(Kitco News) – The Federal Reserve’s monetary tightening could lead us into a “recession that we won’t recover from in a couple of years,” said John Hathaway, senior portfolio manager at Sprott Asset Management.
“[The Fed] has no dial to modulate economic activity,” he explained. “You basically have an on or off switch, and the off switch is to kill the economy.” On Wednesday, the Fed hiked rates 75 bps in response to high inflation. Last year witnessed the highest inflation in forty years. Headline inflation was 8.3 percent in August, while core inflation, which excludes food and energy, was 6.3 percent. Currently, the target range for the federal funds rate is between 3 percent and 3.25 percent. That’s not enough, according to Hathaway, who said the Fed needs to raise interest rates higher to successfully cut prices. “They have to get 8 percent on the prime rate to break [inflation]”, he said. Hathaway spoke with David Lin, host and producer at Kitco News, at the Precious Metals Summit in Beaver Creek, Colorado.
Restrictions on Public Debt
With US debt at 123 percent of GDP, Hathaway said he “can’t imagine” the Fed raising rates high enough to successfully fight inflation.
He mentioned the high-inflation period in the 1970s that prompted the Fed to hike rates up to 20 percent. “Today the economy is more vulnerable than it used to be [in the 1970s]”, he said. “Public debt to GDP in the 1970s and early 80s was a fraction [of what it is today], like 30 or 40 percent. Today we’re between 120 and 130 percent.” If the Fed hiked rates, it could hurt the US Treasury’s ability to service its billions on the budget deficit,” he said. “There are real limitations.”
The Role of Gold
Inflation hedging isn’t the only reason to hold gold, said Hathaway, who said gold hedges against broader “systemic risks.” “If you look long term, I’d say gold has kept up with inflation, but I don’t think that’s a reason to own it,” he said. “It is ultimately [a hedge against] systemic risk and system dysfunction.” As an example of such dysfunction, he pointed to the financial crisis of 2008 and the stagflation of the 1970s. “The reason for this is … the global debt-to-GDP ratio is higher than ever.” He added that with debt levels this high, the “usual antidotes like raising interest rates and slowing money growth” could weaken the economy, leading to systemic default risks . “I think we’re going to see a lot of defaults over the next 12 months,” he said, “that could lead to a sovereign debt default.”
Watch the video above for Hathaway’s gold price outlook.
Follow David Lin on Twitter: @davidlin_tv
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