CNBC reports that stocks have continued to rally this week, raising the S&P 500 to a record and clearing its 2014 loss, leading some financial experts to state they believe the economy is getting stronger. Both the Dow Jones Industrial Average and the S&P 500 both rose this month. The Dow Jones Industrial Average was up as much as 195 points. The S&P 500 rose to a high of 1,858.70, clearing both the intraday and closing records set on Jan. 15.
What still is not known is how much better the economy will need to get before the new Federal chairman Janet Yellon will decide to reduce the Federal stimulus program. This program is currently being used to help propel equities higher, but the Federal Reserve has stated that they will try over the next few months to taper the program.
Is the American economy really recovering?
But Peter Schiff, who is considered one of the few non-biased investment advisers to have correctly called the current bear market before it began and to have positioned his clients accordingly, says not so fast. Before we give credit to the Federal Reserve for saving the economy from catastrophe it’s a good idea to stop and figure out whether we have really been saved from anything or if the United States is headed for what Peter believes could be even greater problems in the future.
Schiff has been arguing for years that the Federal Reserve’s policy, also known as quantitative easing, may have created a “feel-good asset bubbles in stocks, bonds and real estate,” but America faces an unprecedented problem. According to Schiff, “The Fed has yet to figure out an exit strategy to dispose of the nearly $4 trillion of assets that it now holds without puncturing any of the bubbles that its buying spree created.”
So while quantitative easing may have provided low interest rates and pushed up stock prices, it never solved the main problems facing the United States: a federal government that has billions of dollars in unfunded liabilities, overstretched, debt-ridden citizens, and high unemployment rates.
No one is buying our debt
What the American government has not really publicized and doesn’t what the American population to know is that the Federal Reserve, not China or Japan, has become the biggest buyer of U.S. mortgage and treasury debt. Other countries have decided U.S. debt is no longer a good bet and there are no other players willing to match the Fed’s buying power.
We also know that unless the federal government can stop spending and recognize we have unsustainable unfunded debts which must be restructured, the Federal Reserve has no choice but to monetize our debts, which means the printing press won’t stop.
What happens in the economy when you have too much money chasing too few goods? We all know from economics that leads to inflation. Right now the easy money may have led to increased assets prices, but according to Schiff, “Eventually the inflation the Fed so eagerly seeks will hit consumers hard. When it does, Bernanke’s successor will be powerless to fight it without sparking a financial crisis in the economy that is even more severe than the one he supposedly defeated.”
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