Seven years of extraordinary fiscal and monetary stimuli are proving
ineffective towards achieving the growth and inflation targets laid out by
the Federal Reserve. The Consumer Price Index (CPI), the Producer Price Index
(PPI) and Gross Domestic Product (GDP) have all failed to grow over 2%. This
is because asset prices, at these unjustified and unsustainable levels, need
massive and ever increasing amounts of QE (new money creation) to stave off
the gravitational forces of deflation. Fittingly, it isn't much of a mystery
that the major U.S. averages have gone nowhere since QE officially ended in
October of 2014.
According to the highly accurate Atlanta Fed model, GDP for Q3 will be
reported at an annual growth rate of just 0.9%. And things don't appear to be
getting any better for those who erroneously believe growth comes from
inflation: September core retail sales fell 0.1%, PPI month over month (M/M)
was down 0.5% and year over year (Y/Y) was down 1.1%. CPI was down 0.2% M/M
and the Y/Y headline level was unchanged.
While the deflation effect from plummeting oil prices wears off by
years-end, there is no reason to believe the same deflationary forces that sent
oil and other commodities down to the Great Recession lows won't start to
spill over to the other components, such as housing and apparel, inside the
inflation basket. This would especially be true if the Fed continued
threatening to raise interest rates and driving the U.S. dollar higher.
Central banks and governments can always produce any monetary environment
they desire. It is a fallacy to believe that deflation is harder to fight
than inflation. Deflation is currently viewed as harder to fight because the
policies needed to create monetary inflation have not yet been fully embraced
-- although this is changing rapidly.
The Fed just can't seem to grasp why its newly minted $3.5 trillion since
2008 hasn't filtered through the economy. But this is simply because
debt-disabled consumers were never allowed to deleverage and markets were
never allowed to fully clear.
But the Fed isn't one to let the truth get in the way of its Keynesian
story. And why should it? Financial crisis is the mother's milk of increased
central bank power. For example, before the last financial crisis the Fed was
unable to buy mortgaged back securities; rules were then changed to allow it
to purchase unlimited quantities of distressed mortgage debt. The Fed is
perversely empowered to continue making greater mistakes, thus yielding them
greater authority over financial institutions and markets.
Since 2008 the rules and regulations fettering Central Banks have become
more malleable depending on the level economic distress. Congress has
mandated that the Fed can not directly participate in Treasury auctions. But
there is no reason to believe in the near future that this law won't be
changed to better accommodate fiscal spending.
Strategies such as: pushing interest rates into negative territory,
outlawing cash, and sending electronic credits directly into private bank
accounts may appear more palatable in the midst of market distress. The point
is that Central Banks and governments can produce either monetary condition
of inflation or deflation if the necessary powers have been allocated.
In the Fed's most recent dot plot (a chart displaying voting member's
expectations of future rates) the Minneapolis Fed's Kocherlakota was mocked
as the outlier for placing his interest rate dot below zero. However,
persistent bad economic news has quickly driven the premise of negative rates
into the mainstream. Ben Bernanke told Bloomberg Radio that despite having
the "courage to act" with counterfeiting trillions of dollars, he
thought other unconventional issues (such as negative interest rates) would
have adverse effects on money market funds. However, anemic growth in the
U.S., Europe and China over the past few years has now changed his mind on
the subject.
Supporting this notion, the president of the New York Fed, William Dudley
recently told CNBC, "Some of the experiences [in Europe] suggest maybe
can we use negative interest rates and the costs aren't as great as you
anticipate." Indeed, over in Euroland, ECB President Draghi hinted recently
that the current 1.1 trillion euro ($1.2 trillion) level of QE would soon be
increased, its duration would be extended and deposit rates may be headed
further into negative territory.
Statements such as these have me convinced that negative interest rates in
the U.S. are likely to be the next desperate move by our Federal Reserve to
create growth off the back of inflation. After all, the Fed is overwhelmingly
concerned with the increase in the value of the dollar. Keeping pace with
other central banks in the currency debasement derby is erroneously believed
to be of paramount importance. Outlawing physical currency and granting Ms.
Yellen the ability to directly monetize Treasury debt and assets held by the
public outside of the banking system could also be on the menu if negative
rates don't achieve her inflation mandates.
Instead of repenting from the fiscal and monetary excesses that led to the
Great Recession the conclusions reached by government are: debt and deficits
are too low, asset prices aren't rising fast enough, Central Banks didn't
force interest rates down low enough or long enough, banks aren't lending
enough, consumers are saving too much and their purchasing power and standard
of living isn't falling fast enough.
The quest of governments to produce perpetually rising asset prices is
creating inexorably rising public and private debt levels. The inability to
generate inflation and growth targets from the "conventional"
channels of interest rate manipulation and the piling up of excess reserves
are leading central banks to come up with more desperate measures.
We can see more clearly where Keynesian central bankers are headed by
listening to NY Times columnist Paul Krugman's suggestions for Japan to
escape its third recession since 2012. He recently avowed that Japan needs
much more aggressive fiscal and monetary stimulus to escape its
"liquidity trap" and "too-low" rate of inflation.
However, his spurious argument overlooks that the Bank of Japan is already
printing 80 trillion yen each year, its Federal Debt is spiraling north of
250% of GDP, and the annual deficits are currently 8% of GDP.
Here it is in his own words: "What Japan needs (and the rest of us
may well be following the same path) is really aggressive policy, using
fiscal and monetary policy to boost inflation, and setting the target high
enough that it's sustainable. How high should Japan set its inflation
target...it's really, really hard to believe that 2 percent inflation would
be high enough."
You see! According to this revered Keynesian economic expert if what
you've already done in a big way hasn't worked all you need to do is much
more of the same.
Unfortunately, Krugman and his merry band of arrogant Keynesian haters of
free markets represent the conscious of global governments and central
bankers. What they indeed are creating is a perfect recipe for massive money
supply growth and economic chaos. Therefore, if these strategies are
followed, it will inevitably lead to a worldwide inflationary depression. And
this is why having a gold allocation in your portfolio is becoming
increasingly more necessary.