One vehement critic of the Federal Reserve says this: the United States central bank will never raise interest rates. If they do then, well, another financial crisis will occur that will be worse than the 2008 economic collapse.
Is this an unfounded doom and gloom scenario or is this sound economic reasoning?
Whatever the case may be, Peter Schiff, president and CEO of Euro Pacific Capital, is holding to the belief that Janet Yellen and the Fed can’t raise rates without letting the current bubble’s air out. Meanwhile, the Fed’s monetary policies have turned the U.S. economy into a client of a “roach motel.”
“If the Fed tries to raise interest rates we will have a worse financial crisis than the one they caused in 2008,” Schiff said in an interview with CNBC on Wednesday. “They’re going to talk as if they can raise rates because they don’t want to admit that this is a bubble. But they don’t want to let the air out.”
According to Schiff, the Fed’s quantitative easing policies in addition to near-zero interest rates have made the U.S. dependent on low rates just to survive. The only way the central bank can prevent the market suffering from another crisis, suggests Schiff, is by slashing rates.
“Once they check us in, they can never check us out. And that’s what they’re finding out right now,” he said.
The Fed has said that it plans to raise rates at least two more times this year, while Goldman Sachs predicts the central bank has to impose four rate hikes (SEE: Goldman Sachs says Fed will have to raise interest rates four times in 2016 to become a central bank for the U.S. again).
Does this mean a recession is coming? Schiff actually thinks the U.S. is in the midst of a recession that started either at the end of last year or the beginning of this year. And the upcoming recession will be worse than the Great Recession of a few years ago.
Moreover, President Obama’s successor will inherit a worse recession than what he received from Bush. “We’re off to the worst stock market start in history, so I doubt the Fed wants to repeat that and [hike] again in April.”
The only investment investors can shield themselves is gold.
But there is one place Schiff is confident any move from the Fed will withstand: Gold.
“What happened the last time the Fed raised rates? Gold went way up. So if the Fed does that again and the stock market tanks, gold’s going to get the safe haven bid,” said Schiff. “If you bet against the Fed and bought gold in 2000 when it was under $300 an ounce, the Fed is one of the main reasons it’s now more than $1,200 an ounce.”
Once again, Schiff stood by his previous comments that gold will eventually skyrocket to $5,000. “If you bet against the Fed and bought gold in 2000 when it was under $300 an ounce, the Fed is one of the main reasons it’s now more than $1,200 an ounce [today].”
At the time of this writing, gold is trading at around $1,220 an ounce.
If you ask one diehard Austrian economist if the U.S. is entering recession territory he will give you an emphatic no.
Economic Policy Journal’s Robert Wenzel has written consistently that the economic data contradict the idea that the U.S. is embarking upon a recession. Looking at the money supply, jobs numbers and the Fed’s outlook, Wenzel contends the boom-bust cycle is in full play right now. This is just the Fed-manipulated boom side at this current stage (here is one example of a blog post). He has written repeatedly, however, that he does think price inflation will go up significantly, with rate hikes to follow.
–AM
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