Thoughts on the economy and our future
Before you read a single word, this is just an opinion. The article below is based on the opinion of an economist that I follow. Last night at my mentor meeting, a question came up about the future of the US economy, which led to a long tangent on my part. Today I was reading the article below which basically echoes the opinion that I offered last night.
This is why stocks scare me, I own none. This is also why I love real estate. When markets crash, people will lose lots and lots of money, those same people will still need a place to live. There will be droves of motivated sellers and very few people who can get a loan from a bank. Those of us who make money as landlords, and those who understand creative financing will have a field day. Fortunes will be made while the rest of the herd goes into poverty. I take no joy in this prediction, I just wish to ensure the future of my family, and I hope that you do the same. Actually I hope that I am wrong. I really hope that my view of the future is completely wrong.
Peter Schiff, economist and owner of Euro Pacific Capital has been saying for some time that there are going to be big problems in the economy when they taper QE (quantitative easing). The Federal Reserve is on track to eliminate QE next month, as October is the last month of the wind down.
Schiff likens QE to drugs and the US to a drug addict, saying that once QE is removed, (tapered) the drug addict (the US) will go into convulsions.
Schiff says he has never seen irrational exuberance like he has now; that it is much worse now than during the height of the housing bubble. At that time, he went on TV and predicted the housing market would crash, and the analysts would laugh and mock him. He accurately predicted when it would crash and he now says that the atmosphere is worse now.
Hear what he thinks is going to happen next month when QE is eliminated…
QE is like putting out a fire with gasoline. Removing it is going make the economy go into economic convulsions.
Peter Schiff says, “ From my perspective, I remember the giddy days of the housing bubble very well. And I remember the attitude that most people had. I remember how irrational about everything everyone was when I was trying to educate them on what was really going on in the economy and the housing market and the crisis that was in our future, that nobody wanted to believe.
I believe the collective irrational exuberance, the lack of understanding, of the true nature and character of the US economy is greater now. It’s far greater than anything I’ve experienced in that period of time. All of this euphoria that is going on is all based on the Fed and the idea that QE worked, zero interest rates worked, and because they worked so well, now the Fed can end it.
The Fed can take away QE, raise interest rates and the recovery can continue without it. That the stock market and the housing market that rose on that sea of liquidity can keep rising when you remove it [is ridiculous]. And of course, the idea that that can happen is so fanciful that it is amazing that intelligent, otherwise intelligent people, can fail to connect these dots.
That if the Fed were to do what everyone is so convinced they are going to do, based on a lower unemployment rate, or these jobs that are being created, if they were to do it, the jobs would disappear just as quickly as the QE.
Because once they start raising interest rates, even a little bit – the markets cannot sustain it. The stock market can’t sustain it, the housing market can’t sustain it, corporate America can’t afford the higher rates, the banks and home buyers can’t afford it and the Federal government can’t afford it.
The fact is, they can’t end these programs because they worked; … they didn’t work and they can never work. That’s why I’ve always said, QE is like putting out a fire with gasoline. This fire did not go out with the latest round of gasoline, it’s just been burning hotter than ever.
The problems are bigger than ever, that’s why we’re going to need an even bigger dose of QE to numb the pain as the prior dose wears off.
So all the traders buying up dollars and selling gold because they’re so convinced that the Fed is about to tighten, and [the fact is] that none of the other central banks are – Europe and Japan, they’re going to keep doing more QE.
The reason that Europe and Japan are still pursuing these cheap money policies is that they haven’t worked there either. And they didn’t work in America, either. People just haven’t figured that out because they’re looking at the wrong number and they’re focusing on asset [stock] prices and not the underlying economy.”
Peter Schiff goes on to say, ”The only reason the US economy appears strong, that people are confident enough to buy the dollar, is because they believe that QE and ZIRP are temporary. They haven’t figured out that they’re permanent. They haven’t figured out that once we go down this road, there is no turning back.
You can’t create a recovery that’s based on quantitative easing and zero percent interest rates and expect the recovery to continue once you take it away. When people figure that out, that’s when we have a collapse of the dollar and that’s what ultimately brings QE to an end, in that we die of an overdose. If you live by QE, you die by QE. I’ve always said,
the Federal Reserve is looking for an excuse not to raise[interest] rates; an excuse to ramp QE back up.
It appears that the excuse that they’ve got is…the strength of the dollar. It’s inflation not being high enough. It’s still below their 2% target.
Before they were saying “We need unemployment to get below 6 1/2%. And now it’s below-it’s 5.9%.” Forget about how we got there, by people leaving the labor force and taking low-paying part time jobs. The labor force itself has collapsed.
We’re below the Fed’s benchmark, yet they’re not hiking rates. The next thing is inflation. They’re claiming we don’t have enough inflation. The Fed talks about this supposed “threat” of this strong dollar which is going to bring down commodity prices, and lower consumer prices.
That’s not really a threat. I hear it all the time on TV, that falling oil prices are good for the consumer. If it’s true about gasoline, then it’s true about other prices. The less the consumer has to pay, the more money they have to buy other things.
That’s progress. Falling prices used to be considered progress. It meant that you felt richer and that you could buy more stuff. But now, if prices are falling, that’s some kind of economic disaster.
This is just a ruse. The fact that so many people believe it, is incredible.
But what the Federal Reserve is really afraid of, but it cannot admit it, is – asset prices.they’re worried about stock and real estate prices.
That’s what it doesn’t want to come down. So when the Fed is talking about the effect on prices of a strong dollar, it’s not really worried about consumer prices, they’re worried about stock and real estate prices.
That’s what quantitative easing was all about, and they said it. Ben Bernanke, when he launched the program, he said specifically QE was “specifically designed to lift asset prices.” Why did Ben Bernanke want asset prices higher? Apart from bailing out insolvent banks, he wanted to create a wealth effect, even if it was phony wealth. And now that the Fed is trying to take away the “air” [QE], and the bubble is going to burst.
The idea that you can have all this stimulus and then take it away, it’s like a heroine addict that’s been taking heroin for so long, he’s high as a kite. And then you determine, this guy is so high, because he took all this heroine- he doesn’t need the heroin anymore.
He’s on a permanent high, so he no longer needs any more drugs, he can stop taking heroin, and he’s going to feel just as great. Its doesn’t work that way. It isn’t easy to kick a drug habit, and it isn’t going to be easy to kick the QE, ZIRP [Zero Interest Rate Policies] habit.
The economy is going to go through economic convulsions. You cannot end quantitative easing without plunging the us economy into a severe recession.
I think there’s going to be more QE coming. It’s not just going to be a repeat of just what they did last time. I think there’s going to be a political push to let Main Street in on the political action.
When the Fed launches another round of QE, there are a lot of people who correctly understand that this benefits a small sliver of the US population. It’s those who have the assets, not the people who have to pay for their consumer goods with diminished wages.
So I think the next round of QE could also be accompanied by a real old-fashioned pump-priming stimulus program. None of that is going to revive the economy but it’s going to reverse the upward trend of the dollar and it’s going to increase the pain that average Americans experience when they have to buy the products that are necessary for life.
But again, in the latest Fed minutes, maybe a light bulb went off in somebody’s head. This is the beginning of maybe Janet Yellen “coming clean” or “crying uncle.” They haven’t admitted yet that they can’t raise rates at all, but this is the first indication that they realize they can’t.”
Now one of the Fed members is echoing exactly what Schiff is predicting, in an interview made mid-October with Reuters.
John Williams of the San Fransisco Federal Reserve Bank is indicating that they might just initiate another round of QE. In an interview with Reuters, John Williams said, ”If we really get a sustained, disinflationary forecast … then I think moving back to additional asset purchases in a situation like that should be something we should seriously consider.”
“If the outlook changes “significantly,” with inflation showing little sign of returning to the central bank’s 2-percent target, he said he would even be open to another round of asset purchases. In the interview, Williams repeated he is comfortable with his call for a rate hike about nine months from now. “
But “if inflation isn’t moving above 1.5 (percent) and we get stuck into that gear, that would argue for a later liftoff [raising interest rates],” he said. “If we don’t see any improvement in wages, that would be a sign that we still have a lot of slack in the economy and we are not getting any inflationary pressure to move inflation back to 2 percent.”
And two days after Williams’ comment, CNBC reports that another Fed member hints in a possible delay of the QE taper:
“We have to make sure that inflation expectations remain near our target. And for that reason, I think a reasonable response by the Fed in this situation would be to… pause on the taper at this juncture, and wait until we see how the data shakes out in December,” Bullard said.
The Federal Reserve had expected to complete the taper later this month.”
It looks as if Peter Schiff is not blowing hot air, but may be right on target. And we soon shall see…
Dr. Michael J. Randy link
Please note: The real rate of inflation in the U.S. today is slightly over 13%. The U.S. government excludes the price of food in its index.
The U.S. government is very creative. Example the unemployment rate is 5.8% again not true the real rate of unemployment for African American males aged 25 is 25%. The overall rate is again 13%. The U.S. government says if your unemployment benefits run out you are now considered, “Employed.” They say so many people have dropped out of the work force and have stopped looking for work and are therefore considered “Employed.” It is an interesting game.
Take -care, stay well and God bless.
Again, this is why invest in real estate. If there is a big systemic crash, then stock investors will feel the brunt of it. In my own simple opinion I advise my friends to run to real estate. The friends who don’t know how to make money in real estate should look at being private lenders.
(November 2014 Newsletter)