“The Federal Reserve has been the greatest source of instability.”
—Milton Friedman | | “Every recession in the United States has been caused by the Federal Reserve.”
—Paul Krugman | | | In 1974, the last time that we battled double-digit-percentage inflation, Harry Browne wrote a book entitled, “You Can Profit from a Monetary Crisis.” It became a #1 bestseller.
Harry warned that “any currency not backed by gold was doomed to disaster.”
He urged his readers to get out of traditional investments, such as stocks, mutual funds, bonds and even real estate, and invest in alternative funds that would protect you from a “crashing dollar, a new depression and runaway inflation.”
His motto was “buy gold, buy silver, buy Swiss francs.”
Harry’s advice to get out of the traditional stock and bond markets has made sense in 2022.
Stocks have suffered a major bear market, with stock market averages down by 20-35%.
But there has been no crashing dollar.
In fact, the U.S. dollar is up this year, no doubt due to the Fed’s decision to sharply raise interest rates in 2022.
Silver is down for the year, and gold is breakeven. Bitcoin has crashed.
The #1 Culprit in the Boom-Bust Cycle
We will continue to see booms and busts, bull and bear markets and monetary crises from time to time.
The Biden administration has blamed the high price of gasoline and the resurgence of inflation on the Russian invasion of Ukraine.
The war has certainly exacerbated the rise in prices, but it’s not the root cause.
The root cause is the irresponsible “easy money” policy by the Federal Reserve and the trillion-dollar deficits by the Trump and Biden administrations.
 Financial reporter Christopher Leonard has written a new book entitled “The Lords of Easy Money: How the Federal Reserve Broke the American Economy.”
I’d change the subtitle to “How the Federal Reserve Created an Unsustainable Bubble Economy.”
He points out that over the past 10 years, the Fed has adopted a “Zero Interest Rate Policy” (ZIRP) after the 2008 financial crisis.
ZIRP created a bubble in the stock market, especially in tech stocks and real estate.
Now, the Fed has switched from “fighting recession” to “fighting inflation” by raising interest rates.
The fact is that the Fed has been the number one source of instability in our economy since its inception by switching back and forth from easy money to tight money, and from tight money to easy money — and it does so pretty regularly.
The Ideal Monetary Program
I was asked recently what the ideal monetary system should be.
I favor the approach of Milton Friedman, who gave a lecture at Fordham University in 1959 and later published it under the title, “A Program for Monetary Stability.”
His answer was pretty simple: make sure the monetary aggregates (the money supply, broadly defined) increases at a steady rate.
Avoid both tight money and easy money.
Increase the money supply at a steady rate equal to the long-term growth rate.
Of course, under a fiat-money standard, this goal is easier said than done.
But it’s worth a try, and better than what the Fed has been doing for the past 100 years.
How Should Investors Protect Themselves?
For investors, my best advice is found on page 150 of my book, “The Maxims of Wall Street”: “Don’t fight the Fed — fear the Fed.”
That should be your general approach.
When the Fed engages in easy money and “fighting recession,” that is bullish for stocks, bonds, gold, oil and other commodities.
When it fights inflation — the inflation it caused in the first place — that means the arrival of rising interest rates, which is bullish for cash, bank credit deposits (CDs), the dollar against other currencies and even shorting the market via exchange-traded funds (ETFs).
Fighting inflation also means a slowdown in the economy, threatening to produce a recession, bankruptcies and a credit crisis. If the Fed is too aggressive, it can cause a financial crisis.
I used the yield curve as the best indicator of the business cycle — When short term interest rates rise faster than long-term rates, a recession is practically inevitable.
As the chart below demonstrates, whenever there is an INVERTED yield curve, which is when short-rate rates are higher than long-term rates, watch out below.
A recession is coming our way. We are headed in that direction. | | According to my Gross Output (GO) statistic, the economy is headed toward a recession. For more information, go to www.grossoutput.com.
However, I’m prepared. Click here to learn more about my “Biden Disaster Plan.”
Overall, it’s difficult to make money in a recession. As the late Dick Russell stated, “In a bear market, the winner is the man who loses the least.”
Kind regards,
Mark Skousen
Editor, Skousen CAFE' | | | |
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