Is this the beginning of the end for America’s sugar high? Essentially, for years now, the United States economy has been based on sugar high economics – the federal government and the Federal Reserve injecting so-called stimulus into the economy that usually benefits certain groups of people, namely Wall Street and Washington.
The stock market has been riding high this year and the Dow Jones has risen above the 15,000 mark – meanwhile, precious metals have experienced a beatdown since the spring much to the glee of proponents of government intervention into the economy. Most of the financial analysts and political elites have been citing this as signals that the economy is roaring back.
To the average American, attempting to find any sort of economic recovery is as difficult as believing President Obama had nothing to do with the IRS targeting conservative organizations. The real unemployment figure still stands in the low-20s, inflation has been running rampant and the debt, both personal and public, continues to skyrocket.
Don’t tell that to the Obama administration, though. Remember, it’s the recovery, stupid.
Last week, former Federal Reserve Chairman and Mr. Bubbles himself Alan Greenspan made headlines when he called for the nation’s central bank to begin tapering off its quantitative easing initiative and to slowdown its stimulus programs. The ex-supporter of the gold standard and sound money has actually come out urging the Fed to cut back its injections.
As former President Reagan budget director David Stockman put it in an interview in April, if the Fed were to put up a sign saying it has gone fishing for six weeks then the markets would plummet because it depends on the Fed’s heroin injections.
“The minute the Fed stops the whole environment changes, the confidence changes, the psychology changes and the bubble is revealed,” concluded Stockman. “This is the greatest bubble yet.”
Here are three events that will worsen the economic collapse over the course of the next 12 months:
1. Interest rates are starting to move up, will crash the bond market
Since the collapse of the United States economy began, investors like Peter Schiff and Jim Rogers have been warning about the dangers of rising interest rates, which will cause devastation in the economy because of the nation’s enormous debt loads. Well, it was inevitable for the rates to climb, but they are starting to inch higher.
Those days of investors, corporations and government officials relying on artificially lower interest rates are starting to come to an end. The cost of mortgages for homeowners is starting to increase, governments are facing higher borrowing costs and bond holders are beginning to feel the pain.
However, the benefiters are the savers, who will experience more than just a few cents on their $1,000 savings account.
As investors start to make the transition to a world of higher interest rates, the markets that depend solely on lower rates, such as currencies, bonds and stocks, have already started to feel the effects. Stock markets in Asia, Europe and the U.S. have fallen, Treasury prices have declined and the dollar fell against the Yen.
2. Fed to taper stimulus, stock market likely to crash as result
Sure, the stock market has exceeded 15,000, but the quintessential question is: how did it get there? The markets have climbed based on the Fed pumping $85 billion each month into the markets.
When Fed Chairman Ben Bernanke delivered testimony at a congressional hearing last month, he somewhat suggested that if the data showed the economy is actually improving then it could begin to taper off its stimulus – he said he would consider expanding QE if the data recommended it. His hint at curtailing the stimulus caused markets around the world to experience a drawback.
Why did this happen? Markets highly depend on the Fed. This is indeed the largest bond market bubble in U.S. history and once investors realize that the central bank can no longer buy all the debt and print all of the money then the Ponzi scheme will come to its utter demise.
Once this occurs, the stock markets will most likely crash and investors will seek safe havens, like precious metals and alternative currencies.
3. Fed admitting stimulus is failure
No matter how much Bernanke attempted to apply Keynesian economics and implement an aggressive monetary policy, it did not improve the national economy: no jobs, more debt and higher inflation; these are the results of government intervention.
Although public officials hardly ever admit failure of their policies, perhaps Bernanke will be a bigger man and admit that the Fed’s policies over the past few decades have been detrimental to the average American and the overall economy.
Here is something that Bernanke might say:
“My predecessors were the ones who caused the mess we are in today. However, with my black helicopter, my love of inflation and my hatred for sound money, I attempted to revive the economy by helping out billionaires, hurting savers and devaluing the dollar. For that, I am deeply sorry and I think we should slowly abolish the Fed.”
What should be more important is that hopefully this would lead to Washington to declare, “We are all Austrians now!”