Federal Reserve Fecklessness
No other institution has done more to precipitate the boom-bust cycle.
In the midst of yet another wild Wall Street ride last week, the Federal Reserve opened its annual symposium in Jackson Hole, Wyoming. If truth be told, most Americans couldn’t care less. Yet they should. No other institution has done more to precipitate the boom-bust cycle that threatens not only the economy of the United States, but the entire world.
Perhaps nothing was more ironic than the complaints emanating from America’s political class, indignant that China, in the midst of a stock market meltdown of its own, deliberately devalued the yuan in an effort to boost exports and maintain employment. That devaluation makes Chinese exports cheaper, but it also makes the U.S. dollar stronger, dampening our own ability to export goods and services. Furthermore, it follows similar efforts by Japan and the European Central Bank (ECB), both of whom engaged in massive bond-buying programs to stimulate their own growth, which also helped precipitate a rise in the value of the dollar.
Those programs are known as Quantitative Easing (QE). And if that term sounds familiar, that’s because no other nation can touch the amount of bond buying precipitated by our very own Federal Reserve, which has spent the last seven years in a Keynesian-inspired economic stupor, convinced that printing $4.5 trillion additional dollars would “stimulate” America back to economic prosperity following the economic meltdown in 2008.
Hence the indignant whines of our political class about Chinese “currency manipulation” ring exceedingly hollow. Moreover, there is another term that defines concurrent efforts to devalue currencies in the effort to boost national economies:
The Heritage Foundation’s Jim DeMint, who refers to the American monetary system as the “Achilles heel of the world’s economic system,” explains what drives this insanity forward: “Faith in the Fed is built on three arrogant conceits: that government can create wealth; that designated experts possess the perfect knowledge required to manipulate money for the common good, and that markets cannot sort themselves out without the coercive influence of technocrats.”
In other words, the same hubris-driven central-planning mentality that assumes ordinary people are too stupid to run their own lives absent the “beneficent” guidance of their “betters” in government has been the driving force behind the Federal Reserve as well. Thus free markets, driven by millions of people making decisions regarding their own economic interests, are viewed as inferior to direction given by “experts” who insist that without their guidance America would be far worse off than it is right now.
The Great Depression, the stagflation that occurred in the 1970s, the Savings and Loan crisis of the 80s and 90s, the dot com meltdown in the early 2000s and the 2008 financial crisis — every one of which occurred on the Fed’s watch — suggest otherwise.
Right now on Wall Street, experts are trying to determine when the Federal Reserve will raise interest rates that were effectively lowered to zero, courtesy of the Fed’s Zero Interest Rate Policy (ZIRP) it insisted would stimulate borrowing and produce a “wealth effect” that would eventually reverberate throughout the economy. Coupled with QE, this avalanche of cheap dollars was certainly stimulative. It stimulated a wealth gap between the richest Americans and the rest of us that is now the widest on record, as the stock market boomed but incomes stagnated.
ZIRP also undermined the plans of frugal Americans who wanted a decent return on their savings and retirement nest eggs without having to invest those funds in the Wall Street “casino” that decimated them in 2008. By accident or design, the Fed-inspired message was clear: Put your money in the market, or live with interest rates of 1% or less on virtually every other investment vehicle save real estate. The same real estate that crashed and burned in 2008 after those cheap dollars drove the price of housing through the roof, as it were.
ZIRP has also allowed an already profligate federal government to borrow money at historically low interest rates, driving the national debt above $18 trillion as Barack Obama’s “stimulus package” attempted to produce “shovel-ready jobs” he was later forced to admit never existed. If interest rates return to anything resembling historical averages, just the interest on our current debt would rise to approximately $900 billion. For perspective sake, the U.S. Treasury took in record-setting tax revenue in 2014, totaling just over $3 trillion. Thus, debt servicing that would amount to nearly a third of total revenue would precipitate a serious cut in government spending, a massive tax increase to avoid it, or the accumulation of more debt to hide it all from a public largely unaware of the trap the Fed has created for itself. And us.
Are you beginning to get that “cyclical” feeling yet?
Furthermore, the notion that the Feds can completely control interest rates and monetary policy is absurd. Look no further than the totalitarian government of communist China for proof. Despite every manipulation imaginable, including the banning of trades in certain equities, telling state companies to buy shares in others, raising the amount of equities insurance companies can hold, lowering restrictions on buying stocks with borrowed money, and imposing a moratorium on initial public offerings (IPOs) — all on top of devaluing its currency — stocks still tanked. China is also liquidating its holdings in U.S. dollars, a move that will inevitably push up interest rates on the U.S. dollar — whether the Fed likes it or not.
“U.S. presidential candidates have been quick to jump on China’s recent small devaluation as proof of currency manipulation aimed at stealing American jobs,” explains The Wall Street Journal. “The irony is that the Federal Reserve has been guilty of the biggest currency whipsaw the world has ever seen.”
It is a whipsaw aided and abetted by a ruling class not just in America, but all over the world, who are addicted to one incredibly toxic philosophy: pushing the day of reckoning for the massive amount of debt accumulated in government spending sprees as far into the future as possible. And it has been done for the basest of reasons: Politicians spend money they don’t have on programs and initiatives designed to raise their stature among voters increasingly convinced that there really is something known as a free lunch. And they do so knowing full well they’ll be long gone from the political scene when the ultimate conflagration takes place.
Or will they? We were told that absent the massive intervention by the Federal Reserve, which made an astonishing $16 trillion in reserves available to every bank in the world, the entire financial system would have collapsed. All of this occurred without congressional oversight, calling the idea of national sovereignty itself into question. More important, it enshrined the notion of “too big to fail,” which is nothing more than the contemptible reality that gains made by the ruling elites are privatized while their losses are publicly borne by the taxpayers. Taxpayers who ponied up $700 trillion in TARP funds without getting a single resignation in return. What they did get was the weakest recovery since the Great Depression, more than 90 million Americans out of the workforce completely, record numbers of people living in poverty — and more debt accumulation to keep the illusion going.
“The debasement of monetary policy over the last century is but one element of a larger crisis,” writes DeMint. “At its root is a presumption among our country’s political and cultural elites that they can override the wisdom and experience accumulated by mankind over the last several millennia.”
In his novel “The Sun Also Rises,” two of Earnest Hemingway’s characters put the ultimate destination of that arrogant presumption in far simpler terms. “How did you go bankrupt?” Bill asked. “Two ways,” Mike answered. “Gradually and then suddenly.” America and the rest of the world is knee deep in the gradual phase. When “suddenly” hits the fan is anyone’s guess.