Tags: Forbes | Fed | Stimulus | Recovery

Steve Forbes to Moneynews: Fed Stimulus Policies Guarantee Slower Recovery

Sunday, 16 Dec 2012 02:45 PM

By Forrest Jones and John Bachman

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Federal Reserve stimulus measures are hampering recovery rather than spurring it by channeling credit away from smaller and mid-sized companies and pushing it instead to the government, said publisher and one-time presidential candidate Steve Forbes.

Since the downturn four years ago, the Fed has unleashed a slew of stimulus measures to prop up the economy, including cutting rates to rock-bottom levels to more unorthodox measures such as quantitative easing, under which the U.S. central bank buys bonds such as Treasurys or mortgage debt held by banks, pumping the financial system full of liquidity in the process.

The Fed is currently running a third round of quantitative easing (QE3) in which it will buy $40 billion in mortgage-backed securities a month from banks.

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A first and second round of quantitative easing injected over $2 trillion into the economy, and the Fed recently said it would beef up QE3 by adding an additional $45 billion in asset purchases from banks, namely U.S. government debt, bringing total liquidity injections to $85 billion a month with the aim of keeping borrowing costs low to spur investing and hiring.

Side effects to such policies include rising stock prices and a weaker dollar, though Forbes told Newsmax TV in an exclusive interview that such tools aren't freeing up credit to smaller business, who do the bulk of hiring in the U.S., but are rather allowing the Fed to buy government debt so Washington can keep on spending.

"It makes it easy for the government to borrow," said Forbes, who is chairman, and editor in chief of Forbes Media, has a new book, “The Freedom Manifesto,” and is the best-selling author of “The Flat Tax Revolution: How Capitalism Will Save Us.”

Editor’s note: To order 'Freedom Manifesto ' at a great price — Click Here Now.

"It makes it harder for small and medium-sized businesses to get credit, which hurts the economy. So the Fed, perversely, is going to guarantee a slower recovery, and printing money has never worked in getting what they call sustainable economic growth. It just does not work."

On top of juicing the economy with added liquidity injections, the Fed has said benchmark interest rates will stay at rock-bottom levels until the unemployment rate drops to 6.5 percent from its current rate of 7.7 percent.

That won't happen anytime soon, which means the Fed's stimulus measures will stay firmly in place and keep the dollar weak, making gold an attractive hard asset.

"When you change the value of money, especially downward, what you do is get in the way of commerce and misdirect capital. Why would anyone, for example, invest in gold unless you are jeweler or a gold miner? The only reason you do it is because you fear you are going to lose what you have," Forbes said.

"With the Fed making it easy for the government to borrow since the Fed is buying most of their bonds now, you call it a deficit without tears. What it also means though is there are less resources for productive people, and that's why we have this punk recovery now going on for four years now."

Forbes has long been a champion of a return to the gold standard or a similar monetary system that attaches the value of the dollar to gold, which makes it harder for the government to live outside of its means.

Forbes has also made repeated calls to simplify the tax code by flattening rates.

Editor's Note: Tiny Loophole Found in 70,320 Page IRS Tax Code Could Pay $87,500

With President Barack Obama elected for a second term and no real change taking place in Congress or at the Federal Reserve, fiscal and monetary policies won't likely change and calls for the gold standard will ebb.

Americans should realize, however, that the country prospered under a gold standard for close to two centuries and should not fear calls for its revival.

"I think the idea of gold, which when you say that people think of you in the hills with canned goods and machine guns and things like that and think the world's coming to an end. No. We had it for the first 180 years of our existence and it worked pretty well and I think it's going to come back just out of sheer necessity," Forbes said.

Meanwhile, the U.S. economy would prosper with not only a stronger dollar and flatter tax brackets, but also with less regulations, including those outlined under the president's Affordable Care Act and the Dodd-Frank financial overhaul, which gives regulators greater say-so over banking activities, hurting smaller banks especially.

"You do those things and this economy would take off like a rocket," Forbes said.

Those who have been out of work for so long that they are branded today as unemployable would find jobs if the government would stand down.

"If they cut tax rates sharply or simplified it like the flat tax, people who seemingly are unemployable today — companies will train them. They will take the rust off of those skills," Forbes said.

"The unemployment rate can go quite low if you have the right benign environment."

Editor's Note: Tiny Loophole Found in 70,320 Page IRS Tax Code Could Pay $87,500

Meanwhile, investors must put their political opinions aside and invest knowing that monetary policy will stay loose, which tends to be good for equities.

"Probably the best thing to do is get a handful of index funds. So you ride with the market. Let the market be your friend. The real way you generate capital is through savings not trying to hope to pick the right particular stock," Forbes said.

The healthcare sector will hold investment opportunities, while financial services will improve once the economy recovers.

Manufacturing, which will rely more and more on technology, will hold great investment venues as well.

"Manufacturing is about to go in the next 10 to 15 years in an enormous change with high-tech hitting it," Forbes said.

"The reason it hasn't happened already in a great scale is because capital is sitting on the sidelines because of the uncertainty that President Obama and his policies and his tenets have created."

Look for new opportunities as well, even in surprising locations.

"You know where there is going to be a huge surge of healthcare facilities in this country because they don't come under federal regulations? Indian reservations," Forbes said.

"That's where medical tourism is going to take place in this country."

Editor’s note: To order 'Freedom Manifesto ' at a great price — Click Here Now.

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