It’s 2007 all over again
As of this writing the Dow Jones Industrial Average is flirting with the record high set in October 2007. Prior to 2007, the Fed had kept interest rates low for years, inflating the housing bubble and a stock market bubble. Under the illusion they were richer, consumers were spending like crazy. All sectors of the economy seemed to be growing. All government’s pseudo-experts told us nothing could stop the awesome American economy. Then the bubble popped, and we learned it was all a lie.
The Boston Globe tells an eerily familiar story, “The market surged following more evidence that the Fed [Federal Reserve] will keep interest rates low, housing will keep recovering and shoppers aren’t pulling back on spending, though they’re paying more in Social Security taxes this year. The gains were broad: Twenty-nine of 30 stocks in the Dow Jones industrial average rose. All 10 industries in the Standard and Poor’s 500 index climbed.” Deja vu.
In a healthy economy, investors take money out of lower profit businesses and economic sectors and reinvest that money in higher profit businesses and sectors. As a result, some businesses and sectors go down while others go up. Because more money gets invested in more profitable businesses and sectors, overall production increases, growing the economy.
That’s not what’s happening. The only time all businesses and sectors go up at the same time is when the Fed creates new money out of thin air and its cartelized banks invest it in the stock market. That’s a sign of a bubble.
In a seemingly unrelated story, music industry sales increased for the first time since 1999. But the stories are related because 1999 was the peak of the dot.com bubble also created by the Fed.
The Fed is re-creating the conditions that caused the last bust. The same pseudo-experts who failed to predict the last bust are wrong again.
One of the reasons it’s hard to see the link between the Fed’s creation of money to the boom and bust cycle is the delay caused by the two part process. When the Fed creates money, it doesn’t immediately enter the economy, and it doesn’t enter at one location. The Fed is a bank for banks. When it creates money, the Fed increases the deposit account of a commercial bank customer. It would be like your bank adding a thousand dollars to your savings account balance. The money doesn’t enter the economy at that stage.
The price inflation starts when banks use that money as the basis for new loans. Since the Fed generally requires banks to hold about 10 percent reserves, banks turn around and make loans nine times greater than the new money in their balance at the Fed. In other words, for every dollar the Fed creates, banks create nine times more money out of thin air. They loan it out and charge interest. This is called pyramiding because the money creation process looks like an inverted pyramid. It’s extremely profitable for banks. It’s also legalized fraud.
When the new money drives price inflation too high, the Fed raises the interest rate. That triggers the bust. Then the Fed repeats the process.
But this last bust was different. The banks were so broke, they didn’t make news loans. Fed Chairman Ben Bernanke printed $2 trillion, but the banks sat on it while they shored up their balance sheets. As a result, price inflation stayed relatively flat. So far.
The problem is the banks recently started making more loans. Small business loans are up. More ominously, Consumer Affairs reported in October, “Realtors have long complained that if banks would simply adopt the lending standards that were in place before the housing bubble inflated, the housing market would recover. It’s taken a while but it appears banks are beginning to do just that. When JP Morgan Chase and Wells Fargo reported their latest quarterly earnings last week, both showed increased income from a surge in mortgage lending.”
Because the banks are making loans – creating more money out of thin air – price inflation will rise. Currently Bernanke is ignoring real price inflation in the economy, but the bogus CPI statistic will start rising. He will have to choose between raising interest rates to reduce inflation, causing a much bigger bust than 2008, or printing even more money until the dollar is destroyed, creating a Weimar Republic-like economic collapse. Hopefully he’ll chose the former, the sooner the better. Either way, anybody holding stocks, bonds or dollars – anything paper – will get wiped out.
By printing money, the Fed and banks artificially inflate economic statistics measured in dollars. More dollars in the economy means GDP and the stock market go up, but those numbers lie. Production is falling. Despite monetary manipulation, GDP fell in Q4. Unemployment rose in January despite 169,000 people leaving the workforce. The recession never ended. The Fed masked it with inflation.
New loans by the banks will cause another inflation crisis soon, probably this year, forcing Bernanke’s hand. Don’t buy the hype about the economy. Protect yourselves.
The views and opinions expressed in Conspiracy Theorist are the views and/or opinions of the author and do not reflect the views and/or opinions of the Dayton City Paper or Dayton City Media and are published strictly for entertainment purposes only.
Reach DCP freelance writer Mark Luedtke at MarkLuedtke@daytoncitypaper.com