Submitted by William Briat as part of our contributors program.
Do you feel wealthier today compared to last year?
According to the Federal Reserve, you should, as the household net worth of Americans rose 2.5% between the second and third quarters of 2013 for a total of $77.3 trillion. (Source: “Financial Accounts of the United States,” Federal Reserve, December 9, 2013.)
The Federal Reserve calculates household net worth by looking at the value of stocks, homes, and other assets, minus mortgages and debts.
In fact, the nominal total wealth is at a record high. Adjusted for inflation, the current level of net worth is approximately one percent below the peak prior to the Great Recession. On paper, it appears as though economic growth is booming thanks to the Federal Reserve.
But if you’re like most Americans, you’re probably skeptical of this so-called economic “growth,” and rightfully so, since the underlying fundamentals of economic growth really are missing.
While we are seeing some jobs growth, it’s obvious that the current situation is far from ideal. Millions of people remain unemployed, and the jobs being created are of poor quality.
However, because of the Federal Reserve’s easy money printing, asset prices have been boosted upward, creating a significant amount of wealth for the top portion of America’s society.
Over the long term, we cannot have sustainable economic growth if only the top five to 10% of Americans participate. While the Federal Reserve has tried to create economic growth for everyone, the policies are quite clearly tilted toward the very wealthy.
What does this say about the current level in the stock market?
Many people in the mainstream media are stating that the current market is not in a bubble. My response is simple: if the Federal Reserve reversed all levels of money printing and increased interest rates to a normal level, would the stock market remain where it is today? I think the answer is quite obvious: no, stocks would not be at such lofty levels.
If the stock market is artificially inflated through Federal Reserve policies, what does this tell us about the health of economic growth in America? Is everything artificially inflated by the Federal Reserve?
If that’s the case, how useful is this information that Americans continue to increase their level of wealth? To me, if the foundation of a house is unstable and made of sand, it will simply fall apart over time compared to a stronger base built from concrete.
Where does this leave the Federal Reserve?
Clearly, the Fed wants to begin reducing its asset purchase program, as even it knows that at some point, there will be significant negative ramifications.
What happens to economic growth and the stock market if this were to happen and interest rates eventually rise? I think we could see a significant sell-off at that point.
You might be asking, if this is the case, why doesn’t the Federal Reserve continue printing money forever?
The problem in this situation is that asset prices might continue rising, but the value of the U.S. dollar will continue to erode. Just like printing more “Monopoly” dollars, more paper doesn’t mean stronger economic growth.
Over the next few years, we’re left with two possibilities: either stocks sell off significantly, or we get inflation from continued money printing by the Federal Reserve in its attempts to spur economic growth.
I think the Federal Reserve will always err on the side of more money printing to stimulate economic growth, which leads me to believe that the value of precious metals like gold and silver should also increase in price.
Considering the discounted value for precious metals, and the continued money printing by the Federal Reserve and other central banks globally, I think this is an opportune time to accumulate precious metals while they are still on sale.