Uber launched its IPO on Friday. It was less than ideal.
Meanwhile, the Federal Reserve is talking about how it wants to tweak its quantitative easing program when the next recession rolls around.
Peter Schiff talked about how these things relate — and the “writing on the wall” for the economy in his latest podcast.
Instead of buying some fixed amount of Treasurys and mortgage-backed securities, the central bankers have floated the idea of pegging a yield during the next economic downturn. For example, it would try to hold the interest rate on a one-year bond at, say, 1%. As Peter pointed out, this is essentially price-fixing. How an Economy Grows a... Best Price: $1.49 Buy New $9.95 (as of 06:30 EDT - Details)
They’re saying, ‘We don’t want the interest rate that is being determined in the market. We want to interfere in the market so that the interest rate is lower than the market would set.’”
The central bankers are basically admitting that this is not capitalism. They don’t want the free market discovering a rate because they don’t like the rate the market would choose. When you interfere with the market-clearing price – and an interest rate is simply the price of money – then you create surpluses or shortages. This is a basic supply and demand function.
As Peter said, this constant Federal Reserve suppression of rates is the source of our problems.
The reason the Fed constantly feels that it has to artificially suppress interest rates is because we have so much debt as a result of the artificial suppression of interest rates in the past.”
That’s the irony of the Fed suddenly running around warning about high levels of corporate debt. It’s a problem it created!
What they’re saying now is, well, if there’s another recession, we’re going to do the same thing. We’re going to keep interest rates artificially low to encourage over-leveraged companies to go even deeper into debt.”
As Peter pointed out, rising interest rates serve as a market-mechanism for correcting the debt problem. Rising rates discourage borrowing and bring down levels of debt. It also encourages saving, which creates a pool of funds for investing.
What the Fed is saying is we’re going to short-circuit capitalism. We’re going to dismantle the safeguards because we don’t want the recession. The recession is part of the cleansing process in order to reset the economy, to clean out all the malinvestments and mistakes that are made and now you can have real economic growth. But the Fed doesn’t want any of that. The Fed says we are going to suppress interest rates and we’re going to pick a number that we think is right. We don’t care what number the market wants. We just want to pick a number out of the hat because we think we know better.”
This might delay some of the pain by kicking the can down the road, but ultimately it’s going to compound the problems and the ultimate pain.
Peter goes on to explain how the Fed’s yield-targeting scheme could easily spin out of control.
As it increases inflation to artificially suppress interest rates, the real rates of interest have to go up to compensate lenders for the increased inflation that the Fed has to create in order to artificially suppress rates. And this is going to lead to a spiral. This is going to lead to a currency crisis, a dollar crisis. As I said, the writing is here; it is on the wall for everybody to see. Unfortunately, for most people, it might as well be written in Greek because people are not able to read the language.”
Peter Schiff also talked about the Uber IPO on Friday, calling it a disaster. The market price never even got back to the IPO price and closed down 7.6% on the day. This is a real-world example of what the Fed’s tinkering with interest rates does. The Real Crash: Americ... Best Price: $3.06 Buy New $7.59 (as of 03:50 EDT - Details)
Normally, in a real environment where we had normal interest rates, where the Fed wasn’t artificially suppressing them, I don’t think money-losing companies like this would be able to come public. I would think that a company would have to prove that it had a viable business model and was able to generate a profit before it would go public before it would be an acceptable investment for mom and pops to put in their IRAs … you would at least have to be buying into a business that has proven that it makes sense – at least that it made sense in the past.”
Basically, we are in a situation where not only can you not predict the future, you can’t even get an accurate picture of the past.
These are highly, highly speculative stocks, yet Wall Street is putting lipstick on these pigs as if they’re acceptable to the public and the only reason that they’re able to do that is of the Fed — because of this artificial suppression of interest rates that leads to all these bad decisions, all of this misallocation of capital. It is all a result of the Fed and their manipulation of interest rates. And ironically, that’s what the Fed is saying they’re going to do. The next time we’re in a recession, which will be a consequence of the mistakes the Fed made in the past, the Fed is going to repeat those very mistakes as a supposed solution to the problem that it created.”
Reprinted from SchiffGold.com.