Stagflationary Crisis: Understanding The Cause Of America’s Ongoing Collapse

This report was originally published by Brandon Smith at Alt-Market.com

It is at times frustrating, but also interesting, to witness the progression of the mainstream’s awareness of economic crisis within the U.S. over the years. As an alternative economist, I have had the “privilege” of perching outside the financial narrative and observing our economy from a less biased position, and I have discovered a few things.

First, the mainstream economic media is approximately two to three years behind average alternative economists. At least, they don’t seem to acknowledge reality within our time frame. This may be deliberate (my suspicion) because the general public is not meant to know the truth until it is too late for them to react in a practical way to solve the problem. For example, it is a rather strange experience for me to see the term “stagflation” suddenly becoming a major buzzword in the MSM. It is almost everywhere in the past week ever since the last Federal Reserve meeting in which the central bank mentioned higher inflation pressures and removed references in its monthly statement to a “growing economy.”

For those unfamiliar with what stagflation is, it is essentially the loss of economic growth in numerous sectors coupled with a marked spike in consumer and manufacturing costs. In other words, prices keep going up while employment growth, wages, production, etc. decline.

I have been warning about a stagflationary crisis as the ultimate result of central bank bailouts and QE for many years. In 2011, I published an article titled ‘The Debt Deal Con: Is It Fooling Anyone?’ in which I predicted that the Fed would resort to a third round of quantitative easing (they did). This prediction was based on the fact that the previous two QE events had not resulted in the kind of results the central bankers were obviously looking for. At that time, the stock market remained a dubious mess on the verge of a renewed crash, the U.S. debt rating was about to be downgraded by S&P, true employment growth was dismal, etc. The Fed needed something spectacular to keep the system propped up, at least until they were ready to trigger the next stage of the collapse.

In that same article I also discussed the inevitable end result of this stimulus bonanza:  Stagflation.

QE3 was a dramatic con, along with Operation Twist. The Fed got exactly what it wanted — an unprecedented bull market rally in stocks and temporary stability in bond markets. As stocks jumped higher and higher despite all negative fundamental data, the mainstream simply regurgitated the fool’s narrative that a “recovery” was upon us. But now things are changing and no illusion lasts forever.

The second observation I have made is that central banking elites and their cronies tend to give warnings on great economic shifts, but only about a year before they occur. They do this for a few reasons. One, because they are the people that engineer these crisis events in the first place and it’s not very hard to predict a calamity you helped create. Two, because it makes them appear prophetic when they are not, while at the same time giving the public as little time as possible to prepare. And three, because it gives them plausible deniability when the crisis actually happens, because they can claim they “tried to warn us”, though unfortunately it was too late.

The Bank For International Settlements warned of the derivatives and credit crash in 2007, about a year before the disaster struck. In 2017, former Fed chairman Alan Greenspan warned of inevitable “stagflation not seen since the 1970s.” In later comments, he and others attributed this potential crisis to the policies of Donald Trump.

It is important to note that stagflation is entirely the fault of central bankers and not the presidency, though the White House has indeed aided the Fed in its efforts regardless of who sits in the Oval Office.

Years ago there was a rather idiotic battle between financial analysts over what the end result of the Fed’s massive stimulus measures would be. One side argued that deflation would be the outcome and that no amount of Fed printing would overtake the vast black hole of debt conjured by the derivatives implosion. The other side argued that the Fed would continue to print perpetually, resorting to QE4 or possibly “QE infinity” and negative interest rates as a means to stave off a market crash for decades (like Japan) while at the same time initiating a Weimar-style inflationary bonanza.

Both sides were wrong because they refused to acknowledge the third option — stagflation.

The Fed clearly found a way to direct inflationary pressures into certain parts of the economy while allowing deflationary pressures to weigh down other parts of the economy. They also are NOT sticking to their previous strategy of holding interest rates down while pumping up markets with talk of further QE.

Deflationary proponents used to sarcastically argue that if people really believed that inflation would be the consequence of Fed activities then they should jump into the housing market because they would make a mint on price increases. Well, this is exactly what has happened. Home prices have continued to surge despite all fundamentals, including dismal home buyer stats which hit an all time low in 2016 and have barely recovered since.

I use home prices as a prime example of stagflation because the housing market constitutes around 15 percent to 18 percent of total GDP in the U.S. Since items like food and fuel are not counted in the calculation of the CPI index, housing should be the next consideration. Signs of stagflation in housing are a sure indicator of stagflation in the rest of the economy.

The manner in which housing is calculated in the CPI and GDP is a bit odd, of course. Housing is not included in these stats in terms of home purchases annually. In fact, home purchases and improvements are treated by the Bureau of Labor Statistics as an “investment” and not as a consumer purchase, which means they are not considered a measure of inflation. However, home values in terms of their “rental cost and change in cost” are counted in CPI.

As we all know, rent prices across the country have been skyrocketing in the past few years along with home prices, while at the same time home buyers have dwindled and the millennial generation is staying at home with mom and dad rather than paying out monthly for homes and apartments. That is to say, in a normal economic environment fewer buyers should result in lower prices, but this is not what has happened. The question is, how has the Federal Reserve and QE contributed to this example of stagflation?

First, the Fed’s artificial support for Fannie Mae and Freddie Mac after the derivatives debacle allowed for the continued propping up of the housing market when bad debt should have been allowed to cycle out of the system and house prices should have been allowed to fall.

Second, the Fed’s bailout funding of Fannie Mae directly benefited companies like Blackstone, which has become a partner with Fannie Mae and one of the largest buyers of homes in the country. Blackstone has not purchased tens of thousands of homes for resale, but for conversion into rentals. Blackstone’s vast purchases of single family homes has artificially boosted home values across the nation and given the false impression of a housing recovery that does not really exist.

Third, a very interesting discovery; while the central bank under Jerome Powell has become more and more aggressive in its balance sheet reductions, a move which has directly contributed to the recent decline in stock markets, there is one asset class that the Fed has been ADDING to its balance sheet — Mortgage Backed Securities (MBS).  These purchases tend to take place directly after older MBS have been allowed to roll over, meaning, the Fed is maintaining a relatively steady number of MBS while it is dumping other assets.

MBS represent around 40 percent of the Fed’s total balance sheet, and the Fed’s continued fiat support of the MBS market helps explain why home prices refuse to fall despite negative fundamentals. It is also interesting to me that the Fed has chosen to dump certain assets that appear to be causing a downward reaction in stock markets and other sectors while maintaining assets that keep housing prices high. It’s almost as if the Fed wants stagflation…

Finally, while the Fed’s interest rate hikes do not traditionally have a direct correlation to home mortgage rates, there is an indirect correlation. Fears of inflation sometimes ironically create inflation, and as the fed raises interest rates, mortgage rates tend to track. In 2018 mortgage rates have spiked, climbing 48 basis points since the beginning of the year.

This contributes to higher home prices as well a perceived rental values according to the CPI.

The source of almost every instability within our economy can be tracked straight back to the Federal Reserve and the “too-big-to-fail” corporations they bailed out after the credit crash. The current stagflationary development is no different. Stagflation will ultimately result in extreme price increases on necessary goods and services far beyond what we have already seen while the public’s ability to keep up with those prices will falter.

The fact that this issue is FINALLY hitting the mainstream should be concerning to everyone. For when a crisis development is discussed in the mainstream, it means we are on the verge of that crisis reaching its nexus. In June the Fed will raise interest rates yet again despite failing fundamentals. The Fed will continue to cite inflationary pressures, and the Fed will continue to cut its balance sheet. There is no room for delusion on this anymore. The Fed will not stop on its current path. In the meantime, central banks will continue to blame external forces such as trade wars and Trump era policies for stagflation while ignoring the trillions in fiat they have expertly poisoned our financial system with.

All bubbles collapse, but not all bubbles collapse in the exact same way. I believe the Fed has created a perfect storm of combined deflationary and inflationary factors; an economic bomb to surpass all economic bombs.

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You can contact Brandon Smith at: brandon@alt-market.com

After 8 long years of ultra-loose monetary policy from the Federal Reserve, it’s no secret that inflation is primed to soar. If your IRA or 401(k) is exposed to this threat, it’s critical to act now! That’s why thousands of Americans are moving their retirement into a Gold IRA. Learn how you can too with a free info kit on gold from Birch Gold Group. It reveals the little-known IRS Tax Law to move your IRA or 401(k) into gold. Click here to get your free Info Kit on Gold.

Peter Schiff: We Are In A Bear Market, All News Is Bad News

After rallying on Friday, stocks tanked on Monday, dropping over 450 points. In fact, it was the worst first day of the second quarter since the Great Depression.

Stocks dove Wednesday as well on the heels of China’s announcement that they will intensify the trade war with more tariffs, according to most analysts.  But Peter Schiff, the financial guru who accurately predicted the 2008 recession has a different take.

According to Schiff’s blog, Schiff Gold, most analysts blamed the plunge on the escalating trade war, but Peter Schiff sees it quite a bit differently. He said it was just another bad day in a bear market. In fact, he said the market could have rallied because the Chinese response wasn’t as bad as it could have been. But when you’re in a bear market, all news is bad news.

Schiff says that the media’s talking heads are simply using the tariffs as an excuse. The real truth is that most people are in a selling mood. “Stocks are expensive. The bull market is over. It’s now a bear market. People want to get out. People are allocating out. Growth is slowing whether people want to acknowledge it or not,” said Schiff.

The media pundits are optimistic too; just like they were before the 2008 recession, said Schiff. “That’s what’s going on now. Nobody thinks there’s a problem. Everybody is optimistic. Everybody is bullish. So, when you see these classic signs that something is going wrong, you just ignore it.”

The bottom line is Schiff thinks the economy is going to tank (although he isn’t sure how soon that will occur) and the stock market is going to continue its bear run. But the Fed is not going to be able to come to the rescue this time around because of inflation. If it does try to launch more QE to bail out the stock market, it will completely tank the dollar.

When we do all that, the dollar is going to implode because everybody is going to know that the experiment failed. Everybody is going to know there is no way out of this box. There is no normalization of rates that is ever going to happen. Their balance sheet is never going to shrink. The balance sheet is going to grow permanently, which means this banana republic debt monetization. They can no longer pretend that they’re not doing the same things as South American banana republics. It’s a pure ‘we just print money to finance government spending,’ which is going to explode.

The national debt is an often overlooked aspect of the economy, but in truth, it will play a big role in an economic collapse and Schiff is sounding the alarms.

Central Banks Will Let The Next Crash Happen

This report was originally published by Brandon Smith at Alt-Market.com

If you have been following the public commentary from central banks around the world the past few months, you know that there has been a considerable change in tone compared to the last several years.

For example, officials at the European Central Bank are hinting at a taper of stimulus measures by September of this year and some EU economists are expecting a rate hike by December. The Bank of England has already started its own rate hike program and has warned of more hikes to come in the near term. The Bank of Canada is continuing with interest rate hikes and signaled more to come over the course of this year. The Bank of Japan has been cutting bond purchases, launching rumors that governor Haruhiko Kuroda will oversee the long overdue taper of Japan’s seemingly endless stimulus measures, which have now amounted to an official balance sheet of around $5 trillion.

This global trend of “fiscal tightening” is yet another piece of evidence indicating that central banks are NOT governed independently from one another, but that they act in concert with each other based on the same marching orders. That said, none of the trend reversals in other central banks compares to the vast shift in policy direction shown by the Federal Reserve.

First came the taper of QE, which almost no one thought would happen. Then came the interest rate hikes, which most analysts both mainstream and alternative said were impossible, and now the Fed is also unwinding its balance sheet of around $4 trillion, and it is unwinding faster than anyone expected.

Now, mainstream economists will say a number of things on this issue — they will point out that many investors simply do not believe the Fed will follow through with this tightening program. They will also say that even if the Fed does continue cutting off the easy money to banks and corporations, there is no doubt that the central bank will intervene in markets once again if the effects are negative.  I would say that this is rather delusional thinking based on a dangerous assumption; the assumption that the Fed wants to save markets.

When mainstream economists argue that the Federal Reserve could conceivably keep low interest rates and stimulus going for decades if necessary, they often use the example of the Bank of Japan as some kind of qualifier. Of course, what they fail to mention is that yes, the BOJ has spent decades increasing its balance sheet which now sits at around $4.7 trillion (U.S.), but the Fed exploded its balance sheet to around $4.5 trillion in only eight years. That is to say, the Fed inflated a bubble as large if not larger than the Bank of Japan in less than half the time.

Frankly, the comparison is idiotic. And clearly according to their own admissions, the Fed is not going to be continuing stimulus measures anyway. People cling to this fantasy because they WANT to believe that the easy money party will never end. They are sorely mistaken.

I have been battling this delusion for quite some time. When I predicted that the Fed would taper QE, I received a predominantly negative reaction. The same thing occurred when I predicted the Fed would begin hiking interest rates. Now, I’m finding it rather difficult to break through the narrative that the Fed will intervene before the next crash takes place.

There is something so intoxicating about the notion that central banks will stop at nothing to prop up stock markets and bond markets. It generates an almost crazed cult-like fervor in the investment world; a psychedelic high that makes financial participants think they can fly. Of course, what has really happened is that these people have jumped off the roof of their overpriced condo; they think they are flying but they are really falling like a brick weighted down with stupidity.

Former Fed chairman Janet Yellen upon exiting her position stated:

“If stock prices or asset prices more generally were to fall, what would that mean for the economy as a whole?”

“I think our overall judgment is that, if there were to be a decline in asset valuations, it would not damage unduly the core of our financial system.”

Yellen also said when asked about high stock prices:

“Well, I don’t want to say too high. But I do want to say high. Price/earnings ratios are near the high end of their historical ranges…”

“Now, is that a bubble or is too high? And there it’s very hard to tell. But it is a source of some concern that asset valuations are so high.”

Since the middle of last year, the Fed has been calling the stock market overpriced and “vulnerable.” This rhetoric has only become bolder over the past several months. Dallas Fed president Robert Kaplan dismissed concerns over the affect rate hikes might have on markets and hinted at the potential for MORE than the three hikes planned for 2018. The Dow fell 666 points that same day.

New York Fed’s Bill Dudley shrugged off concerns over recent volatility, saying that an equity rout like the one that occurred in recent days “has virtually no consequence for the economic outlook.”

Jerome Powell, the new Fed chairman, has said while taking the chair position that he will continue with the current Fed policy of rate hikes and balance sheet reductions, and reiterated his support for more rate hikes this past week (while the mainstream media hyperfocused on his lip service promise to watch stock behavior closely). This indicates once again that it does not matter who is at the wheel of the Fed, its course has already been set, and the Chairman is simply there to act as the ship’s parrot mascot. The Fed is expected to raise interest rates yet again in March.

Now, all the evidence including the Fed’s surprise balance sheet reduction of $18 billion in January shows that at least for now, the central bank no longer cares about stocks and bonds.

In the meantime, 10 year Treasury Yields are spiking to the ever present danger level of 3% after a hotter than expected inflation report, and the dollar index is plunging. Showing us perhaps the first signs of a potential stagflationary crisis. Bottom line – markets are not long for this world if yields pass 3% and the falling dollar provides yet another excuse for faster interest rate hikes. More rate hikes means eventually cheap loans will become expensive loans.

My question is, if the Fed is not going to feed cheap fiat into banks and corporations to fuel stock buybacks, then WHO is going to buy equities now?

What about corporations? Nope, not going to happen. With corporate debt skyrocketing to levels far beyond that seen just before the 2008 crash, there is no chance that they will be able to sustain stock buybacks without aid from the Fed.

What about retail investors? I doubt it. Retail investors are the primary pillar boosting stocks at this stage in the game, but as we saw during the panic last week, it is unlikely that retail investors will maintain hands strong enough to refrain from selling at the first sign of trouble. They do tend to hastily jump back into markets to buy every dip because for many years this simplistic strategy has worked, but if the Fed continues to back away from stimulus and we seen a few more incidences like the 1,000+ point drops of recent days, investor conditioning will be broken, and blind faith will be replaced by doubt.

What about the American consumer? Will consumer profits boost companies and give them and they stock shares a solid foundation? I can barely write that question without laughing out loud. There was a time (it seems like so long ago) when company innovation and solid business strategies actually meant something when it comes to equities. Those days are over. Now, everything is based on the assumption of central bank intervention, and as I already noted, central banks are pulling the plug on life support.

Beyond that, U.S. consumers are now buried in historic levels of personal debt.

What about the Trump administration’s latest $1.5 trillion infrastructure plan? Will this act as a kind of indirect stimulus program picking up where the Fed left off? Unlikely.

Perhaps if such a plan had been implemented eight years ago in place of the useless bank bailouts and TARP, it might have made a difference. Though, a similar strategy did not work out very well for Herbert Hoover. In fact, many of the Hoover-era infrastructure projects were not paid off for decades after initial construction. Hoover was also a one term Republican president that oversaw the beginning of the Great Depression.

The system is too far into debt and too far gone for infrastructure spending to make any difference in the economic outcome. Add to that the fact that Treasury yields are liable to continue their upward trajectory due to the increased deficit spending, putting more pressure on stocks.

Interestingly, Trump’s budget director has even admitted that the plan will lead to even faster increases in interest rates, and Fed officials have been using this as a partial rationale for why they plan to continue cutting off stimulus measures.

I think anyone with any sense can see the narrative that is building here. The Federal Reserve is going to let markets crumble in 2018. They are going to continue raising interest rates and reducing their balance sheet faster than originally expected. They will not step in when equities crash. And, they don’t really need to. Trump continues to set himself up as the perfect scapegoat for a bubble implosion that had to happen eventually anyway. Now, the central banks can sufficiently avoid any blame.

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You can contact Brandon Smith at: brandon@alt-market.com

After 8 long years of ultra-loose monetary policy from the Federal Reserve, it’s no secret that inflation is primed to soar. If your IRA or 401(k) is exposed to this threat, it’s critical to act now! That’s why thousands of Americans are moving their retirement into a Gold IRA. Learn how you can too with a free info kit on gold from Birch Gold Group. It reveals the little-known IRS Tax Law to move your IRA or 401(k) into gold. Click here to get your free Info Kit on Gold.

Moment of Truth for the Federal Reserve

(ANTIMEDIA Op-ed) — For those who believe in the virtue of central bank economic stimulus, the moment of truth has finally arrived. Federal Reserve chairman Janet Yellen announced late last month that the Fed plans to start shrinking its balance sheet for the first time since it expanded from less than $900 billion in 2008 to an unprecedented $4.5 trillion today. The initial wave of selling will start gradually next month with only $6 billion of Treasuries and $4 billion of mortgages, but the compounding effect over the coming months may shake investors’ confidence.

This kind of unwind has never been attempted before in history, and even the experts are extremely polarized about what might happen next.

Not many people care to understand the potential implications of programs like quantitative easing, which has been implemented most aggressively by the Federal Reserve, the European Central Bank, and the Bank of Japan since the depths of the Great Recession. The policy essentially involves pumping trillions of newly created dollars, euros, and yen into the financial system to ensure there’s always enough credit available for markets to function. Central banks buy up government treasuries, mortgages, and even shares of companies at prices that couldn’t possibly be supported in a freely traded system. This manipulated environment allows central planners to keep interest rates near zero and push money into certain asset classes.

These low rates have helped drive credit card debt, student loans, and auto loans to more than a trillion dollars each. People’s short memories and naive trust in the current system has led many to blindly follow the crowd into near debt enslavement. Low interest rates not only incentivize consumers to borrow and spend but also force investors to chase higher returns by putting their money in risky places like the stock market instead of safer positions like money market and savings accounts.

When central banks merge with government powers to bail out corrupt and bankrupt institutions, rest assured the public will always be the one to suffer the fallout. Debt-dependent governments like the United States are the prime beneficiaries of this unholy alliance. Without the restraint of higher interest rates, the State can accumulate even larger amounts of debt without having to about having to shift any immediate burden to the taxpayer.

At what felt like the worst period of the 2009 financial crisis, this supposed ‘QE fix’ gained instant popularity with politicians and financial pundits alike. Talking heads were desperate to broadcast any hope or plan for a brighter future. It not only alleviated the mounting pressure on elected representatives to take action, but it also began a huge wealth transfer from savers and those on fixed incomes to the wealthiest holders of financial assets.

As this monumental scheme comes to a close, it will become clearer that the divided political environment, record high stock and bond valuations, and impending debt ceiling may create a recipe for the real threat — a loss of confidence. The central banks have been propping up the world’s financial systems for so long that people have forgotten how quickly things can change.

Federal Reserve economists and officials have traditionally displayed a united front to the outside world when it comes to their monetary policy decisions. Any slight deviation in opinion can have a tremendous impact on the public’s trust in the current centralized fiat system. Lately, however, there have been signs of dissent from within their own ranks.

St. Louis Fed economist Stephen D. Williamson has expressed his doubts about quantitative easing several times but most recently wrote:

“Evaluating the effects of monetary policy is difficult, even in the case of conventional interest rate policy….With respect to QE, there are good reasons to be skeptical that it works as advertised, and some economists have made a good case that QE is actually detrimental.”

In 2015, Williamson also stated similar uncertainty about the success of the program:

“There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed—inflation and real economic activity.“

If QE hasn’t worked as advertised and has failed to create real economic activity, then this whole recovery may have been an artificial boom unlike anything we’ve seen before. Unfortunately, central banks have fully convinced the public of their near supernatural power over the economy. Although many still can’t imagine a financial model without government control or central banks, the individuals who see the writing on the wall have already started to adapt.

Blockchain technology and potential asset-backed currencies have finally created competition against fiat money. Although the infrastructure is still in its infancy, the ability to decentralize finance will force the established institutions to respond. The regulatory and taxation powers that have been held by unaccountable agencies for centuries are now being disrupted by real innovation. The future of wealth generation lies in the digital marketplace and real assets that are shielded from the decisions of bureaucrats and bankers.

The Federal Reserve led the entire global financial system down a rabbit hole that nobody is sure how to get out of. The credibility of a system in place for over a century is on the line, and everyone should pay close attention to the actions taken from now on. Nothing has been fundamentally resolved, and the incompetence of central planners shows they will never break from their ideology. If the stock markets do sell off in response to this historic change in monetary policy, expect Janet Yellen and central banks around the world to ramp up their printing presses yet again.

Op-Ed / Creative Commons / Anti-Media / Report a typo

Fed Preparing Trillion-Dollar Bailout for Next Recession?

(ZHE) While in recent weeks there has been a material increase in Fed balance sheet normalization chatter, according to a new report from Deutsche Bank analysts, it may all be for nothing for one simple reason: should the US encounter a recession in the next several years, the most likely reaction by the Fed would be another $1 trillion in QE (see: bailout), delaying indefinitely any expectations for a return to a “normal” balance sheet.

As a reminder, as of this month, the duration of the latest expansionary cycle – as defined by the NBER – has reached 93 months, surpassing the 92 months of the 1982-1990 cycle, and is now the third longest in history. Should the cycle persist for another 27 months, or just under two and a half years, it would be the longest period of “economic growth” in history.

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That observation has prompted speculation that at some point in the next several years, the US economy will finally succumb to what historically has been a contraction in output, aka a recession. The question, then, is how would the Fed responds. The answer, according to a Deutsche Bank analysis of the future shape of the Fed’s balance sheet, is with another a $1 trillion liquidity injection, which would stop dead in its tracks any plans for a Fed balance sheet renormalization.

As the DB’s Matthew Luzzetti writes in his analysis, to this point, the economic backdrop considered is relatively optimistic: the economy is assumed to not enter a recession over the next eight years and the  Fed is able to normalize the fed funds rate in line with their expectations. However, given that the current expansion is already well advanced, it is possible that the economy enters a recession before the Fed’s balance sheet normalizes.

Prospects for normalizing the balance sheet would be dramatically altered by a recession, potentially even a mild one. This is because with the fed funds rate still relatively close to zero, and the neutral fed funds rate potentially remaining low over the coming years, the Fed may not be able to provide enough accommodation by only cutting its policy rate. Just as in the aftermath of the financial crisis, the Fed may have to turn to another round of QE to support the economy during the next recession.

How would a recession affect the Fed’s ability to normalize its balance sheet? DB explains:

“We use recent analysis by the Fed Board staff to calibrate the Fed’s reaction function to a recession in the next several years. This work considered how the Fed would respond to a severe recession, similar in magnitude to the financial crisis with the unemployment gap rising 5 percentage points, and with the fed funds rate already at 3%. Using the Fed’s model of the US economy, FRB/US, this work concluded that the fed funds rate should be cut significantly below zero to provide enough accommodation to the economy in response to the recession. With the actual fed funds rate constrained by the zero lower bound, the paper finds that the Fed could provide similar accommodation by a combination of another QE program and strong forward guidance about the future path of the fed funds rate. The size of the required QE package is significant: $2tn.

“In some ways this scenario seems too pessimistic. The magnitude of the downturn considered is likely to be more severe than the next recession for several reasons: (1) they consider a recession in line with the financial crisis, (2) there is limited evidence of substantial imbalances or overheating in the economy which should limit the depth of the next recession, and (3) monetary policy is still accommodative. Instead, a milder recession appears more likely. Conversely, it may be optimistic to assume that the fed funds rate is able to reach 3% before the next recession occurs, suggesting that the Fed could have less scope to ease monetary policy by cutting rates and therefore may have to resort to a larger QE program.

“We consider an alternative scenario in which the economy enters a more mild recession in 2020 as the Fed has raised the fed funds rate to just above 3%. We assume that the recession causes the unemployment rate to rise 2.5 percentage points.

“Using the results from the Fed staff’s work, and assuming that there results can be extended linearly, a recession that is half as severe would require the Fed to undertake a $1tn QE program in 2020. We assume that this occurs through Treasury security purchases, with the maturity distribution of these purchases consistent with QE3. Finally, in this scenario the Fed reinvests the proceeds from its maturing MBS securities in 2020 and 2021, but does not increase its holdings.

“Securities are allowed to naturally roll off beginning in 2022. In this scenario, the size of the Fed’s portfolio rises above $4tn, near its record high, and it does not normalize by the end of 2024, which is the end of our horizon (Figures 7 and 8). Excess reserves remain elevated at around $800bn at that time, suggesting that it could take another three to four years – or about a decade from now – for the Fed’s balance sheet to normalize under this scenario.”

This is just one example of countless alternative scenarios that should be considered. The timing of normalization would be extended further into the future with larger QE programs, which would be necessary if the recession is deeper or if the fed funds rate at the start of the recession is not as high as we assume. Conversely, the required size of the QE program to combat the downturn will be smaller if the starting point for the fed funds rate is higher (taking the level of the neutral fed funds rate as given) or if the recession is shallower.

In this way, stopping reinvestment can actually increase the required size of the future QE program by limiting how high the Fed is able to raise the fed funds rate prior to the recession. This, in turn, raises the likelihood and size of an eventual QE program in response to the next recession. The magnitude of this effect is likely to be substantial in the Fed’s view, given that they place considerable emphasis on how it is the stock of their assets that eases financial conditions by compressing term premia. In a footnote to a recent speech by Chair Yellen, it was noted that the declining maturity of the Fed’s portfolio in 2017 would raise 10-year Treasury yields by about 15bp – an effect equivalent to about a 50bp increase in the fed funds rate. Thus, the trade-off between tightening via the fed funds rate or through reducing the balance sheet is a non-trivial consideration.

These results suggest that to normalize the size and composition of its balance sheet over the longer-run, the Fed’s most important objective may be to help the economy avoid a recession. Tightening financial conditions due to the start of unwinding the balance sheet may limit the extent to which the fed funds rate can increase prior the next recession, increasing the likelihood and size of the next QE program and thus delaying normalization of the balance sheet.

Obama Killed Our Economic Freedom: “Stagnation, Unemployment, and Deteriorating Social Conditions”

Anyone who feels like the American Dream is dead can now cite solid evidence of its abrupt end.

It seems that eight years of life under Comrade Obama was not only difficult economically, but was fiscally difficult for most American families because his administration had done so much to restrict economic freedom – until his time, a basic tenet of American life, and essential to fostering a vibrant economy in the middle and working classes.

A new set of rankings released by the Heritage Foundation in its 2017 “Index of Economic Freedom” revealed that the United States has been on a continual decline over the past decade, and especially since the 2008 economic crisis. Slipping down to 17th among 180 countries, and losing ground yet again, the country that so often celebrates its shining liberty is considered to be only “mostly free.”

A wave of unprecedented government intervention cut deeply into both freedom and prosperity for millions upon millions of Americans; the reliance upon Federal Reserve QE programs to stimulate the economy has killed businesses, and made other reliant upon government ties to make profits (mainly at the top).

via Daily Signal.com:

It’s already been eight years since the Great Recession, yet the U.S. economy has been just inching along, with its productivity flagging and millions being locked out of the labor market.

One critical underlying factor for this lack of economic dynamism has been the startling decline of America’s economic freedom, an unfortunate legacy of Barack Obama’s eight-year presidency.

The Heritage Foundation’s 2017 Index of Economic Freedom—an annual global study that compares countries’ entrepreneurial environments—highlights the urgent need for the U.S. to change course. For the ninth time in the past 10 years since 2008, America has lost ground.

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The U.S. remains mired in the ranks of the “mostly free,” the second-tier economic freedom status into which it dropped in 2010.

Countries achieving higher levels of economic freedom consistently and measurably outperform others in economic growth, long-term prosperity, and social progress. Those losing freedom, on the other hand, risk economic stagnation, high unemployment, and deteriorating social conditions.

In fact, America’s standing in the index had dwindled steadily during the Obama years. This largely owed to increased government spending, regulations, and a failed stimulus program that enriched the well-connected while leaving average Americans behind.

Read the Heritage Foundation report “Blueprint for Reform: A Comprehensive Policy Agenda for a New Administration in 2017” here.

The government takeover of health care – and forcing Americans to buy into their program – has taken a significant toll. So has government takeover of finance, forcing taxpayers to bankroll a bailout for Wall Street, only to eat the continued decline in prosperity as a result of the terrible policies that solidified under President Obama. Meanwhile, business as usual in the federal government meant more cronyism and picking of winners and losers that ever before in U.S. history.

The attempt to push through a climate change/carbon tax cap & tax system, including proposals to make Americans pay more for everything green, to have homes inspected, pay penalties and fines, and ultimately, pay for the privilege of breathing the air and living on this planet have also signaled an impoverished and tightly controlled future.

However, even President Obama wasn’t able to accomplish everything he wanted; though the era of his worldview has greatly damaged the U.S. in many ways.

Eight years of being coached into debt for everything – from college loans that don’t lead to jobs, to homes you can never really own, and a monetary system that is declining rapidly in value all the time, has marred and stalled what is the very essence of this country.

Ultimately, his legacy is a very somber $20 trillion in national debt – a staggering double on the debt throughout American history up until the end of the Bush years.

This country faces grave decline, and can only turn around if the tax burden is taken off of ordinary people, if jobs and independent business again becomes possible, and if the damn government would just get out of the way.

Unfortunately, it could be too late. Many people now see a recession, and a possible larger collapse and depression, as systematically unavoidable. On paper anyway, someone must pay the bill for the past eight years of economic stagnation and decline.

Read more:

ObamaScare: Our Entire Economy is About to Get Hit With a Sledgehammer

2017 the Beginning Of the End: “U.S. Economy About To Get Slammed By A Major Recession”

10 Signs That Obamacare Is Going To Wreck The U.S. Economy

What 12 Financial Experts Predict for the Economy in 2017…It’s Ugly

Americans Haven't Been This Positive About The US Economy Since July 2007, But...

Bloomberg"s Consumer Comfort index surged once again this week to its highest since April 2015, but it was the "state of the economy" survey that really soared - breaking to new cycle highs at 42.8 - the highest since July 2007...

The last time we saw a surge like this was the post-QE3 "well they would not have stopped QE if they didn"t know that everything was awesome" narrative...

How did that work out for them?