The Fed’s Final Days, The Temple Of Paper Money Is Under Seige

Interest-Rates / Central Banks Dec 15, 2010 - 04:47 AM
By: Darryl_R_Schoon

In 2008, America suffered a massive economic heart attack. Its doctors, thought to be the world’s best, believed the US to be in good health, having recovered from a similar though smaller crisis in 2000.

But America hadn’t recovered. In fact, the Fed’s palliative for the 2000 crisis, i.e. lower interest rates, soon created an even larger crisis, i.e. the 2002-2006 US housing bubble whose collapse caused global credit markets to contract and investment banks to fall, necessitating government intervention on such a massive scale it led to today’s sovereign debt crisis as private losses were absorbed onto public balance sheets; and, now, in 2010, the crisis continues to fester and spread.

Fed Chairman Ben Bernanke’s solution for our current problems is but a more extreme version of the Fed’s near fatal prescription in 2001, i.e. lower interest rates, but this time combined with a new iteration of voodoo economics, a witch’s brew called QE II, a monetary gesture as futile and impotent as a Hail Mary pass thrown by an atheist as time runs out.

IN TIMES OF EXPANSION WATCH STOCKS
IN TIMES OF CONTRACTION WATCH BONDS
BUT ALWAYS, ALWAYS, ALWAYS, WATCH THE FED

When central banks became the primary driver of economic prosperity, the free market supply and demand of goods and services became subsumed by the supply of credit from central banks.

This is because the supply and demand dynamic is distorted by the availability of banker’s credit—the more credit, the greater the distortion, the greater the distortion, the greater the consequent recession or depression.

In case you didn’t get it the first time, here it is again:

The free market’s fundamental supply and demand dynamic is distorted by the banker’s credit—the more credit, the greater the distortion, and the greater the distortion, the greater the consequent recession or depression.

This is how economic cycles of expansion and contraction became commonplace, boom and bust cycles are but lagging indicators of credit growth; and recessions and depressions are the lagging indicators of credit contractions, the inevitable consequence of economies dependent on central bank credit.

The current historic credit boom began in the 1980s when a combination of US government borrowing and easy credit from the Fed ignited what was thought to be the greatest economic expansion in the history of capitalism.

But the expansion, however, was only an asset bubble in disguise, a stock market bubble that took the Dow from 777 in 1982 to 11,722 in 2000 before collapsing then reflating to 14,100 and falling and rising again to 11,440.

Today, the historic 25 year credit boom is ending and the massive debts accumulated on the way up are starting to default; and the US Fed, the primary source of global credit, is directly responsible for what is now happening.

Of course, the Fed denies any responsibility at all, instead blaming others for the crisis it caused. In 2005, then Fed Governor Ben Bernanke identified the problem as a “savings glutâ€