2nd Edition, June 2014 • A Publication by GoldRepublic
Featuring This Month ... James Rickards
James Rickards is an economist and the author of the New York Times best seller The Death of Money (Penguin 2014) and Currency Wars. He has over 30 years experience in global capital markets. His advice to clients from 2002 to 2006 included early warning of impending financial collapse, the rise of sovereign wealth funds, the decline of the dollar and the sharp rise in gold prices years in advance of these events.
Philipp Bagus
Philipp Bagus is an associate professor at the Rey Juan Carlos University in Madrid and an associate scholar of the Ludwig von Mises Institute. He is the author of The Tragedy of the Euro and coauthor of Deep Freeze: Iceland’s Economic Collapse. The Tragedy of the Euro has so far been translated and published in German, French, Slovak, Polish, Italian, Romanian, Finnish, Spanish, Portuguese, British English, Dutch, Brazilian Portuguese, Bulgarian, and Chinese.
Editor’s Preface
Contents
James Rickards: No Exit for the Fed
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Fed Is Wrong about Recovery
2
Why Tapering Is Nothing New & Why the Fed Needs To ‘Untaper’
2
Monetary Expansion Comes at a Price
3
How the Paper Money 6 Experiment Will End
Blowing Asset Bubbles
3
Seven Scenarios
Fed Can’t Stop Printing
4
Philipp Bagus: Public Debt and Paper Money
4
Today’s Wealth Destruction Is Hidden by Government Debt
4
Robinson Crusoe
5
6
Dear reader,
Thank you very much for reading The GoldRepublic Journal. We proudly present the second English edition of our journal. Our journal aims to provide you with timely analysis and advice. Every month, varying leading authors will share their opinion on recent developments in the markets. This month we turn to bestselling author James Rickards and Austrian economist Philipp Bagus, who will tell you more about the catch-22 the Federal Reserve has to deal with. If you have any remarks or suggestions for us, we would be very glad to hear from you (I refer you to our contact information at the very bottom of our newsletter). Olav Dirkmaat Senior Editor
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ISSN: 2215-1397
No Exit for the Fed The Federal Reserve, the central bank of the U.S., is nearing the end of its ability to manipulate the U.S. economy without producing consequences worse that those it set out to avoid in 2008. The Fed has no good exits from seven years of market manipulation. If it continues its current policy of reducing purchases of assets, the so-called “tapering,” it risks throwing the U.S. into a recession. If it reverses course and pauses the taper and later increases asset purchases, it risks destroying confidence in the dollar among foreign creditors of the
money printing has continued in three programs over six years called QE1, QE2 and QE3. The most recent program, QE3, began in September 2012 and was open-ended as to duration and the amount of bonds being purchased. By late 2013, the Fed’s balance sheet has swollen to over $4 trillion due to the money printing. Because U.S. growth appeared to be stronger in late 2013 and the unemployment rate had fallen sharply, the Fed began to reduce the rate at which it printed money. This was the “taper” of asset purchases. However, the data on which the The Fed has no good exits from seven Fed relied was highly years of market manipulation. misleading. U.S. growth had been propped up U.S. Both outcomes are potentially by inventory accumulation. The disastrous, but there are no good declining unemployment rate had outcomes on the horizon. This is been caused not by job creation but the result of manipulating markets by people dropping out of the labor to the point where they no longer force. function as markets providing In fact, the Fed had not tapered into useful price signals and guiding the economic strength, it had tapered efficient allocation of capital. Today into weakness. This quickly became markets are a mirage, created by the apparent when U.S. growth in the Federal Reserve, which is caught in first quarter of 2014 showed a a prison of its own device. decline and as the U.S. labor force continued to shrink. Many other
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Fed Is Wrong about Recovery
Since 2007, the Fed has tried to revive the U.S. economy through monetary ease. It began with a series of interest rates cuts, but by late 2008 interest rates had effectively reached zero and the Fed resorted to money printing, called quantitative easing or “QE” as a way to continue to stimulate nominal growth and aggregate demand. The money printing is done by purchasing bonds from banks and paying for the purchases with money that comes from thin air. This The GoldRepublic Journal
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negative signs appeared including weak retail sales, declining real wages, lackluster consumer confidence, and a cooling-off in the housing market. In short, the U.S. economy was showing signs of sharply declining growth if not outright recession.
Why Tapering Is Nothing New & Why the Fed Needs To ‘Untaper’
This should not have come as a surprise. Those who focused on the tapering in December 2013 did not recognize that the Fed had tapered twice before. The end of QE1 in June 2010 was, in effect, a 100% taper. The end of QE2 in June 2011 was also a 100% taper. So, the famous taper of December 2013 was actually the third time the Fed had tried to withdraw from money printing. The first two times were failures as evidenced by the fact that the Fed had to launch new money printing programs after each withdrawal. By early 2014, it appeared that the taper of QE3
ISSN: 2215-1397
would also be a failure. Depending on economic data in coming months, the Fed may have to pause the taper before it is completed late in 2014. Even if the Fed does not pause the taper but completes the process of reducing new asset purchases to zero, it appears likely that the Fed will have to increase money printing in 2015 in what will no doubt be called QE4. The U.S. economy has not shown an ability to achieve self-sustaining growth, so continued Fed money printing is needed to keep the economy growing at all.
Monetary Expansion Comes at a Price
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Both Russia and China have been buying enormous quantities of gold to hedge against possible U.S. dollar inflation.
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ISSN: 2215-1397