Big time trouble dead ahead thanks to the Federal Reserve.

The paper money dollar experiment of the last 40 years has reached an unsolvable impasse. Since 1971, when Nixon defaulted on the dollars convertibility into gold there has been no restraint whatsoever on the Federal Reserve's ability to finance the U.S. government's boondoggle spending programs both foreign and domestic.

The government doesn't have to rely on tax receipts any more. It simply issues bonds to borrow the money. The Federal Reserve ensures those bonds are always bought, buying them itself if necessary as it has done with QE1 and QE2. Here is a chart of the national debt since the dollar was taken off the gold standard.






That is the macro 40 year picture. During that time there have been recessions. These have been a direct result of the Fed policy of lowering of the interest rates below their natural free market rate during market downturns. Austrian business cycle theory explains this predictable boom bust cycle:  For more see here: 


  1. The Fed lowers interest rates below what they would be on a free market.


  2. Businesses borrow money for long term projects that previously hadn’t seemed profitable.

  3. People and money flow into the sectors most influenced by the apparent boom.


  4. The Fed begins a process of incrementally increasing interest rates at regular intervals.


  5. Prices rise, often ending in a mania phase (examples: dot-com bubble, housing bubble)


  6. A realization occurs that there is not sufficient actual savings to make all the projects profitable in those sectors affected by the boom. The bust occurs as the market tries to reallocate resources to industries that better reflect true supply and demand.
Prices fall. Unemployment rises. The Fed repeats the cycle.


  1. The Fed again lowers interest rates below what they would be on a free market.


  2. As before when rates were lowered below the free market rate, long-term business projects are evaluated based on the artificially low rates.


  3. Resources and workers are encouraged to remain in the unprofitable post boom industries. Money losing businesses that should fail are kept alive. Servicing large debt loads becomes widespread, again made possible by the Fed's artificially low interest rates..
The cycle repeats in progressive cycles with each bust getting progressively worse. Debt loads constantly increase and the malinvestments, never having a chance to liquidate, continuously drag on the economy more and more until we reach the dreaded point of no return.

At some point the low interest rate policy of the Federal Reserve fails to kick start the boom bust cycle. The debt burden is just too large to overcome. We are at this point now.

Below is a graph of the Fed funds rate for the last 10 years. You can see the Fed furiously lowered rates after the nasdaq dot com crash. Instead of a much needed recession to realign resources with profitable investments, the Fed prevented the recession from liquidating the malinvestments. The artificially low rates instead ignited the housing bubble and its related derivative securitization bubbles. The bubble popped in 2008.



Predictably the Fed again lowered rates. This time it has taken them all the way to zero. The difference now is that this time it is not working. The Fed cannot ignite another bubble. The burden of the massive debt overhang is too much to overcome. There will be massive defaults at all levels of society including individuals, corporations, municipalities, states and finally the Federal government itself. They all have too much debt to pay back and it will be defaulted on.

There are two ways they can default.

They can default by not paying the loans back and we get a vicious but not endless period of deflationary debt collapse where all the bad decisions of the past Fed induced business cycles are finally accounted for.

Alternatively, the U.S. Government can bail out everyone by borrowing tens of trillions more and turn to the Federal Reserve to magically print up the necessary dollars to finance it all. This would eviscerate the dollar on the foreign exchange market and send prices soaring to the moon in a hyperinflationary depression.

There is no solution to the crisis, merely a choice of which of two roads to choose, a deflationary debt collapse, or a hyperinflationary dollar collapse. Pick your poison thanks to our masters at the Federal Reserve.

One thing is certain, when the dust clears we need to point our fingers at the Fed as the real culprits enabling a welfare, warfare state where the majority of the populace is on the dole. Free market capitalism will allow us to return to prosperity after the crash if we let it.

We need to listen to those who saw what was happening and warned about it. There are free market economists who understand the need for a sound commodity based money and can help ensure the special interest groups never again take control of our economy and our country.

One such man is Congressman Ron Paul of Texas. He first ran for congress shortly after Nixon took us off the gold standard all those years ago when he saw the writing on the wall for our current day crisis. Dr. Paul is running for president and is the only one running who understands our current crisis and what to do about it to return us on the road to prosperity.

http://ronpaul2012.com/


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14 comments:

  1. George senior - "we will be successful"

    http://www.youtube.com/watch?v=Rc7i0wCFf8g

    ReplyDelete
  2. Eat, Drink, Be Merry, Make friends with a Farmer, Buy some Silver and a semi-automatic 22 !!!

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  3. Providing liquidity in the form of digits (aka Credit, aka A Promise To Pay) cannot end in hyperinflation, as it is just more debt, not money or dollars. Can't hyperinflate debt and the Fed isn’t printing dollars so hyperinflation is not in the cards for anytime soon, if ever. Plus, the entirety of Federal Reserve assets are on the line for every dollar they put into circulation and I don't think they'll put out any more than what they are willing to cover.

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  4. What reserve assets? There are no assets. There is just more fiat money. This is called money of accounting. The fed is the biggest ponzi scheme going ever in all of history. Audit them and put them out of business.

    I'll give you an idea how it works. Go get you monopoly game. Take the money out of the box. Convince your friends it is good. Laugh as you spend it. Go get another monopoly game and do the same. Do it again. Eventually your fiends get wise and refuse to use your monopoly money. The fiat money the fed prints is counterfeit. They are thieves. This is called money of accounting. Eventually no one will want it. Even if they say there will be no QE3, there will be QE3. Even if they tell you there is no inflation,there is inflation.

    These guys are not only thieves, they are liars too. I don't believe anything they say or the president either.

    ReplyDelete
  5. Fiat money, gold backed money, what's the dif?
    Think about it, the only way to have a consumer economy is to have constant spending. If everybody is squirreling away money for retirement then, in a fixed money supply system, it won't be very long before there is a cash shortage. You don't have to take my word for it, as an exercise in historical research you can verify that every government that ever existed that was strapped for cash devaluated their unit of exchange, whether it was metal or paper is
    irrelevant. As long as you have a class of folks making promises with other peoples' wealth this will continue. As long as you have a police mechanism to inforce this involuntary shakedown this will continue. The problem, therefore, does not lie in the system, it lies in the arbitrary morality of people and their conveinient way of changing it whenever it suits their self-interest. Visited a failed commie country once.
    Guy there was emphatic about how the theory of communism was completely sound if you only didn't have to deal with people; was I the only one who found that logic moronic?

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  6. "Can't hyperinflate debt and the Fed isn’t printing dollars so hyperinflation is not in the cards for anytime soon, if ever."

    You are going to see currency cost push inflation and then hyper-inflation when the confidence in the USD (and other fiat paper) is lost.

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  7. Anonymous said..."What reserve assets? There are no assets."

    You misunderstand; it's the assets of the Federal Reserve banks, not "reserve assets". The difference being, the physical assets belonging to the banks chartered as the Federal Reserve Banking System, it's their assets that are on the line for every dollar that put into circulation.

    ----

    Yes, there will be cost push inflation but there will be no hyperinflation, a "lack of confidence" notwithstanding. And here's the reason why: the "dollars" we use in almost all commerce are merely a unit of measure, they have no physical presence and they are only valid for as long as the institutions that issue and maintain them remain solvent and functional.

    Hyperinflation is a physical currency event; you can't have hyperinflation without it.

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  8. Hyperinflation is not just a physical currenty event. Hyper being beyond normal range and inflation the swelling of, an increase which can include prices. Hyperinflation most certainly will happen. To say we won't print what we can't cover, or what is solvent is ridiculous we're already defaulting on oue debts. That's where the lack of confidence is and that is already happening.

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  9. Not to distract from the purposes of your article, but Nixon did not "default[ed] on the dollars convertibility into gold".

    Citizens were never able to convert FRN's to metals under Nixon. The so-called quasi-"gold standard" in place at the time was merely an insurance policy to other NATIONS in case the US mishandled the value of the dollar.

    France was attempting to convert their dollars to gold on claims that the dollar was sinking (due to Vietnam war debts and overprinting). Nixon pulled the rug out from under them...

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  10. The owners of the Federal Reserve Banking System, IMF, the World Bank and throw in the members of the CFR should be detained on charges of Treason from their respective countries, tried and convicted and duly punished according to the law. For dual citizens, they should be tried in both and serve both judgments consecutively. I suggest we send them all to that island Napoleon was exiled. We could charge a fee to see them, the Greatest Criminals the World Has Ever Known! The fee could pay for their being kept in exile.

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  11. The Federal Reserve, when it digitally credits money to foreign banks, foreign corporations, et al, is doing so on the basis of American dollars. That weakens the dollar which, duh, increases inflation. It's so simple even my grand children comprehend it.
    Yes, it is a grand Ponzi scheme as is the so-called Social Security trust account. New victims being charged cover the cash-outs for the olders victims. There are no assets sitting in the trust account except Treasury Dept. IOU's (sounds kinda like derivatives, doesn'it it?)

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  12. When the Federal Reserve digitally credits a foreign government' account, a foreign bank's account, et al, it does so on the basis of US Dollars. That 'weakens' the dollars and pushes inflation....basic economics.

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  13. I wonder how much gold is actually stored at Fort Knox. Wouldn't you like to take a tour? I wish Ron Paul would. I'll bet they're leftover yellow painted bricks from the movie "Goldfinger" (Oddjob's hat is probably still stuck in the crossbars).

    ReplyDelete
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