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BookmarkHILTON TARRANT: US job growth came in lower than expected in August, and the unemployment rate dropping to a four-and-a-half year low as workers gave up the search for work in the US could delay the Federal Reserve’s scaling back its massive monetary stimulus later this month.
All eyes are on the Federal Open Market Committee meeting in just over 10 days’ time. Until today’s data it was widely anticipated we would see some easing or tapering of the stimulus programme. But James Rickards, author of Currency Wars: the making of the Next Global Crisis, believes that we won’t see any cutting back at all of the Fed stimulus because the American economy remains just too weak.
JAMES RICKARDS: I don’t think it’s going to happen. Certainly it’s on the agenda in the sense that the Fed is talking about and thinking about it – they certainly would like to taper. I don’t think there’s much doubt about that. And to a great extent the markets have priced that in.
I don’t think the Fed actually will taper in September – in fact, I don’t think they’ll do it at all this year and the reason is I’m sort of taking the Fed at their word. They said we’d like to. Tapering is the jargon, it’s reducing asset purchases, but asset purchases are the way they print money. So what they are really saying is we are going to print less money.
But they said we are going to do that sometime this year if the economy grows in accordance with our forecast, etc. And so many people in the market have focused on the first part about tapering, but ignored the conditionality, the “if” clause about the economy conforming to their forecast.
So one thing you need to know about Fed forecasting – they have the worst forecasting record of any institution I can think of, any central bank or any private forecaster. Every year the Fed gives a one-year forward forecast. In ’09 they gave a forecast for 2010, in 2010 they gave one for 2011, etc. The last four years they’ve been wrong all four times by a lot – meaning one or two percentage points of growth, which is orders of magnitude when you are talking about GDP. So there’s no reason to have confidence in the Fed forecasting.
The actual economy is doing very poorly. My feeling is they are not going to taper because they’ll be tapering into weakness and the economy’s very weak. But it’s a close call. I’d be the first one to say it could go the other way. If they do taper, they’ll be tapering into weakness, as I say, and I expect they would increase asset purchases some time by mid-2014.
Remember, this is the third time we’ve gone though this – QE1, which they stopped, it turned out they had to go back with QE2. They then stopped QE2 in June 2011, and by September 2012 they were back to QE3. Now they are talking about tapering QE3. But the history has been every time we do see these, the economy goes into a funk. And so I don’t think they’ll do it. But if they do I think they’ll be increasing asset purchases within say, six to eight months.
HILTON TARRANT: Does the Fed have to taper, or is this the new normal? Are we now so addicted to this liquidity, to these assets, that that’s kind of how we are going to go?
JAMES RICKARDS: A good question. The fed’s not doing this gratuitously. They are doing it to try and help the economy and to prop up the banking system, which is their mission. The problem is it hasn’t worked, it hasn’t worked well at all. So the question is do you give up or do you keep trying. Do you back away or double down? And there is a real division of opinion on that one.
One of the reasons this is so difficult to call is because the Federal Open Market Committee is evenly divided between those who think they should taper and those who think they should not. And the argument for tapering has been articulated by Jeremy Stein, one of the governors of the Federal Reserve. He said, look, you are getting less and less benefit out of this. Meanwhile you are increasing systemic risk and setting us up for another asset bubble and asset bubble collapse.
On the other side is Janet Yellen who says we have enormous slack in labour, we have an enormous slack in industrial capacity. There is no example of inflation arising in these circumstances and we should print more.
I’ve spoken to some of the Federal Reserve Bank presidents, Charles Owen of Chicago, Dennis Lockhart of Atlanta, among others, and they said theoretically there is no limit to the Fed’s balance sheet. Now I happen to disagree with that. I think there can come a very rapid, almost instantaneous loss of confidence. Once that happens nothing can save the dollar. We are not there yet, but we are getting closer all the time. As I say it will happen very unexpectedly.
So there are others that think the Fed can keep doing this, that they should keep doing it. There are others who think that the risks are not outweighing the benefits. The problem is they are both right as both sides have good arguments. This is what happens when you manipulate. You paint yourself into a corner from which there is no good way out.
