Member of Economic Elite Comes Clean

Many of those who warn of near-term economic collapses or market panics are consigned to the fringes of economic analysis.

The mainstream analysts at university faculties or Wall Street banks are almost unanimous in saying, “All is well.” Most predict years of strong growth ahead, higher stock prices and higher interest rates.

Of course, these are the same people who told you Brexit would never happen and Hillary would be president and who never saw the 2008 panic coming when it was staring them in the face.

That’s why it’s a big deal when a member of the economic elite breaks ranks and tells it like it is.

Harvard Professor Kenneth Rogoff is a former chief economist at the IMF and best-selling author of several books on systemic risk and market crashes.

Rogoff has reviewed several new books on the history of the 2008 financial panic and warns that such a panic could happen again, possibly very soon. When the elites warn of market crashes, the warning is often aimed not at everyday investors but at other elites so they can begin preparing for a crash before others have a chance to get out of the market.

You might want to take heed.

But what can you expect the Fed to do in event of a crash?

We all know that the Fed printed $3.7 trillion of new money between 2008 and 2014 under the banner of “quantitative easing,” or “QE,” as part of a failed monetary experiment by former Fed Chairman Ben Bernanke.

The Fed also held interest rates at zero for seven years, from 2008–2015, to subsidize bank earnings at the expense of everyday American savers. The money that was printed by the Fed was used to buy government securities, mostly U.S. Treasury notes and some government-guaranteed mortgage-backed securities.

Now the Fed is slowly unwinding those two efforts by gradually raising interest rates and not purchasing new government securities when the old ones mature.

The problem is that this process of normalizing rates and the balance sheet may not be completed in time for the next recession or market panic. In that case, the Fed may have to go back to QE. But some experts are anticipating a new round of QE with a twist.

Olivier Blanchard, former chief economist of the IMF, has suggested that a new round of QE could be used to buy stocks instead of U.S. Treasury notes. That policy would print money and boost the stock market at the same time. The Bank of Japan and the Swiss National Bank already pursue this policy of buying stocks and bonds with their printed money.

Unfortunately, the evidence is that this policy is a black hole that does not boost the economy but does contribute to stock market bubbles that are impossible to unwind without a crash.

The Fed hopes a new round of QE never comes to pass. But a recession that arrives before the Fed has raised rates enough may lead directly to that policy. If so, the stock and bond market bubbles we have today may just get bigger until they crash on their own once and for all.

You don’t want to be heavily exposed to these markets. You should not be the last to be get ready. Start now to decrease equity allocations and increase your allocations to cash and gold so you can weather the coming storm.


Jim Rickards
for The Daily Reckoning

The Daily Reckoning