The Federal Reserve has the US economy on monetary life support and Daily Reckoning managing editor Brian Maher says it will never again breathe on its own. As hedge fund manager Kyle Bass put it, the economy is trapped within the inescapable tractor beam of zero percent interest rates.
“As we have all learned, once an economy falls into the tractor beam of zero rates, it’s almost impossible to escape them… Growth numbers are going to come down and real growth might go to zero. We’re probably never going to go away from zero rates.”
Peter Schiff often compares the US economy to a heroin addict and the Fed to its supplier. Easy money is the drug. The economy is hooked. And the Fed can’t cut off the drug without killing the addict.
Maher uses an equally poignant analogy.
“Like a man hooked to a respirator, the economy cannot breathe on its own. The financial crisis collapsed its lungs. The Federal Reserve rushed over, plugged in the oxygen… and never took it out. The economy’s natural breathing apparatus has atrophied from disuse. Yank the oxygen now… and you will have a situation on your hands. Dr. Powell attempted to wean the patient off support. But it gurgled, sputtered and flailed. He will not try again. He is in fact preparing to pump in more oxygen.”
The Federal Reserve is crashing the debt & real estate bubble it created worldwide.
Both Peter and Maher agree that there is simply no way the Fed can return to anything resembling a normal interest rate environment. Way back in December, before the last Fed rate hike of the cycle, Peter said the next move would be a cut. And he says it won’t be enough. The July cut is the first on the short road to zero.
With an economy built on piles of debt, it simply can’t operate in a high-interest rate environment.
Public and private debt in the US has grown by about $21 trillion over the last decade. It presently stands at an unfathomable $73 trillion. With GDP at around $20 trillion, there is roughly $3.65 of debt behind every dollar of GDP. As Maher put it, “The economy pants and sweats mightily under the burden.”
“And rising interest rates would increase the cost of that debt. Any meaningful interest rate increase would pile on too much weight… and the economy would buckle under the strain.”
But that’s just the beginning of the Fed’s problem. As Peter has been saying, lowering rates isn’t going to work. Maher agrees. He compared cutting rates to an attempt to breathe life into a corpse. Today’s debt load is simply too big.
David Stockman wrote that we are in a condition best described as “peak debt.” A large share of domestic household and business balance sheets are tapped out.
“Accordingly, cutting interest rates has increasingly less potency on Main Street due to the crushing absolute level of debt. As of Q1 2019, in fact, total public and private debt weighed in at $73 trillion and is up by $21 trillion from the pre-crisis peak in Q4 2007 … There are now two turns of extra debt on the national income (3.47x versus 1.48x) compared to the long-standing leverage ratio which prevailed during the century between 1870 and 1970. In quantitative terms, those extra turns amount to $40 trillion of extra debt being lugged around by the US economy. Needless to say, it is becoming ever harder for the Fed to stimulate more borrowing and spending relative to the nation’s $21 trillion of nominal income. It’s simply a matter of diminishing returns to small reductions in what are already rock bottom rates — coupled with the exhaustion of balance sheet capacity.”
As Maher put it, this is why we expect the central bank to “flunk the inevitable recession.”
Interest rate cuts won’t be enough. As Peter has said, the Fed is going to have to launch quantitative easing bigger than QE1, 2, and 3 combined, and that’s going to mean inflation. As Peter explained during a recent interview on Fox Business, investors are missing the boat piling into bonds and dollar-assets.
“The trade – get out of the dollar and look at gold … People are totally on the wrong side of this trade right now. People don’t own gold and silver. They’re too long the dollar. They have no idea just how much inflation the Federal Reserve is going to be unleashing. And it’s not going to be good for stock prices. The inflation is going to be in the supermarket, not in the stock market.”
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