Is the Fed Walking into a Trap?

I guess you would have to describe this past week as a “risk on” week, given the rise in stocks and commodities including silver while the safe havens of gold and Treasuries were down. Actually, there has been a massive tapering of “only” $5 billion per day, or $150 billion per month, compared to six days in March when the Fed was creating ~$125 billion per day out of thin air. Those were the days when Dr. Fauci was predicting 2 million American deaths this year! Why do we still listen to this guy? Beats me! No doubt the Fed wants to try to restrain money creation but one wonders how they will be able to do so as the economic shutdown starts to pay deadly bankruptcy dividends.

This week news came out that loan defaults have suddenly hit a six-year high and you have to think this is just the beginning, given a natural lag. Remember, we are only about two months into this horrific shelter-in-place policy. A very painful economic hardship lies ahead, which I’m sure is why the Fed chairman took an unusual step this week of almost begging the government to kick up the policy of helicopter money directly to Americans, rather than relying on the Fed to pump newly created debt money into the banking system which does little but make Wall Street and Washington richer.

In an article titled, “Is the Fed Walking into a Trap?” Lance Roberts notes the Fed may very well be walking into a liquidity trap. While the U.S. is trying to slow down money creation to “only” $5 billion per day, according to Bank of America’s Michael Hartnett, during the past eight weeks central banks have been buying $2.4 billion per hour of financial assets. A liquidity trap occurs, “When injections of cash into the private banking system by a central bank fail to lower interest rates and fail to stimulate economic growth. A liquidity trap occurs when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Signature characteristics of a liquidity trap are short-term interest rates remaining near zero. Furthermore, fluctuations in the monetary base fail to translate into fluctuations in general price levels.

Lance points out that declining interest rates are in large part due to declining demand for capital. That results from decades of mal investment caused by massive Fed interference doesn’t allow price discovery of capital. Debt grows dramatically from monetary and fiscal promiscuity causing investment to flow into unworthy endeavors and everyone consumes endlessly. Now we are at the point where cash flow from mal investments cannot service debt. So, the Fed keeps pushing good money after bad, leading to what is actually a national insolvency. We do have inflation but it isn’t a healthy rise in prices that occurs from robust demand. Rather it is a cost-of-living inflation that continues parasitically to ravage demand for products beyond bare necessities that would provide a higher return on investment and thus higher yields. As John Williams points out, the real cost of living is closer to 10% than 2%. This is destroying the middle class and demand.

And now, the more the Fed prints, the more lower-income people hoard simply to try to pay rent and buy food. So, we are seeing monetary velocity hitting near zero levels as during the financial crisis of 2008. The Fed seeks to overcome that by printing more money. But it can’t work. It only reduces the value of the dollar, which is why gold is relentlessly rising. (Please note my monthly gold price chart on the following page.)

At some point perhaps with Democrats gaining both the executive and legislative branches of our government in November, the stealth overthrow of our government attempted by the Obama Administration starting in 2016 will be achieved. Then there may very well be helicopter money to the poor who will spend 100% of what they get, driving us into hyperinflation. I had thought it might start happening during Trump’s presidency but he seems to be going along with Mitch McConnell’s restraint on spending, which may very well play into the hands of the Democrats in November.

When I say I agree with Lance on the deflation thesis, again it’s a mixed bag. The cost of staying alive rises for the lower 90% and dramatically so for those further down the food chain. My IDW is a mix of U.S. and global equities as well as the T-Bond and commodities. The 2008-09 crisis actually dipped below the IDW starting point of 100, meaning that we had a brief period of “deflation” in 2008-09. But from that point on the rich got richer and the poorer became poorer. This can go on only so long before there is a revolution, and we may be seeing the start of it now as middle-class people trying to stay alive are displaying desperation against totalitarian leftist rule by the governor of Michigan who seems to be campaigning for the Vice Presidency in quest of the Presidency, given Vice President Biden’s apparent fast track toward senility. Whichever way this horrible global financial mess plays out, we can be sure that the dollar will continue to debase. The only question now is how much longer can the dollar hang on as the world’s reserve currency?  Even though I love gold and hate the dollar and all fiat currencies because they are inherently dishonest, as an American, from a selfish point of view, I hope the dollar can hang on a lot longer. Who in their right mind wants chaos?

Virtual Metals Investor Forum Videos. During the past couple of weeks, I have been devoting a lot of time learning how to use Zoom technology and using it for the Metals Investor Forum. Here https://youtu.be/hAXas_w9B34 is the link to my presentations, titled, “It’s Worse Than You Can Imagine.” Also, here are links to presentations from the companies I invited and cover in this newsletter. Calibre Mining Corp. https://youtu.be/WGL5ZeK0COE  Goldsource Mines Inc. https://youtu.be/3xPfoZyJaYg  Klondike Gold Corp. https://youtu.be/A8kBtBhHnW4  Premier Gold Mines Ltd. https://youtu.be/KpBfREikvO4  Rise Gold Corp. https://youtu.be/te1Vnr1Te-Q   Also, here https://youtu.be/T-dvx5zoEtw is the link to Question and Answer Session with these five companies following their May 13 presentations.

About Jay Taylor