The Fed Must Choose

Low Rates or Robust Growth Were you forwarded this email? [Sign-up to The Daily Reckoning here.]( [Unsubscribe]( [Daily Reckoning] The Fed Must Choose - Economists overestimate Q2 GDP by 25%… - “We can have low interest rates or robust growth. But not both”… - Productive vs. nonproductive debt… Recommended Link [MASSIVE 10X Opportunity FLASHING Right Now!]( [Read more here...]( According to The New York Times, this kind of opportunity is a “PROFIT GUSHER”! Thankfully, only a few people seem to have picked up on the news. That means the BIGGEST profits are still up for grabs. And one tiny stock – trading for less than $10 right now – could soon be the next “PROFIT GUSHER” you’ve been waiting for. [Click Here To Learn More Before It's Too Late]( Annapolis, Maryland July 29, 2021 [Brian Maher]Dear Reader, Second-quarter GDP expanded at a 6.5% annualized rate. This we learned this morning, informed by the United States Bureau of Economic Analysis. A Dow Jones survey of economists had forecast an 8.4% spurt. That is, a Dow Jones survey of economists once again missed fire — a 25% overshoot in this instance. 6.5% growth in isolation is plenty handsome. But it cannot be considered in isolation. It comes rising off a very low floor. During Q2 2020, April-June, the economy was sunk in the blackest deeps since the Great Depression. A 6.5% bounce in Q2 2021 is therefore a letting down of sorts. Again, economists had projected an 8.4% effervescence. Hence the 25% disappointment. Meantime, this morning the Department of Labor revealed this information: 400,000 Americans filed onto unemployment lines for the week ended July 24. The Dow Jones survey of economists had projected 380,000 fresh filings — another “miss.” How did the stock market take the disappointments? In stride, in loafing stride. From opening gun, the three major indexes were up and away. There they remained until closing whistle, despite some late pulling back. The Dow Jones Industrial Average gained 153 points on the day. The S&P gained 18; the Nasdaq, 15. Gold, we mention in passing, enjoyed itself a day at the races — up $28 and change. The Old Bad News Is Good News Routine Recall, bad news for the economy is good news for the stock market. One man takes his tumble on Main Street, another goes skipping down Wall Street. It means the Federal Reserve will keep the support coming until the economy can stand upon two legs. And the support will keep coming for a long, long while — at least as we see things. We do not believe the economy can push along absent continual shoves, prods and cajolings. More joy on Wall Street is the result. For it is Wall Street that gains most from the Federal Reserve’s encouragements. Here Yahoo! Finance “buries the lead.” You will find the kernel beneath the outer husk: Stocks rose on Thursday as investors looked beyond a weak set of economic data and a mixed batch of corporate earnings results. Traders also considered a Federal Reserve decision that signaled the central bank was still looking for the U.S. economy to recover further before adjusting its monetary policies. And there you have it. Investors believe — correctly — that the Federal Reserve will leave its helping hand out. As Mr. Jerome Powell himself affirmed yesterday: We have not reached substantial further progress yet. We see ourselves having some ground to cover to get there. Today’s economic data adds additional distance to the journey. Recommended Link [Biden’s Next Move Will Catch Most Americans by Surprise]( [Read more here...]( In his first week in the White House, President Biden broke all records by signing 19 executive orders… But it’s this move from one of his agencies that will catch most Americans by surprise. Warning… If you wait until you hear it from the mainstream media, it might be too late for you to take any action. [Click Here For The Full Story]( “We Can Have Low Interest Rates or Robust Growth. But Not Both.” But can the Federal Reserve ever “get there?” Can it ever break the finishing tape? Not unless it turns 180 degrees around, argues economist Daniel Lacalle: “We can have low interest rates or robust growth. But not both.” Again — we can have low interest rates or robust growth, he says — not both. That is, the faster Mr. Powell and mates run… the further they fall behind… and the more distant the finishing line at journey’s end. They may mean the best in the world. Their hearts may be purest gold. Yet the road paved with swell intentions terminates in a very hot place. Mr. Lacalle: Central banks believe their policies are working, because equity and bond markets remain strong. That is like giving more vodka to an alcoholic because he has not died of cirrhosis yet. Low bond yields and high levels of negative-yielding debt are not signaling monetary success but are evidence of a deep disconnection between markets and the real economy… Markets may continue to reward excess and high risk, but that is not something that should be ignored, let alone celebrated… Central banks should be tapering already, and if they believe that low sovereign yields are justified by fundamentals, let markets prove it. If negative nominal and real yields are justified by the issuers’ solvency, why is there any need for monetary authorities to purchase 100 percent of net issuances? Reality is much scarier. If central banks started tapering, sovereign yields would soar to levels that would make many deficit-spending governments quake. Therefore, by keeping yields artificially low, central banks are also sowing the seeds of higher debt, lower productivity, and weaker growth. The great bugaboo of this woeful tale is debt — unproductive debt. Productive Debt A business firm chooses to expand production to meet rising demand for its products. It requires a new plant. It requires new equipment. It lacks the wherewithal to purchase the plant or the equipment. It therefore goes upon the borrow… and sinks into debt to acquire them. This firm begins rolling out additional product. Sales go on the jump. Its added productivity allows this firm to satisfy its debt within the specified term. In the process it has expanded its empire. It has also furnished employment to scores of additional workers. Their wages go hunting down goods in the broader market... which butters the parsnips of other industries… and so on and so on in a virtuous cycle. Meantime, this firm’s creditors have been repaid in full — with a lovely cherry atop the principal — interest. These creditors are therefore positioned to extend additional loans to fund further productive enterprise. Round and round it goes... in widening circles. None of it would have been possible without our theoretical firm taking on the initial debt. Here you have a splendid example of productive debt. The firm went down in debt but came up higher than before. It is wealthier, and its bounty goes cascading out in numerous directions. Next we come to nonproductive debt… Recommended Link [Gilder: “This Reboot Could Make You Rich”]( [Read more here...]( A wealth revolution is coming. And it could make you very… very… rich. That’s the latest forecast from the man they call “America’s #1 futurist”… “Wall Street’s most influential technology trader”… and “a true American genius.” How so? “We’re headed for a potential $16.8 trillion reboot,” he says. “Nobody will remain untouched. And a few early investors could walk away with a king's ransom.” [Click Here To Find Out More]( Nonproductive Debt Nonproductive debt does not invest. It consumes. It keeps the hamster running frantically on his wheel, but going no place. It is the use of one credit card to service the debt of another. That is, nonproductive debt casts no eye to the future. It instead impoverishes the future to gratify the present. Mr. Michael Lebowitz of Real Investment Advice: When debt is used productively, the interest and principal are covered with higher profits and sustained economic activity. Even better, income beyond the cost of the debt makes the nation more prosperous. Conversely, unproductive debt may provide a one-time spark of economic activity, but it yields little to no residual income to service it going forward. Ultimately it creates an economic headwind as servicing the debt in the future replaces productive investment and or consumption… The U.S. economy is overly dependent on unproductive debt. Not surprisingly, secular growth rates have been trending lower for three decades. The massive amount of unproductive debt added in the last year will only further reduce future growth rates. Each economic “recovery” since 2000 has grown progressively weaker… as progressively more debt has gone heaping on. We discern no reason why the present recovery will break the evil trend — and every reason why the evils will continue. Not only will they continue, we expect the pace to quicken. Meantime, as we have argued before, the authorities continue digging us deeper and deeper into debt’s impossible depths… with no end in prospect. We hazard they will dig clear through to China… Regards, [Brian Maher] Brian Maher Managing Editor, The Daily Reckoning Editor’s note: The stock market is certainly in a bubble. So are many other asset classes. It’s all part of the “everything bubble” that the Fed has inflated. But Jim Rickards has identified an [alternative that doesn’t involve the stock market or any of the other overinflated markets.]( It involves instead a massive, $6.6 trillion daily flow of capital that you can tap for potentially large gains. You see, [Jim recently developed a proprietary secret]( for profiting from this gigantic, yet often overlooked market. [It’s called C.O.B.R.A.]( Jim and his team have built a new computerized [Tactical Operations Center]( to track this massive cross-border capital flow. Jim thinks it’s something you need to learn about. We agree. [Click here now for details.]( --------------------------------------------------------------- Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Brian Maher][Brian Maher]( is the Daily Reckoning's Managing Editor. Before signing on to Agora Financial, he was an independent researcher and writer who covered economics, politics and international affairs. His work has appeared in the Asia Times and other news outlets around the world. He holds a Master's degree in Defense & Strategic Studies. 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