It was the British economist John Maynard Keynes who wrote that a recession or depression should be cured by a burst of government spending. The resulting budget deficit could be offset later when the economy improved. That’s what the Federal Reserve is trying to do now, reduce the stimulus. I’m sure Keynes never dreamed that a central bank would pump out gargantuan amounts of money ($4 trillion QE) to stimulate the economy and fund the governments deficit spending. Now that they are trying to pull money out and reduce stimulus, they are running into the arguments of another economic genius, Ludwig von Mises.
Mises claimed that the economy and stock market would indeed be booming from the monetary stimulus. However, the moment this stimulus was withdrawn it would lead to a recession. We have evidence that this is correct from our past recessions. Mises further argued that if the monetary stimulus is not curtailed, it must eventually lead to hyperinflation. That is the conundrum now facing the monetary authorities. Almost immediately upon the Fed withdrawing purchasing media and raising interest rates the stock market went into convulsions. According to Mises, a recession must follow.
However, the Federal Reserve can switch direction at any time and begin easing again. This would prove Mises to be correct and cause inflationary worries to explode. The huge government deficit must be covered by borrowing and that works to increase interest rates. Mises would argue that higher rates are a way to slow down monetary expansion and easy money and thereby save the currency from debasement. So we are between a rock and a hard place. The current monetary entrenchment threatens a collapsing stock market and another severe recession. The other path of monetary easing and money printing promises an inflationary disaster. That’s probably the course ahead. Over the years this has been a slow motion process. However, the policy options have narrowed and the day of reckoning could come quite soon.
For many years, I’ve expected a financial and monetary crisis to decimate the U.S. economy. When I started Investment Rarities 45 years ago, I thought that it would only be a few years before gold and silver were the only liquid assets still standing. However, constant inflating has rescued us time and again. Years ago, I let my stock broker’s license lapse in order to sell precious metals which I believed would save people from a horrible financial fate. I hate to think that was a mistake and I’ve wasted my time for all these years. I’m still certain that a great crash and financial crisis lies ahead. When that happens real estate will lose its liquidity, stock will be crushed, incomes and savings will lose their purchasing power. There is a terrible price to pay for years of fiat money creation. Fortunately gold and silver will remain unscathed and help people to weather the financial catastrophe that I believe is inevitable.