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Dec. 23, 2015 - Freedomain Radio - Stefan Molyneux
27:17
3160 The Federal Reserve: There Will Be No Economic Recovery.
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Hi everybody, it's Stefan Molyneux from Freedomain Radio.
We're going to do a quick tour through some of the very exciting economic news that has been cooking, particularly in the U.S. lately.
On October the 19th, 2014, the Federal Reserve ceased the third round of quantitative easing, QE3, and all but promised to raise the interest rate by the end of 2015.
So the general idea is the economy slows down and you reduce interest rates Which is supposed to stimulate economic activity in the here and now.
No point saving the money if you're not getting anything back in interest.
And particularly if interest rates are lower than the inflation rates, then you might as well spend the money now because your money is being eaten away by inflation as times go forward.
So the idea is economic slowdown, of course, in the 07-08 housing crash, lower interest rates.
But if you keep interest rates low, you're signaling to the world as a whole.
That your economy doth suck.
Because if you're not going to raise interest rates, it's because the economic indicators are still really bad.
So, it was widely speculated that an increase in the interest rate would occur in September.
But the month came and went without change.
It was reported, of course, that the Federal Reserve wanted to see more improvement in the economy before raising the key interest rate.
So, low interest rate means bad economy.
If you raise the interest rate and things get really bad, all you're doing is revealing not only that you have a bad economy, but you don't even know what to do about your bad economy, which is even worse.
Despite approximately $3.5 trillion worth of asset purchases since 2007, and the unprecedented and prolonged decrease of the effective federal funds rate to a historic low, basically 0% to borrow money, the economy had yet to recover enough to warrant a rate increase.
With their, hey, the economy is improving, we promise!
Credibility on the line of Federal Reserve did decide to increase the interest rate 0.25% on December 16th, effectively adjusting it in name only and leaving it at historic lows.
Ah, what happened?
Well, the Dow Jones Industrial Average fell by 367 points in the days following.
Of course, this didn't stop the fact that there's a teeny tiny sliver of a rate increase.
It didn't stop the mainstream media from proclaiming the dawning of a new era, announcing an end to an era of easy money that helped save the nation from another Great Depression.
Actually, it just saved the bankers from going bankrupt.
The economically illiterate empire cheerleaders made these claims despite the near 2% annual rate of inflation reported by the government, a figure which is...
Far higher for those of us actually living in economic reality, say buying things from stores rather than from misleading government reports.
So, this is effective federal funds rate 1954 to 2050.
Now, if you're just listening to the audio, I'm sorry you're going to miss the rollercoaster bump at the right.
So, the federal funds rate is the interest rate at which banks trade federal funds.
The balance is held at Federal Reserve banks.
So, when people talk about the interest rate set by the Federal Reserve, this is basically what they're talking about.
And, I mean, there's no free market left in the world.
If there's no free market in money, there's no free market.
And the effective takeover of money by the government in 1913 means that everything else has just been, you know, you shoot the giant in the kneecap and he falls slowly, but he ain't getting back up.
And that's really what's happened to the free market since the government took over money.
If there's no free market in money, then basically there can't be any free market in interest rates.
And interest rates is one of these things that's so important in the economy.
Because if people are saving a lot, right, then money can be lent out more cheaply because there's an excess of money sitting in banks that they want to lend it out.
That drives the interest rates down, which stimulates people's buying.
And that sort of is the balance that goes back and forth.
If people are saving too little, then banks will pay you more money to put money in the bank because there's a lack of it which they need to lend out.
And so if people are spending too little, then interest rates will tend to go up.
And there's a lot of other factors, but there's a self-regulatory mechanism that occurs in a free market with regards to interest rates that once the government steps in gets completely haywire.
And there's no longer any rational calculation for money as a whole and whether you save or whether you spend as a whole.
And, of course, the government has to control interest rates because what happens is when the government gains control of the printing presses in the economy, what it does is it starts printing money to buy votes.
Right.
Because when it prints money or borrows, then what it can do is give you goodies that seem free in the moment.
But then what happens is 18 months to 24 months later, inflation hits.
Inflation is actually the increase in the money supply.
The price increase is just a result of that.
So inflation hits and then people are like, well, this is terrible.
But there's this illusion of free stuff, at least for the election cycle.
And so governments start printing money.
But, of course, printing money drives up prices.
Driving up prices drives up inflation.
Because if you want to lend money and get 5% back, but inflation is running at 10%, you need to lend money at 15% because you have to take into account inflation.
this terrible stuff happens.
The inflation starts to go up, the interest rates start to go up, and then all the money that the government has borrowed has to be repaid back at higher interest rates.
So the moment government takes control of the money supply, starts printing money to buy votes, it then has to take control Of the interest rates to keep them artificially low to hide the actual effects of all its money borrowing and money printing.
And there's QE1, QE2, QE3, the ocean liners that all end up with the movie Titanic, and we are the guys hitting the propeller.
That has been one of the biggest expansions of the money supply in human history, and so they have to keep a tight lid on interest rates to cover up all the inflation that is occurring.
So here we can see effective federal funds rate, 1954 to 2015.
Now, I won't go into all the detailed history of all of this kind of stuff, but there was a series of decoupling dollar from the remnants of the limitations of the gold standard that happened in the 70s under Nixon.
But down here, you can see that it was fairly high.
When the economic crash happens, it goes way down.
Now, you see this little bottom right of the corner here.
There's a little up, and it goes up a tiny, tiny little bit.
This is the dawn of a new era and the end of cheap money that saved us from the...
Right?
This is what people are cheerleading, this tiny, tiny little blip.
If people are cheering this tiny, tiny little blip, which is a complete deviation from history as some sort of new era, they're just willfully misinforming it because this data is not that hard to find.
Federal Reserve manipulation.
So, major stock indices versus Federal Reserve interest rate.
So, Federal Reserve, of course, dropped the rate to near zero.
And instead of crashing, this artificially cheap money provided the illusion of growth and recovery.
So, as you can see here, things kind of cooking along.
The red is the effect of Federal Reserve.
Funds rate.
And when the crash happened, they dropped the rate way, way down.
The rate is on the right-hand side.
They dropped the rate way down.
And as you can see, when they dropped the rate way down, what happened is there's this illusion of a recovery.
But the illusion is entirely artificial.
Because when you take your interest rate down to zero, people will spend money rather than save money.
No point putting money in the bank if you're not getting any money back in interest.
And so what happens is people spend money, it creates a certain amount of economic stimulus, but the reality is people actually need to save money in order to have a sustainable and growing economy.
You put your money in the bank or you save your money, that money is then available for entrepreneurs to invest in capital improvements.
The stuff you don't see, business-to-business stuff, like upgrading a factory or building a new office building, the stuff that doesn't really show up As flyers in your mailbox, but it's kind of essential to economic growth.
Buying new machinery to improve the productivity of workers and so on.
All of that requires a significant amount of savings.
And we basically in the West for the past two generations, ever since the welfare warfare state really got cranked up in the 60s, we've been eating our seed crop.
So in winter, you have to save your crop so you have stuff to plant in the spring.
And no matter how hungry you get...
You can't eat your seed crop, but we've been eating our seed crop.
We've been bleeding off our savings.
We've been kicking the can down the road.
We've been indebting the next generation.
And so all of this is, in my view, an artificial bubble.
And the longer the bubble goes on, the more it's going to pop and the louder bang it's going to make when it all starts running down.
So you see, they've crashed down the interest rates and the industrial average has gone up.
Yeah, why not invest in stocks?
Because sticking money in a bank isn't going to do you any good.
So more money flows into stocks.
And you've got a huge amount of money chasing a small amount of stock profit.
I've called it the supercharged stock market.
How many people out there, are you listening to this?
Do you really want to be in the stock market?
I bet you don't.
The stock market is supposed to be for people who are experts in a particular field, who understand a particular kind of business, who can do the research to figure out what's going on in that business.
What's happened now is a lot of your money gets herded into the stock market against your will through pension plans, through 401k, through a variety of other mechanisms that force you to put your money into the stock market, whether you want to or not, just to avoid the tax man.
Of course, corporations love that because it drives up the price of their stock market.
But of course, you're in the stock market and I'm in the stock market without exactly much of a clue what's going on in any kind of detail.
Just handing your money to silver-suited guys with monocles and hoping for the best.
And this is what's changed the stock market from a sort of rational investment scenario to this hyperkinetic, hysterical anime cartoon.
Of people jumping on any variation in stock price to make or gain or lose potentially millions of dollars in a few minutes.
And this is why people move their computers closer to the hub of the internet to gain a millisecond of stock trading time.
It's because there's way too much money in the stock market.
It's all been herded there by the government.
And part of it's direct and part of it's indirect just by crushing interest rates.
So, just looking at this, this can't be sustainable.
And, of course, we see, if you look on the right-hand side, this is the percentage, the rate has gone up 0.25, and we've already had a slight crash in the stock prices, right?
So, this is how you know.
As soon as the federal funds rate goes up, stock prices are going to go down, in my humble opinion.
So...
U.S. Treasury securities, these are the debt obligations of the United States government, or as it's also called, you, me, and every unborn child for the next 10,000 generations.
Now, the Treasury securities, they come in various forms.
They've got bonds or notes.
So, in essence, when you buy U.S. Treasury securities, you're lending money to the government for a specified period of time.
Now, mortgage-backed securities are bonds that are backed by mortgage loans, and these are the toxic assets that float around the world in the early to mid part of the 2000s, and, of course, all of this cascading catastrophes around the world.
So here, if you look at mortgage-backed securities, and these are assets held by the Federal Reserve in billions of dollars, 2003 to 2008-2009, We didn't really have any.
Now, of course, then they had to buy up a bunch of these mortgage-backed securities because their bankster friends on Wall Street were facing a complete clusterfrak of disintegration of the value of these mortgage-backed securities, partly because some rating agencies seem to have...
It embellished the creditworthiness of these mortgage-backed securities.
And so the Fed began buying up all these mortgage-backed securities, not exactly part of its mandate.
And here we can see U.S. Treasury securities is just being bought up and bought up and bought up.
So the Federal Reserve is buying assets made out of thin air, basically, by the government.
That obligation is made out of thin air.
And you can see that the Federal Reserve is just grabbing a whole bunch of assets, which are, you know, you buy a bond, all you're doing is saying, hey, would you mind raising my taxes in the future to pay me the principal and interest of this bond?
Because the government doesn't have any money.
It doesn't invest in things that make money.
Other than, I guess, voters from time to time.
It just makes votes.
So when you buy a government bond, all you're doing is saying, please raise my taxes in the future.
Of course, a minority of people buy these bonds, and so the tax increases are pushed onto other people, usually the poor, because that's the way that often works.
So this chart doesn't show bank debt or other, quote, assets held by the Federal Reserve.
The Federal Reserve is just buying up a whole bunch of assets and...
That's not great.
Again, buoying up things, propping things up, making them look like they're solvent when they're really not.
So Federal Reserve, total assets in trillions of dollars.
So you can see here,.8,.9 trillion, 2007.
QE1 begins and they just start buying up massive amounts of assets.
QE2, more.
QE3 begins and they're just buying all kinds of assets.
So since 2007, It's crazy.
I mean, four or five hundred percent increase in the assets held by the Federal Reserve.
Now, of course, when the Federal Reserve is buying up assets, it's artificially driving up their prices.
You know, if the Federal Reserve comes to your used car lot and buys everything, well, that drives up the value because it's taking them out of the market.
And driving up the price.
It's artificial demand.
It's not real demand.
It's not consumer demand.
It's not satisfying anyone's particular needs or wishes in the general marketplace.
It's just hoovering up a bunch of assets and driving up their prices and thus propping up the value of the banks.
See, the banks have all these assets and then trading companies in particular have all these assets and they're allowed to lend out a certain multiple of their asset value, right?
So if your asset value declines, you have to start calling in loans Now, if you call in those loans and a lot of those loans can't be repaid, then you have to further write down your asset value because the value of the loans declines, which means you have to call in all kinds of loans, and that creates this domino-cascading end of Sodom and Gomorrah effect that occurs.
So, by propping up the value...
Of the bank's assets and the trading company's assets, stock market trading company assets.
It's allowing them to continue to put on this crazy leverage, right?
This margin stuff.
So this is another reason why it's happening.
And it's all just a shell game with your children's futures as the ball under the cup that will never materialize.
So, Dow Jones and Federal assets.
See, Federal Reserve assets, the amount of stuff that the Federal Reserve is buying up, versus the Dow Jones.
Now, as you can see, in the market crash, the Dow Jones was crashing.
It was crashing.
And this is why they started doing QE1, right?
Starting printing a bunch of money.
Now, they love to print the money to buy the assets of the bankers because if they send you a tax bill for $2,000 saying, we need to prop up bankers' values, well, you're going to get kind of upset.
So it's all this shell game where we walk through life being rained on by tiny mosquitoes with fiery lances, but we're drugged by fear currency, so we don't even really feel it until it's possibly...
Arguably too late.
So here you can see the Dow Jones is going up lockstep with the buying up of the Federal Reserve assets.
Of course, right?
This is the whole point behind it.
The correlation is 0.75, right?
So a 1.0 is a perfect correlation and a 0 is no correlation.
So it's a very strong correlation between the Federal Reserve buying up all these assets and the stock price.
And what that means, of course, is if the Federal Reserve stops buying all of these assets or starts to sell them, the likelihood is that the Dow Jones is going to go out.
Now, please, I'm not an investment expert.
These are just my thoughts.
This has nothing to do with anything you should buy or sell.
These are just my particular opinions, you know, backed up with some data.
An even stronger correlation...
This is the NASDAQ and the Federal Reserve assets.
So as you can see here, same pattern.
NASDAQ is crashing in 07-08.
QE1 starts.
They start cranking all of these purchases through the economy.
And this props up the value of the NASDAQ. The correlation here is 0.86, which is even stronger than the previous graph.
So again, Federal Reserve buying up a bunch of stuff props up the value of the NASDAQ, which means that most likely when they stop doing that, which they have to do eventually, It's going to crash.
So here, S&P 500 is a standard and poor 500, top stocks in America.
S&P 500 in Fed assets.
So Federal Reserve total assets in S&P 500 index.
And again here, you can see the market is crashing and QE1 comes in to, you know, Here, Elvis, have another upper if you're feeling sleepy, right?
I mean, this is what's going on.
And you can see here it goes lockstep.
This is a correlation of 0.76 between these two things.
So my argument is, you know, if you want to know what's going to happen to stock prices in the future...
Watch what the Fed is buying and make your conclusions, I guess, accordingly.
But this is, again, all propped up, I would argue, by the Federal Reserve, right?
And as you can see here, the reason I'm saying it's causal, right?
If you look at QE1 here in 2008, they start buying and that later reverses, right?
So the stock price is going down.
The Fed starts buying up assets.
And then it starts to go up later.
It's not like it was recovering and then the Fed started.
So the Fed buying the assets, see this big spike of QE1, the Fed buying the assets slowly over time, over a couple of months, starts to reverse the S&P 500.
Now, let's look at Bitcoin.
I've done a lot of conversations, had a lot of conversations about Bitcoin.
Bitcoins, and here you can see, they're cooking around $300 to $200 in January 2015.
They've recently climbed in U.S. dollars a little over $450, and it is, you know, where it's going to go, who knows, but...
Certainly, as fiat currency becomes more unstable, there is a strong argument to put assets in Bitcoin or other digital currencies because they are limited in terms of how much can be produced.
Whatever is limited in terms of its production is going to be more stable over time.
One of the reasons why gold remains relatively stable, I don't mean in terms of fiat currency, I mean in terms of things that it can buy.
One of the reasons that gold remains relatively stable is the amount of gold mined in any particular year, Tends to mirror the amount of increase in GDP, right?
So if the world adds 2% GDP in general, there's about 2% of gold added every year.
So gold remains relatively stable over time.
Bitcoin, the argument will be, of course, and I was talking about Bitcoin way back in the day when it was pennies and recommending it back then.
So one of the things that you can look at here is where you think Bitcoin is going to go as fiat currency, the euro, and The dollar in particular, as they become more unstable, and if the Fed stops doing these crazy asset purchases, you're going to see a big crash in, perhaps a crash in stock prices, what's going to happen with Bitcoins.
And this is important stuff to understand.
I mean, it's annoying to even have to know this stuff.
It really is.
But, you know, if the wizard is calling fireballs to rain down randomly on your livestock, well, you're kind of going to have to study a little bit of magic to know what's coming next.
So this is all stuff that would be wonderful to not have to know absolutely anything about.
But unfortunately, you do have to learn this stuff and you do have to talk about this stuff with people because it is important.
And so this cover-up, right?
This is a big financial fraud and cover-up that is occurring throughout the world.
We're just talking in particular in the U.S. at the moment, which is what is the value of your money?
What is the value of your money?
Well, the value of your money is that it's paper with ink.
It's not even that great to wipe your ass with unless you want to stay George Washington on your rectum.
It's not that great.
Look at Zimbabwe with their billion-dollar, multi-billion-dollar bills.
Look at Weimar Republic with the wheelbarrows of money to go buy a bread and the fact that people found it cheaper to burn their money for heat rather than go out and buy firewood.
If you look at what happened around the time of the French Revolution with the money, as soon as the government decouples money from any fixed commodity like gold or even Bitcoin, What happens is they just go hog wild on spending.
It is an unstoppable addiction, at least unstoppable within the paradigm.
It stops eventually, like even an adult coke addict stops when his heart stops.
You hope he's going to stop beforehand, but it's not hugely likely in the later stages of addiction.
And we can see this with Paul Ryan's...
Supported omnibus spending bill that added over a trillion dollars to spending at a time when the government is around 20 trillion dollars already in debt.
And the US government has, some people have calculated, up to 150 to 180 trillion dollars of unfunded liabilities, promises it made that it doesn't have the coin to cover.
And so you can only stave off reality for so long.
And the longer you stave off reality, the worse it is.
If you have some strange lump in your body, the longer you take to get to the doctor, the worse your prognosis is most likely to be.
And so you really do need to examine this kind of stuff and talk about it with stuff.
Talk about this stuff with people.
It's Christmas, time for getting together, but really talk about stuff.
This is really important.
This is the foundation of civilization.
When money dies, civilization dies, because you go back to this...
Fight club hunting deer in the canyons of abandoned office buildings trading sex for deer meat.
I mean, it's just brutal.
What happens in the Dark Ages is what happens when money dies.
And in the fall of the Roman Empire, they also watered down the money by adding a bunch of junk metals to the silver and gold coins.
And this caused one of the big problems in the economy, which ended up in the depopulation of the city of Rome from a million to 18,000 in space of a year or two.
And so...
Money is the foundation of civilization, and the stability of money is the stability of civilization.
And all of these games and tricks that the Fed is doing to cover up the fact that the economic system has, to put it mildly, wildly misallocated its capital.
And it's really tough.
When money starts to really lose its value, what happens is people on welfare and people on fixed incomes start to run out of the capacity to eat.
It is really that serious.
And then what happens is they riot.
And then what happens is what?
What happens?
Do you let the cities return to some escape from New York feral zone of Mad Max Thunderblades whipping across the sky?
Who knows?
Do you violate posse comitatus and have the army deployed to quell rioting in the inner cities or wherever it's occurring?
I don't know.
Do you get roving bands of people ranging through the countryside looking for any ear of corn they can rip out of a child's mouth?
I don't know.
But we must, must, must work to educate people on what money means and what happens when money dies.
Human beings are an ecosystem of life held aloft solely by the stability of money.
In other words, we have so many people on the world because at least there's some, even now, illusory stability in terms of the value of money.
When the value of money collapses, it's not just a, I'll cut back, it's millions of people may die.
And this is not hyperbole.
This is an actual fact gleaned from the repetition of this kind of stuff throughout history.
People can't afford medicine.
People can't afford food.
People can't afford heating.
And my concern is that because people believe that the government is supposed to run money and everything else that happens is the free market, people will blame the intermediaries between the consumer and the government.
So when the government screws up the value of money, then the prices at your local grocery store and the prices for your heating and all of that, they will go up and you'll get mad at those companies who are merely passing along the costs of collapsing and raped government money value.
And people will then say, freedom has failed.
What we need now is the iron fist of government to set things right.
What happened after the Weimar Republic And the only way to stave off that descent into fascism or to communism is to educate people and say that the problem when the value of money collapses is not money and it's not freedom.
It is the absolute political horror of allowing sociopaths with bottomless satanic greed to control money, to control people, and to destroy freedom.
And we must pry that power from the hands of the state with arguments, with reason, with compassion.
In order to pass along the freedoms that we inherited from our parents to our own children.
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