by Samuel Bryan
In a recent article on the next looming recession, Peter Schiff explains how current monetary policy has come to a crossroads. With respect to interest rates, there now seems to be two entrenched camps: raise or don’t raise. Unfortunately, they’re both wrong, mainly because they’re beginning with the wrong premise: that the economy can somehow avoid the painful process of market correction that raising rates would inevitably bring. Peter explains:
“The real choice is not between recession now or recession later. It’s between a massive recession now, or an even more devastating one later … Now is the time to bite the bullet, endure the pain, and allow the wound to actually heal.”
Since 2009, all of the standard metrics for indicating a recovery have shown sub-par results. The only growth has occurred in asset prices. However, higher prices in stocks and bonds haven’t occurred because of upward pressure from a free market, but have been artificially inflated by easy borrowing and risky speculation. Consequently, the “recovery” we’re supposedly experiencing is as artificial as asset prices themselves. The next bubble that will have to burst is the Fed’s own fantasy it’s been selling investors.
“So I agree with those who believe that rate hikes now will bring on a recession,” Peter states in the article. “But I disagree that we should keep rates where they are … despite the short term pain that will surely follow, we need to raise rates now to break the addiction before it gets worse.”
Ironically, the Fed’s low-rate policy ends up creating the very thing it seeks to avoid. By disrupting the natural business cycle of speculation and market correction with artificially low rates, the Fed actually encourages risk taking that otherwise might not have existed. Over speculation leads to bad debt and bubble creations where prices no longer reflect the true (i.e. market created) value of an asset, product, or service. This becomes an illusionary cycle where the only “solution” to the problem involves keeping up the appearance of growth by papering over the problem with printed money.
Ultimately, no monetary policy will be able to hold off an inevitable correction. Any attempts to do so only increase the intensity and downside of the next one. “I think it’s high time the Fed finally moves rates well into positive territory,” Peter states. “The next recession has been on its way for years, and it will arrive no matter what the Fed does if it’s not already here. Sometimes reality hurts, but fantasy can be more damaging in the long run.”