There’s been a lot of talk about the Federal Reserve tapering its asset purchases. Peter Schiff talked about it during his podcast, saying even if the Fed does getting around to tapering, that doesn’t equate to a legitimately tight monetary policy. Furthermore, any tapering today sows the seeds for its own destruction.
The minutes from the July Federal Reserve meeting came out last week. They revealed the Fed is starting to talk about tapering asset purchases later this year. That sent stocks lower as traders continue to anticipate Fed monetary tightening. The hardest-hit sectors were economically sensitive cyclical stocks and anything that was part of the reflation trade.
Peter said there was really nothing new in the minutes.
The Fed did not reveal anything that hadn’t already been revealed by other FOMC members in their various talks.”
Nevertheless, according to all the experts, the Fed is Johnny on the spot. It is now tightening. And because it is tightening, inflation is no longer a concern.
Peter said the markets are reacting to this anticipated tightening cycle in the same way they have to past tightening cycles without appreciating the difference between this tightening cycle and those that preceded it. In fact, it’s hard to call the Fed’s next step a “tightening cycle.”
So far, the only thing that has happened during this cycle is that the Fed has talked. That’s it. It’s all talk and no action.”
Peter conceded that the central bank may well taper and slow down quantitative easing.
Now, it’s not a sure thing. We may never get a taper. The only thing we may get is talk of a taper, and in fact, that might constitute the entirety of the tightening cycle, because by the time the Fed actually gets around to tapering, it could be too late. The economy could already be turning down. The markets could already be turning down, in which case any plans to taper are going to have to be torn apart because the Fed is basically hostage to the markets and to the economy.”
This raises a question: if the entirety of the taper is talk, why should that mean anything? Why should the dollar be rallying? Why would you be selling gold?
You can’t say this is a normal tightening cycle and so it’s negative for gold if all we’re going to get is taper-talk. Why is that negative for gold?”
Peter said gold should be going up right now based on the reality of what’s going to happen, not based on a fantasy conjured up out of Fed talk. And he said he thinks even if the Fed does begin to taper, it won’t actually complete the process. It will never wind down QE completely.
Currently, the Fed is buying about $120 billion a month in assets split between US Treasuries and mortgage-backed securities. The only thing we know so far about this mythical taper is that the Fed plans to cut back on both assets equally, not favoring one over another and that it might happen this fall.
The Fed also went out of its way to emphasize that tapering asset purchases does not mean the Fed is close to raising interest rates. Peter said he doesn’t think the central bank will ever raise rates given that during the last tightening cycle, it only managed to get rates to 2.5% before it broke the back of the overleveraged economy. During the cycle before that, the Fed pushed rates all the way to 5%.
If as high as they could get last time was two-and-a-half percent, it makes sense that this time they can’t raise them at all. In fact, I think the only thing they can do this time is taper. Because last time they were able to taper and raise rates. This time, I think, at best, they’re just going to have a taper.”
Peter noted that as each tightening cycle has gotten less tight, each loosening cycle gets looser and looser.
The next time the Fed has to go back to the QE well, it’s going to be drawing a lot more water. So, we’re going to be doing even more QE the next time than we did following the COVID disaster.”
It’s like a drug. You always need more of it, and when you try to kick the habit, you can give up less and less of it.
So, I think that to the extent that we actually get to a taper this time, I think the next easing cycle will never get to the taper. All we’ll have is the taper talk, but we’ll never actually walk the taper walk — if we even walk that walk now.”
And even if the Fed does bring down the level of asset purchases a bit – if that’s all we get – how is that tightening?
It’s slightly less ridiculously easy than what we have now? But going from completely ridiculously easy to slightly less completely ridiculously easy — how does that constitute tightening? Why is that a reason to buy dollars? Why is that a reason to sell gold? It’s not. Especially when you realize that any tightening today is going to be proceeded by loosening tomorrow, and the tightening simply lays the foundation for the next easing, which will be much bigger, even looser, than the last easing.”
In effect, Peter said any tapering today sows the seeds of its own destruction.
As Mike Maharrey put it in the Friday Gold Wrap podcast, modest tapering does not end the inflationary monetary policy. The Fed will just inflate a little more slowly. It’s like a faucet running full speed into the bathtub. If you turn the knob halfway back, water is still running into the tub. It’s still going to fill up and overflow.
Simply put, less loose is not tight.
In this podcast, Peter also talks about companies accepting bitcoin for mortgage payments, actual rent data compared to the formula the Fed uses to calculate rent for the CPI, and how Roosevelt and Nixon buried the dollar.
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