Former Texas U.S. Congressman and three-time presidential candidate Ron Paul told CNBC that the serendipitous bull market since the financial crisis of 2007-08 is signaling the “biggest bubble in the history of mankind,” which could spell doom for the capital markets.
In the last five years, the Dow Jones Industrial Average has risen by about 61 percent and with the Federal Reserve hawkish on the economy, most signs point to the continued running of the bulls. In addition, the Dow has never fallen below its 200-day moving average in the past five years.
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However, Paul senses things are ready to go awry and it’s because of two major factors
“I see trouble ahead and it originates with too much debt, too much spending,” said Paul.
In the latest data published by the U.S. Bureau of Economy Analysis, government spending has increased to $2,930.69 billion in the first quarter of 2018 from $2,921.52 billion in the fourth quarter of 2017–a rise of 0.3%. Furthermore, government spending averaged $1,904.56 billion from 1950 until 2018, reaching as high of $3,113 billion in the third quarter of 2009.
“The Congress spending and the Federal Reserve manipulation of monetary policy and interest rates — debt is too big, the current account is in bad shape, foreign debt is bad and it’s not going to change,” said Paul.
The Congressional Budget Office estimates that by 2019, federal deficits will average $1.2 trillion a year from 2019 to 2028. In addition, its 2018 deficit estimates increased by $242 billion over original forecasts in June 2017.
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According to Paul, exacerbating the economic situation in the U.S. is the Federal Reserve’s hawkishness and propensity to increase interest rates–in addition to the two interest rate hikes the last two quarters, more spikes are expected through 2018. In addition to interest rate hikes, the Fed is also unloading assets from its balance sheet, expanding to $4.5 trillion since its quantitative-easing program after the financial crisis in 2007-08.
“The government will keep spending, and the Fed will keep inflating, and that distorts things,” said Paul. “When you get into a situation like this, the debt has to be eliminated. You have to liquidate the debt and the malinvestment.”
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