There’s really only one thing that has been keeping the US economy from melting down since the last recession. It’s the abundance of cheap money that has been flushed into the economy by the Federal Reserve. Until recently their interest rate was near zero, and has steadily climbed to a paltry 1% over the past couple of years.
This can’t go on indefinitely, because low interest rates tend to create bubbles. However, raising the interest rate isn’t going to have pretty results either, at least according to David Rosenberg.
He’s the chief economist at Gluskin Sheff, a Canadian wealth management fund. He’s also somewhat famous for saying that the US was in the midst of a housing bubble several years before it burst. So it’s safe to say that he knows his stuff.
During a recent interview, he revealed that out of the past 13 recessions, the Fed increased interest rates just before 10 of them. In light of that trend, he stated that we’re probably going to have another recession very soon.
“I think what people should be focused on is the shape of the yield curve,” Rosenberg said. “[Every] single inversion of the yield curve, where short-term rates go above long-term interest rates, has presaged a recession—every single time.”
The three times where rate hikes did not lead to recessions, he noted, were due to the Fed stopping short of inverting the yield curve.
At the moment, Rosenberg suggested, “the yield curve is flat enough that if the Fed raises rates four more times, that’s all it takes. We probably will have a recession next year.”
Looking at the dot plots shows that more than 50% of all FOMC [Federal Open Market Committee] officials are ready to raise rates four more times going into 2018, so “the risk isn’t necessarily high right now, but it is rising.”
This certainly won’t be an ordinary recession. For starters, the vast majority of the country hasn’t even recovered from the last recession. Our economy is like a wounded animal. It can’t take much more damage.
But it’s going to. The inflationary practices of the Federal Reserve has spawned multiple bubbles. And once they cut off the supply of easy money, those bubbles are going to pop. It’ll be like cutting off a junky. The results will be messy, and nothing will be safe. Bonds, stocks, real estate, and even the dollar will take a dive. The only asset that will be left standing is precious metals.
And in all likelihood, President Trump will take the blame for this mess. Everyone will forget that it was years of abysmal fiscal policy that got us into this situation.
Unfortunately, there is only one way out. Our country is going to have to bite the bullet, and endure a protracted economic correction that is probably going to hollow out our standard of living. In short, things are going to get a lot worse before they get better.