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Thursday, November 27, 2008

How the Federal Reserve Causes Recessions and Depressions

TLP has left a new comment on your post "The Federal Reserve Caused the Great Depression":

How does the Federal Reserve cause a depression?

This is the essence of the Compound Interest Paradox. I'll repeat it again.

With debt-based money, the supply of money is always less than all outstanding loans. In the present, suppose the M2 money supply is $10T and the total outstanding debt is $60T. (I'm using round numbers.)

With interest rates at 2%, people will take out a certain amount of loans. This keeps the money supply up.

Suppose the Federal Reserve jacked up interest rates to 10% or 20% or more. Then, people would stop taking out loans.

Suppose that $5T of loans were repaid, and no new loans were issued. Now, the M2 money supply would be $5T and total outstanding debt would be $55T. Prices would crash in half, but the effect of money supply inflation/deflation is not uniform. Some debtors would have a hard time raising money to repay their loans.

In the Great Depression, some sources indicate the the Federal Reserve crashed the money supply by 50% or even 66%. People had loaded up on debt in the 1920s boom, to expand their businesses and take advantage of the boom. During the crash, they lost their farms, their businesses, and their homes. They were unable to repay their loans.

With fiat debt-based money, the Federal Reserve has the power to create recessions at will.

By the rules of the monetary system, boom/bust cycles are inevitable. If the Federal Reserve keeps interest rates low, then there will be an extended inflationary boom. When the Federal Reserve raises interest rates to stop inflation, there is a crash.

In the 1920s, the Federal Reserve insiders knew that their purpose was to loot and pillage the American people. (Some off-the-record comments indicate this.) In the present, I don't know if the Federal Reserve insiders believe their own propaganda, or if they're consciously aware of the scam.

For this reason, someone who plays by the rules of a corrupt system cannot accomplish good. No matter what Ben Bernanke does, he is stuck. If he keeps interest rates low, there will be massive inflation to bail out banks. A lot of wealth will be transferred from the productive sector of the economy to the parasite sector via inflation. If Ben Bernanke jacks up interest rates to stop inflation, then large banks will go bankrupt, and the entire monetary system will unravel. If FRE and FNM and other banks are not bailed out, then there will be a huge economic crisis.

By jacking up interest rates, the Federal Reserve crashes the money supply, causing recessions and depressions. Inflating the money supply to bail out banks is also damaging, because that transfers wealth from the productive sector of the economy to the parasite sector.

Financial industry insiders benefit on each leg of the boom/bust cycle. During the boom, they borrow and load up on assets. During the bust, they don't have to "mark to market" their holdings. During the recession, large banks may stay in business even though they're technically bankrupt, due to "Level 3 Assets" and other accounting tricks. Individuals lose their homes and businesses, but the insiders always profit.

Ben Bernanke is literally playing the no-win game. (Just like in "Wrath of Khan". Fnord!) The only way to win the no-win game is to cheat and break the rules. Ben Bernanke doesn't have the intellectual capacity to do this, but fortunately other people do.

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