The chairman of one of the country’s top financial magazines and former presidential candidate Steve Forbes’ new warning that the Federal Reserve’s elephant gun of a loose dollar policy could trigger an economic meltdown shouldn’t be ignored.
Just take a look at the warning signs already in the headlines around the globe below.
Forbes advises a return to a “gold standard” as the only way to avoid disaster in his new, must-read book, Money: How the Destruction of the Dollar Threatens the Global Economy -- and What We Can Do About It, co-authored by the always sharp Elizabeth Ames (McGraw Hill, May 2014).
The U.S. central bank’s "vastly misguided monetary policies are now setting the stage for a new economic and social catastrophe -- one that could rival the financial crisis and horrors of the 1930s,” Forbes wrote, adding that U.S. economic success and prosperity will come only if the dollar is fixed to gold and not subject to the Fed’s arbitrary liquidity hydrants.
A gold standard would “lower interest rates,” provide for “cheaper capital” and lead to “gangbuster growth,” Forbes says, adding: “If the American economy had the growth rates it once achieved under a gold standard, it would be three times -- instead of two times -- the size of the Chinese economy today.”
And it would make government spenders more accountable, instead of today’s Fed which is now abetting the reckless spendthrifts in government by buying and monetizing U.S. debt.
Could the U.S. keep prices from spinning out of control if the Fed stopped printing money and instead returned to the gold standard? Are central bankers more secretive and powerful than ever before?
Recent headlines sound the warning:
*“The wide consensus entering the year of Fed tapering equaling a stronger US dollar has not come to fruition because on the stage of QE, the Fed’s balance sheet is only exceeded by the Bank of Japan as a percent of GDP.”
*”In 2000, the U.S. dollar made up 71% of all reserves held by governments around the world. Today it accounts for just 62%.”
“”Today, 56% of the world economy has zero-interest-rate policies.”
*"Central banks have doubled their reserves since 2006 and are crucial participants in currency markets, but some traders say their activities are opaque and unaccountable.”
*“The $4-trillion-a-day forex market is the largest in the world, but covert activities by central bank reserve managers have the clout to move it.”
*The International Monetary Fund estimates that central banks held $10.8 trillion in assets at the end of September, more than four times as much as global hedge funds.
*”The dollar has been weak against the Aussie dollar after the central bank there continues to leave rates unchanged and reaffirm that rates are not going any lower. Even the New Zealand currency is at a three-year high vs the U.S. dollar, the South Korean Won is close to a six-year high vs the U.S. dollar and the Chinese yuan has been posting sharp gains.”
Could the Fed’s easy money policies be the black swan event market players have been worried about? For decades now, interest rate spikes and inflation hikes have always triggered economic crises. Currently, economists note inflation is not a problem, but once the trillions in bank reserves (created by the Fed) come pouring into the U.S. economy, that could change.
Higher commodity prices are the canary in the coal mine for inflation, notably food-price spikes. It is a striking irony that the U.S. is consumed by fights over raising the minimum wage, while that very same minimum wage would be undercut by a devalued dollar.
The Fed’s boomerang could come back to hit it in the head in another way besides inflation -- at the banks it oversees.
It is noteworthy that even the Financial Times has reported that the Fed’s easy money has disconnected markets from the real economy, as the Fed’s wind beneath the wings of the market has helped drive the stock markets to historic highs and the 10-year Treasury yield to an historic low of 2.58%.
Meanwhile “the hunger in the markets for yield is as voracious as ever,” with investors pouring into risky junk bonds and debt, the FT warns, adding: “The performance of junk debt and equities suggests both markets are being driven less by economic fundamentals than by easy money.”
The Fed’s easy money policy could in the future be the banks’ undoing, as the cycle comes full circle -- inflated assets used by banks now for their increased capital reserve requirements could turn into valueless paper down the road.
The Fed’s usual anti-inflation strategy -- raising the fed funds rate -- is broken. Raising the fed funds rate may not work because of the Fed’s own money printing. The banks have so much money in excess reserves that they don’t need to borrow from each other, as economist Martin Feldstein has pointed out.
Stopping inflation by getting banks to park their excess reserves with the lure of higher Fed interest payouts on those reserves would be a political firecracker, because the central banks would be viewed as icing over lending to businesses and consumers.
A modern-day example for belt tightening like going to the gold standard is already with us. Just look at Greece, a member of the fixed-currency union the eurozone. It couldn’t print more money or lower its interest rates, and it’s muddling through after the rioting there quieted down.
The size and complexity of the U.S. economy would make the conversion to a gold standard devilishly hard to do, analysts have noted. In order to back the dollars now in circulation and on deposit -- about $2.7 trillion -- with the approximately 261 million ounces of gold held by the U.S. government, gold prices would have to rise as high as $10,000 an ounce, risking huge inflation in the tricky conversion period.
But Forbes notes that the monetary base would shrink to $325 billion, and the value of the dollar would soar -- talk about a true bang for the buck.
Forbes adds that those inflation fears could be assuaged by a gold-based currency board, which he adds have been around for more than 150 years. In fact, Hong Kong, Denmark, Lithuania and Bulgaria use a currency board, a basket of currencies, euros and euro-bonds along with gold, to back their own money.
Plus, gold is not a strict, unwavering standard, as critics suggest. “Gold is far less rigid than people realize. It is both flexible and stable,” Forbes wrote. “A gold standard no more means a fixed supply of money than a use of the metric system means there has to be a fixed number of rulers.”
Elizabeth MacDonald joined FOX Business Network (FBN) as stocks editor in September 2007.
Follow Elizabeth MacDonald on Twitter @LizMacDonaldFOX.