Yesterday we talked about how the “Great Taking” isn’t in the future… it already happened.
I’m referring here to a popular book and documentary making the rounds in the alternative finance space. It posits that the global bankers are going to set off a great depression and legally steal everyone’s wealth. Afterwards, they will force a central bank digital currency (CBDC) on us.
The book seems to suggest that the Federal Reserve’s (the Fed’s) aggressive rate-hiking campaign was part of that plan. Higher interest rates are what will trigger the crash.
I don’t see it that way.
For one, I don’t see the incentive for bankers to execute such a plan. With the fractional reserve banking system and fiat money, they control and influence the vast majority of the world’s wealth already.
What’s more, I believe the powerful New York banks are actively opposed to a retail CBDC. They have a very big incentive to do so. We can talk about that more tomorrow.
The idea I’d like to explore today is that recessions are healthy. They are necessary.
Keynesian economists have dominated Academia and American politics since the 1960s. They conditioned us to believe recessions were bad. And in their arrogance, they told us that their policies could stop them from happening.
That’s why they used the central banks to drop interest rates to zero in response to the financial crisis of 2008. The world’s central banks colluded to execute what they called zero interest-rate policy (ZIRP).
That made borrowing money effectively free – for those closest to the money spigots. And here in the US they proceeded to inject trillions of new dollars (created from nothing) into the financial system. From there some of those new dollars trickled into the real economy.
They said this funny money would work as stimulus. And in a sense it did.
ZIRP and funny money fueled all kinds of malinvestment. That is to say, the free money funded countless companies and projects that simply aren’t economical with normal interest rates. That includes the electric vehicle (EV) “revolution” and all these “green energy” initiatives they pushed on us.
The onslaught of liquidity also sent asset prices soaring. Real estate… stocks… bonds – everything skyrocketed in price.
As we noted yesterday, those closest to the free money got to buy up these assets first. They are the ones who bid up asset prices. That made it harder for regular folks in Main Street America to play the game.
But their “stimulus” didn’t drive sustainable economic growth. It warped the economy and redirected precious resources (capital/natural resources/labor) to uneconomical endeavors. We call that malinvestment.
Because these uneconomical companies and projects can’t pay for themselves, they constantly need new injections of liquidity to survive.
That’s why the great Austrian economists always warned against Keynesian theory. They pointed out that this kind of “stimulus” creates a quagmire.
Here’s how Ludwig Von Mises put it in his great work Human Action: A Treatise on Economics:
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
What Mises was saying is this…
Once you go down the path of manipulating interest rates lower and printing new money from thin air, you necessarily sow the seeds of a future crisis.
Yes, you may successfully push asset prices higher in the short-run. But you’ll drive consumer price inflation and make the economy quite fragile in the process. Then you’ll need to print more and more money just to keep the game going.
If you keep this up for too long, you’ll destroy the currency and wreck the economy beyond all recognition. That’s the worst-case scenario.
But if you recognize that these policies are unsustainable, you can make the decision to reverse course.
Doing so will result in a painful economic contraction as all the malinvestment you enabled is liquidated. The uneconomical projects will be scrapped. The zombie companies will go bankrupt… and all associated debt will be written off.
That’s what the necessary recession does. It clears out the bad debt and gets rid of unproductive companies.
It’s not pleasant. But this process will free up resources for better use – so long as it’s accompanied by normal interest rates.
So I don’t see the Fed’s aggressive rate-hiking campaign as a devious plot for destruction. Quite the opposite.
Normalized interest rates are going to cause a much-needed recession. It will get rid of all the malinvestment that’s accumulated over the last sixteen years. That is, if we let market forces work without intervention.
Higher rates and a recession will also force some degree of fiscal restraint on governments once again. The days of running trillion dollar deficits will have to end one way or another.
This is exactly what needs to happen if we want to salvage whatever’s left of the American dream.
It’s also what needs to happen if we ever hope to restore sound money to this country. That would quickly resurrect the middle class and reverse the Great Taking.
Of course, there are powerful forces out there who don’t want America to save itself. That’s what makes 2024 such a pivotal year.
The battle lines are drawn. The question is – how will it play out?
-Joe Withrow
P.S. Ironically, I believe the Fed needs a recession and higher rates to defend the dollar and save the commercial banking system as well. If I’m right about this, the Fed’s incentives are directly opposed to those of the globalist faction and its “Great Reset” with CBDCs.
We’ll talk more about this dynamic tomorrow. And if you would like a deeper dive, you can get it in my book Beyond the Nest Egg right here.