The current landscape for investors is one of confusion and uncertainty. Following the Federal Reserve’s much-anticipated 75 basis point interest rate hike on Wednesday, major stock market indices experienced a temporary surge. However, this optimism quickly faded.
Investors were initially buoyed by the Federal Open Market Committee (FOMC) statement, particularly a comment indicating that the Fed, “will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation and economic and financial developments.” This was erroneously interpreted as a harbinger of a policy shift.
However, during the post-FOMC statement press conference, Powell clarified that it was “very premature to be thinking about pausing.” This prompted a sharp decline in stocks, with the Dow Jones Industrial Average (DJIA) closing the day down 505 points.
The question of whether a pivot or pause is in the cards is misguided. The stark reality is that the major stock market indices have significant ground to lose before the bear market concludes, irrespective of the Fed’s potential policy changes.
Historically, the Fed initiated interest rate cuts in September 2007, yet the stock market did not reach its lowest point until March 2009. Similarly, rate cuts commenced in January 2001, but the market remained unstable until October 2002.
By reflecting on these recent bear markets, it becomes evident that once the Fed finally begins to cut interest rates—after inflation has stalled and a period of rate pauses has elapsed—the stock market could continue its decline for another 18 to 22 months. This suggests that the current bear market may not bottom out until well into 2025. Even more concerning is the potential instability within the entire dollar-based financial system before then.
Understanding the Complexity
The actions of the Fed have caused investors to become entangled in monetary policy, which has influenced the ebb and flow of the stock market. Unfortunately, many workers and voters remain unaware of how these policies impact the broader economy. Here’s why…
Fiscal policy, unlike the more abstract monetary policy, is easier for the average worker and voter to comprehend. Income taxes, budget deficits, and the national debt are tangible concepts that are more relatable.
On the other hand, the effects of zero interest rate policy (ZIRP) or quantitative easing (QE) are often lost on the everyday observer. Politicians may make throwaway comments about consumer price inflation to win votes, yet the true implications of currency devaluation rarely come to light.
Though workers feel the ups and downs caused by central bank policies, few trace the source of significant price hikes back to the Federal Reserve. Instead, they tend to blame producers for rising costs.
For instance, workers may mistakenly criticize capitalism for inflation, particularly when stirred by populist rhetoric. However, they often fail to delve deeper to see the underlying influence of the Fed’s monetary strategies, which skew the economic playing field against them.
Consider the diligent wage earner who, despite increasing effort, finds their situation stagnating or even deteriorating. Unfortunately, many don’t connect the dots back to aggressive monetary policy. The gradual erosion of purchasing power can be subtle, and the ramifications of currency devaluation touch every aspect of the economy.
Imagine a recent college graduate, earning a meager wage at a coffee shop, burdened by $50,000 in student loan debt. This individual likely senses that something is amiss and questions, ‘Why does the cost of education diverge so drastically from the benefits it offers?’ However, they often fail to link the student loan debt bubble and the college construction boom to the Fed’s expansive credit policies, opting instead to look to the government for relief.
Stimulus Checks and Economic Illusions
Similarly, voters may cheer a new round of stimulus checks while condemning greedy capitalists for increasing coffee prices. Some even sport T-shirts declaring “GIMME MY STIMMY”. Yet, few pause to consider, ‘Where’s the money actually coming from?’
The answer, while seemingly absurd, is that it’s conjured from thin air.
Yet, a significant portion of Americans cannot connect these dots. This week revealed alarming evidence demonstrating a widespread lack of understanding among the populace.
What are we referring to?
The following Newsweek headline captures this perfectly: “Majority of Americans Back New Stimulus Checks To Combat Inflation”
The Fed’s strategy has been effective, particularly during an extended period of globalization and international trade, allowing it to subtly debase the currency while propping up financial markets and oversized government spending. Unfortunately, with over $5 trillion injected into the economy to counteract the impacts of stringent lockdowns, a new challenge has emerged: rampant inflation.
Again, most Americans seem to seek further stimulus checks as a solution to this looming issue, even as a global shift reverses decades of globalization. This transition portends higher prices for years to come, and simple interest hikes won’t be sufficient to counter this trend.
While it’s important to note that not all financial woes can be placed squarely on the Fed, individual complacency also plays a significant role in the current economic malaise.
Poverty, for many, is more a mindset than a mere financial condition. Distributing free money does little to change this mentality and may, in fact, intensify dependency.
Nevertheless, industriousness can still triumph over ZIRP, though this becomes increasingly difficult for wage earners. A mere 3% pay raise feels inadequate when official inflation rates hover around 8%, with real inflation likely exceeding 16%.
Are You Prepared for a U.S. Government Default?
Ultimately, it’s crucial to recognize that Fed Chair Jay Powell is significantly responsible for the rampant consumer price inflation we are witnessing today, as well as the destructive rate hikes introduced to manage it. The Fed’s attempts to stabilize business cycles and benefit its private banks have, ironically, intensified these fluctuations.
As intervention into the economy escalates to maintain the status quo, all stakeholders—workers, savers, and retirees—will face dire consequences.
The U.S. national debt has now surpassed $31.2 trillion, and when adding household, business, and governmental liabilities, total U.S. debt exceeds $92.9 trillion.
With the Fed’s interest rate hikes aimed at curbing inflation, the cost of servicing government debt rises sharply. Currently, U.S. tax revenue stands at approximately $4.9 trillion, while nearly $480 billion is allocated to interest payments. Soon, interest payments could overshadow essential programs like Social Security and Medicare.
So, what happens next?
The widely held belief that the U.S. government has never defaulted on its debt is fundamentally incorrect. Over the past century, the U.S. has unofficially defaulted on two occasions.
In 1933, Executive Order 6102 mandated that all American citizens surrender gold coins and bars—an act that constituted a form of default. Citizens were compensated at a rate of $20.67 per troy ounce but were paid in paper dollars. Shortly thereafter, the Gold Reserve Act of 1934 increased the gold price to $35 per ounce, effectively robbing Americans of over 40% of their wealth.
The second default occurred in 1971 when President Nixon “temporarily” ended the dollar’s convertibility into gold, reneging on the Bretton Woods agreement that enabled foreign banks to exchange dollars for gold at a fixed rate.
In both scenarios, the government did not overtly default; instead, it altered the foundational terms of the dollar. These actions can be accurately classified as defaults.
What trick does Uncle Sam have up his sleeve this time?
One possibility is the introduction of a digital dollar—a central bank digital currency (CBDC) that is traceable and programmable. When launched, your accounts may be credited one-for-one, converting one federal reserve note into one digital dollar. However, the purchasing power of these digital dollars will likely be significantly diminished.
The rollout of a digital dollar will serve as a smokescreen for what amounts to a default.
And make no mistake: this shift is nearer than most anticipate.
Are you prepared?
[Editor’s note: It is indeed frustrating, but you don’t have to become a victim of these circumstances. After nearly two decades of research, I meticulously crafted the Financial First Aid Kit. Within, you’ll find valuable insights to safeguard your wealth and privacy as the U.S. government approaches its looming third default in a century.]
Sincerely,
MN Gordon
for Economic Prism
Return from Are You Ready for the Coming U.S. Government Default? to Economic Prism
