Federal Reserve Says Economy Will Suck Through 2014

Written by: Joshua Gayman

Last week the World seemed to take a break from worrying about Europe and focused their attention back to the United States and the meeting of the Federal Reserve AKA the Fed. The proof? The Euro rised big against the Dollar.

Ironically, the United States’ problems far surpass the debt problems of the European Union. The difference? We have a Central Bank that can print our currency out of nothing!

The Fed introduced an “Inflation Target,” which they set at 2%. This is something that has never been done before! Last year’s inflation numbers were closer to 3.5-4%, but given that the outlook for coming months is to drop significantly, expectations point to a drop under 2%, at which time would be a perfect scenario for the Fed to come out and unveil a 3rd round of quantitative easing AKA QE3.

The Fed also said they will keep short term rates(“over-night rates”) at all time lows through 2014. The Federal Reserve has never stated a policy that would last 3 years! What’s more crazy, is that debt is the only product the Central Bank sells. Can you imagine if a large company came out and said, “We are going to sell our one and only product at all time lows for the next 3 years.”? I am thinking we’d question whether they could survive another 3 years. The same should be true for the Fed, but I doubt it will. People are still so blinded by the illusion that they actually produce something..

The monetary policy by the Fed to keep rates low KILLS savers. This included anyone who has money in checking, savings, any type of deposit account, IRA, 401k, mutual funds, pensions, etc. If you have your money in one of these places, don’t expect a return for…YEARS.

So where do you see the economy going in the next few years? Well, if the statement by the Fed is any indication, I would say a strong recovery is not on the horizon.

I really don’t see these long term low rates benefiting the masses. I do see it benefiting small business owners who rely on short term loans. I also see it benefiting those who have Adjustable Rate Mortgages AKA “ARMS.” And the group I see being benefiting most by this are those savvy entrepreneurs who will use this cheap money to buy cash flow producing assets.

So what’s the bottom line?

The bottom line is that nothing is free. Money is no exception. There is a “cost for capital.” This means that there is a cost for borrowing money. DUH! The problem is that the cost of capital would be much higher if it weren’t for the Federal Reserve who can set the interest rate anywhere they want. By the Fed placing interest rates under the cost for capital, mal investment is brought into our economy by people who are getting loans for things they shouldn’t. It is because of this that I think the Fed needs to back off and let the market find it’s true equilibrium. This would allow for the smart money to come back into the marketplace. The smart money will stand on the sidelines as long as the Fed holds interest rates low. Investors can’t compete with the Fed when the Fed gets it’s capital by printing it out of thin air! Because the Fed simply “prints” their “capital,” they can hold interest rates at all time lows as long as they need to. Of course this is terrible for the economy as it means we are at their mercy.

If stimulating more debt would help us recover, I think it’s safe to say we’d have recovered by now. The reality is that pushing more debt into the system will not make our problems go away. It won’t slow the foreclosures, it won’t add jobs, and it won’t make life cost less money.

Like any private company, the Federal Reserve exists for one main purpose….PROFIT. The Federal Reserve can’t profit if it doesn’t exits. And it wouldn’t exist if people realized they don’t create anything of real value.

An indebted society is not a healthy one. Look at Greece.. If it weren’t for the US being able to print money, we’d be no better off than them.

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Gold Value from 1935 to 2011

Here is a graph of gold from 1935 to 2011 me discussing the trend it shows and why it is doing what it is doing.

BS: “The Recession is Over.”

By Joshua Gamen

Sure. I recall a lot of hype last summer that the real estate market had hit bottom too.. Try telling that it has hit bottom to the millions of Americans who have lost their home to foreclosure this year. Or to their neighbors, who continue to throw their money at their sinking ship home while the foreclosures around them sink it’s value, and any hope for a return in their lifetime.

Who is the recession over for? The millions of unemployed people? The business owners who don’t have any customers? The guy trying to sell his home? The elderly lady trying to retire? The young adult trying to start his business? TELL ME, WHO IS THE FREAKING RECESSION OVER FOR?!

Let’s look at housing numbers:

  • Almost $6 trillion in housing wealth has been lost since 2005
  • Home values have dropped 30 percent
  • Existing home sales dropped 27 percent over the previous month
  • Housing inventories stand at 12.5 months(some part of the country, 24-36 months), over twice what’s considered healthy

What about Income, or Unemployment?

  • The unemployment rate is officially at 9.6%. It is a lot higher unofficially, because many unemployed Americans have been without a job for too long for the government to consider counting them.
  • Americans with jobs have seen their income fall over 4% between ’07-’09, and the % of Americans living BELOW the poverty level rose to 14.3%!
  • The gap is widening largely between the rich and the poor. Furthermore, the gap between the rich and the middle class is growing rapidly, as is the pace.(The top 20% of households now account for over 50% of all pre-tax income in the country = bye bye middle class.)

To quote the great educator/businessman/investor, Robert Kiyosaki:

“Maybe when the NBER says the recession is over, they mean it’s over for the ultra-rich. After all, many corporations are now posting better than expected earnings reports and balance sheets are getting healthier. For instance, FedEx recently announced that their earnings more than doubled. They also announced that they’re firing 1,700 people. Why? I believe it’s because they know what you already know, the recession may be “officially” over—but it’s not really over. Is the recession over for housing? Not according to the numbers. Thanks to high unemployment, new home orders are down 15 percent over last year, foreclosures are still rising, and pricing is not recovering. People are predicting that the housing inventory, which is more than double healthy levels, will take up to three years to work through. There will be no recovery until that happens.”

MORE COMING!

I wish I could post some stats to show that the market is taking a positive direction, but that would be covering up the truth with illusions. There are plenty of illusions out there to hide behind, but let’s be real..

Unemployment is still rising, and without jobs, nothing can get done. Business owners can’t provide jobs if they don’t have customers. And there aren’t any customers if there isn’t any money to spend. Sure, more money can be printed, but it will only become worth less as they print more and more, and they are..

MASSIVE government printing of US Currency. I call it currency, because it is just that-it’s not money! In 1971 President Nixon took the US off of the gold standard, meaning that the dollar was no longer attached to anything of value. It is simply a piece of paper that is backed by the good faith of the citizens of the United States.(See US dollar bill) They can print as much of this paper as they want, but the problem is, supply and demand will always work their course. Too much supply brings the equilibrium price down, and with the rate they have been running the printing presses the past few years, the market will soon be flooded with worthless pieces of green paper. –

If you study the history of currencies, since the earliest recorded times, every civilization that has had a currency not attached to something of value(ie: gold or silver), has gone to 0. That means, as more and more of the currency comes into existence, the existing currency is devalued, until the currency is no longer worth anything. Sound like pennies? Soon this will be nickels, then dimes, then quarters. Even the metal in them won’t be worth much, since they haven’t been made from silver since the late 60’s.(Weird how the government stopped using real silver and snatched it out of the money supply just a few short years prior to 1971 when our currency was removed from it’s tie to gold. Conspiracy?? 😉

In 1974, the government passed a law called ERISA. This made it so that people’s retirement was up to themselves, not the employer. It gave birth to plans like the 401k, and mutual funds, plans that were devised so that you could “invest for your retirement.” When this happened the American citizens turned to mutual funds, stocks and 401k’s for retirement plans. What they were actually doing was handing their money to wall street to play with until they retire, and expecting that wall street would automatically grow their money for them.

As we saw with the recent stock market crash, Wall Street is not looking out for the mutual funds or 401k accounts, Wall Street is looking out for their FAT KATS. What’s worse is, regardless of your opinion on the stock market, it doesn’t take a lot of intelligence to see that when the largest demographic of citizens(Baby Boomers) start to retire, money will flow out of the stock market like never before. This will be a the second dip of this what I believe to be, double dip recession.

Foreclosures can’t slow down, not yet. Go to google and type in mortgage resets. You will see graphs that will show you the largest mortgage product ever sold – the 5/1 Adjustable Rate Mortgage(ARM), and when these loans will adjust. These loans were primarily written in 2006 and 2007, right at the end of the real estate bubble, and will be resetting over the next 2 years. This will cause another HUGE drop in real estate values, as the number of foreclosures will sky higher, and at a more rapid pace than current.

Good News??

There is good news…

When markets bubble and then pop, the money doesn’t disappear, it just flows into another asset class. It moves.. The money is going somewhere, so where is it going? Well, take a look at the value of gold, or silver. Go to Google, and type in “gold spot.” Examine the value of gold as it has climbed over the past week, month, year, 5 years, or further. Then check out the same for silver. Since forever, gold and silver have always been used for exchange, hence making it the real money of the world. Until the rich figure out where they can put their money to make more money, they are holding it in the form of real money, gold and silver. It’s catching on quick, think of how many places you see driving to work and back that say, “WE BUY GOLD.” It is the next major bubble, but we’re still early to the trend. Gold just went over $1,300 an ounce today, but we will see gold hit $13,000 per ounce, and in the not too far future.

Assets are cheap. Real estate, businesses, etc. Now is a good time to gather as many assets as you can, that will reward you as the economy turns around. Buy investments for what they will provide you in cash flow, do not worry about selling for a profit. That is speculation. Whatever you grow your asset and sell it for later should be the gravy. Now is an excellent time to pickup businesses for cheap, cut out the expenses, make the systems more efficient, and get the asset as profitable as possible. Now is an amazing time to buy real estate that will cash flow for you as well.(Rental income exceeding the loan you are paying to own the property.)

So…

The recession is not over. We are in a new economy, the old one is not coming back. We are in a shift from the industrial era to the information age. In this new economy, knowledge is money. You can print your own money just like the the Fed does. Financial IQ is the way out of the paycheck chasing. Get real, get right, and get assets! Financial knowledge, is the greatest asset you have, so acquire as much of it as you can!

~Josh