Game Plan by Kevin D. Freeman

Author:Kevin D. Freeman [Freeman, Kevin D.]
Language: eng
Format: epub, azw3
ISBN: 9781621572183
Publisher: Regnery Publishing

What Happens if the Fed Loses Control?

Even if the government pays its debts on time and keeps the currency in place, there is another risk. What happens if the Fed can no longer hold everything in place? Jim Rogers believes that this will happen. At some point, he suggests, bondholders might stop caring about what the Federal Reserve is doing. So far, the Fed remains “god” of the markets. A sentence in a press release can move markets up or down. But the Fed’s weapons, ultimately, are only paper. They either increase or reduce the supply of dollars. If the dollar loses its value, the Fed loses its weapons. Likewise, if the Fed loses control, the dollar could collapse.

The Federal Reserve has almost single-handedly propped up the global financial system since 2008. The Fed supported banks around the world and has pumped trillions of dollars into economies. The Fed could do that because the world desired and trusted dollars. The Fed could electronically inject dollars into a bank in Italy, making it instantly solvent. If the dollar lost value, however, this intervention would be meaningless. The Fed would not be able to help anyone. The result would be massive inflation, tremendous bond losses, and a knockout of support for everything the Fed has held up—in other words, chaos. Prices would be volatile for almost every asset class, even as the dollar collapsed. In this unprecedented calamity, inflation and deflation would occur almost simultaneously—food and other necessities would skyrocket in price, while other assets could collapse. The economy would be a ship in a sea, rocking from one extreme to another in short order. Some currencies might skyrocket while others failed, so we would see hyperinflation in some areas and deflation in others. Even the strongest metal will ultimately fail from stress if repeatedly bent back and forth at a rapid pace. To quote Zero Hedge: “[I]f and when Bernanke finally loses control, there are simply no words to describe what would ensue, as a situation like that—one where not just the Fed but every single central bank has gone all in on reflating the world’s biggest asset bubble—has never been encountered before.”44

Certain asset classes could survive a Federal Reserve crackup, but maintaining ownership would be challenging. Bonds denominated in dollars would likely be hit the worst.

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