Is the Fed Signaling More Trouble Ahead?

By Greg Hunter’s USAWatchdog.com

With all the euphoria about the stock market these days, it would seem that the worst of the economic meltdown is behind us.  After all, the S & P 500 is up an astounding 64% since March.  I have heard plenty of market pundits say “the worst is behind us.”   Then again, I saw this story on Bloomberg over the weekend.  It said, “Federal Reserve Bank of New York President William Dudley said the central  bank could curtail the risk of future liquidity crises by providing a “backstop” to solvent firms with sufficient collateral.  “The central bank could commit to being the lender of last resort” to such firms, Dudley said in a speech yesterday in Princeton, New Jersey. This would reduce “the risk of panics sparked by uncertainty among lenders about what other creditors think…” (Click here for the complete story)

Why would the New York Fed President even bring this up if it were not a potential problem?  My bet is  new “liquidity crises” is something the Fed sees in the not too distant future.   It seems the Fed wants the financial community to know it is on top of things, and  it will do whatever it takes to stop another meltdown.   I asked economist John Williams of Shadow Government Statistics (shadowstats.com) about the Bloomberg story above.  He told me, “It sounds to me like they are front-running a problem.”

Market and gold expert Jim Sinclair had a more critical view  on his website jsmineset.com about what Dudley said.   Sinclair wrote, “A “pre-emptive” backstop to “solvent firms” with “sufficient collateral” – that sounds like an oxymoron to me.  If they really want to work to prevent future liquidity crises they should do exactly the opposite. Stop providing implicit taxpayer guarantees to preferential industries and increase system transparency.”   

We have had a good quarter boosted by government spending, but one good quarter does not mean we have a new bull market.  NYU Economics Professor Nouriel Roubini feels the economy is going to get a lot worse before it gets better.  In a recent article Roubini said, “Think the worst is over? Wrong. Conditions in the U.S. labor markets are awful and worsening.”  Roubini also said, “There’s really just one hope for our leaders to turn things around: a bold prescription that increases the fiscal stimulus with another round of labor-intensive, shovel-ready infrastructure projects, help fiscally strapped state and local governments and provide a temporary tax credit to the private sector to hire more workers.”  (For the complete article click here)   

John Williams, on the other hand, thinks there is no “…quick fix” and that America needs to “rebuild its industrial base.”  However, Williams agrees with Professor Roubini and also thinks the worst is ahead of us.  So I asked Williams about the possibility of systemic failure?  He said, “My betting remains that the Fed and the Treasury will do everything in their power to prevent systemic failure, as they have been doing for the last two years…. The efforts to prevent systemic collapse, however, have a cost: inflation.  Given the government’s long-range fiscal bankruptcy, current efforts by the Feb at debasing the dollar have created high risk of eventual hyperinflation beginning to surface in the year ahead.”   

In my final question to John Williams I asked how people should protect their assets?  Williams said, “Holding some physical gold remains the best long term hedge against all that can go wrong here.  It maintains purchasing power in a liquid and portable form.  Long-term holding is emphasized, since any of these markets can go through wild, short-term gyrations, particularly with possible government intervention.  Gold was a buy at $200, $500, $1,000 and will be at $5,000 etc. on a long term basis.  Williams goes on to say, “If there is risk of systemic failure prior to a hyperinflation, holding some cash is worthwhile, as is stocking up on necessary supplies same as one would for a severe natural disaster.”    

Williams, Sinclair and Roubini have been most accurate in their predictions and assessments of the economy.  That is why I included them in this post.  In my humble opinion if everything was turning positive, the Fed would certainly say it.  Instead, William Dudley is talking about providing a “backstop” to solvent firms.  That sure sounds to me like trouble is coming soon.  

 

 

Comments
  1. WBoucher

    With the predictions in this article:http://www.dailyfinance.com/2009/11/17/should-americans-brace-themselves-for-european-style-unemploymen/ and others it is not only liquidity crises but employment crises that will cause further liquidity crises ahead.
    With 10 years or more of high unemployment expected unless we have the highest rate of job creation that the USA has ever had every month for 5 years there is no defense for keeping over a million H1B visas or illegal aliens in the country as both increase the unemployment rate among citizens. For a realistic wage to be paid the illegal aliens and temporary visa holders gone.

    • Greg

      WBoucher,
      It took a long time to get to this point and it will take a long time to get out of this mess. Both parties are at fault. Thank you for you comment!
      Greg Hunter

  2. Martin Smith

    Greg,
    I am surprised after talking with John that the obvious wasn’t brought up? How about something new such as the truth. The obfuscating of employment and inflation numbers is not helping. There is a growing anger that is palpable and needs to be dealt with immediately. When you have the Goldman Sachs employees receiving the highest bonuses in company history in this economic atmosphere, funded in the peoples mind by their tax dollars,the FED refusing an audit is unacceptable.
    I retired from the medical imaging field and can tell you with confidence that %50 plus exams are done because of medico-legal liabilties, ditto most all other emergent testing procedures. We have both houses packed with lawyers that have turned a blind eye to this major cost increaser. We will have to somehow rebuild our manufacturing base probably using Ronald Reagan’s tax cutting measures as a start. But until then the mandate of Congress should be to decrease spending and reduce the taxes on the people.
    I fear that proposal would be met with howls of laughter if presented to them. Thank you

    • Greg

      Martin,
      Great comment and feedback…Thank you!
      Greg

  3. Vinny

    On H1B visa, if locals could do the job for the price (which is much cheaper for h1bs) we won’t have that many h1b here or would we ? Little known fact about h1bs, they come here to work, pay taxes and Social Security fully knowing that they won’t get any benefit of Social Security when they return or retire. They generally travel around the country to see places and improve local economy, not to mention much needed help to Air-Lines/hoteling industry.

    They mostly come from warm countries and purchase a lot of clothing for cool climate here, cars, rent houses, buy houses, send thier kids for extra classes, buy medical insurance, car insurances and the list goes on. These all CONTRIBUTE.

    Ya ! let’s just send those million+ back and have million+ MORE HOUSES available for sale or rent…..eliminate million plus from the market place, that would help tremendously.

    -In case you’re wondering, I am a US citizen !!

    • Greg

      Vinny,
      I did not know this. Thank you for sharing you comment with USAWatchdog!
      Greg

  4. beltane

    ..it’s so frustrating to me to envision an obvious solution never discussed…debt forgiveness. We are trying to stabilize society here, not financial markets. All these forclosed homes have no caretaker, neighborhoods are turning into standing landfills, pets are being abandoned, utility companies are not recouping their capital investments, real estate taxes are not being paid to support police, fire and schools…because of the banks. The banks foreclosing on homes, causing homelessness, broken families and the other negative externalities mentioned prior. The banks never had the money they loaned to begin with…they counterfeited it, magically created it via this fractional reserve fiat currency system they have sired.

    Forgive all mortgage debt on primary residences and move on. Move on thereafter to restructuring our monetary system to be within the public domain rather than a private group of international monopolists. Our society will continue to slip into an abyss of unrest until we right this wrong. Behind every fortune is a forgotten crime…the Federal Reserve Act is the forgotten crime.

    • Greg

      Beltane,
      Love your mind! “…neighborhoods are turning into standing landfills…” Bravo!!! Thank you for the contribution!!!
      Greg

  5. Dave

    Thanks Greg for yet another interesting article.
    While trying to view our predicament as dispassionately as possible,leaving aside the fact that I have some gold,I simply cannot envision a way that our nation can crawl out of this very serious mix of problems.
    There are those that say “war always follows an economic collapse as a distraction and economic stimulus”,but the wars of yesterday won’t be like the wars that will take place now.
    As reluctant as I am to envision food shortages,riots,rebellions,race wars,etc,I just cannot come up with the logical way that this can be avoided this time around.

    • Greg

      Dave,
      I feel the same way. I do not want to feel that way but I just cannot work out the math. Thank you for your comment.
      Greg

  6. George

    Vinny said:
    On H1B visa, if locals could do the job for the price (which is much cheaper for h1bs) we won’t have that many h1b here or would we ?

    Vinny, No Offense but why should we allow companies to import cheaper workers for what used to be high paying jobs? Isn’t that the mentality that caused all the outsourcing? We need manufacturing. We need the high paying jobs.

  7. George

    beltane said:
    ..it’s so frustrating to me to envision an obvious solution never discussed…debt forgiveness.

    I’m not a big proponent of this but to be honest, it would have had more impact and likely would have been cheaper to give every Family in the country $50,000 than the way the stimulus …who exactly got stimulated besides the People in Congress and their buddies…was passed

  8. Vinny

    George said:

    Vinny, No Offense but why should we allow companies to import cheaper workers for what used to be high paying jobs? Isn’t that the mentality that caused all the outsourcing? We need manufacturing. We need the high paying jobs.

    I am not offended and I see your point. I do agree that we need manufacturing (other than manufacturing of $$ aka printing).

    But when you’re asked ( if you’re a business man) to service overspent, over overdone Americans. Cutting the cost of doing business definitely appeals very strongly. Immigration is good, has always been for this country, everybody here is or has been an immigrant, somewhere on their family tree.

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