Therapists and addicts alike know that withdrawal from addiction can be a painful process.
It’s the same with an economy’s addiction to made-up money and credit. That’s why so many descriptions of inflation are made in terms of dependency. Money printing is commonly called “stimulus,” referring to the sudden rush it seems to provide. One Federal Reserve chairman talked long ago about needing to “remove the punchbowl” just as the party was getting going. The Austrian school of economics’ description of the cause of financial busts is sometimes called “the hangover theory.”
Just like addicts who require bigger and bigger fixes to get their old accustomed high, the central bank must print ever more money as time goes on to get the same lift it got before. Inflationary economies go into a painful withdrawal—recessions, depressions, unemployment—when the narcotic of artificial money slows or comes to an end, provoking demands for another fix.
This is a pretty good metaphor for where we are now. After playing the part of “Dr. Feelgood” for decades, the Federal Reserve has promised to stop the monetary injections. So far, the withdrawal pains on Wall Street have been sharp, with the stock market sweating and the bond market shuddering like deprived addicts.
But the pain has only just begun. If the Fed were to stay the course and deflate the liquidity bubble of the last 14 years, the pain would quickly become an economy-wide trauma. At some point, the question moves from being one about the Fed’s resolve. It becomes a political question. And then talk of the Fed’s independence is eclipsed by the reality that it is a creature of Congress, and its officials are political appointees.
A willingness to withstand a mild recession is one thing. So, the unemployment rate rises in flyover country. If no one at the Fed or on Capitol Hills loses a job, the pain might be tolerable.
But what happens when a depression threatens? We ask that because major financial institutions like Credit Suisse are wobbling under capital challenges. Similarly, the International Monetary Fund is growing alarmed about international financial stability risks. “Contagion” is the term the financial world uses when one institution, market, or country threatens to take others down with it. We prefer to use Warren Buffet’s more earthy description. He says that when the tide goes out, you see who has been swimming naked.
The history of the Fed is clear: the central bank was created by the leading money center banks to serve their interests and keep them afloat in crisis after crisis. And that is exactly what it has done for more than a century.
In pointing to Credit Suisse, or even the Bank of England’s sudden pivot to more money printing and bond buying that we mentioned last week, we feel as though we are warning about a bridge out on the road ahead. It’s around a bend, so no one sees it yet. The new anchors are not watching, and the financial press is mostly inexperienced. But it’s a danger, nonetheless.
So today, with interest rates rising and stocks falling, keep a close eye on troubled financial institutions. The Fed can take a little pain — your pain — but it will not tolerate a contagion of pain among the banks. Before any key banks here or abroad are allowed to tumble, the money printing and liquidity operations with kill into overdrive, sharply devaluing the dollar and driving gold to new highs.
What can you do to protect yourself? We’re describing problems not with one company that fails to meet earnings estimates or loses a little market share. We’re talking about a systemic problem. The entire monetary system has been a plaything of Washington and Wall Street for years. Now that system is in trouble. We recommend you move assets out of the troubled system and into the enduring money of the ages, physical gold and silver, before a crisis long in the making erupts into view.
If you’re interested in investing in precious metals, let us provide you with a free one-on-one consultation.
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.