Why the Economy Will Never Be “Normal” Again

Justin Spittler

Rock-bottom interest rates could be here to stay.

If you’ve been reading the Dispatch, you know the Federal Reserve has held rates near zero since 2008. It did this to encourage borrowing and spending. It thought this would grow the economy.

It hasn't worked.

The U.S. economy is growing at the slowest pace in decades. In many ways, the economy is worse off than it was before the financial crisis. For example, the real median U.S. household income is about $2,500 lower today than it was in 2007.

The Fed’s experiment has been a huge failure. And yet, it looks like low interest rates aren’t going away anytime soon.

As you’re about to see, doubling down on this failed policy won’t fix the economy. It will only steer it toward a huge crisis.

• Last week, Fed Chair Janet Yellen said low rates were the “new normal”…

Bloomberg Business reported:

Yellen in the past has ascribed the low level of rates mainly to lingering headwinds from the financial crisis—tight mortgage credit, for instance—and suggested that they would dissipate over time.

On Wednesday, though, she also pointed to more permanent forces that could depress rates for longer, namely, slow productivity growth and aging societies, in the U.S. and throughout much of the world.

In other words, the Fed plans to keep rates low until the economy gets better.

Think about that. Eight years of low interest rates have done nothing for the economy. And yet, Yellen’s solution is to do more of the same.

• Americans are borrowing and spending money recklessly…

That’s what happens when it costs almost nothing to borrow money. Folks buy stuff they can’t afford. They borrow more money than they can pay back.

This is already happening on a grand scale.

For instance, the size of the U.S. auto loan market topped $1 trillion for the first time ever during the first quarter. According to CNBC, the average loan amount for a new car is $30,032, which is also an all-time high.

Folks aren’t just borrowing money to buy cars, either. They’re also borrowing to buy televisions, smartphones, and shoes. In May, The Wall Street Journal reported that credit-card debt is approaching record highs as well:

U.S. credit-card balances are on track to hit $1 trillion this year, as banks aggressively push their plastic and consumers grow more comfortable carrying debt.

That sum would come close to the all-time peak of $1.02 trillion set in July 2008, just before the financial crisis intensified, and could signal an easing of frugal habits ingrained by the recession.

Folks are racking up huge debts despite making less. (As we said earlier, the typical American family earns about $2,500 less today than it did in 2007.)

• The Fed also encouraged companies to borrow trillions of dollars…

U.S. corporations have borrowed $10 trillion in the bond market since 2007. Last year, they borrowed a record $1.5 trillion.

Corporate America’s debt problem has only got worse this year. According to Business Insider, U.S. corporations are borrowing at their second fastest pace ever. They’ve borrowed 50% more over the past year than they did leading up to the 2008 financial crisis. They’ve borrowed almost twice as much over the past year than they did at the peak of the dot-com bubble.

• Rock-bottom interest rates have pushed stocks to record highs…

The S&P 500 has surged 215% since March 2009. Today, it trades within 3% of its all-time high even as America’s biggest companies struggle to make money.

Earnings for companies in the S&P 500 have fallen four quarters in a row. That’s the longest streak of falling earnings since the 2008–2009 financial crisis. It’s only going to get worse.

According to research firm FactSet, earnings are on track to fall for a fifth straight quarter.

• The longer the Fed keeps rates low, the more reckless borrowing and spending we’ll see…

Unfortunately, the Fed could do something even more destructive than keep rates near zero.

It could introduce “helicopter money.” You may recognize this term. Economist Milton Friedman came up with the idea in the 1960s. He said the government could drop cash from helicopters to stimulate growth. People spend the free cash, which would grow the economy.

We doubt Friedman ever took this cartoonish idea seriously. For a long time, no one else did either.

• Last week, Yellen said the Fed would “legitimately consider” using helicopter money in “extreme circumstances”…

Of course, the Fed wouldn’t actually drop bills from a helicopter. It would create money out of thin air and deposit it directly into people’s bank accounts.

Yellen isn’t the only person who thinks it’s time to try this crazy idea.

In April, former Fed Chair Ben Bernanke said “helicopter money could prove to be a valuable tool.”

Bernanke’s endorsement isn’t surprising. In 2002, he said Japan should use helicopter money to jumpstart its stagnant economy. This earned him the nickname “Helicopter Ben.”

• Helicopter money could happen sooner than most people think…

That’s because the U.S. economy is getting worse in many ways.

U.S. companies are hiring at the slowest pace in years. Corporate profits are plunging. And nearly three out of every 10 machines in U.S. factories are sitting idle right now instead of making things.

As Dispatch readers know, these are classic signs of a shrinking economy.

• Even Yellen admits there’s something very wrong with the economy…

Last week, she said she’s worried about “headwinds blowing on the economy.”

The worse the economy gets, the more likely the Fed will “do something.” But there’s a problem. It’s running out of tools. As we mentioned, its key interest rate is at 0.38%. In other words, the Fed doesn’t have much room to cut rates.

The Fed’s other favorite way to “stimulate” the economy is to print money.

As regular readers know, the Fed has injected $3.5 trillion into the economy since 2008. It did so using an experimental policy known as quantitative easing (QE). That’s when a central bank creates money from nothing and pumps it into the banking system.

Helicopter money is basically a mutation of QE. But instead of printing money and handing it to the banks, the Fed would print money and give it directly to the people. To many folks, that sounds like a dream come true. After all, who doesn’t like free money?

But, as Casey readers know, it would have serious side effects.

• Helicopter money could destroy the value of the dollar…

That’s what happens when governments print money.

You end up with more paper currency chasing the same amount of goods and services.

Everything from a loaf of bread to a new car costs more dollars. If the government goes too far (which almost always happens), the dollar could become worthless.

• We encourage you to own physical gold…

Gold is real money. It’s protected wealth for thousands of years because it has a rare set of qualities:

It’s durable, easily divisible, and easy to transport. Folks around the world immediately recognize its intrinsic value.

And unlike paper money, the government can’t create more gold on a whim. That’s why gold has held its value for centuries.

It's also why the value of gold can skyrocket when governments do reckless things like print money.

Last week, the price of gold topped $1,300 an ounce for the first time in almost two years. We think it could go even higher in the coming years.


Chart of the Day

Helicopter money has destroyed currencies before…

Recently, Venezuela and Argentina used it to jumpstart their failing economies. Both times, it ended in complete economic disaster.

CNNMoney reported last week:

There's major risks to helicopter money, which some experts equate to money printing. It can create hyperinflation, where prices for gas, groceries and other goods shoot through the roof, and make the dollar less valuable.

That scenario has happened in countries like Venezuela and Argentina where central banks in the past have printed money, given to it the government which then gives it to citizens. Inflation skyrocketed in both countries.

Inflation in Argentina is currently running about 40% per year. It’s even worse in Venezuela.

You can see in today’s chart that inflation is soaring in Venezuela. In December, it hit an all-time high of 181%. And it’s only getting worse.

In April, the International Monetary Fund (IMF) warned that inflation in Venezuela could hit 481% this year. Next year, it could surge to 1,642%. At that rate, prices would double every three months.

The same thing could happen to the dollar if the Fed introduces helicopter money. Now, some might call us crazy for comparing the U.S. to Venezuela. But the truth is that central banks almost always go too far…

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