Fed’s taper decision reaffirms our skeptical view of US economy

GAVIN WENDT: The Fed’s recent decision to delay the inevitable – the scaling back of its $85 billion a month stimulus program – reinforces my view as to the relative shakiness of the US economy.

The Fed says it needs more evidence of lasting improvement in the economy, and has also warned that an increase in interest rates would threaten to bring a halt to expansion.

“Conditions in the job market today are still far from what all of us would like to see,” Chairman Ben S. Bernanke said at a press conference in Washington after a two-day meeting of the Federal Open Market Committee.

“The committee has concern that rapid tightening of financial conditions in recent months would have the effect of slowing growth.”

There are poor foundations on which the US sharemarket rally has been built.

Trillions of dollars-worth of hand-outs, bail-outs and stimulus to high-risk corporates that were deemed ‘too big to fail’ has led to the US market hitting record highs.

But a booming sharemarket doesn’t necessarily reflect a healthy and sustained recovery.

The US is essentially a market that’s been pumped to the max with Fed-administered financial steroids.

If you pump trillions of dollars into a financial system then of course you’ll generate some level of growth – but like the steroid-addicted athlete, exactly how sustainable is that performance and what are the unintended consequences?

The US has mortgaged its future by bringing forward future consumption in an attempt to stave off what could have been a deep and prolonged recession.

It’s understandable that authorities and politicians were keen to stave off wholesale economic collapse in the wake of the GFC. But the financial taps have been left open for too long.

The result is that the financial sector has become addicted to what was intended to be only a short-term ‘quick fix’ – fiscal stimulus – not a long-term remedy for the economy’s ills.

Stimulus and ultra-low interest rates have created all sorts of distortions in the US economy, with the result that asset values and share indices have been pushed to record levels as a result of the flood of ‘easy money.’

Those that have been the beneficiaries of the Fed’s largesse (i.e. Wall Street) have enjoyed an immeasurably profitable past few years as they have invested in property and shares, but those that have taken the cautious approach (i.e. retirees on fixed interest incomes) have seen their living standards slip dramatically.

Unemployment has fallen (to some degree), but the negative case (reduced number of participants in the labor force, lower wages, fewer hours, reduced full-time and increased part-time employment) is typically overlooked.

Despite the booming sharemarket, more US citizens are today living on food stamps, the labour participation rate is falling, home affordability is declining, living standards are deteriorating, the divide between rich and poor has never been greater, and savings are being wiped out by ultra-low interest rates.

This is because the US CPI is by no means an impartial judge of inflation.

Anecdotal evidence suggests that food prices have increased at a rate well above CPI numbers.

The CPI is heavily weighted towards consumer electronics, the prices of which tend to go down due to improvements in technology – which reduces production costs and also improves product efficiency.
Inflation has also been kept in check by the fact that the velocity of money has remained remarkably slow.

Regardless, the large accumulated store of funds is best portrayed as an enormous tsunami of capital poised over the consumer market, waiting to flood the system.

When it does, systemic inflation will result.

You cannot continue to undertake monetary expansion on such a mammoth scale without major longer-term economic consequences. Debt is inherently inflationary if you have the ability to print your own currency.

 

And it’s not just my view – these are the comments from a speech given by President Richard W. Fisher (President of the Dallas Fed), during August:

“For six of my eight years at the Fed, we have been working to bring the nation’s economy out of recession.

“The fiscal authorities have for the most part been AWOL during this time; having left the parking brake on during their absence…The result is that our balance sheet has ballooned to more than $3.5 trillion…

“As equity prices break new ground daily, the S&P 500 has soared 153 percent from its March 2009 trough.

“And yet job creation has been slow in coming.

“On this crucial front – the second leg of our dual mandate – we do not seem to have achieved much with the trillions of dollars we have poured into the economy through our three QE programs…

“First, savers and others who rely on retirement monies invested in short-maturity fixed-income investments…have seen their income evaporate while the rich and the quick, the big money players of Wall Street have become richer still…

“A corollary of reining in this massive monetary stimulus in a timely manner is that financial markets may have become too accustomed to what some have depicted as a Fed ‘put’.

“Some have come to expect the Fed to keep the markets levitating indefinitely. This distorts the pricing of financial assets, encourages lazy analysis and can set the groundwork for serious misallocation of capital…”

All of which is tremendous news for gold.

Interest will continue to grow, both from individual investors and central banks, despite selling from speculators and hedge funds.

When it comes to risk-free wealth preservation, gold does a far better job than any other asset you can think of.

Gavin Wendt is the founder of MineLife, publisher of the MineLife Weekly Resource Report