Eric Sprott: US In a Recession, and Stimulus Policies Won't Help

Monday, 30 Jul 2012 10:27 AM

By Forrest Jones and Kathleen Walter

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The United States has likely slid into another recession despite repeated attempts by the Federal Reserve to jolt the economy with stimulus measures that, in reality, have done little more than inflate asset prices, said Eric Sprott, chairman of Sprott Money Ltd.

Since the downturn several years ago, the Fed has rolled out two rounds of quantitative easing (QE1 and QE2), which injected a combined $2.3 trillion into the economy to stave off decline via buying bonds held by banks, a policy often dubbed as printing money out of thin air that sows the seeds for inflation down the road.

Weak economic indicators are fueling talk that the Fed will roll out a third round of quantitative easing.

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Such a move would come right on the heels of the recent decision to extend a Fed program that buys up longer-dated Treasury bonds in the market while simultaneously selling short-term government debt, dubbed by the markets as Operation Twist.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

Fed officials themselves say continued use of these tools — all designed to push borrowing costs down throughout the economy — are becoming more likely.

Meanwhile in Europe, the European Central Bank has juiced its own economy via providing banks with a round of low-cost loans known as long-term refinancing operations (LTROs).

All these monetary tools won't work, Sprott told Newsmax.TV in an exclusive interview.

They don't stimulate the economy but rather, pump up stock prices to make it look like the country is getting better.

"Well, it’s interesting to use the phrase they’re going to stimulate their economies because, so far, we’ve had QE1, QE2, LTRO this, LTRO that, Operation Twist and it hasn’t stimulated the economy. In fact, we’re probably in a recession right now," Sprott said.

"We’re probably in a recession right now in the U.S. and we’re certainly in a recession in Europe. We’re certainly in a manufacturing recession in China. And these things that the central banks do, the bottom line is they don’t stimulate the economy. They keep asset prices inflated."

Fundamental improvements need to gain steam for better days to return, including an improvement in the housing market and the firming retail and automobile sales.

"Ultimately, there’s not much follow through in the economy, unfortunately," he said.

As a side effect to monetary stimulus measures, paper currencies weaken, and when that happens, gold tends to rise.

Gold prices are about $300 off from their record highs of $1923.70 hit in September of last year, thanks mainly to the European debt crisis that sent investors racing to the safety of the U.S. dollar and Treasurys, which are large and liquid markets that offer plenty of safe harbor despite paltry returns.

Still, further central bank action could send investors right back to gold and send prices climbing anew.

"I’m pretty convinced it will be at new highs before the end of the year. It’s not even that relevant to me what it is exactly at the end of the year," Sprott said.

"I think the more important thing is to take a long-term perspective on what’s going on in the world and what’s going on in the world is we have governments and central banks printing money and having to back up their banking systems and they’re basically destroying the value of the currency."

Even market heavyweights have said gold belongs in the portfolio.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

"We see great buying out of China. We see changes in the attitude of mainline sort of investment experts, for example Bill Gross, the bond king, mentioned in his June letter that we have to start thinking about real assets including gold," Sprott said, referring to Bill Gross, who founded Pimco, the world's largest bond fund.

"There’s been studies by the World Gold Council published both in the U.S. and the U.K. suggesting that gold should represent a portion of everyone’s portfolio to keep things in balance," said the chairman of Sprott Money Ltd. (http://sprott.com/market-insights/eric-sprott/)

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