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The Fed Bubble: Time To Pop?

|Includes:AGQ, SPDR Gold Trust ETF (GLD), PSLV, SLV

In a recent interview, David Stockman, former director of the Office of Management and Budget, painted a grim picture of a Fed-fueled series of hyperinflationary bubbles that, he said, must be close to bursting.

In critiquing Vice Chair of the Board of Governors of the Federal Reserve Janet Yellen's testimony before Congress to become the next Chairman, Stockman called her testimony, "Appalling…the pettifoggery of a Keynesian school mom that was superficial, mechanical, naïve and disingenuous." Asked if we are monetizing the debt, she said, "No, we are only carrying out the directions of Congress." Stockman said such a response was "Absurd."

Stockman argued that Yellen has been part of the current Fed system since the 1990s and fully supports the current Fed policy of printing money. In 2000, Stockman said, the Fed balance sheet was $500 billion. Today it is $4 trillion, an eight fold increase. Stockman said, "If that isn't monetizing the debt, I don't know what the word means."

Stockman said that the Fed argument that quantitative easing is designed to help the economy, has been proven to have failed. Over the past 13 years that the Fed has been printing money in huge amounts, the US has had the lowest GDP rate, 1.7%, at any time in the modern history of the United States for any comparable time frame. Furthermore, investment growth has been less than 1% in real terms since the beginning of this century. The US has lost 30,000 full-time bread winner jobs per month for the past 13 years since this monetization policy began. Only the 1%, "the very top," Stockman said, have benefited from this "windfall from the Fed."

If Yellen becomes Chair of the Fed, Stockman said, "What the new chair of Fed will be doing and saying, is she's going to take this lunatic policy that we've had for years, right over the edge in a Keynesian spree of money printing."

Stockman sees the greatest danger as the Fed. He said, "It has become a serial bubble machine." He argued that three times already this century, during the dot com boom and bust, the housing boom and bust, and the Wall Street collapse in 2007-8, we have seen bubbles driven by deliberate Fed policies. Today, as I and others I have interviewed have argued, and Stockman agrees, "There's bubbles everywhere."

Stockman mentioned the housing market, as well as markets for fine art, wine and diamonds as experiencing severe bubbles driven by the Feds easy money policy of low interest rates. He argued that the Russell 2,000 is up 230% since the bottom in barely four years, yet the environment for small businesses has not improved anywhere near that much in four years.

"There is a complete disconnect between the Main Street economy that is struggling," Stockman said, "and Wall Street bubbles that are being driven by the lunatic policies of the Fed."

Stockman also derided Yellen's argument that the Fed is just doing what Congress demands. The Humphrey-Hawkins Full Employment Act of 1978 does not mandate that inflation should be set at a specific quantitative rate nor does it set a specific unemployment rate target. Both such figures have been made up by the Fed.

What about the future? Stockman said the Fed's policies "leave us in a very precarious state. Rationally you know it can't go on much longer." Although Yellen said the Fed is not intimidated by the markets, there is clear evidence that the Fed is terrified that the financial markets will react negatively if they taper, let alone change policy direction. "She said we are not going to be intimidated by the financial markets," Stockman said, "But there's ample proof that they are."

The Fed's policies have not just been a danger to the United States. Stockman said, "The Fed has created massive danger for the world." Other Central Banks have either bought into the policy of easy money or are doing it defensively. Therefore, you have, he said, "A race to the bottom amongst Central Banks." This means that world financial markets are "extremely dangerous, and unstable."

The flood of money moving into emerging markets in a quest for higher returns, which Yellen said has nothing to do with Fed policy, is clearly the result of Fed low-interest policies, Stockman said. He argued that if the Fed begins to taper, that money is going to flee the emerging market economies as fast as it went in.

In comparing today to 1981 when President Reagan brought Stockman and others in to rescue the US economy, Stockman sees no reason for hope. In 1981, the problem was smaller, given 30 more years of Fed easy money policies today. In 1981, there was also a political will to see that there was a huge problem and to take the difficult steps needed to resolve it. Stockman said, "There is no evidence that there is any will or even any honest recognition of the problem today."

Hyperinflation in gold, diamonds, fine art and wine are evidence that many of the wealthy are exiting dollars and buying anything tangible they can get their hands on. When the financial markets realize that the Fed policy is bankrupt, then tangible assets that the Fed cannot manipulate will be the alternative to paper money, and gold fits that requirement, which support my argument, as well as those made by John Embry, Rick Rule and others, that today is an excellent time to buy gold.

When the collapse comes, Stockman argues that "It will create a massive sell off in financial markets and a huge rise in fear and volatility…. It's the calm before the storm."