“U.S. households are spending more on housing, food, gas, transportation and medical care and falling deeper into the red. From credit cards to car loans, the average family now owes $155,622.” – CNBC, 1/11/22
“The Federal Reserve works for all Americans. We know our decisions matter to every person, family, business, and community across the country.”
– Federal Reserve Chairman Jerome Powell, 1/11/22
By Sean Kelly
It is hard to keep up with the Federal Reserve’s bouncing from pillar to post. The Fed’s complaint that we suffered from insufficient inflation is still fresh in our minds, as is its assurance a year ago that inflation was only transitory.
Today we know that inflation is neither insufficient nor transitory.
If the Fed had not thought inflation insufficient this time last year, we would not have had the highest inflation in nearly 40 years today. If the Fed had not thought inflation was transitory last year, it would have taken steps to reign it in.
Instead, the Fed has been on a binge, increasing its assets – purchases it makes with digitally printed money – by $1.43 trillion in the last 12 months. Indeed, in just two years it has doubled its assets to an unthinkable height of almost $9 trillion. That made-up money had to go somewhere, so it inflated asset prices. It inflated bubbles in stocks, housing, and bonds.
“We have nutty, crazy, massive bubbles everywhere,” said veteran market analyst David Rosenberg. “In my professional lifetime, and probably going back further, I don’t remember there being so many asset bubbles taking place at the same time.”
Now the Fed wants to dial it all back. It wants to put the genie back in the bottle. But it does not want to burst the bubbles and usher in a recession.
So, what does the Fed do to avoid a crash?
It takes a series of halfway measures. Goldman Sachs recently predicted that the Fed is looking at as many as four interest rate hikes this year.
Let us share with you some notes from stock bubbles gone by and reasons to protect your wealth and retirement with gold in circumstances like these.
During 1973-74 the stock market fell in half. No wonder. Not only had Nixon removed the dollar’s ties to gold, but the Fed also raised rates like a madman. The effective Fed funds rate (the benchmark rate targeted by the Fed) reached almost 13% in 1974.
Although the stock market struggled to recover, it fell again. Between September 1976 and March 1978, the S&P500 fell 19.4%. During the same brief period, gold rose 54%.
Fast forward to 2000. After the bursting of the dot-com bubble, the Fed thought it wise to drive down interest rates (much as it did during the COVIDlockdowns). One consequence of that interest rate repression was the housing bubble.
So, the Fed began raising interest rates. Just as it proposes to do this year.
After a year of Fed funds at 1%, the Fed raised rates 17 times, to 5.25% by June 2006.
Mortgage delinquencies began to pile up and the panic of 2008 ensued.
It was another ordeal for stock investors. From its high in October 2007, the S&P 500 fell for 17 months. It lost 56.4% of its value. The Dow Industrials fell from 14,198 in October 2007 to 6,443 in March 2009, a loss of more than 54%.
Gold on the other hand was once again the place to be for profit and wealth protection. From its low of $713 in the fall of 2008, it raced to $1,900 an ounce three years later.
Today, the effective Fed funds rate is almost zero. A new policy trajectory of higher interest rates will certainly panic some stock and bond investors and pop a few bubbles. But even four interest rate increases of a quarter-point each (or even increases of two or three times that amount) will still leave the Fed funds rate well below the inflation rate.
And that is not nearly enough to wring inflation out of the economy, a point made by former Treasury Secretary Larry Summers: “My own view is that the Fed and the markets are still not recognizing what’s likely to be necessary. The market judgment and Fed’s judgment is that you can somehow contain this inflation without rates ever rising above 2.5% in terms of the fed funds rate.”
A Gold Watch commentary about the effect of higher interest rates on slowing the economy and tax receipts and adding to the problem of funding the growing Federal debt will have to wait for another day.
More immediately, the Fed’s announced interest rate reversal is enough to spook some markets and pop some bubbles without wringing inflation out of the dollar economy. In other words, it has all the components of a powerful gold bull market.
Protect yourself and your future today. Let us provide you with a free one-on-one consultation to help you protect your retirement.
The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment advice and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.