He Tried to Warn Us, But No One Listened

If you don’t know the name Thomas Hoenig, don’t worry, you’re not alone. Hoenig is probably best known to hardcore Fed watchers, having been the President of the Kansas City Fed from 1991 to 2011. After that, he served as Vice Chairman of the Federal Deposit Insurance Corporation (FDIC) from 2012 to 2018.

Hoenig is probably best remembered for his hawkish stance on monetary policy, particularly his series of dissenting votes against Federal Reserve Chairman Ben Bernanke’s monetary policy in the aftermath of the 2008 financial crisis. In an era in which the Fed prided itself on consensus, Hoenig was not afraid to buck that consensus and be the maverick on the Federal Open Market Committee (FOMC).

It goes without saying that no one in the mainstream paid much attention to Hoenig at that time. After all, Ben Bernanke’s policies of quantitative easing were credited with “saving” the economy. Everyone was so focused on the short term attempts to get out of the crisis that they failed to appreciate that the Fed’s actions to do so could end up harming the economy in the long run.

A Prophet Has No Honor in His Own Country

In many ways Hoenig was before his time. Along with other prominent critics of the Fed, like Congressman Ron Paul, Hoenig provided opponents of the Fed’s ultra-loose monetary policy not only with good arguments against the Fed’s policies, but also lent them credibility. After all, if one of the Fed policymakers voting on these policies opposes them, it obviously isn’t because he’s some crackpot on the fringes.

In the end, however, a single man can’t do much to stop a determined group. And so the Fed went on to continue easing, and easing, and easing. The Fed’s balance sheet grew so bloated that from a pre-crisis size of around $800 billion it eventually ended up at around $4.5 trillion. That’s over $3.5 trillion created in just a few years, versus the 95 years it had taken to build up its balance sheet to $800 billion.

Hoenig warned that such easy monetary policy would become addictive, and that the Fed would find itself in a tough situation, creating new asset bubbles and being unable to extricate itself from the morass it had created. When he left the Fed over a decade ago, everyone thought he had gotten it wrong. But it just took some time for history to prove him right.

The Fed Doubles Down on Creating Money

When current Fed Chairman Jay Powell decided to start normalizing the Fed’s balance sheet, he barely got started before markets started to come apart. The federal funds rate had barely reached above 2%, and the Fed’s balance sheet had barely gotten under $4 trillion before everything was paused. Then came COVID, and all bets were off.

The Fed more than doubled the size of its balance sheet since then. In fact, it added $3 trillion to its balance sheet between March 2020 and June 2020 alone. And since then the Fed has continued to purchase assets, with its balance sheet now near $8.8 trillion, or nearly double what had been its previous post-2008 peak.

In the aftermath of the 2008 crisis, the Fed did in a matter of a few years more than it had done in a century. And in the aftermath of COVID, the Fed did in a matter of weeks what it has previously done in years. What does this bode for the future, and how does the Fed extricate itself?

Getting Out of the Mess

According to Hoenig, getting out of this situation will be painful. Not only will it require the Fed to stop its loose monetary policy, it will also require a painful period of adjustment. Think of high inflation, high unemployment, and economic uncertainty and instability. That’s what has to occur in order for things to get back to normal. But does the political will exist to do that?

Paul Volcker made his reputation by fighting inflation in the late 1970s and early 1980s. Combating what was essentially two decades of loose monetary policy that resulted in the stagflation of the 1970s, Volcker’s Fed eventually raised the federal funds rate to 20%. That helped cause the 1980-82 recession, which saw unemployment rise to double digits.

Things were painful then, but the economy recovered and went on to prosper and thrive. In fact, the 1982-2000 stock market bull market remains the most amazing period of stock market growth in US history. Getting through the pain of recession is necessary to get back on track to continued growth. But will there be a second coming of Paul Volcker?

Americans Have Had It

There’s a growing sense among many Americans that the financial system is rigged against them. They’ve given up hope that they can ever get ahead. Their wages are stagnant, they lost jobs to lockdowns, and now the prices of everything they buy are climbing at the highest rate in 40 years.

Can we really expect that tens of millions of Americans would be willing to go through even more pain and suffering for the promise of a better life after it’s all over? Can we expect people who are already broken, depressed, and suffering to suffer even more? Can we expect them to believe those promises? It’s a hard sell even in good times, and in times like these it’s even harder.

That’s why it’s highly unlikely that we’ll see another Volcker-like tackling of inflation. Powell is certainly no Volcker, and doesn’t have the guts to stand up to a President and do what’s right for the country and for the economy. And the likelihood of anyone with Volcker’s spine getting nominated to the Fed is slim to none.

In all likelihood inflation is here to stay. The Fed probably won’t reverse course, and has locked itself into a dangerous cycle of continued asset purchases that will likely continue to grow over the next several years. The 2020s could end up looking like the 1970s or, if we’re really unlucky, like the 1930s. And that dismal outlook for the future could end up harming millions of Americans.

What Can You Do to Protect Yourself?

If you’re like most Americans, you probably dream of a safe and comfortable retirement. You’re probably saving for retirement right now. And if you’ve benefited from the bull market of the past several years, you’ve probably built up a nice little nest egg.

But what happens if that nest egg starts to disappear? Or what happens if the dollars you’ve worked so hard to accumulate buy you less and less each month?

That’s the reality facing more and more Americans today. It’s a sobering reality, and a reminder that we could be entering a period in which asset preservation plays as important a role or greater than asset accumulation.

Many Americans have seen the writing on the wall. They don’t believe that the Fed will turn away from its money printing. They don’t believe that Washington will stop racking up trillions of dollars in debt each year. They don’t trust that the dollar won’t be devalued even further. And so they’ve decided to protect their assets with precious metals.

Precious metals like gold and silver have been trusted for centuries to protect wealth and safeguard assets. They have a history of gaining value when other assets aren’t performing well due to weak economic conditions and financial turmoil. During the 1970s, for instance, gold and silver’s average annualized growth rates were over 30%.

Gold and silver can also help you protect your retirement savings, such as through a gold IRA or silver IRA. They allow you to invest in physical gold and silver coins while still enjoying the same tax advantages as your existing retirement accounts. And you can roll over or transfer funds from your 401(k), 403(b), TSP, IRA or similar accounts into a gold IRA or silver IRA tax-free.

Tom Hoenig may have been ignored for years, but history is proving him right. If you agree that the Fed has gotten itself into a quagmire that it’s going to have a tough time getting out of, and you realize that your retirement savings are at risk, you owe it to yourself to get some protection. Call the precious metals experts at Goldco today and find out how you can help safeguard your retirement savings with gold and silver.