Today I’d like to share one final excerpt from my new book with you. It’s titled Beyond the Nest Egg, How to Be Financially Independent Outside of a Broken System.
Yesterday we set the stage for the book’s macroeconomic discussion. Today we’ll set the stage for the book’s suggested approach to personal finance.
The thing is – to manage our own finances successfully, we have to understand how all this macroeconomic activity impacts us personally. Here’s excerpt #3:
The Fed has spent the last thirty years consistently pumping cheap money into the financial system. By “cheap,” I mean money that it created from nothing.
In total, the Fed has created at least $8 trillion. That’s what we can verify. And there’s a good chance the Fed engineered even more new dollars through back-channels.
This onslaught of money created from nothing drove interest rates down to near-zero.
Then the commercial banks pyramided credit on top of these trillions of dollars by roughly ten-to-one. In other words, for every new dollar created, the banks could lend out ten dollars against it. And remember, this necessarily creates new money from nothing as well.
This all served to create a massive financial bubble in the US and many developed countries around the world.
Meanwhile, major western governments used this funny money to spearhead massive spending programs… for pretty much anything and everything.
The most obvious spending circled around military and welfare-state programs. But a quick search on the private search engine Brave (search.brave.com) for “most ridiculous government spending programs” will reveal all kinds of other shenanigans. It’s mind-blowing what these people have done.
As a result, many regular folks have been conditioned to see the government as this great cornucopia. Whenever there’s a problem, somehow our society has adopted the idea that it’s the government’s job to fix it. And given its seemingly infinite resources, the government has been quick to acquiesce.
That’s why all western governments are now drowning in debt.
Name any major western country and you can be sure that its debt-to-gross domestic product (GDP) ratio has ballooned in recent decades. In fact, many countries now service a debt that’s near or greater than 100 percent of their GDP.
These numbers are unprecedented historically. Never before have so many countries run up a debt that equals or exceeds their gross domestic production.
This is only possible in a world where central banks can create new base money from thin air. And that world has only existed since 1971. That’s when US President Richard Nixon removed the dollar’s final link to gold.
However, it appears we’ve reached the limit. We’ve come to the point where the economy simply cannot handle any more debt and cheap money.
The problem is, there’s no easy fix to this mess. The great Austrian economist Ludwig von Mises spelled out the dilemma very clearly in his great work Human Action: A Treatise on Economics.
Here’s Mises:
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.
If you keep going down that same path for too long, you’ll destroy the currency and wreck the economy beyond all recognition. This is the worst-case scenario. But if you recognize that your current trajectory is unsustainable, you can make the decision to reverse course.
This will result in a painful economic contraction. Artificially low interest rates and funny money fuel all kinds of malinvestment, and that malinvestment must be liquidated.
That’s what the necessary recession does. It clears out the bad debt and gets rid of unproductive companies. It’s not fun to go through, but it’s far preferable to destroying the currency and the entire economy…
-Joe Withrow
P.S. The new book just hit the shelves at Amazon. You can find it right here: https://www.amazon.com/Beyond-Nest-Egg-Financially-Independent/dp/B0CGG5G6XH/nch