Yesterday, we spoke of the possibilities for improvement in our economy- as well as barriers which could make the normal ebb and flow of recession and growth difficult. For many decades, the government has been using the mechanism of interest rates to influence the economy.
In each cycle that has occurred in the past, the bottom of the market cycle is marked by high interest rates and low stock and bond prices. All the government had to do was lower interest rates and more money was naturally created through the velocity of the multiplier effect. Banks received cheaper money and so they lent money out at cheaper rates. Businesses were then encouraged and able to access cheaper capital and take entrepreneurial risks and the market got kick started again.
Today, everything is backwards. Stock and bond prices are high. Perhaps not extremely so, but they are certainly not cheap. I consider a Price/Earnings ratio of 17 to be average or the dividing line between overpriced and under-priced stocks. The current P/E ratio of the S&P 500 is 18.86. So the market is expensive when we should expect it to be cheap. It was cheap in March, but it has rallied incredibly since then. Much of the ownership here is foreign money which still feels comfortable in dollars.
Interest rates on the other hand are about as low as they can possibly go. The Fed charges almost nothing on its Federal Funds rate to banks. They could charge zero and give the money away at no interest, but short of this, there’s not much room for them to lower rates to stimulate the economy. Rates are already very low.
You can rig a system for a while and it will work, but eventually the same old tricks don’t work anymore. The US government is now finding this out. The playbook that they’ve been using for decades no longer works. The rules have changed and they have no idea how to adapt to these rules. This is not an insurmountable problem in itself. The market would eventually kick start itself without top down interference, but the ones who have been rigging it for so long no longer have the power to do so.
Still, even with these problems, if it wasn’t for the large looming crises level issues, our current way of doing things would survive and eventually begin growing again without issue. However, there are large looming problems that are not going away and will soon hit you harder than you can imagine. We’ll begin looking at many of these in the coming days, starting with an explanation of our fiat currency and the gold standard. I hope you’ll join us.
You’re invited to a free event Wednesday, November 18th in Austin to discuss these things in greater detail. If you would like more ideas on how to prepare for this coming storm, please sign up for our free newsletter here. If you’d like to read more about the spiritual realities behind what’s happening, read the series we just finished.
This post is Part 3 in the series Financial Outlook of the United States. To continue with this series, click on Pt 4. To gain more insight, you can read about the coming storm here, in Pt 1 and Pt 2.