Once upon a time, the US stock market was soaring. I remember back in the late 90s when CNBC anchors would make proclamations such as, "It's a whole new market, all the rules have changed." Of course it wasn't a new market. And the rules had not changed. What goes up must always come down-it's the nature of economic cycles. During upswings in the cycle, some people start to believe that the rules of nature have changed and that they are somehow impervious to the natural cycles of economics. Of course this inevitably leads to bust, and the whole boom-bust cycle completes again-a cycle most Americans are all too familiar with these days.
One person who has been credited for the boom, and in some cases credited for the bust, is the Federal Reserve Chairman. During the 90s some people said the Fed Chairman at that time, Alan Greenspan, held more power than the president! No one seemed to cared who President Clinton was jet setting around the world with on Air Force One.
But when Greenspan spoke, the entire financial world stopped and listened. Why? The Fed sets monetary policy, and more specifically, they affect interest rates.In the world of Central Banking, interest rates are used to slow down inflation. It is their primary tool. When the economy looks to be inflating, the Fed will raise interest rates. This causes a slow down in borrowing, and thus a slow down in spending. The net effect is a slow down in inflation. If, however, the economy is moving too slowly, the Fed believes its job is to lower interest rates. Lower rates tend to cause people to borrow more money and then spend it. This spurs the economy on.
This policy has worked relatively well for the past 80 years. In fact if you ask the Federal Reserve, they have masterfully engineered the US economy for the past 80 years, and it is their success that has kept us from another depression like we experienced in the 1930s.
The problem with this Fed position is, like the people trading the market who believe they are impervious to economic cycles and believe the market will always go up, the Fed also believes they are impervious to economic cycles. But their cycle is different. It's not that they believe the market will always go up, but rather they believe credit will always be available.
The Federal Reserve has built their entire machine on the premise that people will always want to borrow money. So their magic lever to control the machine is that of interest rates. What the news does not report is the very reality of the current economic trouble-the reality the Fed is all too aware of but afraid to admit. The reality is that this crisis is the result of too much credit. And the Fed is afraid to admit it because without credit, their machine is broken!
After the housing bubble burst, the Fed aggressively began lowering interest rates in an attempt to get people to borrow money. The problem? People didn't want to borrow any more money! Why? Well, people have become tired of paying more in debt than they can afford. Eventually they are forced into foreclosure and bankruptcy. So no matter how low the Fed drops interest rates, they still cannot convince those people to take on more debt! And it is for this reason that the Federal Reserve is scrambling to keep the facade going that they truly have everything under control.
The truth about this crisis, the one no one wants to admit or talk about, is the reality that instead of being in a state of monetary inflation (what the Fed believes will always happen), we are in a state of monetary deflation! It's the opposite of inflation. Deflation is when prices fall because the supply of money has contracted, or become smaller. Deflation is evidenced in our economy by falling housing prices, falling car prices, and even falling wages. While most people have not been forced to work for less, many people have been forced to take unpaid vacations. This is a form of wage-related deflation.
And this brings us full circle back to the Fed. The current Fed Chairman is Ben Bernanke. Bernanke is not enjoying the same popularity as his predecessor, Alan Greenspan. Not because he's less competent than Greenspan, but simply because the Fed's facade has fallen apart on Bernanke's watch. But rather than admitting the error, correcting it, and moving forward, Bernanke and his crew are doing everything they can do to get the economy back in an inflationary position, perpetuating the myth that inflation is good and the nation's economy must always be inflating.
Bernanke's actions have caused great alarm and have created an uproar of protests-people demanding that Congress audit the Fed. What many Americans do not realize is the Federal Reserve answers to no one! They are their own boss. Sure, they report to Congress once a month, but Congress can't make them do anything. All Congress could do is to strip them of their power to make monetary policy. And Bernanke knows that. So currently, while many in Congress are calling for an audit of the Fed, Bernanke knows if he can keep them out of the books, no one can stop his powerful reign.
The question many are asking is, "Does Bernanke even know what's going on?" But the TRUE question that needs to be answered is, "Why is Bernanke allowed to implement his policy?" Very few people, including Congress, realize that back in 2002, before Bernanke was even considered to be the Chairman of the Fed, brilliant Ben announced his own policy for staving off deflation. In his own words:
"Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation." (Read The Speech, given 11/22/02)
That's right, if you didn't catch it, Bernanke's magical plan to prevent deflation is to intentionally print dollars until they are worth less and force an inflationary condition. Most people would call this policy "nut job." But Ben Bernanke thinks it's brilliant! That's his brilliant plan! In his speech quoted above, Bernanke goes on to explain why current law prevents the Fed from actually implementing some of their actions, but they have created some workarounds to make sure they can sufficiently "inject money into the system."
In other words, it is Bernanke's goal to solve this crisis by printing money. And even when the law does prevent him from doing certain things, he has devised some workarounds, including the purchase of private assets, which we have already seen! If anyone thinks Ben Bernanke is working his magic, they should think again. He's working his plan. And his plan is destined to debase our currency to the point where it is absolutely worthless.
The good news is, I'm not the only lone ranger sounding the alarm. Over 300 House members have signed on to a bill to audit the Fed. Check out this video played on the Glenn Beck show recently of Democratic Congressman Grayson in discussions with Bernanke over the actions of the Fed.
When both Democrats and Republicans are up in arms, it's clear . . . Houston, we have a problem. But Congressman Barney Frank? Well, he likes Bernanke for some crazy reason, and he will not let the bill come to the floor for a vote. Oh, don't you love power trips?
Well, friends, I believe it is clear. It's time the people of this country begin to stand up and make our own statements about the Federal Reserve. It's time to Audit the Fed! Ben Bernanke answers to nobody. And his clearly stated intention is to debase the currency and make it worthless so the Fed can attempt to save face and keep their game going of controlling the US economy by playing with inflation. Not only is it wrong, but it is incredibly dangerous. We must stand up and demand accountability!
Investor Insight - Time to Audit the Fed!