What Happens When the Fed Stops Chasing the Dragon?

I grew up in the drug culture of the late-1970s and ’80s. Not that I actively participated; I never did. But I was there, watching too many friends chase the dragon.

They’d hit me up for whatever allowance money I might have. Or they’d beg me to help them mow a lawn or rake leaves or deliver phones books so they could more quickly earn a bit of scratch for another high.

Even when you’re barely a teen, it’s sad to watch addiction in action. To see how it hobbles the once-strong. To see the desperation. The rationalization. The never-ending promises to stop…you both knowing those promises are a lie, but both willfully pretending they are iron-clad.

I come to this by way of my growing concern for the U.S. economy…

Back in the early days of my investing career (mid-’80s), I always heard the phrase “Don’t fight the Fed.”

The idea was—still is—that the Federal Reserve has the power to giveth and taketh away in the economy and, thus, the stock market.

Back then, the Fed had a dual mandate: price stability and maximum sustainable employment. Or, in simpler terms, manage inflation so that it doesn’t get out of hand, and manage the economy to keep a maximum number of Americans in the workforce.

That’s still the mandate today.

But it seems the Fed has taken on a third, unspoken mandate: Ensuring Wall Street always climbs ever higher.

Basically, the Fed is chasing the green dragon of wealth through an addiction to unnaturally low interest rates that have persisted for more than a dozen years now. Those low rates have inflated asset bubbles. Money can’t collect a safe, respectable return in bank savings accounts and bonds, so it goes trolling on the seedier side town, looking for a high in the stock market.

As with watching your friends kill themselves with heroin and crack, watching the Fed’s actions seems like someone else’s problem—sad to see, but at some point, it’s like, “hey, not my life.”

Only, with the Fed it is our life. It’s my life. It’s your life. It’s our kids’ lives. It’s the anthropomorphized life of the American economy and its role in the larger world.

And as with every addiction, there’s always an end. Always.

The addict either recognizes the addiction and truly search for the road to redemption.

Or the addiction reaches its inevitable sorry conclusion.

Not really a third option.

One of my friends—I’ll call him “M”—was on track for an early funeral. I was there when, at 2 a.m., M leaped out of his bed, grabbed ceiling fan blades spinning at full speed, punched out the fan’s bulbous light cover, then dove through a closed window and ran down the street, bloody, in his underwear, screaming about airplanes chasing him.

He sought redemption.

Today he’s healthy—hasn’t touched drugs in nearly 40 years.

I fear America has taken a path different than M’s.

We have reached a stage as a country where the addiction is everything. The Fed chases the green dragon because the green dragon demands it be chased.

Stop drugging the economy, and the stock market will collapse from price levels that are irrationally high.

Stop drugging the housing market with irrationally low interest rates and the irrationally high housing prices will collapse.

It’s a conundrum, really. Stop chasing the green dragon, and the economy and American wealth plunge.

Then again, keep up the chase and, well, the economy will eventually overdose…forcing it into a painful self-correction.

That is precisely why I recommended the investments I recommend—primarily gold and Swiss franc. They are the Narcan of the investment world, the assets that will revive your portfolio when the Fed overdoses the economy. (Check out my specific Swiss franc and gold fund recommendations in our Global Intelligence Portfolio.)

As with all addicts, the problem is never a problem—until one day you’re bloody and half-naked, running down the street at 2 a.m., screaming about imaginary airplanes stalking you.