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A crisis is coming

Listening to analysts and economists who are frequent guests on financial programs, you might conclude that higher interest rates — which the Fed is imposing — will be good for the economy.  No, they won’t.

Higher interest rates mean increased costs for businesses, higher mortgage costs for consumers, greater costs of carrying credit card debt.  Just as near zero interest rates help boost the economic recovery coming out of the Great Recession, higher interest rates will slow economic growth and possibly lead to a recession if not an economic crisis.

The Federal Reserve is playing with fire, raising interest rates at the end of an expansionary period that is now the second longest on record.  Here’s what Ludwig von Mises, the greatest economist of the 21st century, had to say about artificially induced economic expansions:

“The boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation – which, as in all other cases of unlimited inflation, ends in a “crack-up boom” and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion, and thus bring about the crisis. The depression follows in both instances.”

“The depression follows in both instances.”

Not only has the Fed quit pumping money into the markets, it has started draining money from the markets AND is raising interest rates.  By October, the Fed will be on course to suck $600 billion a year from the markets.  Since December 2015, the Fed has boosted interest rates six times.  Further, in fiscal 2019, the federal government is likely to run a deficit of $1.2 trillion, putting still more upward pressure on interest rates.

From 2008 to 2015, the Fed pumped $3.6 trillion into the market.  Now, current Fed chair Jay Powell has said that about $1.5 trillion is his target of bonds to sell (euphemistically called “reducing the Fed’s holdings.”)

According to Mises’ observations, a crisis comes when the banking system simply quits adding money to the system.  Powell is set to drain $1.5 trillion over the next few years, which should hurry the appearance of a recession.  As for the “orgy of speculation” that Mises talks about, it’s in stock prices, and quite possibly, again in housing prices.

Now is the time to consider moving from over-priced stocks into under-valued assets such as gold and silver.  No one ever went broke holding gold or silver.

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