by Chris Black
The Federal Reserve is currently implementing a series of interest rate increases as a means of addressing the stagflationary crisis that has been caused by past efforts to stimulate the economy through the use of fiat currency.
However, the higher interest rates have not had the desired effect of lowering prices or curtailing stock market speculation.
The prolonged period of easy money has made it difficult to make significant changes, leading to the possibility of a difficult economic downturn.
There are already clear signs of an impending economic crisis, but mainstream sources may not acknowledge the full extent of the problem until it becomes much worse.
This is a common pattern in financial crises, where mainstream economists and commentators give false reassurances and downplay the risks in order to keep the public calm.
Even now, with consumer prices rising significantly, some are still suggesting that there is nothing to worry about and that the Fed’s “soft landing” is on the way.
In the early 2000s, the Federal Reserve implemented low interest rates, which contributed to the housing and derivatives bubble. In 2004, the Fed began to increase interest rates. By 2006, rates had risen to over 5%, causing cracks to appear in the credit structure. Debt becomes too expensive for the system to sustain when rates reach between 4.5% and 5.5%. By 2007/2008, the credit system in the US experienced a rapid collapse, leading to the largest money printing effort in US history in an effort to rescue the banking sector, at least temporarily.
Since the measures taken by the Federal Reserve in the past did not fully address the underlying problems, I predict that we will see another significant economic contraction when interest rates reach 5%. The difference this time is that the central bank may not have the ability to stimulate the economy through the use of fiat currency without causing a further escalation of stagflation. I am also considering the possibility that the Fed may intentionally cause a crash at this time.
Mainstream financial commentators may hope that the Federal Reserve will change its policies in order to sustain the current stock market rally, but this is unlikely to happen. While there may be occasional market rallies based on statements from Fed officials, these events will become increasingly rare.
The Fed has removed the means of stimulating the economy and is unlikely to reverse course at this point. In fact, the Fed may intentionally cause economic and market decline due to the stagflationary crisis that they themselves caused.
In my view, the central bank prioritizes its global agenda above any loyalty to a specific country, and is willing to allow the decline of the American economy in order to hasten the implementation of Central Bank Digital Currencies (CBDCs) connected through the International Monetary Fund.
They are aware of the consequences of their actions and are achieving their desired outcomes.
It is expected that by the February 2023 FOMC meeting, the Federal Reserve will have reached or be very close to an interest rate of 5%, which may contribute to a significant drop in markets and widespread job losses.
Another factor to consider is the new 1% excise tax on stock buybacks included in President Biden’s Inflation Reduction Act, which goes into effect in January of next year.
This tax is not expected to lower the prices of goods, but stock buybacks have been a primary means of supporting equities for major corporations.
In the past decade, buybacks have been financed with money borrowed from the Fed at near-zero interest rates, effectively free money.
However, this easy access to funding is coming to an end.
The combination of a 1% excise tax on stock buybacks and a 5% Federal Reserve interest rate will create a burden of 6% on any borrowed money used to finance future buybacks. This cost will be too high and buybacks will decline, leading to a drop in stock markets.
It may take two or three months for the tax and interest rate increases to have a noticeable impact on markets, potentially leading to economic contraction in March or April of 2023.
It is also important to consider that inflation is likely to persist, as high energy prices contribute to supply chain pressures.
The current decrease in oil and energy prices is not a result of supply and demand dynamics, but rather is being artificially driven by government actions.
In the US, oil prices are being kept low through the release of oil from strategic reserves by President Biden. However, eventually the available supply of oil for release will be exhausted and will need to be replenished at a higher cost.
In addition, oil and energy prices are being kept low due to China’s weird Zero Covid policy, which has slowed their economy and reduced oil consumption.
As public unrest grows, the Chinese Communist Party may seek to improve conditions in an effort to quell dissent, potentially leading to a reopening of the economy early next year.
However, certain controls will likely remain in place.
However, as soon as China fully reopens, oil prices are expected to rise significantly on the global market.
In addition to the factors previously mentioned, the ongoing conflict in Ukraine and sanctions against Russia may also contribute to economic challenges.
Europe is expected to experience one of the worst winters in recent history, with limited natural gas supplies and the cost of power for manufacturing becoming unsustainable, especially in Germany.
If temperatures remain mild, it may help to mitigate some of the production disruptions, but if not, there will likely be significant disruptions to the global supply chain, which translates into more inflation globally.
Bottom line: even with a contraction in the job and stock markets, high energy prices and supply chain disruptions are expected to result in continued high prices for goods and services throughout 2023.