Bull (The Fed) In A China Shop (The Economy)

Analyst, Author, and Owner of Kelsey's Gold Facts
March 21, 2022

BULL (THE FED) 

Today, more than ever before, focus is on the Federal Reserve. The general public has joined economists, financial analysts, and market participants in monitoring and parsing every statement regarding Fed action and policy.

Each morsel of data receives the the strictest attention. The actions are mostly for naught, of course. That is because most of those asking the questions are unaware of certain facts that would change the nature and tone of Fed focus overnight.

FEDERAL RESERVE FACTS 

  1. The Federal Reserve is a banker’s bank. Its origin in 1913 is shrouded in conspiracy (see Federal Reserve – Conspiracy Or Not?).
  2. The Federal Reserve creates inflation (How Government Causes Inflation).
  3. The Federal Reserve caused the Great Depression of the 1930s and the Credit Collapse and Great Recession of 2008-09.
  4. Federal Reserve inflation is losing its intended effect.

THE FEDERAL RESERVE IS A BANKER’S BANK

The purpose of the Federal Reserve is to provide a structured system whereby its member banks can create and lend money in perpetuity. The Fed accomplishes this by continually expanding the supply of money and credit.

The Federal Reserve exists for the benefit of the banks and bankers. Their purpose and motivation is not aligned with ours. The Fed’s objective is to facilitate the ongoing creation of money and loans which generate interest income. (see The Federal Reserve – Purpose And Motivation)

THE FEDERAL RESERVE CREATES INFLATION

The U.S. Treasury, in conjunction with the Federal Reserve, continually expands the supply of money and credit by issuing Treasury bonds, notes, and bills.

The money received from the sale of the Treasury securities is credited to the U.S. Treasury and subsequently spent to pay the government’s expenses. This puts the money back into circulation.

But the newly issued Treasury securities are then in circulation too; and are an increase in the supply of money and credit. This is called monetization of the debt, and it is an act of inflation.

CHINA SHOP (THE ECONOMY)

The Federal Reserve caused the Great Depression of the 1930s.

Since its inception, the Federal Reserve has used interest rates and credit to accomplish its purpose. The manipulation of margin requirements in the 1920s and the extension of credit to (almost) anyone who wanted to buy stocks led to excessively high stock prices and rampant speculation.

According to Wikipedia, “brokers were routinely lending to small investors more than two-thirds of the face value of the stocks they were buying.”

It is important to note some critical distinctions regarding events, conditions, causes, and participants.

First, the stock market crash in 1929 was a financial event. The Great Depression was an economic event. 

Second, the Federal Reserve created the conditions which led to the stock market crash, not the crash itself. 

Third, the Federal Reserve caused the Great Depression by pursuing a tight money policy, i.e., raising interest rates, in 1928 and 1929. 

Cheap and easy credit, courtesy of the Federal Reserve, fueled the stock market and boosted consumer spending throughout the 1920s (Roaring Twenties).

When the Fed raised rates, it dampened consumer spending but did nothing to contain the public’s voracious appetite for stocks. As long as investors (speculators) could buy stocks on margin so easily, there seemed to be no limit to how high stocks could rise.

After the stock market crashed, economic conditions continued to deteriorate, now with speed and severity.

The Fed’s actions, coupled with the government’s economic policies, deepened and lengthened the duration of economic distress from what might have lasted a year or two at most, into a horrible (Great) depression which lasted twelve years and affected nearly everyone.

THE FED’S DILEMMA

There is criticism now that because of actions taken to raise interest rates that the Fed is guilty of policy error…  “The Fed needs to be more accommodative at this time.”

Not too long ago, people were complaining that the Federal Reserve was not acting decisively enough.

Part of the problem is seeing the entire situation for what it is – and not for what we think it is, or want it to be.

Inflation and low-interest rate policies were slow in stimulating the desired results.

Similar to the repeated doses of a drug addict, each succeeding monetary fix is less and less effective.  The fixes, at best, allow the patient (i.e. the economy) to sustain life temporarily. With each passing day, the possibility of slipping into a coma (recession, depression, etc) increases.

Continuing down the path of artificially low interest rates and ultra-cheap credit would eventually kill the U.S. dollar. The Fed knows this.

Their decision a few years ago to begin raising rates slowly was an attempt to begin a return to a more normal level of economic activity with interest rates at more reasonably normal levels.

Unfortunately, that action has its own serious risks. Easy credit and low interest rates are the new normal. Attempts to generate higher rates from abnormally low levels creates additional strain on an economic system that is already quite fragile. As bad as cheap credit can be on a fundamental basis, the effects of withdrawal from it can be worse.

Stocks, bonds, and real estate have all benefited from cheap and easy credit. The ‘reflation’ effort was the primary reason that asset prices rose so dramatically from their post-crash lows ten years ago and two years ago.

In other words, all asset prices are severely and artificially overblown. Another credit collapse is likely in the cards. And nothing will be spared.

The reason the Fed began to raise interest rates is because continued easing could again trigger huge declines in the dollar. On the other hand, raising rates raises the possibility that the system won’t tolerate the restrictions well enough to get better, and another collapse could ensue.

Most Federal Reserve activity for the past several years is based on fear. One one hand, they are afraid of killing the patient (the US dollar) with an overdose of cheap money and easy credit.

On the other hand, they are afraid that efforts to restore interest rates to a more historically normal level will be rejected and the system will collapse anyway.

The Federal Reserve reacts to the same news and headline statistics that we all see and hear. And whatever actions are taken have less and less impact (Fed Inflation Is Losing Its Intended Effect).

What is ironic is that the Fed is trying to manage the effects of inflation that is of their own making.

OPTIONS FOR THE FEDERAL RESERVE 

The path towards higher interest rates will be followed until the patient screams too loudly; or a full-scale collapse occurs. Then we can expect to see a return to a more accommodative monetary policy.

Unfortunately, it will be too late.

Any efforts by the Fed to halt or recover from financial and economic calamity the next time around will likely be ineffective. Fundamental laws of economics cannot be abused and ignored indefinitely without eventually paying the price.

Since inception of the Federal Reserve in 1913, inflation intentionally created by the Fed has erased ninety-nine percent of the US dollar’s purchasing power. The Fed caused the Great Depression of the 1930s and the credit collapse in 2008. Their policies and actions have brought us directly to our current predicament.

Today, most of the Fed’s time is consumed with trying to manage the effects of the inflation which it created over the past century.

The US dollar is in a state of perpetual decline (by intention) which can ultimately end in complete repudiation.  Whether or not the Federal Reserve continues to raise interest rates is not the real issue. The Fed will do – or not do – whatever they think will keep the charade going for a while longer.

*******

Kelsey Williams has more than forty years experience in the financial services industry, including fourteen years as a full-service financial planner. His website, Kelsey's Gold Facts, contains self-authored articles written for the purpose of educating and informing others about gold within a historical context. In addition to gold, he writes about inflation and the Federal Reserve.

Kelsey is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN'T, AND WHO'S RESPONSIBLE FOR IT and ALL HAIL THE FED! 

Kelsey Williams is available for private consultations, public speaking, and interviews at [email protected]


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