Most people seem to think that tighter monetary policy will bring on a recession, but they believe that it will solve the inflation problem. In his podcast, Peter Schiff explained why they’ve got it half right. We are heading toward a recession, but it’s not going to solve the inflation problem. In reality, we’re heading for stagflation.
Inflation is a problem globally, but the only major central bank talking about fighting inflation is the Fed. The European Central Bank and the Bank of Japan continue to hold interest rates down and run quantitative easing, despite rising prices in both economies. And as Peter said, all the Fed is doing is talking. It won’t actually fight inflation.
Their inconsequential, tiny rate hikes are going to do anything. In fact, the only reason they’re raising rates at all is to pretend they can keep on doing it. But at some point, they will reverse course because the bond market has that right. These higher rates are going to cause a recession, and it’s not going to take that many hikes to push the economy into recession given how addicted the economy is and how overleveraged the economy is. So, once the impact on the economy and on the financial markets is felt, then the Fed is going to give up all the tough talk and inflation is going to continue to get worse.”
As Peter mentioned, the bond market is already signaling recession warnings with inversions of the yield curve. Meanwhile, bonds had their worst quarter in 40 years. And the data is starting to reveal cracks in the economy.
Construction spending disappointed, coming in 0.4% below expectation. It was up 0.5%. The expectation was a 0.9% increase. This reflects an increase in the dollars spent on construction, not an increase in construction per see. Peter said he thinks construction is slowing down due to rapidly rising costs.
What’s happening is we’re constructing fewer structures, but we are paying a lot more to construct the ones we are building, and that’s why construction spending is going up — because builders are spending more money to build fewer homes. So, again, this is not good news. This is bad news for the economy.”
And it’s only going to get worse as mortgage rates increase. Mortgage applications have already dropped as rates charted the fastest run-up since 1994.
ISM manufacturing numbers also came in weaker than expected. Manufacturing grew in March, but it was down from February. The expectation was for the ISM to come in at 59, up slightly from 58.6 in February. The actual number was 57.1.
We also got the March jobs numbers last week. Most pundits spun them as good news with the addition of 431,000 jobs and significant upward revisions the January and February. But this was largely a function of huge adjustments made by the BLS. Nevertheless, the unemployment rate dropped down to 3.6%. Of course, government numbers understate unemployment. But this is still a low number.
Most mainstream economists, particularly those at the Fed, believe low unemployment is correlated to inflation. That being the case, Peter said interest rates should be much higher.
We have a huge inflation problem, and the Fed continues to drag their feet. Even though they acknowledge that it’s a big problem, they’re doing nothing about solving it. Raising interest rates from zero to 25 basis points in the face of this huge problem is not solving it. It’s continuing to make it worse. They are throwing gasoline on a fire even though they acknowledge that the fire is burning, which again proves it’s not about inflation. The Fed knows they can’t fight inflation. But they also know they can’t admit that. So, they’re trying to solve the problem by pretending they’re fighting inflation even though they continue to create it.”
There are all kinds of reasons bandied about for rising prices. But ultimately, it is the Federal Reserve and its expansion of the money supply.
To the extent that the economy gets weaker, they’re going to try to expand the money supply even more aggressively to try to stimulate it, which is why we’re going to have more inflation during the next recession.”
All of this adds up to stagflation.
In this podcast, Peter also talks about the stock market, the dollar, the bond market and commodities.