The Federal Reserve, along with other central banks around the world, are recklessly bringing the world economy to the edge of an abyss from which there will be no graceful exit.
The zero, and negative, interest rate policy they have instituted is blowing up financial asset bubbles like none ever seen in our lifetimes! Just as when an avalanche is permitted to excessively build up on a hillside, when the disaster happens, the communities in its path will be decimated!
THE FEDERAL RESERVE IS TO BLAME!
Let’s be clear up front. This issue is NOT the fault of Republicans or Democrats. It is the fault of central banks like the Federal Reserve. In fact, our politicians have no control over the Federal Reserve since the Federal Reserve central bank is NOT PART OF THE FEDERAL GOVERNMENT. The Federal Reserve is no more a part of the US Treasury than Federal Express is a part of the US Postal System.
Our central bank, the Federal Reserve, is a PRIVATE CORPORATION, with private shareholders, and a sanctioned monopoly over creating our nation’s money supply. And they have exercised this privilege with shockingly poor judgement and skill.
STOCK MARKET BUBBLE:
The stock market is at record highs and, according to a CNBC article published yesterday, appears “detached from reality”: http://www.cnbc.com/2020/01/18/stocks-appear-detached-from-reality-rallying-in-anticipation-of-two-things-that-may-not-happen.html .
Just 3 weeks ago, Forbes was echoing similar concerns: https://www.forbes.com/sites/investor/2019/12/27/us-stock-market-is-a-bubble-2020-is-coming/#2980d73d53d0
I am sure there are pundits who will vehemently argue that this is the strongest economy ever, and that’s why the stock market is hitting new highs. It should come as no surprise though to any armchair economist that the economy and stock market ALWAYS appear strongest right before the crash!
At the height of the tech bubble in 1999, it appeared as though we were in a new investing paradigm that would never end. I would hear shouts of “It’s different this time!” Only later did we learn that Alan Greenspan, Chairman of the Federal Reserve at the time, was almost solely responsible for the “easy money” policies which drove stock prices artificially through the roof.
At the height of the real estate bubble in 2007, the “experts” were all telling us that real estate never goes down! As with the tech bubble, we learned later that the Federal Reserve was sanctioning the lending debacle being conducted by the investment banks under its supervision.
In 1929 Irving Fisher, famed economist and Yale University PhD graduate, proclaimed in the Wall Street Journal on October 16, 1929 that “Stock prices have reached what look like a permanently high plateau.” Black Thursday and the great crash occurred little more than a week later heralding in the era of the Great Depression.
So you can’t believe the “experts”, and if you are looking at unemployment numbers, jobs numbers, sales numbers……just as in 1929, none of these are particularly useful in predicting when the bubble will pop! In fact, the numbers are always strongest just prior to the bubble popping.
The ONLY way to see a bubble is by looking at intrinsic values……the “cash earnings” being thrown off as a percentage of the asset cost. This fully explains why Warren Buffet now has one of the biggest cash/T-bill hoards ever, as he cannot find assets worth buying!
Just as stock prices are in a bubble, real estate is also in a bubble. Home prices in the Denver area have been rising the past 6+ years at about 10% annually. This pace appears to be accelerating with every new dollar printed into existence by the Federal Reserve!
Cities like San Francisco, Portland, Seattle, Austin, Phoenix, Los Angeles, Miami, and many others are seeing similar real estate bubbles expanding.
These bubbles are growing, not because of solid economic fundamentals, but rather because of Federal Reserve money printing! If it were solid economic fundamentals underlying the price increases, these cities would not be seeing millions of “tent city inhabitants”, many of whom work full time jobs and are still unable to afford a place to live.
When financial asset bubbles are expanding, those who have access to credit borrow the money into existence, spend it on assets like real estate, which in turn pushes up the prices of similar homes in the area. Asset owners get richer (on paper), but wages of the folks building those properties tend to stagnate, or not rise as fast. This increases wealth disparity, which is now at the highest level ever recorded in the United States. The previous highest level was just prior to the Great Depression.
Okay Paul, so stocks and real estate are excessively priced. What about putting money in the “safety of bonds or T-bills”. Unfortunately, bonds and T-bills are even MORE UNSAFE THAN STOCKS OR REAL ESTATE!! In fact, the prices of these debt instruments, again because of Federal Reserve central bank recklessness, are at WORLD HISTORY RECORD HIGHS! Never before in the history of the world have interest rates been this low, or negative! Bond prices move opposite to interest rates, and this means bond prices have never been higher! They too are in bubble territory!
Bank of America Merrill Lynch analysts have published articles in the past few years discussing these facts: https://www.marketwatch.com/story/charting-the-lowest-interest-rates-in-5000-years-worst-commodity-returns-in-80-years-2016-06-14
Bonds and T-Bills DO have an advantage. At least with federal government bonds and T-Bills, you WILL get your money back, dollar for dollar, just as they promised. What they cannot guarantee is the value of the dollars they give you back! https://www.youtube.com/watch?v=HxSLtC62RG0
Well maybe we should just run down to the bank and take out our savings in cash! It is true than many are doing just that, and it appears they are storing that cash in the form of $100 bills: https://www.weforum.org/agenda/2019/07/100-bills-double-in-circulation/
The acceleration of $100 bill usage began after the 2008-2009 financial crisis.
I think this would be a mistake to store wealth this way. When the inevitable pop of the current bubble happens, where real estate, stocks, and bonds concurrently crash, the Federal Reserve will be printing dollars like never before in history. This rapid increase in the supply of dollars will completely diminish the value of those you have in your hands and bank account (not that the paper had value to begin with).
The fact that we have cash, backed by nothing, IS the problem! Whether that cash is in your sock drawer or bank account makes no difference. The issue is that its value can change by Federal Reserve policy decisions.
THE END GAME:
The result of this next crisis will be the realization that all this dollar printing by a privately owned Federal Reserve central bank was just smoke and mirrors. It produced nothing for the society except for those who printed the money and lent it into circulation. Like those living in tent cities, many middle class folks will find themselves working full time for dollars that are worthless, and will not be able to afford the necessities of life like food and housing.
For sure, the dollar will cease to be the reserve currency of the world, as it is already losing that status…..because of Federal Reserve debasement of the dollar.
If history is any guide, we will again revert back to a gold and/or silver standard, as has happened to EVERY prior paper currency in history. The government and banks will do what they can to thwart this conversion. The Chinese government will be pushing for the Yuan currency to take the place of the dollar as a reserve currency, while the IMF (International Monetary Fund) will be pushing for their SDRs (Special Drawing Rights…..a currency the IMF uses internationally) to be used as a world’s currency.
Don’t believe that these other paper currencies will be any better than the dollar. The ONLY sure money is gold and silver. Governments and banks cannot manipulate it!
Gold has a 6000 year history behind it! Central banks cannot manufacture more of it. Therefore, it is the BEST store of value, especially when all other forms of value are overpriced!