The Federal Reserve and the Obama administration may be enthusiastic about the United States economy and financial system, but one economist is warning that we shouldn’t be popping open the bottle of champagne just year. Well, the U.S. couldn’t even afford a bottle of champagne without turning on the printing press or borrowing money from China or Japan.
David Stockman, former Reagan budget director and bestselling author of “The Great Deformation,” told Bloomberg TV on Wednesday that the U.S. is “in a more dangerous financial environment than we’ve ever been in history.”
Stockman believes there is a major distortion in the overall economy. “We’re in a perilous place. The market is putting in a top, the bottom is falling out of the economy.”
For evidence of a sluggish global economy, one should look at China, Europe and Japan, countries that are experiencing a significant slowdown in their respective economies. To circumvent this, their own central banks are unleashing a tidal wave of stimulus through quantitative easing and record-low interest rates.
In addition, Stockman alluded to the collapse in commodity prices that he thinks is “a sign of deflation” across the globe, which would be difficult to “escape.”
“Sooner or later there will be a recession,” Stockman averred. “The market is running way ahead of the real economy. The real economy of the world is grinding to a halt.”
What about the Federal Reserve? Stockman vehemently criticized the U.S. central bank for leaving the federal funds target rate at near zero at its last policy meeting. He argued that the Fed has been using the argument of low inflation for far too long as an excuse to suppress interest rates.
Although many contrarian investors cite inflation as a dire issue, Stockman feels that it’s interest rates that are the current problem. “Interest rates impact all financial pricing in the world — tens of trillions of dollars of cash, stocks and bonds. The Fed has fundamentally distorted all those prices.”
The solution, says Stockman, would be to remove the Fed from the financial markets and allow the price system to work alone. He added: “[interest rates] should never have been on zero, now they have to get off of zero to be credible. Sooner or later we’ve got to get off the monetary heroin.”
Fed Chair Janet Yellen eliminated the word “patient” from its guidance and said that a rate hike wouldn’t transpire at next month’s Federal Open Market Committee (FOMC) meeting. Yellen did say, however, that an increase in interest rates could transpire anytime afterwards.
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