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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— or stop by your nearest bookstore.
Best wishes,
Claus