submitted by jwithrow.
The following is an excerpt from Chris Rossini’s new book titled “Set Money Free: What Every American Needs to Know About the Federal Reserve”. Chris does a magnificent job of breaking down the Federal Reserve System, monetary policy, and free market economics in a way that is comprehensive yet easy to understand. Chris also had the foresight to lay the book out as a quick-reference guide which makes it a tremendous tool to have on hand.
The topics of central banking and the Federal Reserve System are the most important economic matters of our time and this book does a tremendous job of shining the light of truth in the dark corners. There will be another major financial crisis within the next decade of greater magnitude than the crisis of 2008 specifically because of the unholy alliance that is the Federal Reserve, Wall Street, and the federal government. The only way to be prepared for such a crisis is to first understand how and why it will occur. Only then will you be able to formulate a financial plan accordingly. Chris Rossini’s “Set Money Free” is a great step towards gaining that understanding.
The book is available on Amazon here:
From Chapter XI: The Fed Causes Economic Booms & Busts
We’ve covered extensively how the Fed’s money creation is the source of general price inflation. However, the problems don’t stop with rising prices and robbing us of our purchasing power.
The new money creation also creates serious distortions in the economy. Blame for the wild economic booms & busts can be laid right on The Federal Reserve’s doorstep.
The Fed brings about the roller-coaster ride by manipulating interest rates. Let’s go over some basics before we cover The Fed’s interventions:
What is an interest rate?
Let’s say that you borrow $100 from your friend John, and agree to pay him 5% interest, due in 1 year. So, in one year, you’ll owe John $105.
What valuation have you just made? Well, in this exchange, you value having $100 right now more than you value paying John $105 a year from now. Conversely, John has made a valuation as well. He valued $105 a year from now more than he values the $100 that he’s giving you now. As with all exchanges, both parties desire what they are getting more than what they are giving up.
What does the 5% interest reflect? Well, since John is loaning the $100 to you, it means that he has $100 less that he can spend for the next year. He is giving up, or sacrificing, the ability to consume $100 worth of goods and services for an entire year. John truly is making a sacrifice. After all, we live in an uncertain world. What if John is no longer around in 1 year? He is also taking a risk. What is you skip town and don’t pay him back the $105?
Well, in this case John has a lot of confidence that he can trust you, and that he will be around in a year. He also has a large amount off savings that he has accumulated, so the loan makes sense at this time.
But what if the situation were different? What if John was elderly, in poor health, and without much savings accumulated? Perhaps, in that scenario, loaning you the $100 would constitute too big of a sacrifice on his part. He may only agree to loan you the $100 in return for $145 in 1 year.
The key takeaway from this mental exercise is that there are an infinite number of variables at play when interest rates are agreed upon between exchanging parties. And those variables can change at any time.
An interest rate is a price like any other. The variables that go into a mutually agreed upon price depend on each individual’s value scales at the moment of the exchange…
What are “business fluctuations” and the “business cycle”?
Since we live in a world of never-ending change, many forecasts and investments made by entrepreneurs will turn out to be wrong. Neither can be reduced to an exact science. It’s always a speculation.
With that being the case, there will always be localized “business fluctuations” that occur. There will also be natural disasters that will affect a portion of an industry, or even an entire industry, while all unrelated industries go unscathed. Business “fluctuations” are unavoidable.
What is called the boom/bust cycle, or “business cycle”, is avoidable. A business cycle deals with a general boom & bust. In other words, the booms & busts are not localized to a particular industry or sector only. They are economy-wide.
Money is the one link that connects all economic activity. In order to have economy-wide booms & busts, it means someone (or something) is messing with the money supply. Well, that something is The Fed, and it most certainly does mess with the money supply.
Is the Fed a “price-fixer”?
Yes. The Fed fixes the price of credit, or interest rates. Now, if you read the first couple of sections of this chapter, you’re probably a bit intrigued right now. The examples clearly displayed that there are an infinite number of variables at play when interest rates are decided upon by two parties. And those variables can change at any time.
Well, an uninvited third party (known as The Fed) has inserted itself into countless transactions that take place each day of our lives. How can someone who is not one of the parties to an exchange know what the agreed upon price (i.e. interest rate) should be? Answer? They can’t know. Ludwig Von Mises described central planners perfectly: “A government can no more determine prices than a goose can lay hen’s eggs.”
If The Fed can’t possibly know what interest rates should be, it follows that they are distorting what interest rates would be had they not intervened. Without The Fed’s interventions, interest rates would naturally be agreed upon in the marketplace. Instead, The Fed jumps in and falsifies the balance between savers and investors. It falsifies reality!
Now, can The Fed get its wish, and drive interest rates in the direction that it desires? Yes, for the most part, it can. Can The Fed avoid the economic ramifications of its interventions? That, it cannot do.
The moment that The Fed falsifies interest rates with its schemes, it sets into motion an artificial boom, which must be followed by a very painful economic bust…
Who gets blamed for the bust?
When the bust occurs, government and its propaganda machine media go into all-out Fed protection mode. Anyone and everyone will get blamed before the Fed. The media will purport that the crisis hit despite the benevolent central planners. The media is nothing but a fog machine. For as Jörg Guido Hülsmann writes: “The crisis did not hit us despite the presence of our monetary and financial authorities. It hit us because of them.”
And yet, they are not only given a free pass, but are actually sought out to save us from the mess that they’ve created. Murray Rothbard wrote: “Instead of being habitually pelted with tomatoes and rotten eggs, the chairman of the Federal Reserve Board, whoever he may be, whether the imposing Paul Volcker or the owlish Alan Greenspan, is universally hailed as Mr. Indispensable to the economic and financial system.”
Not only are they considered “indispensable,” but more power flows their way after each crisis. Ron Paul points out that: “even though the Fed continued to make the same mistakes over and over again, no one in Washington ever questioned the wisdom of having a central bank. Instead, after each episode the Fed was given more and more power over the economy.”
What a system! The very culprits of bringing on economic misery always seem to end up smelling like roses! Ron Paul again: “Isn’t it amazing that the same people who failed to see the real estate bubble developing, the same people who were so confident about economic recovery that they were talking about ‘green shoots’ five years ago, the same people who have presided over the continued destruction of the dollar’s purchasing power never suffer any repercussions for the failures they have caused? They treat the people of the United States as though we were pawns in a giant chess game, one in which they always win and we the people always lose. No matter how badly they fail, they always get a blank check to do more of the same.”
Blame for the terrible suffering always ends up on the doorstep of the free market! Yet, a free market does not exist! We are forced to use government’s paper as money, they can (and do) increase its supply on a whim, and these pieces of paper are a part of every single financial transaction. Since the money is controlled, the market is controlled. It cannot possibly be free.
Nevertheless, the free market gets the blame. “Greedy businessmen” are the source of everyone’s financial ills. The government must “do something”. The Fed, meanwhile, either flies under the radar, or is called upon to come to the rescue as well…
**This excerpt just highlights this particular chapter. Please purchase a copy of the book to read it in its entirety.