I received another E-Mail from that same reader. I'll paraphrase his question and summarize my response.
Dear FSK,The topic of the Federal Reserve was initially raised in a forum about cars. The question that started the thread was "Am I better of paying for a car with cash, or taking out a loan?"
I'm still debating clueless losers in another forum. They raised a whole bunch of stupid arguments and I can't really answer them all properly. Will you give it a try?
Wage Slave Wasting His Time Educating Fools
I'll answer the initial question first. This is a simple Discounted Cashflow Analysis. The first question is: What rate of return do you expect to earn on your other investments? If you keep your money in a bank account earning 1%, you're probably better off paying cash (and you're also a fool for letting inflation steal your savings). If you believe you can get 6% investing in the stock market, use that rate. If you believe you can get 10%, use 10%. I have been averaging over 15%/year on my investments, over a 7 year period. After 7 years, I'm not sure if it's luck or skill or a combination of both. I think that my knowledge of the structural flaws in the monetary system have helped me be a better investor.
The other question is: Do you have other loans at a cheaper rate? If you have a mortgage at 6% and your car loan is 8%, you're better off paying for the car in cash and keeping your mortgage.
As long as you have a payment schedule for the car loan and a lump-sum cash price, you can do a discounted cashflow analysis to figure out the implied interest rate. The interest rate the car dealer is telling you is probably wrong. You have to take into account all fees and the "discount" you might get for paying cash. I would advise you to do the calculation yourself.
The Discounted Cashflow pricing model is sophisticated enough to handle a comparison of (1) purchase with cash, (2) purchase via loan, and (3) lease. When you analyze the loan and the lease, you need to analyze *ALL* payments, compared to the price you'd be charged with the cash purchase. This lets you calculate the effective interest rate of the loan. A lease is slightly more complicated, because a lease usually contains an option to purchase the car at the end of the lease term; valuing this option is tricky.
There is an inherent risk with leverage. You don't know when the next bust cycle will occur. If you use leverage, you risk being forced into bankruptcy during the next bust cycle. Any leverage used should be carefully minimized.
Typically, the car loan will be at a sufficiently high interest rate to make it unattractive compared to other ways to borrow money for investing. However, you can use a Discounted Cashflow analysis to do a true comparison. Excel has a function that calculates Discounted Cashlfow pricing for you.
Now, I'll address the specific points raised by the clueless losers in that forum:
The Federal Reserve only fixes short-term interest rates. The Federal Reserve does not fix long-term interest rates. Long-term interest rates are chosen by the free market.That's not true, because the Federal Reserve is expected to be fixing short-term interest rates in the future. If I knew that the average Fed Funds Rate would be 5% over the next 10 years, then the yield of a 10 year Treasury bond should be 5%. If it was more or less, there would be an arbitrage opportunity. This arbitrage is performed by the "free market", but it's an inevitable consequence of the fact that the Federal Reserve is expected to set future interest rates in a certain range.
With a corrupt monetary system, how can there be a "free market"? There is some free trade occurring, but it's heavily dampened by the corrupt monetary system, the taxation system, and government regulations.
This FSK guy isn't citing facts from reliable sources. Therefore his analysis is wrong.
M2 is growing at a rate of over 6% per year. You can look that up on the Federal Reserve's website. The current Fed Funds rate is 5.25%. You can look that up in many locations. Let's see, 5.25% minus 6% is -0.75%. Real interest rates are negative. I used 100% mainstream information sources for that part.
Some people say that M3 would be growing at a rate of 8-10% or more, if the Federal Reserve were still publishing M3. There's no "reliable source" for that anymore. Why not?
The Federal Reserve's policy of debt-based money can be confirmed from mainstream information sources. The Compound Interest Paradox is just straight Mathematics. The Compound Interest Paradox is very simple. When money is created via debt, only the principal is created. The money required to make interest payments is not simultaneously created. This guarantees that debts increase exponentially faster than the money supply over time. The Compound Interest Paradox guarantees that everyone is enslaved under a crushing debt burden. Even if I have no debts, everyone around me has crushing debts. I have to compete with debt-slaves when I look for a job. I am forced to accept the same working conditions as debt-slaves, even though I have no debts.
Unfortunately, if you aren't able to understand the Compound Interest Paradox, I'm probably not going to be able to help you. It took me a couple months of thinking to figure out what other sites were complaining about when they mentioned the Compound Interest Paradox. I think I've managed to explain the Compound Interest Paradox in simple terms.
The obsession with "reliable sources" is a form of the Strawman Fallacy. It's a form of censorship. A lot of "reliable sources" are heavily censored. To perform a true analysis, it is frequently necessary to cite alternative information sources. That's one of the things I'm trying to provide in my blog. I read other "alternative sources" and translate the information into simpler language. For example, I think I do a good job of explaining The Compound Interest Paradox in simple language.
Everyone knows that bloggers who disagree with mainstream media sources are insane.This is a bias that mainstream news sources are themselves spreading. I've heard many people repeat this.
If I controlled a newspaper like the NY Times, I would write about The Compound Interest Paradox at every available opportunity. If I controlled a major TV station, I would do my best to educate people about the fundamental structural flaws in the monetary system and taxation system.
Fortunately, I don't control a major newspaper or TV station. I'd probably die a mysterious death if I owned a mainstream media outlet and tried to publish such stories. Currently, my audience is only 150 people. I will educate them before attempting to reach a wider audience. As an obscure blog, I can fly under the radar of the bad guys.
I know that it is kind of incredible to realize this. It is a huge mental block to overcome. It's kind of depressing to realize this complete and total betrayal by mainstream news sources. It's more comfortable for you to think that I'm insane rather than actually check my analysis.
I consider it a major defect in the education I received, that The Compound Interest Paradox was never mentioned. I've read several economics books, and not one mentions The Compound Interest Paradox.
Are you saying that if the mainstream news doesn't cover something, that automatically means it isn't true?
It is much more convenient for you to believe that there is something wrong with me. The only alternative is extremely depressing. You don't want to realize that you have been completely and totally betrayed by television, newspapers, and the educational system.
I view this as another instance of The Grand Conspiracy Experiment. Anyone who suggests there is a big and nasty conspiracy is automatically insane. Their opinions are not worth considering. Everyone must believe The Strawman Fallacy. This guarantees that the big and nasty conspiracy will continue to exist forever.
It is kind of amusing. The person citing my blog in that car discussion forum is performing The Grand Conspiracy Experiment for me.
FSK proves he's a fruitcake when he starts talking about the Communist Manifesto.
This point was correctly answered in the forum. This is the Strawman Fallacy. If you disagree with my analysis of the Communist Manifesto, that does not detract from my analysis of The Compound Interest Paradox. My two strongest arguments are "The Federal Reserve is Evil" and "The Income Tax is Evil". I have yet to see any convincing arguments that the Federal Reserve and income tax are not evil.
I like my post on the Communist Manifesto. I concluded that 9/10 planks were implemented in the USA. Do you disagree?
Actually, I think my fruitiest post is the one on The Supreme Leader of Humanity. I'm not 100% convinced there actually is a Supreme Leader of Humanity. The possibility is serious enough that I think it's worth mentioning. My post on Transistors and UFOs is also kind of fruity. I think those topics are interesting, and so I mention them. Why should I censor myself because of The Strawman Fallacy?
When the stock market goes up, new money is created.
This is false. New money is created by a bank when they issue a fractional reserve loan. Typically, banks loan out the maximum amount they are legally allowed; banks with surplus reserves lend them to other banks. New money is only created by the Federal Reserve when it repurchases short-term Treasury notes. This money is then multiplied by banks as fractional reserve loans, driving up the money supply.
Consider a specific example. I make a shirt and sell it to you for $10. Has the money supply changed? No. The money supply is the same. You have $10 less and I have $10 more. Only banks and the Federal Reserve have the power to create money. When I made the shirt, I didn't create money. I created wealth.
Creating wealth is deflationary. There are more goods and services, but the same amount of money. Therefore, prices should decrease over time. Prices don't actually decrease, because the Federal Reserve creates new money faster than new wealth is created.
Similarly, the stock market does not create money. When stock prices go up, the stock can be used as collateral for loans and cause money creation that way. Stock prices go up, because the Federal Reserve keeps printing new money. As the rate of money creation goes up or down, stock prices go up or down. As the expected future rate of money creation goes up or down, stock prices go up or down.
If I buy a share of stock from you for $50, that transaction neither created nor destroyed money. You have $50 more and I have $50 less. Each stock transaction, no matter what the price, neither creates nor destroys money. Many people who invest in the stock market are leveraged. They will suffer margin calls if stock prices decline, so money actually is destroyed when stock prices decline. People are forced to repay their margin loans when stock prices decline, i.e. money is destroyed. As stock prices rise, people take out more margin loans, i.e. money is created.
I'll mention this point in boldface. Wealth and money are not the same. A shirt is wealth. A piece of paper with the number "20" printed on it is money. In a fair monetary system, they would be practically equivalent. In a fair monetary system, the amount of money someone has would equal the amount of wealth they had created, minus the amount of wealth they had consumed. Corrupt money is a tool that lets the bad guys steal the wealth of productive people.
If you are critical of the Federal Reserve and our monetary system, you are being critical of the free market.
The defective monetary system is the primary reason why the US does not have a free market. The defective monetary system is the primary reason the US economy resembles a communist dictatorship more than a free market.
I would like to see a free market. As an extremely skilled worker, I would welcome the opportunity to sell my services in a free market. Unfortunately, no free markets exist anywhere in the world.
Guernsey has a free market.
Actually, it doesn't. According to the Wikipedia article cited, British pounds trade interchangeably with Guernsey's money. This makes the British central bank Guernsey's central bank. Further, Guernsey is under pressure for compliance with EU regulations. I don't think Guernsey can be accurately described as a true free market.
A free market is an abstract ideal that can't be realized.
How do you know there isn't some malicious force preventing a truly free market from existing? How do you know that there aren't a group of people who secretly control the whole world's resources? Maybe they're intentionally preventing free markets from existing, because they would represent a threat to their absolute power?
If you're in debt and there's hyperinflation, you're screwed.
That's false. If you're in debt and there's hyperinflation, it's like you can repay your loan for nothing.
If you're in debt, the thing you have to fear is deflation. The Federal Reserve will never allow deflation over an extended period of time. That would benefit the average person, who is holding primarily cash. In the late 1990s, there was deflation briefly. Due to productivity gains from computers, the economy was expanding faster than the Federal Reserve could inflate the money supply. New wealth was being created too quickly.
I started my own business without taking on any debt. Worship my business acumen!
It is quite impressive to start a business without debt. You were overcoming a humongous handicap. Why should the monetary system be so unfair that a successful small business is the exception, rather than the rule? Why should the monetary system be so unfair that only exceptionally talented people can successfully start their own business?
The 1929 stock market crash was caused by greedy speculators.
The 1929 stock market crash was caused by the Federal Reserve.
Quick trivia question: Was the Federal Reserve created BEFORE or AFTER 1929? Most people will answer AFTER. The correct answer is BEFORE. The Federal Reserve was created in 1913.
The boom in the 1920s was caused by the Federal Reserve. The Federal Reserve kept interest rates at an artificially low level. This encouraged a lot of speculation in the "free market". Prices shot up. The Federal Reserve insiders knew that interest rates were going to be jacked up in 1929. They sold assets and stopped issuing loans before the crash. Then, the Federal Reserve jacked up interest rates, causing the crash. The insiders made a bundle, buying assets cheap after the crash. The non-insiders were all bankrupted.
This cycle is repeated every 5-20 years. The average person is not an insider. The average person doesn't know when the bust is going to occur, so it's risky for the average person to take on debt. A lot of wealth was confiscated in 1929, so the boom/bust cycles don't need to be as severe anymore.
There was a banking crisis in 1933. This was "solved" by President Roosevelt. President Roosevelt confiscated everyone's gold and declared the United States bankrupt. The US government defaulted on its promise that dollars were backed with gold.
There can't be a fundamental structural flaw in our monetary system. Congress would never allow such a thing to happen. The government is looking out for our best interests.
Are you kidding me?
Let's start with one specific example. Some polls indicate that over 70% of the population favors an immediate withdrawal from Iraq. Why does the US still have troops in Iraq?
Similarly, even if 70% of the people managed to develop extreme outrage towards the current monetary system, that still doesn't mean that the monetary system would be reformed. It is impossible to achieve meaningful reforms by voting.
The international bankers bribed a bunch of Congressmen and the President to pass the Federal Reserve. They were able to get banking leaders in the US to support a corrupt monetary system, because the banking leaders knew they would benefit handsomely from the Federal Reserve. They knew in advance when interest rates would be raised or lowered, and made outrageous profits.
In case you haven't noticed, Congressmen are not selected for their intelligence. They are selected for their ability to look good on TV. They are selected for their ability to be corrupted by lobbyists. Most Congressmen don't have the time to read every single law. They vote the way their backers tell them to vote.
Schools are intentionally dumbed down. People are intentionally kept ignorant about Mathematics and economics. It is important to make sure most people don't understand the Compound Interest Paradox.
I'm afraid that the Compound Interest Paradox is sufficiently complicated that only 1-5% of the population is capable of understanding it. It is impossible to make more than 50% of the people understand and vote for a sound monetary system.
There are too many people who profit handsomely from the corrupt monetary system and taxation system. They won't give up their perks voluntarily.
I don't live in the USA. Why should I care about the Federal Reserve?
All countries have a corrupt monetary system and taxation system. Replace "Federal Reserve" with the name of the central bank in your country. They're all the same.
The only solution is for Congress to repeal the Federal Reserve Act. Alternatively, Ron Paul could be elected President and abolish the Federal Reserve via executive order.
There is zero chance of that happening. It is impossible to educate 50% of the people and make them be strong advocates for monetary reform. Even with 50% support, how do you know which candidates to vote for? There are all sorts of dirty tricks that can be used.
There is another solution. People should develop their own private monetary system. They should do productive work and not report it to the government for taxation and confiscation. In other words, it's the Ayn Rand "Atlas Shrugged" solution. It doesn't matter what the clueless fools decide to do. They aren't important. It's only necessary to convince the people who are smart enough to be productive workers. I'm planning to give the details of this solution in later posts.
I'm not just some idle talker. I have a specific solution and I'm getting ready to start looking for people to implement it.
I tried to answer all the points raised on that forum. Let me know if I missed any.
That's one of the reasons I decided to start my own blog. It's impossible to get an intelligent debate on someone else's forum. I try to answer all comments here, except for those that are obviously spam.
I'm not really interested in wasting my time debating clueless losers anymore. I'm not responsible for what happens to them. On the other hand, I'm trying to answer all reasonable questions.
My intended audience is people who are smart enough to understand things like the Compound Interest Paradox and the Strawman Fallacy. I'm not going to censor some of my weaker arguments, so that people will take my stronger arguments seriously. I have yet to see any convincing arguments anywhere that the Federal Reserve is not evil and that the income tax is not evil.