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, the producer-price index and gross domestic product have all failed to grow over 2 percent.
This is because stock prices, at these unjustified and unsustainable levels, need massive and ever increasing amounts of quantitative easing (new money creation) to stave off the gravitational forces of deflation.Fittingly, it isn't much of a mystery that the major U.S. stock averages have gone nowhere since QE officially ended in October of 2014.
According to the highly accurate Atlanta Fed model, GDP for the third quarter will be reported at an annual growth rate of just 0.9 percent. 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 percent, PPI month over month was down 0.5 percent and year over year was down 1.1 percent.
CPI was down 0.2 percent month over month and the year over year headline level was unchanged.
Central banks and governments can 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.
Since 2008, the rules and regulations fettering central banks have become more malleable depending on the level of 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 Narayana 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" by printing 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, New York Fed President 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, European Central Bank President Mario 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 of paramount importance.
Outlawing physical currency and granting Janet 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 for which there is no easy escape.
What central bankers 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 necessary.
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