The Federal Reserve Has Failed Us

I happen to be one of those people that thinks the U.S. economy (and much of the world economy for that matter) is currently running in an unsustainable fashion with expectations of infinite growth (growth every single year) on a finite planet financed by debt.

I prefer to invest for the long term and as such I try and look at what will happen over longer periods of time. I can’t tell you if the price of gold or oil or any commodity will go up the next day. I can tell you what direction it will probably go over the next decade due to the fundamental economics. Much of the daily fluctuations in the stock market are not linked to fundamentals… but to fear, greed, wall street hype and the media machine. Sometimes the key to understanding where we might be headed is in looking at the basic building blocks of our situation.

Federal Reserve

The Federal Reserve is neither Federal, nor a reserve. It is a private bank that was established in 1913. I won’t bore you with the details. All you need to know is that it is owned privately - by people who could afford and had the power to start a central bank in 1913. It has never been audited. It controls the money supply. And the only Senator in the United States that seems to be asking hard questions of the Federal Reserve is Ron Paul. Perhaps he is the only Senator that understands economics? Perhaps he is the only one willing to stick his neck out to discuss the things that need discussion. I wish more Senators would question the Federal Reserve and whether we should abolish it.

The Federal Reserve controls the money supply by deciding to increase or decrease interest rates and whether to create more money. The whole point is to create a stable and steady economy. The U.S. dollar is NOT backed by gold. It is nothing more than a promissory note - a debt instrument. I believe fiat currencies are inherently flawed and doomed to eventual failure. Fiat currencies are easy to manipulate and that is significant problem. Leave my money alone! Don’t touch it, don’t manipulate it, don’t devalue it. Let it be.

In March 2006 the Federal Reserve stopped publishing the M3 index - reportedly because it costs a lot to collect this information and it wasn’t worth it. The M3 index is a report that tells us how many dollars are in existence. So lets get this right. The Federal Reserve (a privately owned company) has never been audited (ordinary citizens and corporations get audited all the time - The Fed hasn’t been audited since their creation in 1913) and now they NO LONGER PUBLISH HOW MUCH MONEY IS IN CIRCULATION. The same company that CONTROLS THE MONEY SUPPLY isn’t held accountable? How can you determine the value of a currency without that information? How do we truly know what the Federal Reserve has been doing? It could be conducting pure fraud and acting like a free ATM for its owners!? We don’t know. That should scare you. Sometimes I truly wonder, do the people have control over government anymore? Is voting once every four years really government by and for the people?

The Federal Reserve has been saving U.S. banks that invested in sub-prime mortgages. What about the pension funds? What about the average investor? Will they be bailed out? Nope. Just the banks. Funny how that works. The Fed bailing out their friends when they do dumb things that hurt the average American. Is it odd that the banks only own a small portion of the sub-prime mortgages and yet they are the only ones to get bail-outs…?

“The Federal Reserve is totally out of it. They’re destroying the currency
and driving up inflation, which will result in higher interest rates and a
worse economy. We now know the Fed doesn’t understand markets or
economics, but is just trying to bail out its friends on Wall Street at the
expense of 300 million Americans, nay, of the whole world.”
- Investment Guru Jim Rogers

Then there is the bigger question. Do you believe in the free markets and capitalism? Do you think the government should stay out of our business and let it be (laissez-faire)? I guess they think the free market won’t work without interference? Why else would we need the Federal Reserve? The whole point is to manipulate the money system in order to have a more stable economy. Tell me… is the economy stable? Was the economy stable in 1929 and the “Dirty 30’s”? The Federal Reserve has never done a good job.

Want another example of how the Fed has failed us? In the 1950’s a man could support his entire family with ONE average job. He could afford a nice home with the white picket fence and his wife didn’t have to work. Now women are forced to work outside the home just so the bills can be paid and her husband (and quite often her too) is working 80+ hours a week just to keep up with the workload. Inflation has slowly hidden the effects over several generations.

I tend to agree with the Austrian school of economics and believe government interference is counter-productive and has caused many problems. It has done nothing but push problems forward so that they can be dealt with another day. Pushing the problems forward hasn’t solved them… but merely delayed and intensified them and the consequences are scary. Instead of dealing with the problem of debt several decades ago, we are now in a much worse situation. We are headed towards economic disaster.

To stop a recession from happening after the internet bubble burst, the interest rates were lowered. That spurred a real estate bubble. Home values soared (people had cheap access to money) and people refinanced to take some of that money out and spend it. Others went into massive debt to build their dream homes. Lenders lowered their lending requirements to the point where they would lend money to people with no job, no income and no assets. Adjustable rate mortgages lured people in to dangerous mortgage situations. Interest only loans popped up. What happens when millions of people spend $500,000+ each on homes during the same two or three year period and also spend lots of money on furnishing their homes with appliances, decorations, furniture and electronics? A large economic boom! Now that so many people have spent 30+ years of their money all at once (thanks to the low interest rates decided by the Federal Reserve), the economy will slowdown even worse than what would have happened when the internet bubble burst… It’s inevitable. All those people will NOT spend another $500,000+ on another home this year… they already bought their home during the last three years… The Federal Reserve has interfered time and time again and it has always backfired later on.

Now What?

Now the Boomer’s will begin to retire. The most productive segment of society is going to become the biggest drain. The economy is in shambles, the stock market returns are lousy and homes are worth less than consumers paid for them (if they happened to be a recent buyer/builder as the Fed would have hoped they’d be).

The U.S. Dollar is falling… it is being done in such a way (hidden with no M3) that it actually looks like they are purposefully lowering the value of the dollar to cause wide-spread problems. Let’s face it, they are lowering the interest rates to help spur the economy but that is an action they know will lower the value of the dollar. Also by hoping more consumers take on MORE debt to stop the recession the economy will inevitably become even more shaky. Sorry, everyone is already maxed out! You can’t keep borrowing your way out of a recession. The dramatic swings in the U.S. Dollar are just the beginning. Soon, no one will know what the U.S. dollar is worth and foreign countries will sell their reserves. Then, the Fed or the government will probably create a solution: Ditch the dollar and create the Amero and a North American Union. This is scary stuff when you truly realize what it does to your constitutional rights and the future of the United States.

So far all the Federal Reserve has done is do a good job of getting EVERYONE into debt to others. Being indebted to others feels like a form of wage slavery. How much debt do you have?

Comments

[youngpygmalion]

Just to make a clarification, Ron Paul is not a senator, he is a congressman who has served 10 terms in the state of Texas

[Kunst]

The reason a male high school grad could support a middle-class family in the 1950's is because we won World War II, or economy was hitting on all cylinders, and the rest of the world was in ruins or underdeveloped (e.g., colonized). We were able to get paid many times what workers in other countries earned. This was an artificial situation which has eroded over the decades. It has nothing to do with the Fed.

Overall, a pretty lame and rambling article.

[gordon]

Excellent article, one of best I've ever read on this site. Those like us at 57yrs old who planned for this meltdown know our standard of living topped in July 2005, when home prices did. Gold at $900, oil $100 are not enticing, earnings will be slashed, the market goes down. Cash in only US Treasury money market is about all we can do now, not adding to gold up here. Paulson, with his influence on the GSCI, can tank oil/gasoline before the election (like July 2006), Bush trading lower Saudi oil for $20 billion in weapons as I write, meaning gold could selloff in a hurry up here, the Repub Iran-fear machine is kicking into high gear w/ McCain their "keep us safe" man, they will pull out all the stops to stay in power. I'd be selling any bounces.

[RobertNabloid]

Yes, I meant Congressman, sorry.

It was a rambling article that was badly structured, I'd be the first to admit it (I wrote it). It was very late and I was debating whether to publish it or not because it is clearly too big of an issue to write about in a few short paragraphs and it very quickly turned into rambling.

I would argue that the Fed has SOMETHING to do with the situation though, Kunst. You'd be hardpressed to convince me that the Fed had nothing to do with your current currency situation with respect to its effect on the earning power of the middle class.

[RobertNabloid]

Kunst: "This was an artificial situation which has eroded over the decades. It has nothing to do with the Fed."

I agree it was an artificial situation that has eroded over the decades as other countries developed and started to compete with our workers. I think the entire economy is usustainable, even today. I also believe the Fed is part of the problem (that doesn't mean they are the entire problem, but they are part of it). I think the so called Free Trade Agreements are another issue that makes the situation unsustainable... An American company doesn't have to follow half the laws and regulations if it just outsources to another country... We by law must pay workers a minimum wage, take care of the environment, etc, etc... The countries we can outsource to have none of those laws/regulations. They have a huge copmpeititve advantage against us cause they are playing by a different set of rules.

Like I said, the topic is too large for me to write about in one article and that was why this is such a poor article. Sorry. I know I didn't do justice to the topic and I'd like to apologize.

[RobertNabloid]

I was trying to deal with is the fundamental building blocks for our economy and why its unsustainable (an artificial situation 'in and of itself'!).... There are other issues at hand, but the Fed and our fiat currency is one of the building blocks upon which the economy and entire monetary system is built - and it is being run unsustainably and irresponsibly. I maintain, the Fed should be abolished as it has created more problems than solutions and its continued interference with the economy will be disastrous - every time we turn around they are bailing someone out of a situation which they helped create, and in doing so they are creating another problem.

You can't print your way out a recession forever - That only works as long as others are willing to take USD's and the rest of the world is waking up to the currency situation and a lack of an M3 index is scary when trying to determine what the USD should be worth.

You can't borrow your way out of a recession forever either... borrowed money must be paid back and in the meantime interest payments eat away at consumers buying power and the size of their discretionary budget.

Inflation numbers are understated as well. Do this for enough years and you can slowly erode middle-class America.

The Fed has failed. The Fed's failure has cost middle-class America dearly. I think the worst is yet to come and it will be almost entirely the Fed's fault. I couldn't write all the reasons for the economic woes in one article... but I think the biggest problem is the Fed and fiat currency and I stand by that. I fully expect they want it to fail so that Americans demand the situation be fixed. The solution they will offer will be to enter a North American union with a new currency - and that scares me even more. Either way, the worst is yet to come.

Name one fiat currency that has not failed in history. Name one economy or empire that used and abused a fiat currency that did not ultimately fail because of the unsustainable economic situation? You can only defy economics for so long before it takes hold and corrects the situation.

[dan94]

The Fed is not a private, profit-making institution.

[Peggy]

Great article because you get the important points right, and the message needs to be heard. Ron Paul is ont only a Congressman, but a presendetial candidate - the only worth voting for in as long as I can remember....and the only one who gets why Constitutional law is written as it is, and who understands the principles of economics, thereby making him the only one capable of making the right long-term decisions.

[RobertNabloid]

dan94: "The Fed is not a private, profit-making institution."

The Fed is a private corporation, and you can almost certainly guarantee they make a profit - even if they don't, it is often used to bail out banks for which the owners may also have an interest in. The Fed doesn't have to make money itself for it to be responsible for making its owners money... But as a privately owned corporation that controls the money supply, I'm pretty sure they make a profit or there would be no point in owning it.

[Kunst]

Robert,

First of all, I apologize for my snide remark at the end. There are many different opinions on this forum. That's what makes it so valuable. I try not to criticize other viewpoints, but sometimes I slip up. That's wrong.

In regard to trade agreements, free trade has definitely contributed to the basic process of equalizing American and world living standards, i.e., income. Trade barriers would have slowed but not stopped the process.

I come from the high-tech (software) world, where Americans had a monopoly for a long time. Monopolies push up prices, in this case wages. All of a sudden, starting in the 80's, we had programmers in or from India, Ireland, Russia, and more and more other places who could do the same work for a whole lot less money. We still had the advantage because the development infrastructure was here. If we had shut them out, US programmer wages would have been higher, as would the cost of software. Gradually, other countries would have developed the methods and market that we had, because they could do it cheaper. First we would have lost sales in their home markets. After a while, their products would become quality-competitive and we would start losing sales in our own market, or even if we didn't allow that, in third countries.

We could have held off the inevitable for a while but not indefinitely. I remember in the 1980s when US steel workers made $40 an hour for the same work South Koreans were doing for $8. We have a lot fewer steelworkers now.

The wage inequality that existed between the US and the rest of the world is unsustainable. If American cars cost considerably more than comparable cars from other countries, we will lose out in non-US markets even if we keep them out of our country. There is no moral reason that Americans should make more and live better than people in other countries unless we are doing something they can't do. That was the case once, because of concentration of capital and various barriers to competition (distance, tariffs, information) but that day is gone. The end result of this process would be that we would be uncompetitive across the board. Think Japan in 1859.

Inflation has been the prime mechanism for reducing Americans' incomes relative to the rest of the world without the appearance of decreasing. We have tried to maintain our higher standard of living by relying on accumulated wealth. Quite frankly, we are nowhere near the top of the competitiveness scale, especially in the area of education, which is the long-term key to economic strength.

I fear that the US is like that old, mighty tree that looks formidable but is actually weakened and rotting from within. Such a tree eventually becomes fertilizer for the next generation.

[RobertNabloid]

Kunst, I agree. I come from a business background and I know there are MANY issues all working out at the same time. The unsustainable economic model which the US now relies on is largely continued by the Fed and the way it entices/pushes debt onto the consumers and manipulates our currency.

It seems like every company wants to build products in foreign countries but sell to the large US market, but the market will obviously decrease due to the loss of jobs and income. I don't think there is any moral reason Americans should have a better living standard than others either, but the Fed is acting in an unsustainable fashion and it will hurt us more in the long run by burdening us with debt.

But we aren't just competing with laborers in foreign countries, but against their currencies as well... which is another part of the problem with being competitive - especially when our own currency is so unstable and manipulated.

I don't suggest getting rid of fiat currency and the Fed would fix all problems but I think they are part of a larger issue that will ultimately ruin the currency and hurt middle class America - Especially because now instead of just being uncompetitive, we will be burdened with large debt and the interest payments that come with that (Thanks Fed!) - Many of those laborers we are competing against won't have those large interest payments and burdensome debt because they are unable to borrow such large sums of money to begin with. Our ability to borrow such large sums of money has pushed up our cost of living ($500k to buy a normal house!?! How is that sustainable? But that is partly the fault of the Fed). Add to that the free trade, poor education standards, and the many other issues we face, and I agree... a rotting tree is a good analogy. I've been able to see the cracks in the foundation beginning to show for a little while now and it scares me.

I sat down wanting to write some of this down and figured I'd start with the basic foundation upon which the economy is built (fiat currency and the Fed). It wasn't intended to show all the reasons for the economic woes. It wasn't the best article but you could write a book about this stuff and still miss things. As any article writer, I was planning on writing on the other issues later. I didn't want to write too much at once or it starts to look like a really long one page book (on the internet its one super long page!) and no one would bother reading it...

[Tom B]

"I think the so called Free Trade Agreements are another issue that makes the situation unsustainable... An American company doesn't have to follow half the laws and regulations if it just outsources to another country"

I've said it before, I'll say it again: Tariffs are good. But, in this environment, where the Govt (particularly the GOP) kisses the---let's say-- toes of Business, I don't expect fairer trade any time soon.

[WAKEUP]

GREAT ARTICLE that desperately needed to be written. And, just in case no one else answers your question, "How much debt do you have?", I have zero debt, after a number of years spent achieving that goal. But, if I DID still have substantial debt, as most people seem to, these days, I'd be scared s---less of the way things are going.

[calbh]

Well stated article. Until Americans tune out TV and filter the noise, they will not see what is happening to them. I took several teens to a movie the other night with my son, and one of the kids was asked a question about his ex-girlfriend. He stated, "No comment...I plead the 5th". One of the other kids stated, " what's that?" The kid who "pleaded the 5th" stated that he didn't exactly know. My kid kind of explained it as the 5th Amendment to the Constitution, but did not go into detail. I began to explain, but they did not care to learn. Later that night, I had my son doing some reading of a pocket guide on the Constitution that I got from a Ron Paul booth at a local fair. It is amazing that kids are not learning the valuable lessons to help ensure their futures. They will have their liberties and freedoms stripped from them over the next several decades due to their lack of knowledge of the guarantees that their forefathers fought for them. God help us we need an 'overhaul' in the worst kind of way!

[Congressman]

Ron Paul is a U.S. Congressman....not a Senator. I just thought I would let you know since you used the word Senator so often. ;) Great Article though!

[Congressman]

Oh you cleared it up...nevermind.

[IDROJ]

Kunst has the point, in the long run in this globalized world where no matter where you live to do a service or no matter where something is manufactured all people have to end up with the same standard of living if they work the same hours and in the similar economic environment (technology, trade, regulations…) . It means that as the resources in the world are limited third world country workers will get close to us and we will get close to them, it will happen whatever we do, we can’t compete with them , they want the same standards we have for the same work. If we lowered our salaries or work more hours to compete our standard gets lower as we don’t do that it will happen with inflacion and the devaluation of the dollar, we can’t keep consuming the same.
if the fed wouldn’t have lowered interest rates maybe the process would have been slower, the fed decided to lower them to give us the feeling that everything was ok, but with this the American worker became more profligate and spend money that he didn’t have, third world countries lend us a lot of money that they saved with their work, money that is not going to have any value soon. I think that the fed the only thing it did was accelerate the process.

[JBo]

You guys keep talking about the morals of people from one country having a higher standard of living than people of another; but corporations have it backwards. Do Americans deserve a better standard of living than others? Of course not, but that does not mean we should be actively lowering the standard of living for Americans (which is currently happening), we should be bringing the standard of living of the countries we do business with up to the American standard. THAT is the moral thing to do.

If every company had to ensure that every product they import into this country was manufactured under equal or better labor, environmental, etc., standards as the USA, the unfair and damaging to America advantage these countries currently have would be wiped out. THEN we would be competing on a level and MORAL playing field. At that point the competition becomes about true innovation and the ability to do something better, not just cheaper.

India and China are not innovative, they are cheap. The vast majority of their people also live with little to no protection from the will of corporations. Of course products are cheaper to make in China, they can poison people, overwork them, pay them little to nothing, all LEGALLY. If you support that, you are a bad human being.

On the other hand, Japan is roughly equal to the USA in terms of how people are treated. You can argue that they have an advantage with healthcare, but the bottom line is that Toyota and Honda are cleaning up because Ford, GM, and Chrysler all got fat and lazy. Japan isn't any cheaper to build cars in than here. That is actual competition, based on innovation and good management. As much as I hate to see the US car companies struggle, they deserved it. Now GM, Ford and Chrysler have found religion and are putting out cars of superior quality. Let's hope they can erase their old reputation in time to make some money.

I agree with a poster above and Warren Buffet; time to bring back tarifs. If our corporations cannot be relied on to behave ethically and morally, they need to be taxed.

[IDROJ]

It’s not morals it’s economic reality, if they produce the same as us and sell it in the same market (the world) they will end up having the same standards of living.
People buy the cheaper product they don’t check the moral level of the product, American products have more moral but they are more expensive and that’s what it counts.
tariffs maybe help in the short run but they will be damaging in the long run, and china and India now produce cheap products without quality but at the end they will produce products with the same quality, nothing we can do about it.
Our standard will get lower because now is too high compared with the standard of living of people producing the same that we produce, USA companies now have some comparative advantage (regulations, laws….) but they will get eroded by some other advantages of third world countries (products without moral are cheaper)
Or their standard goes up or ours down, I think both things will happen till they converge in this world of limited resources.

[JohnIsOld]

If you believe in a free market, then you should also agree with Ron Paul's idea to allow competition with the federal reserve. By allowing other currencies to compete, each of us could choose which currency to use. A currency backed by something (maybe a basket of commodities, or maybe silver) would be a more stable currency in terms of purchasing power and inflation.

I would like to see competition allowed to break the monopoly of the federal reserve.

[flow5]

Lambasting the Pacs has always seemed to be too dry or taboo.

The Fed, though intended to be an “independent” agency has, like the Supreme Court, “followed the elections”.
We don't have captialism, we have regulated capitalism.

We have an “elastic” currency “aided and abetted” by “elastic” legislators. We have perennial Walter Wriston caricatures pressuring the House Committee on Financial Services & the U.S. Senate Committee on Banking, Housing, and Urban Affairs. We have a conspiratorial organization that goes by the name of the American Bankers Association - with its well funded lobbyists.

The Board of Governors is self-described as: “subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute” Even so, the Fed is “connected at the hip” with Congressional allies, a la Greenspan, who the New York Times called a “three-card maestro”.

The Fed’s research is politically coordinated, targeted to justify its monetary policy objectives - those that appease the banking community. It’s as the university professor said: “innovate away from home”. Academic freedom has become the “barbarous relic”.

The great German poet and playwright Bertolt Brecht would have agreed and once said it was "easier to rob by setting up a bank than by holding up (one)."

The profit proclivities of the American Banker are responsible for our speculative orgy.