Seven years of extraordinary fiscal and monetary stimuli are proving ineffective towards achieving the growth and inflation targets laid out by the Federal Reserve. The Consumer Price Index (CPI), the Producer Price Index (PPI) and Gross Domestic Product (GDP) have all failed to grow over 2%. This is because asset prices, at these unjustified and unsustainable levels, need massive and ever increasing amounts of QE (new money creation) to stave off the gravitational forces of deflation. Fittingly, it isn’t much of a mystery that the major U.S. averages have gone nowhere since QE officially ended in October of 2014.

According to the highly accurate Atlanta Fed model, GDP for Q3 will be reported at an annual growth rate of just 0.9%. And things don’t appear to be getting any better for those who erroneously believe growth comes from inflation: September core retail sales fell 0.1%, PPI month over month (M/M) was down 0.5% and year over year (Y/Y) was down 1.1%. CPI was down 0.2% M/M and the Y/Y headline level was unchanged.

While the deflation effect from plummeting oil prices wears off by years-end, there is no reason to believe the same deflationary forces that sent oil and other commodities down to the Great Recession lows won’t start to spill over to the other components, such as housing and apparel, inside the inflation basket. This would especially be true if the Fed continued threatening to raise interest rates and driving the U.S. dollar higher.

Central banks and governments can always produce any monetary environment they desire. It is a fallacy to believe that deflation is harder to fight than inflation. Deflation is currently viewed as harder to fight because the policies needed to create monetary inflation have not yet been fully embraced — although this is changing rapidly.

The Fed just can’t seem to grasp why its newly minted $3.5 trillion since 2008 hasn’t filtered through the economy. But this is simply because debt-disabled consumers were never allowed to deleverage and markets were never allowed to fully clear.

But the Fed isn’t one to let the truth get in the way of its Keynesian story. And why should it? Financial crisis is the mother’s milk of increased central bank power. For example, before the last financial crisis the Fed was unable to buy mortgaged back securities; rules were then changed to allow it to purchase unlimited quantities of distressed mortgage debt. The Fed is perversely empowered to continue making greater mistakes, thus yielding them greater authority over financial institutions and markets.

Since 2008 the rules and regulations fettering Central Banks have become more malleable depending on the level economic distress. Congress has mandated that the Fed can not directly participate in Treasury auctions. But there is no reason to believe in the near future that this law won’t be changed to better accommodate fiscal spending.

Strategies such as: pushing interest rates into negative territory, outlawing cash, and sending electronic credits directly into private bank accounts may appear more palatable in the midst of market distress. The point is that Central Banks and governments can produce either monetary condition of inflation or deflation if the necessary powers have been allocated.

In the Fed’s most recent dot plot (a chart displaying voting member’s expectations of future rates) the Minneapolis Fed’s Kocherlakota was mocked as the outlier for placing his interest rate dot below zero. However, persistent bad economic news has quickly driven the premise of negative rates into the mainstream. Ben Bernanke told Bloomberg Radio that despite having the “courage to act” with counterfeiting trillions of dollars, he thought other unconventional issues (such as negative interest rates) would have adverse effects on money market funds. However, anemic growth in the U.S., Europe and China over the past few years has now changed his mind on the subject.

Supporting this notion, the president of the New York Fed, William Dudley recently told CNBC, “Some of the experiences [in Europe] suggest maybe can we use negative interest rates and the costs aren’t as great as you anticipate.” Indeed, over in Euroland, ECB President Draghi hinted recently that the current 1.1 trillion euro ($1.2 trillion) level of QE would soon be increased, its duration would be extended and deposit rates may be headed further into negative territory.

Statements such as these have me convinced that negative interest rates in the U.S. are likely to be the next desperate move by our Federal Reserve to create growth off the back of inflation. After all, the Fed is overwhelmingly concerned with the increase in the value of the dollar. Keeping pace with other central banks in the currency debasement derby is erroneously believed to be of paramount importance. Outlawing physical currency and granting Ms. Yellen the ability to directly monetize Treasury debt and assets held by the public outside of the banking system could also be on the menu if negative rates don’t achieve her inflation mandates.

Instead of repenting from the fiscal and monetary excesses that led to the Great Recession the conclusions reached by government are: debt and deficits are too low, asset prices aren’t rising fast enough, Central Banks didn’t force interest rates down low enough or long enough, banks aren’t lending enough, consumers are saving too much and their purchasing power and standard of living isn’t falling fast enough.

The quest of governments to produce perpetually rising asset prices is creating inexorably rising public and private debt levels. The inability to generate inflation and growth targets from the “conventional” channels of interest rate manipulation and the piling up of excess reserves are leading central banks to come up with more desperate measures.

We can see more clearly where Keynesian central bankers are headed by listening to NY Times columnist Paul Krugman’s suggestions for Japan to escape its third recession since 2012. He recently avowed that Japan needs much more aggressive fiscal and monetary stimulus to escape its “liquidity trap” and “too-low” rate of inflation. However, his spurious argument overlooks that the Bank of Japan is already printing 80 trillion yen each year, its Federal Debt is spiraling north of 250% of GDP, and the annual deficits are currently 8% of GDP.

Here it is in his own words: “What Japan needs (and the rest of us may well be following the same path) is really aggressive policy, using fiscal and monetary policy to boost inflation, and setting the target high enough that it’s sustainable. How high should Japan set its inflation target…it’s really, really hard to believe that 2 percent inflation would be high enough.”

You see! According to this revered Keynesian economic expert if what you’ve already done in a big way hasn’t worked all you need to do is much more of the same.

Unfortunately, Krugman and his merry band of arrogant Keynesian haters of free markets represent the conscious of global governments and central bankers. What they indeed are creating is a perfect recipe for massive money supply growth and economic chaos. Therefore, if these strategies are followed, it will inevitably lead to a worldwide inflationary depression. And this is why having a gold allocation in your portfolio is becoming increasingly more necessary.

About Michael Pento

Michael Pento produces the weekly podcast “The Mid-week Reality Check”, is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”

This chart series features an overlay of the Four Bad Bears in U.S. history since the market peak in 1929. They are:

1. The Crash of 1929, which eventually ushered in the Great Depression,
2. The Oil Embargo of 1973, which was followed by a vicious bout of stagflation,
3. The 2000 Tech Bubble bust and,
4. The Financial Crisis following the record high in October 2007.

The series includes four versions of the overlay: nominal, real (inflation-adjusted), total-return with dividends reinvested and real total-return.

The first chart shows the price, excluding dividends for these four historic declines and their aftermath. As of Friday’s close are now 2025 market days from the 2007 peak in the S&P 500.

…..read more HERE

 If It’s Important, Control It!

“Better to remain silent and be thought a fool than to speak out and remove all doubt.”
–  Abraham Lincoln
 

Getting things doing is about doing one thing really well, setting a priority.  Once a priority is set, everything thing else seems to fall into two camps; activities that make the priority happen and those that oppose it.  I know it sounds simple, but there is some form of magic in setting a priority, and then the universe conspiring to make it happen.  I have seen it many times in my personal and professional life, when I have finally decided that a task is my number one priority, and suddenly, people and opportunity seem to appear out of nowhere to help make it happen.  Conversely, the obstacles to my priority often appear as well, which is good, since now know which problem desires my attention.

1. Martin Armstrong’s Armageddon scenario looms as Fed has now lost control: $5,000+ gold anybody?

I know there’s only a week left – but I’ve been watching and I really think I’m getting the hang of this political thing. I’ve even got a first draft of my campaign speech ready – and it goes like this….The man who forecast $5,000+ gold prices for 2016 back in 2009 (click here), and whose cycle model predicts a big disruption in global financial markets at the close of this month, has spoken out against the Federal Reserve’s decision to keep interest rates on hold last week..

….read more HERE

2. Richard Russell Warns Countries Are Now Preparing For A Collapse In Global Fiat Currencies And Panic Buying Of Gold

“This bear market (and I’m calling it one) has developed a case of internal erosion. Stocks are falling apart one by one as the big averages mask the damage. Bear markets are sneaky beasts and they like to do their damage as secretly and as unobtrusively as possible. I hate to say it, but somewhere ahead the bears are going to get together and the innocent little stream is going to turn into a waterfall.

What can you do about it?”

….read more HERE 

3. Jim Rogers: The Best Opportunities are in Agriculture

“I will tell you, the whole Middle East situation is unbelievable. I cannot think of many times in history where you have so much just pure, pure chaos by so many people. I mean, it’s not as though there are one or two people making mistakes in the Middle East, there must be a dozen people making mistakes in the Middle East, and unfortunately, they are coming together more and more.

….read more HERE