Ron Paul has a warning for the markets: The Federal Reserve Bank is the source of today’s market instability and it will likely get worse.
As the Fed begins its two-day policy meeting on Tuesday, world markets are being rattled by two major issues: credit market instability in China and a further taper of the US monetary stimulus.
Former congressman Ron Paul believes that Ben Bernanke is going to avoid responsibility for additional tapering and foist it on his successor, Janet Yellen. He believes the Fed has its back against the wall – if it tapers any more, emerging markets will spin out of control; if it continues buying bonds at the same monthly pace indefinitely (which is expected to be $75 billion this month), US and world markets could find themselves overvalued and susceptible to a big drop if and when the music stops. The US dollar’s role as a reserve currency is part of the reason this could be a global problem, according to Paul.
“We create money out of thin air to the tune of billions and billions of dollars,” says Paul. “Then we spend it in places like China and they monetize that debt. It’s a worldwide phenomenon. Everybody has mal-investments and overinvestments and all the problems built-in. The weakest economies are going to crack first. But, eventually, I think everybody’s going to suffer from the massive monetary inflation that’s been going on, not only for the last 10 years but probably 30 years.”
I have a lot of respect for Ron Paul for one simple reason. He was the only politician in the US Congress to speak the truth about our economic predicament. Well, either that or all other politicians are idiots without an ounce of economic understanding. Judging by what they are doing to the country I think it’s the latter.
His assessment of our economic situation is right on the money. The FED is the problem that has distorted most of our financial markets and most of our pricing mechanisms to an amazing degree. Everywhere you look, you will find discrepancies. From the stock market to the car loan market. Everywhere.
Even though most people view our current economic situation as “typical”, it is anything but that. The FED is, indeed, backed into the corner. That is what happens when you blow financial bubbles on a massive scale. They cannot take the stimulus away. If they do, most financial markets around the world will ferociously collapse. If they don’t, the markets will simply stagnate as the velocity of credit/money slows down. Making the situation worse in the long run.
Of course, most people don’t see that. Even our own president.
President Barack Obama spoke repeatedly last year about the need to avoid what he called “artificial bubbles.” He praised Yellen for “sounding the alarm early about the housing bubble” when he announced her nomination for the job of Fed chairman on Oct. 9. “She doesn’t have a crystal ball, but what she does have is a keen understanding about how markets and the economy work,” he said.
Wrong, Mr. President. We are already in a massive speculative bubble driven by a massive amount of credit and by the FED. Bigger than 1929, 2000 or 2007. Will the markets collapse as they did back then? My mathematical and timing work says NO, but the main issue persists. While it might not take the form of a severe market collapse, the economy will have to suffer for decades to come under the weight of today’s economic mismanagement.
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