International Man: Recently, the Federal Reserve Chairman Powell said: “The time has come for policy to adjust.”
It marked the official end of one of the steepest rate hike cycles in US history. The Fed will soon go back to easy money policies.
What do you make of this?
Doug Casey: Any discussion of what the Fed should or should not do, ought to be prefaced by a statement about how the Fed should never have been created, should not exist, and should be abolished. But that’s just in an ideal world. It’s not going to happen in the real world until the rotten system created by central banking collapses.
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As it is, we’re stuck with a bunch of bureaucrats toying with the most important price in society, the price of money—interest rates. And, of course, everybody watches the Fed, trying to guess and second-guess what they’re going to do.
The way I see it? They need easy money just to finance the $2 trillion Federal deficit. It’s no longer a question of wise solons twisting this knob or pressing that pedal to optimize the economy as if it were a machine. At this point, they’re desperately trying to keep the machine from blowing up. In fact, even the commonly used machine analogy is wrong. The economy is more like a rainforest; trying to control it like a 19th-century factory is a big mistake.
They’re also pretending the US government isn’t bankrupt. The country’s numerous over-indebted zombie corporations need low interest rates to stay in business. But at least they produce something, however uneconomically. The government produces nothing but regulations, sport wars, fiat money, and penalties.
Of course, there are some sensible people at the Fed, even though they’re guided by very nonsensible Keynesian economic theory. They’d like to stop printing money and “normalize” interest rates.
However, after decades of distortions cranked into the economy, nobody knows what “normal” really is. Who knows what interest rates would be without all the money printing needed to support the government and all the debt and distortions in the economy?
We can only be sure that, at some point, the debt and distortions will be liquidated. And it will be scary when it happens.
International Man: It is unusual for the Fed to make such a dramatic pivot just before a presidential election.
What do you think the effect will be on the election?
Doug Casey: I don’t know what Powell’s political beliefs might be. Theoretically, it shouldn’t make any difference what they are because the Fed is supposed to be independent and non-political. But that’s a fantasy.
One thing we can be sure of is that the Fed sees serious political change as dangerous. They must see Trump as a loose cannon who could make massive changes. But, despite his rhetoric or even his sincere intentions, no one can be sure what he’s going to do. That’s because, like Biden, Trump is ignorant of economics. He might act like Homer Simpson when there’s an emergency at the nuclear power plant where he works.
Another thing to remember is that since the Bidenistas have been in office for almost four years, they’ve built good relations with Fed employees. They all live within the DC beltway and are part of the same political/economic/social ecosystem. Whether they work for the government or the Fed, they tend to share the same worldview. They’re all fans of big government. They think that they can direct the affairs of not just 345 million people in the US but the 8 billion people on the planet. They really don’t want to see all their comfortable relationships replaced with deplorables and Trumpers.
So yes, I expect that they’ll try to lower interest rates. That’s because lower interest rates are necessary to keep the economy from collapsing. Plus, they’ll help to keep the Democrats in office.
Look at it this way: The Fed manipulates interest rates in the same way that the government has manipulated the Strategic Petroleum Reserve (SPR) to artificially keep gasoline prices down. But at some point, if the government’s going to refill the SPR, gas prices will go up above what they otherwise would be. It’s pretty much the same thing when the Fed artificially suppresses interest rates.
If they want to encourage the average person to save and build capital, which is good for society, interest rates have to go up. They’re caught between a rock and a hard place. They want rates low to keep the economy rolling, but they also want them high to encourage saving and capital formation.
International Man: Despite the non-stop gaslighting from the government and media, inflation has not been tamed.
The Fed is about to start a new cycle of monetary easing and interest rate cuts amid elevated inflation.
What do you think the impact will be?
Doug Casey: Let me stress that we have to be careful when we use the word “inflation”. It used to mean the rate of money creation. But in popular usage, inflation now means retail price rises. Retail price rises are the consequence of inflation, not inflation itself. Cause and effect are being confused.
The corruption of the meaning of words is an important part of the corruption of society.
In any event, when they lower interest rates, non-productive zombie corporations are kept alive, and their capital can’t be reallocated to productive businesses. Low interest rates encourage higher levels of consumption and discourage saving. That’s basically the opposite of what you want for a healthy economy. Low interest rates and easy credit also create new bubbles, encourage scams, and result in indebted consumers and social instability.
Above all, the Fed doesn’t want to be blamed for a collapse of the economy. To prevent unsustainable levels of debt and consumption from crashing down, they must inflate. It’s inflate or die. They’re caught between Scylla and Charybdis. There’s no way out.
International Man: If one of the steepest rate hike cycles in history couldn’t tame inflation, can the Fed ever escape the trap of ever-increasing currency debasement?
What are the implications?
Doug Casey: Retail price increases are slowing because the economy is slowing. It’s important to remember that inflation isn’t caused solely by the trillions of dollars of new money the Fed creates annually. Also, just as important, is the amount of borrowing in the commercial banking system. Fractional reserve banking allows banks to create new money by issuing loans.
People tend to borrow less when interest rates are high. So, as the economy slows down, people borrow less, and therefore, less money is created by the commercial banking system. Retail prices rise more slowly. Retail price rises slow because the economy itself is slowing. If it slows too much, lots of people and companies will default on their loans. A deflationary credit collapse, as happened in 1929, is always a possibility.
People have been guessing how much debt and money printing is sustainable and how much is too much for over 50 years. I’m of the opinion that this time around, for a lot of reasons, it’s the end of the line. The Fed has tried massive “Quantitative Easing” (QE) and “Zero Interest Rate Policy” (ZIRP), which were insane. Now they’re trying MMT, which is super insane, And CBDCs, which are even more psychotic. Things could have gone over the edge numerous times in the last 50 years since the dollar was cut loose from gold in 1971. We could have wound up in a catastrophic depression a number of times, but printing more money kept the game going. The odds are very high that this time there will be enough straws to break the camel’s back.
It’s important to remember that printing paper money does not make a society wealthier because the government, which is itself nothing but a consumer, can’t print wealth.
International Man: Given everything we’ve discussed today, how can people protect their savings amid increasing currency debasement and even profit from this situation?
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Doug Casey: Since the government detached the dollar from silver in 1965 and from gold in 1971, the answer has been to buy gold and silver. That simple strategy has worked out well over the last 50 years, and I suspect will work out even better in the future.
In addition, as things get rough in society because of government intervention, you might look at alcohol, tobacco, and firearms—the three things you need for a fun party. When times get tough, people will always want what the ATF regulates.
Unfortunately, the same is true of pharmaceuticals. A quarter of the country is on legal psychoactive drugs like Ritalin, Xanax, Zoloft, and a couple hundred others that cloud their minds and detach them from reality. I don’t recommend that anybody buy into the giant pharmaceutical firms that push them at this point, but it’s important to see the unpleasant realities…
The most important takeaway is that you should learn to speculate. Prices will be going up and down like an elevator with a lunatic at the controls, which is an accurate analogy. If you’re going to survive, you’re going to be forced to speculate. That’s unfortunate because it’s a skill, and most people aren’t good at it. Speculation is very different from investing, as well as gambling. Although it’s confused with both.
Right now, in my opinion, the highest potential areas of stock speculation are energy and metals stocks.
Reprinted with permission from International Man.
