Big time trouble dead ahead thanks to the Federal Reserve.

Discussion in 'Economics' started by Sammysouth, Jun 2, 2011.

  1. 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.

    See here:

    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:

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

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

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

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

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

    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.

    Rest of article at above link.