Markets Are at an All Time High - Why That's a Problem

Markets Are at an All Time High – Why That’s a Problem

Hi, I’m Ron Paul, former Presidential candidate and US Congressman. If you follow the news, you’ll know that stock markets are near their all-time highs. The Dow Jones Index surpassed the 20,000 point mark for the first time this year, and even broke 21,000 points in March. That’s over 4,000 points higher than its lowest mark in 2016. The S&P 500 and the NASDAQ Composite Index are enjoying similarly fast growth.

While the financial media loves to tout this as evidence of a strong economic recovery and robust economic growth, the truth is anything but. If we look at why stock market prices are soaring, we realize that this newfound prosperity is in danger of collapse.

A Bubble Ready to Burst

The reason stock prices are rising so much is because they are in a bubble, and that bubble was created by the Federal Reserve System. Years of quantitative easing have meant trillions of dollars being created by the Fed and pushed into financial markets. Those newly-created dollars have pushed up bond prices, pushed up stock prices, and created new bubbles in real estate and other sectors.

When more and more financial pundits start to swoon over how well stock markets are doing, or start to talk about how this is just the beginning of a new period of unprecedented gains, that’s usually a sign that the market isn’t far from crashing. Economic booms that are caused by central bank money creation do not last.

The Fed’s response to the last financial crisis was to pump trillions of dollars into the financial system, creating a bigger bubble than the last crisis. And when this bubble bursts, the effects will be far worse than last time.

The Dow and the Federal Reserve

It won’t just be the effects of the Fed’s previous monetary actions that will contribute to the stock market crash, but also its actions going forward. As the Fed begins to raise the federal fund’s rate,  bank borrowing costs will increase. Those costs will naturally be passed along to consumers in the form of higher interest rates on mortgages, credit cards, and car loans. People with adjustable-rate mortgages will be particularly hard-hit.

You see, the economy never really recovered from the last financial crisis. Unsustainable debts weren’t liquidated, malinvested resources weren’t put to better use, and the financial situation of the average American didn’t really improve. Ultra-low interest rates allowed people and businesses to continue carrying bad debts. When interest rates begin to rise, those debts are going to be unsustainable and defaults will start to rise.

The Federal Reserve may increase interest rates up to three more times this year, and some Fed officials have even hinted that the Fed may decrease the size of its balance sheet, meaning that it could sell off assets and pull money out of financial markets, hastening the bursting of a stock market bubble. This combination of weak underlying economic fundamentals and a Federal Reserve that seems oblivious to that weakness will result in a crash that will likely be worse than the 2008 crisis. Recovering from the next crisis will be difficult, which makes it very important for savers and investors to protect themselves before the crash comes.

So what can you do? Investing in gold is a very important way to protect yourself. Gold maintains its purchasing power over time, unlike paper money. And when stock markets crash, gold maintains its value. Very often gold prices will increase during a crash, as investors flock to the safety that holding gold provides. When stocks and bonds lose their value, when paper money is inflated to the point of being worthless, holding gold will be the only means of keeping your savings and assets from being wiped out.

Don’t be fooled by the apparent health of the current market. It won’t last, and the higher the Dow goes, the worse the crash will be when it inevitably comes. Protect yourself now, while there’s still time.