The Federal Reserve may be responsible for the biggest financial meltdown yet to come. In fact, this meltdown could be even bigger than the subprime mortgage crisis in 2008.
Let me explain. We all know the Federal Reserve has created an artificial economy that has been built on the availability of easy access to cheap money due to near-zero interest rates. There is no argument here. Via its aggressive quantitative easing programs, the Federal Reserve has produced an economy that is dependent on cheap capital.
Some would argue the Federal Reserve didn’t have a choice; if they didn’t introduce monetary policy, the housing market and banking system may have collapsed. I agree to that extent, but with the economy now in recovery, you kind of wonder why the Federal Reserve continues to allow the flow of easy money.
Recently at its January Federal Open Market Committee (FOMC) meeting, the Federal Reserve suggested that it would have to review the possible stoppage or slowing of its $85.0 billion in monthly bond purchases. The market reacted by selling stocks. Federal Reserve Chairman Ben Bernanke then came out and said that the central bank was committed to its monthly bond buying as long as the economy and employment remain fragile. So which is it? The Federal Reserve needs to really think about reining in its easy monetary policy and reducing the amount of the M2 (all money in circulation, plus savings deposits, time-related deposits, and market-money funds) money supply in the system.
Here’s the dilemma:
The climate of historically low interest rates has driven a false sense of comfort. Consumers are buying more due to the low financing charges. Whether it’s a home, furniture, vehicle, computer, or other non-perishable good or service, the incentive of low interest rates has resulted in an economy that could be in trouble once interest rates ratchet higher—and they will.
According to the Federal Reserve Bank of New York, aggregate consumer debts increased by $31.0 billion in the fourth quarter, which is not a big change; but consider the amount of consumer debt at the end of 2012—it was an astounding $11.3 trillion. (Source: “Quarterly Report on Household Debt and Credit: February 2013,” Federal Reserve Bank of New York web site, last accessed March 13, 2013.) The amount is below the record $12.7 trillion in the third quarter of 2008, but it’s still high and extremely vulnerable to higher interest rates, which will have an impact on consumer spending and gross domestic product (GDP) growth. Retailers could feel the pinch again.
There has been improvement in the housing market, but another 210,000 homeowners were foreclosed on in the fourth quarter. (Source: Ibid.) Just imagine when rates move higher? I’m still wary about the current run-up in housing starts, and I advise caution.
The news isn’t good for students, either. The amount of student loans outstanding was a staggering $966 billion at the end of 2012. (Source: Ibid.) A concern is the11.7% of students who are delinquent on student loan payments over 90 days late, and this number is rising. Of course, the lack of jobs for graduates is not helping.
My concern is the amount of indebtedness in the country, especially as interest rates begin to rise over the next few years. And the Federal Reserve has helped to create this situation, which could wreak some major havoc and may cause a financial crisis down the road. Given this, once rates begin to ratchet higher, you may want to cut your exposure to stocks.
By: George Leong
Posted: March 14, 2013, 7:53 am
We believe the stock market and the economy have been propped up since 2009 by artificially low interest rates, never-ending government borrowing and an unprecedented expansion of our money supply....