Zeal For Truth

America is likely entering its next great recession and pottential depression.

Ben Bernanke has chosen to undergo some of the most reckless Fed policies of the modern era, as today the Fed cut interest rates by .75 points - demonstrating to the whole world that it is in panic mode about the short-term future. Yesterday world markets dropped drastically as the rest of the world, still heavily tied to our currency and government, realized their mistakes as well.

Most people presume these cycles are completely natural fluctuations in the market - isn’t that why we have the Fed in the first place? To speed up and slow down the economy so we all have an easy ride? Or, even more ignorantly, isn’t this all just a result of corporate greed and vice?

It may be surprising, but the second one is partially right.

The Anatomy of a Crisis
The Federal Reserve has virtual monopoly control over interest rates and currency creation. When interest rates are low, more people can get their hands on large sums of money and use it to invest and consume, stimulating the economy. However, because the money is so easy to obtain, many people in all classes and professions (whom the market would never have permitted to acquire it) malinvest. Poor people buy houses they cannot afford, middle class people buy properties and start businesses and wealthy people invest in new (and riskier) ventures. And consumer spending skyrockets, making it all seem justified. It creates a massive economic party that everyone is invited to.

But the money was too easy, and those who obtained it for little cost went and did dumb things with it. The poorer people who extended themselves to their maximum debt to buy a house, are the quickest to topple. They lose their house, or have to make massive lifestyle reductions and can no longer spend gobs of money on the junk that the middle-classes were peddling to them. The middle-class businesses that the wealthy invested in fail, and massive amounts of money disappear into dust and ruin.

While these groups were obviously responsible for their bad decisions, it was the easy money that was initially created by the fed that is ultimately to blame.

Analogies to the Crisis
Like any party - the drinking, sex and revelry all feel good in the moment, but in the morning it brings sickness and regret at best, and at worst, you wake up next to the biggest mistake of your life. So too does the Fed, by the very practices which are intended to bring growth, actually sow the seeds of recession, depression and financial crisis.

Milton Friedman once wisely compared the easy money of Fed creation to a drug addict. To avoid becoming sober and dealing with the physical, emotional and psychological consequences of abuse, the user continues to get high - desperate to avoid reality and live in a fantasy world. The addict knows that when he goes off the drugs, he will have to face the accumulated consequences of his lifestyle. They may last years, even be permanent, but he will be better off in the end by sobering up.

If the market determined interest rates, then as soon as investments began to sour, the rate would be increased by private banks to ensure that they were not losing money. Corrections would be small, localized and manageable. With one institution, and one oligarchical board controlling the essential mechanism of the economy, we are merely passing time until a major collapse. Interest rates and currency management, like all goods, services and prices, cannot be controlled by even the wisest of men and must be left to the market to determine to avoid the poor driving of the Fed.

Here Come the Effects of Inflation
The Fed Rate cut has other drastic effects which hasten the coming of the bust period. Part of the mechanics of lowering the rate, is to liquidate debt. That is to move virtual dollars into physical ones. More dollars chasing the same amount of goods and services causes prices to rise and brings inflation. During the initial boom, this is great - everyone has more money to throw around. But soon the market realizes this and prices shoot up, causing a decrease in living standards and economic activity.

In other words, the inflation is not about to commence, but was started after 9/11, after the dot com bust and after the housing bust. Its effect has merely been staved off by even further inflation.

These most recent rate cuts are only going to heap more negative consequences on the economy. We’ve dealt with the last three busts (dot com, 9/11 and housing) by behaving this way - by taking another swig from the inflation bottle and toasting to our health. The consequences are compounding, growing and will soon bring this country to it’s knees. Do we have the courage to stop now, deal with the consequences, and return to a normal and prosperous economy?