Gordon Long: If You Think QE Was an Experiment, You Haven't Seen Anything Yet!

Wed, Jan 13, 2016 - 3:50pm

Gordon Long, co-founder of Financial Repression Authority, believes that a massive tax grab by government at the federal, state, and local level is coming regardless of which candidate wins the 2016 US presidential election. He also discusses “a peak in the credit cycle,” what this means for investors, and why the Fed may have to reverse course this year in light of a potential liquidity crisis.

"There's concern (and you're seeing it in the market from those who understand what's going on)...that because we have so much collateral pledged to support debt and credit right now,” Gordon said, “that when that collateral falls in price as we're seeing in oil and commodities, you get margin calls and if you don't have the liquidity you're caught and you're caught in a serious problem."

"I think what we're going to go through here in the first quarter is some kind of adjustment or correction—it's healthy...I can't imagine the market will be allowed to go much below 1820 on the S&P before the central banks will react with new policies and if you think quantitative easing was an experiment you haven't seen anything yet."

"We are going to see negative interest rates potentially...we already have $5 trillion in bonds around the globe trading negative...there are all sorts of things that the central banks could do other than just interest rates and they will do them when the collateral is in jeopardy because it will bring down the entire system."

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Gordon Long: "We've had a $30 trillion household net worth increase since 2009...while the government is facing huge issues of underfunded pensions, a baby boom retirement coming, drains on Social Security—so there's a lot of pressures on the government...to increase (taxes) significantly."

"I don't care who is elected—which party—they are going to have to increase taxes. It's a simple matter—there's just not enough cash coming into the coffers...and they can't tax the corporations any higher or they'll be leaving and are already leaving at significant rates."

“We have 75 million baby boomers retiring—10,000 a day right now—and there's no money there. So, we've got a cash issue here and unless we increase credit...we have a recession problem in front of us which will hurt the tax revenues even worse."

"This is not just about the United States—the UK has the same problem; the EU has the same problem; Japan—all the developed countries are facing this and if you go through each of these countries—look at Jeremy Corbin in the UK who came out of nowhere and it looks like he'll be the next prime minister—very much a socialist leading the labor party. We can look at Marie Le Pen in France; we can look at Beppe in Italy—I go around and there's leaders that are either very far right or very far left that are gaining huge popularity and I think it's because of the frustrations in the electorate today because they don't see their economies delivering the kind of security they need or the social contract they believe they have with the government—that is, if I work hard I'll be rewarded. They're working hard and they're not being rewarded."

"The Fed is boxed in—they are trapped right now...they can't raise rates. We might be able to raise another half (of a percent with) two more twenty-five basis point increases possibly but I think personally a recession is looming...the global slowdown is serious and significant and it's washing ashore very quickly in America...so you don't raise rates when you are going into a recession or, maybe even more importantly, as the credit cycle itself has already turned."

"Just think of it this way, when you have the size of the debt that we do that has to be funded, higher interest rates just cost more money. 25 basis points or 50 basis points on the national debt is a quarter trillion dollars of extra tax money. That sounds like really standing into a punch doesn't it? So the pressures on the Fed to increase rates right now is actually to decrease and if we have a recession they will quickly turn suit. Remember, we have loose monetary policy in the EU with the ECB, we've got Japan loosening even worse; we have China now loosening (with a weakening yuan)—so the rest of the world is loosening credit, not tightening, and with us at least espousing that we are going to go in this direction it's forcing the US dollar even higher and the US dollar is so strong that it's now hurting profits. So I believe they are going to have to reverse here."

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