With all the smoke and mirrors action going on in the stock markets over the last few years as they made one new high after another, it has been easy to forget a critical detail that is now coming back to haunt the markets.
Suddenly the long-forgotten reality that the Federal Reserve has been holding them all up with an enormously expanded balance sheet of $4.5 trillion has been raised as the Fed has decided it is finally “safe” to begin reducing it. This is economist speak for pulling out all the extra money they have been propping up the stock markets (and overall economy) with the last few years. Just look at this chart and you will appreciate how much money the Fed pumped in:
Now the May Federal Reserve minutes just showed they will begin to pull out the props holding up the stock market valuations this year. Remember that the Fed had massively boosted their injections of money into the economy as a dramatic reaction to the greatest financial collapse since the Great Depression, now called the Global Financial Crisis and the Great Recession of 2007 to 2009.
So what is the problem with the Fed simply taking back out the money they flooded into the system at an unprecedented level? Much of it lies in the unpredictability of the results of their actions. This is something the Federal Reserve members have admitted to themselves.
Consider that the severe downturn and weak recovery which ensued caught the Fed totally off guard. Since then, the American central bank members have been forecasting significantly greater growth rates than economic reality delivered. It caused them to constantly over-promise on how soon they could restore interest rates to historically normal levels.
Now the Fed in its May meeting has provided us all with their blueprint for how and when they will “reduce the balance sheet size.” They will gradually desist from reinvesting the proceeds of maturing bonds back into buying new securities. It sounds harmless enough, but the Fed officials have been eager in their admission that they have little idea how these actions will affect the financial markets and the resulting borrowing costs.
In reality, it means they will no longer be the supporting buyer that has held up the Treasury bonds and mortgage markets any longer. As the demand and prices for these assets inevitably decline, interest rates will rise inversely. This will impact borrowing costs on every level, from you the individual, to small businesses and corporations, to (most crucially) the Federal Government itself.
The Federal Government has over $20 trillion in debt now. The only way it has been able to service this historically unprecedented amount is through abnormally low interest rates. When the rates start to rise again because of the Fed’s unwinding actions, the Fed will literally be shooting its own government in the foot.
Is Your Retirement Portfolio Protected by Gold Against The Unwinding of the Fed’s Enormous Balance Sheet?
Decreasing their balance sheet as they raise the interest rates is only adding fuel to the Federal Government debt fire. Even the Fed officials themselves acknowledge they can not be certain about the impact this “reduction of their asset holdings” will have on financial conditions. If they attempt to back down, it will represent another hit to their already shattered credibility as a central bank who can be trusted. The only question now is when exactly will the government’s own central bank decide to blow up its own government’s budget and finances?
When the government finances erode because of inevitably higher interest rates, it will be gold you can look to as protection for your investment and retirement accounts. The yellow metal has an unrivalled 5,000 year long track record of carrying individuals through government declines and collapse. Click here now to get your no-cost, no-obligation rollover kit from industry leader Regal Assets, which will give you all of the information you require to effectively protect your retirement portfolio through a partial diversification of these assets into physically held, tangible gold.