“Pumping up stock markets is not part of the Fed’s dual mandate (price stability and maximum employment), yet the Fed is good at it.”
― Jim Rickards, The New Great Depression
The major indexes are rallying sharply today as investors seem to think Russia’s invasion of Ukraine won’t affect their wealth too much.
Our Jim Rickards thinks differently, as he explained in Wednesday’s webinar. And whichever way things go in Eastern Europe, there’s a bigger problem on the horizon for Wall Street.
Since 2009, investors have come to expect the Federal Reserve to jump in at any sign of a bear market. With just the right mix of rate cuts and asset purchases, they believe, any dip in equities is sure to be short-lived.
But that established paradigm might be in for a major shakeup. Inflation is out of control… and the Fed’s only real hope of stopping it is to raise interest rates and stop shoveling cash into the system.
The effects of rising interest rates are pretty easy to predict. Borrowing will cost more, so people and businesses will take out fewer loans. Spending slows as people become less inclined to part with their cash.
It slows down the velocity of money, which Jim Rickards describes in his The New Great Depression:
When consumers pay down debt and increase savings instead of spending, velocity drops, as does GDP, unless the Fed increases the money supply. The Fed is printing money prodigiously to maintain nominal GDP in the face of declining velocity, a problem it has not faced since the 1930s.
Velocity is mostly a function of behavior and psychology. You really can’t force people to spend money that spurs economic growth. You can only entice them to. And now the Fed is poised to take that enticement away.
We could see a huge loss of confidence in our policymakers… which will make matters much, much worse. Because with a national debt of over $30 trillion, confidence is the only thing holding the U.S. government together.
“You don’t have to pay off the national debt,” Jim tells me during our Session. “You do have to roll it over” — meaning to take on more debt to keep up the payments to your creditors. But that only works if someone is willing to loan you the money…
“If people lose trust in the value of a dollar or lose trust in the ability of the United States to be able to issue new bonds at rates lower than Zimbabwe,” Jim explains, “then it fails.”
You’ll get to hear my full conversation with Jim tomorrow.
Follow your bliss,
Founder, The Wiggin Sessions