Richard Duncan—author, former specialist at the World Bank and consultant to the IMF—says the Federal Reserve plans to stimulate the stock market by 10-15% each year for the next two years.
“My opinion is that credit growth will remain insufficient to drive economic growth and, therefore, the Fed is going to have to continue [its efforts] through fiat money creation; and their goal is 10-15% appreciation of the stock market a year in order to create a wealth effect and push up asset prices to create consumption and to drive the U.S. and global economy,” he explained in a recent interview with Financial Sense.
If Richard’s analysis is correct, that means the Fed has a target of around 20,000 on the Dow before backing off its quantitative easing program.
To determine his figure, Richard looks at the five major sectors that drive credit growth in the U.S.: the government, Fannie Mae and Freddie Mac, the household sector, the corporate sector, and the issuers of asset backed securities. Collectively, they must expand credit in the economy by a certain amount each year or else the economy rolls over.
“Going back to 1952 there have been only 9 years when credit grew less than 2%, adjusted for inflation. And every time that happened there was a recession. And the recession didn’t end until there was another big surge in credit expansion,” he said. “None of those sectors look like they’re going to expand their debt enough to make credit grow more than 2% adjusted for inflation. Thus, the Fed is going to have to continue QE for the foreseeable future to make up for the shortfall, if they want to try and prevent credit contraction and another subsequent recession.”
To understand how long the Fed can continue to monetize U.S. government debt and keep interest rates suppressed without major risks, Richard points to Japan, where debt to GDP is near 250%.
“Japanese government debt increased from 60% of GDP in 1990 to now where it up to almost 250% of Japan’s GDP. U.S. government debt is only 100% of US GDP. So, the US government has the potential to continue borrowing and spending easily for the next decade before it’s anywhere near the levels of Japan’s government debt at the moment. So, the government does have the ability to continue directing the economy through fiscal spending and quantitative easing so long as inflation doesn’t rear its ugly head.”
Although many people think the Fed’s efforts are undermining capitalism and free market forces, Richard says that once we severed the link between gold and the dollar under Nixon, capitalism was no longer the force driving economic growth. Now, he says, we have “Creditism.”
“We have to understand that our economic system now is not capitalism in the sense that it used to be in the 19th Century. Now the government is directing the economy one way or another, either through budget deficits or fiat money creation or a combination of both. And right now the Fed is in the driver’s seat. And the Fed wants asset prices to go up.”
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