The Federal Reserve has sabotaged the economy since 1913 with its socialistic interventions. Every single boom created via its artificial credit expansion has resulted in disaster, which includes the Great Depression, which was caused by nearly a decade of inflation that begun as an effort to help finance the government’s involvement in World War I. The Federal Reserve’s efforts appear akin to a blind infant performing a piano concerto but the truth is far worse. When not manipulated by the Federal Reserve, interest rates are determined by the ratio between savings and consumption among all the people, a ratio economists call time preference. By creating trillions of new dollars and thereby artificially lowering the interest rate, the Federal Reserve has created an «everything bubble.» Every asset class is ripe for a massive crash.

Government didn’t suddenly start running deficits and businesses didn’t suddenly become greedy or acquire the power to dictate market prices. The new dollars created by the Federal Reserve must go somewhere, and where they go, they bid up prices. Further, as the new dollars are created, they’re almost always distributed to the rich and powerful before «trickling down» to the poor and middle class and bidding up the prices of the things they buy most. The boom was a binge that led to record levels of debt, including automobile, corporate, credit card, mortgage, small business, student loan, local government, state government, and the national government’s $30 trillion debt .

Further, inflation’s unpredictable impact on the price structure causes a significant increase in business errors, which leads to a surge in businesses overextending themselves and going bankrupt, as well as shortages and surpluses. Finally, inflation causes a redistribution of wealth from those on fixed incomes, those unaware of the changes in the price structure, and those unable to raise their prices and wages early in the cycle to those who can and do raise their prices and wages early in the cycle. These symptoms are the beginning of a depression, a time when the people and government must pay off or liquidate their debt and accumulate new savings before reinvesting. This is where the Federal Reserve finds itself against a rock.

If it stops inflating and raises interest rates significantly to encourage savings and end the binge, the national government won’t be able to make the interest payments on its debt with current tax funds. The national government, along with many businesses, local, and state governments, will go bankrupt if rates are raised significantly. The latter is very likely the choice the Federal Reserve will make without massive political pressure against it because it would inflate away its debt. In short, the government will likely try to pay its debts by printing tons of dollars, but those dollars will be worthless or close to worthless, like your savings.

Yes, the federal government can abolish regulations, all of which are pure waste, radically reduce its spending, and end its numerous expensive wars that also increase prices by obstructing trade and destroying resources. This will help your personal finances, given the inevitable rise in interest rates on savings accounts, CDs, etc., that will be coming, by helping you pay the higher prices caused by the Federal Reserve’s inflation, preparing you to buy cheap assets in the coming crash, and readying you to reinvest more quickly. It will help the overall economy in the same way, by cleansing the system of debt. The national government could also intentionally default.

It would initiate a recession, since holders of the debt would take those losses, but openly admitting the government’s inability to pay has the advantage of discouraging future lending to the US government. Its debt is catastrophic, but its assets are astronomical. The US government can disgorge itself of assets so that it doesn’t have to print dollars to pay its bills. As people’s savings are wiped out, they’re likely to get scared and angry.

Understanding these truths, the politicians are likely to change course under increasing political pressure and allow rates to rise to belatedly rescue the dollar.

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Source: CHRIS LEROUX | MISES.ORG