Dear Friends,
It seems to me, once you have thrown a rock into the sky over and over, each time it falls to the ground failing to fly, a sane person would reconsider his attempts to orbit a rock by throwing it, the elite however only redouble their efforts. The Federal Reserve was implemented for the express purpose of stopping economic recessions and stabilizing the monetary supply, it’s every effort has led to the exact opposite of what it is supposed to do. In fact, the Federal Reserve is responsible for every recession, bubble and depression we have experienced since it’s inception. The results have shown, beyond any doubt, that the Federal Reserve does far more harm than good, it’s history being a string of spectacular failures, but the elite redouble their efforts at monetary control through rational policies. A sane person would stop throwing the rock into the sky, but the elite, clearly, lack sanity.
The Great Depression, according to Milton Friedman, was entirely the fault of the Federal Reserve. His argument was that the Federal Reserve allowed the Bank of the United States to fail, because it was owned by Jews, and that failure set off a cascade of events culminating in the Great Depression. The Federal Reserve then doubled down on it’s stupidity by destroying money and hoarding gold. That policy destroyed businesses around the country. As other nations sent their gold to the US to pay for their negative balance of trade, the Federal Reserve locked it away, not using it to create more money and so, even as the supply of gold to back more currency came in, the amount of currency in circulation diminished.
Since then the Federal Reserve has practiced exactly the opposite strategy. When the US fully disconnected from the gold standard in 1973, and US currency became totally fiat, the Federal Reserve was given carte blanche to print money. Like every other central bank with fiat money it did so with gusto. The stagflation of the 1970s was the result. While most people today don’t remember the situation then, to buy a house the interest rate was upwards of 14%! Imagine trying to buy a house, car or start a business with a loan today at 14% interest rate? It would be impossible. The Federal Reserve had flooded the system with too much money, the exact opposite mistake as they had made in the 1930’s.
The creation of the Federal Reserve was supposed to reign in the boom bust cycle of the economy. During the 19th century, there were many booms followed by busts, economists argue to this day what caused them. I am of the opinion that each was caused by the situational exigencies of the day. Monetarists however believe all economic problems are related to the currency. One boom might have been stimulated by the gold rush a bust by the playing out of easy to reach gold, to a monetarist every economic event is a money event. So they decided to invent a US central bank. They understood that Americans were wary of a central bank and so named it the Federal Reserve. It was supposed to fix the problems of the market by rationally planning the money supply.
Since it’s creation however the boom bust cycle hasn’t gone away, far from it, the cycle has got far worse. The cycle is a boom that typically lasts 4-8 years followed by a bust that lasts a year or so, with a few notable exceptions. Within the cycle there is a super cycle of huge busts that cycle about every 30-40 years and lasting about 10 years. While one could argue such a cycle in and of itself is not such a bad thing, it allows for creative destruction, the super cycle booms have become more reliant on money printing and the busts have become bigger and more dangerous. Today everyone knows if the Federal Reserve raised the interest rate above 0, (zero) the economy would collapse. In other words, the economy is on life support.
One of the pernicious effects of the Federal Reserve’s planning is that they hide the results of the rapidly growing bureaucratic state. By 1933 the Federal Reserve had done it’s damage to the US economy and it was FDR’s turn to continue the destruction. He implemented innovations in regulations that would have far ranging effects on the ability of people to do business in the US. From regulating the price of underwear to how many acres a farmer could plant, FDR brought the US economy under the command and control of central planning. Upon his death many of his draconian regulations were overturned, allowing the US economy some breathing room, but the march of bureaucracy goes on, until today every aspect of our lives are regulated by the Federal government. To protect the bureaucracy and the elite from the consequences of their actions, the Federal Reserve has had to lower interest rates, (expanding the money supply), to counter the negative effects of the increasing regulation and taxes, the pernicious effects of the welfare state and crony capitalism.
The 2008 housing bubble was entirely inflated by the Federal Reserve. By keeping interest rates very low the Federal Reserve allowed the prices of houses to inflate well beyond the American people’s ability to pay. That bubble pulled in resources that otherwise would have been used elsewhere. The legislators passed laws that prevented banks from using reasonable diligence in giving loans, in the name of racial equality, and the term liar loan came about. As more people brought homes, even homes they couldn’t afford, they could refinance them every year because the price continued to go up. This created a feedback loop where demand could be fueled by the increase in house prices which was increased by the low interest rate of the Federal Reserve. Of course the whole house of cards came crashing down in 2008 and the entire banking system was put in peril.
Obama came in an instead of fixing the underlying problems, he doubled down, and instituted a host of new regulations further diminishing the ability of the economy to recover and so the Federal Reserve had to monetize the debt, to make it seem like the economy was recovering. During QE3 the Federal Reserve was printing enough money to make 85,000 people millionaires a month! Just to keep the whole thing afloat and protect Obama from the fallout of his policies. Every year since the stopping of QE3 the Federal Reserve has hinted it would start to “normalize” rates, and every time it does the stock market throws a hissy fit. Even today the fiction that the Federal Reserve can normalize rates is bandied about like it could happen. Far more likely the federal Reserve will be forced into another round of innovative quantitative easing to prop up the economy.
The Federal Reserve has failed in it’s core mission, spectacularly, in every way. It’s policies have ushered in far worse economic events than could have been imagined by a 19th century economist. It’s policies, rationally considered central planning of the money supply, has created more human suffering in the 20th century than any time in US history. It has been a tool of the socialist elements, to hide the effects of their disastrous economic policies and has inflated bubbles that threaten, and continue to threaten, our banking system indeed our economy as a whole. It’s failures are legendary, yet the elite cannot even consider it’s dismantling. Yes, you or I would tire of throwing a rock into the air and hoping it will achieve orbit, but the elite never fatigue of it, in fact, they double down on their efforts… well, until our economy totally collapses.
Sincerely,
John Pepin
