287 days Forbes: Aramco Remains Largest Company In The Middle East
  • 289 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 689 days Could Crypto Overtake Traditional Investment?
  • 694 days Americans Still Quitting Jobs At Record Pace
  • 696 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 699 days Is The Dollar Too Strong?
  • 699 days Big Tech Disappoints Investors on Earnings Calls
  • 700 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 702 days China Is Quietly Trying To Distance Itself From Russia
  • 702 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 706 days Crypto Investors Won Big In 2021
  • 706 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 707 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 709 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 710 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 713 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 714 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 714 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 716 days Are NFTs About To Take Over Gaming?
Billionaires Are Pushing Art To New Limits

Billionaires Are Pushing Art To New Limits

Welcome to Art Basel: The…

The Problem With Modern Monetary Theory

The Problem With Modern Monetary Theory

Modern monetary theory has been…

Another Retail Giant Bites The Dust

Another Retail Giant Bites The Dust

Forever 21 filed for Chapter…

  1. Home
  2. Markets
  3. Other

Beware The Fed Tide

This week, desperation became palpable at the Fed. In both the formulaic statement that accompanied its FOMC policy decision and Chairman Ben Bernanke's unusual (and clumsy) Washington Post op-ed follow up, the guardians of our currency expressed grave disappointment at the slow pace of US economic recovery and emphasized the continued threat of deflation. The Fed is now pledging to defeat this recession using any monetary means necessary. Unfortunately, their embrace threatens to smother our economy.

Despite its paternalistic rhetoric, the Fed really has just a few simple goals: allow for the perpetual expansion of the federal deficit, push up stock prices to create the illusion of wealth, and stimulate consumer spending. To do this, the Fed will hold interest rates near zero for the foreseeable future, and will buy some $600 billion of US Treasury debt by April of next year. Per capita, the commitment to quantitative easing comes to almost $2,000 per American. What's more, if this program fails to pull the economy out of recession, the Fed stands ready to up the ante. This amounts to little more than gambling; but instead of using their own accounts, the central bankers are wagering the nation's savings.

Having already committed $1.7 trillion in the first round of quantitative easing, the Fed is rolling the dice once again - despite ample evidence that their costly remedy won't work.

According to the Fed's own analysis, the US economy continues to disappoint, despite the massive QE-1 cash injection. Given the poor fundamentals: rising unemployment, plummeting house prices, and falling stock prices, it should come as no surprise that consumer confidence is low and spending continues to lag.

Now, by monetizing almost the entire federal deficit through QE-2, the Fed hopes to give Congress the breathing room to enact reforms before skyrocketing interest rates bankrupt the Treasury. Meanwhile, the central bank hopes that the expected inflationary consequences will be nullified by a resulting broad-based recovery. But an economist as knowledgeable and experienced as Chairman Bernanke should know by now that any real economic revival will come from private industry, not government. The money printed by the Fed will indeed flow into the economy, where it will push up asset prices in many sectors. Already commodity prices are soaring. But inflation cannot create real growth.

What the Fed is doing, essentially, is forcing consumers to spend their cash hoardings. Until the economic and financial policies of the government change dramatically, those who are tempted to invest their savings within the United States risk increasing regime uncertainty. So, much of our domestic capital is flowing into hard assets and overseas markets.

This will do nothing to help the festering wounds underlying the US economy.

For example, the problems within the real estate market remain toxic. Combined with falling margins, they threaten the banks with a second crisis. The probability of a mortgage-related crisis in the housing market has further increased by the unresolved "robo-signing" scandal, in which legitimate foreclosures have been blocked by sloppy paperwork. Given the truly abysmal state of documentation for foreclosed properties that had been bought with securitized loans, it is hard to imagine that this problem will be resolved anytime soon.

Surveying the landscape in the mortgage market and elsewhere, it becomes apparent that the only bankable asset America has left is a reservoir of confidence in our country's role as the global economic leader. But confidence can be ephemeral. Usually, even gradual erosion of credibility reaches a latent tipping point. When change comes, it does so with alarming speed.

When international confidence in the US evaporates, those holding dollars will be holding worthless paper. Furthermore, if the US dollar retains its privileged position as the international reserve currency while it spirals downward, the entire structure of international fiat money will be threatened.

In the turmoil that lies ahead, America's saving grace could have been a reliable currency to brace us up. Yes, our legs are weak, but at least we could have had firm ground on which to walk. The present Governors of Federal Reserve, however, would prefer to prop up the bloated and hobbled bubble-era structures in the hopes that a deus ex machina will save the day. Unfortunately, while they're waiting for a miracle, we'll all be left swimming against a tide of new dollars.

 


For in-depth analysis of this and other investment topics, subscribe to The Global Investor, Peter Schiff's free newsletter. Click here for your free subscription.

Click here to download Peter's latest Special Report: My Five Favorite Gold & Silver Mining Stocks.

Peter Schiff is president of Euro Pacific Capital and host of The Peter Schiff Show.

Please note: The Peter Schiff Show will be produced by a new media company created by Peter Schiff. Euro Pacific Capital is not affiliated with this company. Neither Euro Pacific Capital nor any of its affiliates are responsible for the content of SchiffRadio.com.

 

Back to homepage

Leave a comment

Leave a comment