The Peter Schiff Show Podcast

Fed Fears Inflation Is Not High Enough

Fed statements drove the markets today; particularly the foreign exchange markets and the precious metals markets. First we got a quote from Janet Yellen early this morning in which she was talking about inflation. Her concern is that inflation isn't high enough.  Here's and exact quote from Janet Yellen:

“It can be quite dangerous to allow inflation to drift down and not to achieve over time a central bank’s inflation target,”

Dangerous? Dangerous to whom? She also says that one reason it is dangerous is because inflation expectations are likely to drift down, too.  So she's not only worried that inflation isn't high enough, but she is worried that people won't be worried about inflation.  Why is low inflation dangerous?

What's so Bad About Low Inflation?

First of all, it's not even negative. She's not saying we are going to have deflation, which I don't think is bad anyway.  She is just saying it is dangerous if we don't have enough inflation, meaning that if we have 2-2.5% inflation, we're out of the danger zone, but if we have 1.5% inflation, we're in this danger zone?

What is so dangerous about prices not going up? This is all a bunch of nonsense that the media just accepts. Now, I'll tell you why it is dangerous and for whom it is dangerous: The reason the Fed wants high inflation is so the next time they cut interest rates, they can create a negative rate.  They know that the bubble is so big that just low interest rates are not going to do anything.  This addict is so hyped up on this "sauce" that we have to get rates negative. Low interest rates are not enough.  They've got to be negative.

Major Ramifications for the Reserve Currency

So the Fed has got to be able to get the Fed Funds Rate below the inflation rate, and they need it to be way below, because, let's say inflation is only 1% and they go to zero interest rates, well they have -1%!  That's not enough!  They might think we need -3% or -4%.  Well, if zero is the lower bound, and you want rates to be -3% then you need to have inflation at 3% in order to get a negative 3% yield. Unless you want to go from the absurd to the ridiculous, and actually take rates negative, which would have major ramifications for the reserve currency,

I think the Fed is still reluctant to try that, but if they have to, they'll certainly give it a shot.  They'll use that as the Hail Mary, but they'd rather keep that one in their back pocket.  So they need room to be able to get interest rates to zero but have a high enough negative rate to try to provide the stimulus that they think helps the economy.

Collateral Damage in the Fed's Manipulation and Experimentation

But it doesn't help the economy.  This is all their nonsense but they are willing to sacrifice American families.  They are just casualties of war, collateral damage in the Fed's manipulation and experimentation.  They are saying that we need to have higher inflation so that we can fight the next recession.  Well, the next recession is going to be a lot worse, if in addition to unemployment, people are dealing with a rising cost of living.  But as far as the Fed is concerned, that's OK, because the only way we can stimulate the economy is to make sure we sedate it by causing the cost of living in the U.S. to go up and the standard of living to go down.

Concerns About a Potential Buildup of Financial Imbalances

The other danger of inflation not being high enough is probably the stock market.  Interestingly enough, later on in the day,  the FOMC minutes were released, and in addition to expressing their concern about low inflation, they are also worried about the stock market.  It's about time, but listen to this, I am reading a quote from the minutes:

"In light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a...

Financial Conditions Are Loosest Since 1994

I was reading an article today that the Chicago Fed released their National Financial Conditions Index (NFCI)  and according to their research, financial conditions in the United States are the loosest since January of 1994.  Of course, that was early on in the dot com bubble, before it even "bubbled up", it was just at the beginning of that bull market, yet the Federal Reserve has been tightening; raising interest rates for a couple of years.  They've been talking about shrinking the balance sheet - why is it that financial conditions are looser now than they were when the Fed was still at zero?

Fed Behind the Curve

I have been talking about this the whole time.  The Fed is so far behind the curve.  Yes, they have raised interest rates, but it is too little too late.  Even the official inflation rates have risen as much if not more than the rate hikes. Meanwhile, the stock market keeps going up and now that you have the dollar going down, a weakening dollar actually adds to the loosening of financial conditions which are obviously going to get a lot looser if the Fed doesn't really start jacking up rates faster, which I don't think they are going to do.

Relapsing Back into Recession

In fact, I think they are going to get ready to cut rates again and loosen financial conditions even further as the economy relapses back into recession, which I said in my last podcast, would have already been here had Hillary Clinton won the election.  Since Donald Trump won, all this false optimism is delaying the onset of that recession for a year or two, but it's not preventing it. So if financial conditions are this loose now, when the Fed is tightening, imagine how much looser they're going to get when the Fed is easing.

 

 

 

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Financial Conditions Are Loosest Since 1994

I was reading an article today that the Chicago Fed released their National Financial Conditions Index (NFCI)  and according to their research, financial conditions in the United States are the loosest since January of 1994.  Of course, that was early on in the dot com bubble, before it even "bubbled up", it was just at the beginning of that bull market, yet the Federal Reserve has been tightening; raising interest rates for a couple of years.  They've been talking about shrinking the balance sheet - why is it that financial conditions are looser now than they were when the Fed was still at zero?

Fed Behind the Curve

I have been talking about this the whole time.  The Fed is so far behind the curve.  Yes, they have raised interest rates, but it is too little too late.  Even the official inflation rates have risen as much if not more than the rate hikes. Meanwhile, the stock market keeps going up and now that you have the dollar going down, a weakening dollar actually adds to the loosening of financial conditions which are obviously going to get a lot looser if the Fed doesn't really start jacking up rates faster, which I don't think they are going to do.

Relapsing Back into Recession

In fact, I think they are going to get ready to cut rates again and loosen financial conditions even further as the economy relapses back into recession, which I said in my last podcast, would have already been here had Hillary Clinton won the election.  Since Donald Trump won, all this false optimism is delaying the onset of that recession for a year or two, but it's not preventing it. So if financial conditions are this loose now, when the Fed is tightening, imagine how much looser they're going to get when the Fed is easing.

 

 

 

Faltering Expectations

The U.S. dollar and the stock market continued to be a little bit under pressure this week as anxieties are rising over the fate of the tax cuts with so many investors are putting so much expectation into the proposed tax cuts.

Tax Cuts Do Not Reflect Smaller Government

I have gone over many times on this podcast why I do not believe the tax cuts are going to help the economy. Tax cuts are good for the economy to the extent that they reflect smaller government.  If you are going to make government smaller, and government is going to be less of a burden on the economy, if government is going to take fewer resources out of the economy, it will be freeing those resources up for the private sector.  If you are lowering people's taxes because you relieve them of the responsibility of paying for a larger government, that is a big positive!

Government Will Have to Print or Borrow

Any time we can take resources out of the government sector and put them back into the private sector, those resources will be used more efficiently and more productively, the economy will be better off.  But if we simply cut taxes, and allow government to get bigger and bigger, that is not good for the economy.  All that is happening is that the government has to find and alternative source for paying for the resources it is consuming.  And if it is not going to collect it through taxes, then it is going to have to borrow it or print it. Those other ways of sucking up those resources do more economic damage than what otherwise would have been the case if they had just left taxes alone.

So Everybody is Wrong

So everybody is wrong in believing that these tax cuts are going to be good for the economy.  They are not going to be good for the economy, and they are certainly not going to be good for the dollar. They will hurt the dollar because, by definition, instead of removing dollars, the government is going to print dollars out of thin air and spend that.  So they are debasing the dollar.

No Individual Mandate

But putting that aside, there is still a lot of nervousness out there about whether or not the tax cuts will pass and what their final form will be.  First of all, the Senate came out yesterday and all of a sudden thew a curve ball into the tax cuts. As part of the tax cuts they said they were going to repeal the individual mandate from Obamacare. That is the part that requires individuals to pay a penalty to the government for not purchasing insurance.

Hail Mary

First of all, the fact that they have to throw that in there shows that they needed to do that to tempt some Republicans, maybe like Rand Paul, who were on the fence or not for the tax cuts. I think the fact that they had to go for the Hail Mary shows that they are having a hard time getting enough Republican support.

Saving the Government Money?

But here's the ridiculous part: The government claims that by eliminating the individual mandate it is going to save the government a lot of money and the savings will subsidize a larger tax cut for the middle class.  Wait a minute. The individual mandate means that people who don't buy insurance have a penalty to the government!  That's revenue to the government. Wouldn't that cost the government more?

Republican Logic

Here is the Republican logic: If they stop penalizing people who don't buy health insurance, then fewer people will buy health insurance.  Some of the people who are buying health insurance now are getting government subsidies, so if they don't buy health insurance then the government won't have to provide the subsidies and that's where they save the money.

Premiums Through the Roof

Then they argue that if younger healthy people drop out, then insurance premiums will rise even faster than they are rising right now.  And because health insurance premiums will rise a lot faster,

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Faltering Expectations

The U.S. dollar and the stock market continued to be a little bit under pressure this week as anxieties are rising over the fate of the tax cuts with so many investors are putting so much expectation into the proposed tax cuts.

Tax Cuts Do Not Reflect Smaller Government

I have gone over many times on this podcast why I do not believe the tax cuts are going to help the economy. Tax cuts are good for the economy to the extent that they reflect smaller government.  If you are going to make government smaller, and government is going to be less of a burden on the economy, if government is going to take fewer resources out of the economy, it will be freeing those resources up for the private sector.  If you are lowering people's taxes because you relieve them of the responsibility of paying for a larger government, that is a big positive!

Government Will Have to Print or Borrow

Any time we can take resources out of the government sector and put them back into the private sector, those resources will be used more efficiently and more productively, the economy will be better off.  But if we simply cut taxes, and allow government to get bigger and bigger, that is not good for the economy.  All that is happening is that the government has to find and alternative source for paying for the resources it is consuming.  And if it is not going to collect it through taxes, then it is going to have to borrow it or print it. Those other ways of sucking up those resources do more economic damage than what otherwise would have been the case if they had just left taxes alone.

So Everybody is Wrong

So everybody is wrong in believing that these tax cuts are going to be good for the economy.  They are not going to be good for the economy, and they are certainly not going to be good for the dollar. They will hurt the dollar because, by definition, instead of removing dollars, the government is going to print dollars out of thin air and spend that.  So they are debasing the dollar.

No Individual Mandate

But putting that aside, there is still a lot of nervousness out there about whether or not the tax cuts will pass and what their final form will be.  First of all, the Senate came out yesterday and all of a sudden thew a curve ball into the tax cuts. As part of the tax cuts they said they were going to repeal the individual mandate from Obamacare. That is the part that requires individuals to pay a penalty to the government for not purchasing insurance.

Hail Mary

First of all, the fact that they have to throw that in there shows that they needed to do that to tempt some Republicans, maybe like Rand Paul, who were on the fence or not for the tax cuts. I think the fact that they had to go for the Hail Mary shows that they are having a hard time getting enough Republican support.

Saving the Government Money?

But here's the ridiculous part: The government claims that by eliminating the individual mandate it is going to save the government a lot of money and the savings will subsidize a larger tax cut for the middle class.  Wait a minute. The individual mandate means that people who don't buy insurance have a penalty to the government!  That's revenue to the government. Wouldn't that cost the government more?

Republican Logic

Here is the Republican logic: If they stop penalizing people who don't buy health insurance, then fewer people will buy health insurance.  Some of the people who are buying health insurance now are getting government subsidies, so if they don't buy health insurance then the government won't have to provide the subsidies and that's where they save the money.

Premiums Through the Roof

Then they argue that if younger healthy people drop out, then insurance premiums will rise even faster than they are rising right now.  And because health insurance premiums will rise a lot faster,

No Real Tax Relief

Yesterday the Senate released their version of the Tax Cut and Jobs Act, and it is not that different from the House version.  There are some differences, some of which I will get into, but the main problem is not the difference, but the similarity.  The plans don't deliver any kind of substantial tax relief, in the manner that President Trump refers to as, "the biggest tax cuts ever". It's not even close. For most people, there will be minor tax cuts and for other people there are actually minor tax increases.

Democrats: "I'll Give You Something You Did Not Earn!"

The real problem, again, is that Republicans can't really be Republicans, given how much debt we have.  They like to talk about lower taxes - that's how they get elected: "We're going to lower your taxes!". The Democrats are generally the party of, "I'm going to increase your benefits! Vote for me and I will give you something you did not earn."  What the Republicans used to say is, "Vote for me and I'll let you keep more of what you did earn." That was really the difference between the Democrats and the Republicans. The Democrats were about taking things from other people and the Republicans were about keeping your stuff.

You Can't Take Away an Entitlement

The problem is, too many Republicans are really Democrats or they're afraid to cut any government spending. At this point, the deficits are so big that you can't really have big tax cuts unless you're willing to cut government spending. Most Republicans are not willing to do that. Sometimes they will vote not to create a new government entitlement, but they will never vote to take something away, which is why they didn't really want to take away Obamacare. A lot of Republicans didn't vote for it, but they are not going to vote to kill it.

Small Government Everywhere but in the Military

The problem is, if you really want to cut spending so you can have tax cuts, where's the money? The defense budget is big, and most Republicans don't want to cut defense - that' s the only place they like big government (in theory) is defense. They want small government everywhere except in the military. So there are not very many Republicans who are willing to cut defense to enable the tax cuts.

So What's Left for Republicans to Cut?

Now you got Social Security and Medicare, but a lot of Social Security recipients vote Republican. So the Republicans don't want to cut Social Security and don't want to cut Medicare because they are afraid of how the voters will react. So that's off the table. You can't cut interest on the debt, unless you're going to default on the debt; nobody wants to do that. In fact, interest on the debt is going to go up as interest rates go up.  So what's left that Republicans (in theory) can cut?  They are afraid of being labeled mean, heartless, taking away programs for the poor, the needy - so there's really nothing that the Republicans are willing to cut, so they can't give any tax cuts. They don't want to level with their constituents and say that they can't cut your taxes because then, what's the point of voting Republican?

 

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No Real Tax Relief

Yesterday the Senate released their version of the Tax Cut and Jobs Act, and it is not that different from the House version.  There are some differences, some of which I will get into, but the main problem is not the difference, but the similarity.  The plans don't deliver any kind of substantial tax relief, in the manner that President Trump refers to as, "the biggest tax cuts ever". It's not even close. For most people, there will be minor tax cuts and for other people there are actually minor tax increases.

Democrats: "I'll Give You Something You Did Not Earn!"

The real problem, again, is that Republicans can't really be Republicans, given how much debt we have.  They like to talk about lower taxes - that's how they get elected: "We're going to lower your taxes!". The Democrats are generally the party of, "I'm going to increase your benefits! Vote for me and I will give you something you did not earn."  What the Republicans used to say is, "Vote for me and I'll let you keep more of what you did earn." That was really the difference between the Democrats and the Republicans. The Democrats were about taking things from other people and the Republicans were about keeping your stuff.

You Can't Take Away an Entitlement

The problem is, too many Republicans are really Democrats or they're afraid to cut any government spending. At this point, the deficits are so big that you can't really have big tax cuts unless you're willing to cut government spending. Most Republicans are not willing to do that. Sometimes they will vote not to create a new government entitlement, but they will never vote to take something away, which is why they didn't really want to take away Obamacare. A lot of Republicans didn't vote for it, but they are not going to vote to kill it.

Small Government Everywhere but in the Military

The problem is, if you really want to cut spending so you can have tax cuts, where's the money? The defense budget is big, and most Republicans don't want to cut defense - that' s the only place they like big government (in theory) is defense. They want small government everywhere except in the military. So there are not very many Republicans who are willing to cut defense to enable the tax cuts.

So What's Left for Republicans to Cut?

Now you got Social Security and Medicare, but a lot of Social Security recipients vote Republican. So the Republicans don't want to cut Social Security and don't want to cut Medicare because they are afraid of how the voters will react. So that's off the table. You can't cut interest on the debt, unless you're going to default on the debt; nobody wants to do that. In fact, interest on the debt is going to go up as interest rates go up.  So what's left that Republicans (in theory) can cut?  They are afraid of being labeled mean, heartless, taking away programs for the poor, the needy - so there's really nothing that the Republicans are willing to cut, so they can't give any tax cuts. They don't want to level with their constituents and say that they can't cut your taxes because then, what's the point of voting Republican?

 

Conventional Media Was Surprised

It's hard to believe has been a year since Donald Trump shocked everybody, at least everybody in the conventional media, Wall Street, all the pundits, professional politicians, anybody who has anything to do with Saturday Night Live... Nobody believed that Trump a snowball's chance in Hell of winning the White House. Hillary Clinton had already picked out her china patterns, she had this big glass ceiling that she was going to shatter in her victory party.  So everybody believed that Trump was going to lose and Hillary was going to win even after the polls closed. It took about an hour or two for reality to set in.

Conventional Media Was Surprised

So now it has been a year.  Of course the stock market has gone up a lot during that year, in fact, the market was up just under 21% in Trump's first year.  Of course, Trump never lets you forget this because he constantly talks about it, but he says this stock market rise is unprecedented - and that is a lie! Why do you have to go out of your way to lie when 21% is still a big move.  In fact if you go back to Eisenhower, which is almost 70 years, this is the fifth biggest rally for a President's first year.  That's still not bad, it's fifth place. The guy in last place is George W. Bush.

Not Unprecedented

Unfortunately, Bush was elected in 2000 and the market tanked that year, it was down 20.4%.  That is the worst performance of any President. Trump is #5, but let's look at #1; Number one was Bill Clinton - Democrat, 1996, his second term, the market was up 31.7%. So that's a 50% greater rise than Trump's first year, yet Trump is claiming that this is unprecedented.  Kennedy, first term, 1960, the market was up 28.4%. In third place, Barack Obama's second term the market rallied 23.9%.  Then George Bush (41), in 1988, the stock market rallied 21.7%. So Trump is certainly in the top third, but his first year is not unprecedented.

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Conventional Media Was Surprised

It's hard to believe has been a year since Donald Trump shocked everybody, at least everybody in the conventional media, Wall Street, all the pundits, professional politicians, anybody who has anything to do with Saturday Night Live... Nobody believed that Trump a snowball's chance in Hell of winning the White House. Hillary Clinton had already picked out her china patterns, she had this big glass ceiling that she was going to shatter in her victory party.  So everybody believed that Trump was going to lose and Hillary was going to win even after the polls closed. It took about an hour or two for reality to set in.

Conventional Media Was Surprised

So now it has been a year.  Of course the stock market has gone up a lot during that year, in fact, the market was up just under 21% in Trump's first year.  Of course, Trump never lets you forget this because he constantly talks about it, but he says this stock market rise is unprecedented - and that is a lie! Why do you have to go out of your way to lie when 21% is still a big move.  In fact if you go back to Eisenhower, which is almost 70 years, this is the fifth biggest rally for a President's first year.  That's still not bad, it's fifth place. The guy in last place is George W. Bush.

Not Unprecedented

Unfortunately, Bush was elected in 2000 and the market tanked that year, it was down 20.4%.  That is the worst performance of any President. Trump is #5, but let's look at #1; Number one was Bill Clinton - Democrat, 1996, his second term, the market was up 31.7%. So that's a 50% greater rise than Trump's first year, yet Trump is claiming that this is unprecedented.  Kennedy, first term, 1960, the market was up 28.4%. In third place, Barack Obama's second term the market rallied 23.9%.  Then George Bush (41), in 1988, the stock market rallied 21.7%. So Trump is certainly in the top third, but his first year is not unprecedented.

High Expectations for Jobs Numbers

This morning we got the release of the October jobs report, and it followed the hurricane-related very weak report that we got in September. This time, the reason actually was weather-related. Remember, they originally reported a decline of 33,000 in September.  No one cared, though, because it was all about the hurricane. This month everybody was very optimistic; the consensus for October was 325,000 jobs.

Numbers Fell Flat

I was watching CNBC this morning and they were all trying to guess the jobs number.  Everybody ended up being over.  Rick Santelli's estimate actually was 401,000, but most guys were somewhere between 350 - 400,00, so everyone on CNBC was more optimistic than the consensus. And then the number came out  at 261,000. Everybody went over, so they all lost by the Price is Right rules.

Lowest Unemployment Since Dot Com Bubble

But beneath the surface, this is a weak report - even weaker than the 261,000 jobs that were reported.  The unemployment fell to 4.1.  That's a new low for this cycle.  You have to go all the way back to the dot com bubble to get an unemployment rate this low.  I don't know if Trump tweeted about it yet, but I'm sure he's going to talk about it: "Oh this is great!" He's going to take credit for the drop in the unemployment rate.  But the problem is, the reason that the unemployment dropped was because so many people left the labor force

Largest Labor Force Exodus

We had 968,000 people leaving the labor force in October.  This was the third largest monthly exodus ever, causing the number of Americans currently exiled from the labor force to hit a new record high - 95,385,000.  The labor force participation rate plunged back down to 62.7% from 63%.

Obama Revisited

This is the exact same type of jobs numbers we were getting under Obama, where you'd have a falling unemployment rate because so many people were leaving the labor force and so many people were working part time. Candidate Trump was extremely critical of this:"The unemployment rate is the biggest con, the biggest fraud in history - unemployment is really 30-40-50% - the jobs are lousy, they are low paying, people are leaving the labor force!" Exactly what is going on today.  Yet now, "Everything is great, the unemployment rate is low, it's all thanks to me, and I'm doing a great job!"

Weak Number

This is a weak number.  In fact, look at average hourly earnings. They were supposed to rise by .2% and they were flat.  The only reason they were flat is because they rounded it up. Actually, average hourly earnings went down during the month of October. And this is not adjusted for inflation.  These are just the earnings.  So we know prices are going up and so earnings actually went down in October.  Now year over year, we have an increase of earnings of 2.4%.  I am sure the cost of living is up by more than 2.4%, regardless of what the CPI claims. So this is a weak report.

 

 

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