We don’t like to be suspicious. We prefer to be able to take people at their word. But there seems to be more going on in the economy than meets the eye.
Let’s start a long time ago.
When the US was wracked with ruinous double-digit inflation, the new chairman of the Federal Reserve, Paul Volcker, decided to do something about it. He raised rates fast and furiously until inflation was mostly wrung out of the system.
Whether or not you were harmed by his policies, and even if you disagreed with Volcker, you knew he was taking extreme measure in response to extreme conditions.
Last week, the Federal Reserve lowered its policy interest rates for the third time this year. They lowered rates to Fed borrowers below the rate of inflation. That means the real interest rate for Fed borrowers is below zero.
We have to ask why.
The stock market is cruising along around all-time highs. The economy, we are told, is doing great. In fact, we are in the longest economic expansion in history, we are told. On Friday we learned what the Fed would already have had a peek at, that employment was strong, with “blowout” numbers.
But if everything was hunky-dory, why did the Fed feel it was necessary to cut rates three straight time in a row? Especially since this time last year they told us they would be raising rates.
If that’s all there were to it, we might set our skepticism aside.
But wait! As they say in the infomercials, there’s more!
In September the Fed began providing billions of dollars to the repo market, the overnight and short-term borrowing market among financial institutions, banks and hedge funds, which found itself in a “liquidity event.”
The Federal Reserve has tried to soft-pedal it, but in October it launched a massive new money printing program.
I mean a big one!
Early on, in the depths of the housing bust and Great Recession with millions of people losing their homes, the Fed launched a money printing operation called Quantitative Easing. It was “printing” $30 billion a month to bail out banks and fund US debt. Before long that ratcheted up to $40 billion a month. Soon it was $85 billion a month.
Now the Fed has quietly started its new round of QE at a rate of $60 billion a month. That’s twice the rate that QE started with a decade ago. And they say that they intend to keep it up through next June. We’ve written about it here, calling it a “backdoor bailout” of somebody, somewhere. At the same time, the money supply is growing at double-digit rates as we recounted here.
So, again, we ask “why?” Why the extreme Fed interventions? If we are in an economic expansion of unequaled duration, then why the serial interest rate cuts usually reserved for a crisis?
They don’t do this because they think everything is just fine.
Nor was QE money printing a policy option created for times when everything is alright, either.
There is more to all this than meets the eye. Extreme measures are being taken. Extreme measures imply extreme conditions. The Fed is acting like something big is brewing.
And that is usually time to move to the safety of gold.