Historical, or Hysterical
The Federal Reserve states that it “conducts the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy.”
There is not much regarding our economy that Federal Reserve policy does not affect.
Since 1913, the US unemployment rate has ranged from 2.5 percent in the early 1950s to 25.0 percent during the Great Depression. Inflation has ranged from positive 24 percent to negative 16 percent. While the Fed has some influence over money supply, they have no control over money demand or how money is spent, which has a significant impact on employment and inflation.
The Fed’s goal to “moderate long-term interest rates” below free market levels is a form of price fixing. Since price fixing never works for long, it is no wonder the Fed has been unsuccessful in this goal. Since 1913, ten-year Treasury rates have ranged from 0.5 percent in 2020 to 16 percent in 1981.
The Actual Function of the FED
The Fed’s real purpose is to enable banks to make loans by creating money out of thin air, and then to bail them out when their loans go bad. It has been successful in that goal, as we saw with the bank bailouts during the Great Recession.
As Murray N. Rothbard explained:
“Banks can only expand comfortably in unison when a central bank exists, essentially a governmental bank, enjoying a monopoly of government business, and a privileged position imposed by government over the entire banking system”.
The Fed’s other main purpose is to help the US government borrow. They have been very successful at this, as the government debt-to-GDP (gross domestic product) ratio has more than tripled in the past forty years to over 120 percent.
Since the Fed’s founding in 1913, the US dollar has lost 97 percent of its purchasing power. Furthermore, Fed policies helped engineer the Great Depression of the 1930s and the Great Recession of 2008–09. - ZeroHedge
A History Lesson
If you go back to March 2000, when the dot-com bubble collapsed, the NASDAQ peaked at 4600, and the market dropped by 30% in the next 15 days. And after that bone-rattling drop people said it’s all over. The worst has happened, and you should buy the dip. You’re going to make a lot of money.
And over the next two years, they kept buying the dip, but over the next two years, the NASDAQ went from 4,600 to 3,300, all the way down to 800. An 80% plus decline and all that dip buying resulted in massive losses and pain.
Are we headed down that same path?
There are many reasons why it has been wise to be safe for some time. Jeremy Grantham says we are in the fourth SuperBubble of the last hundred years.
Previous equity superbubbles had a series of distinct features that individually are rare, and collectively are unique to these events. In each case, these shared characteristics have already occurred in this cycle. The checklist for a superbubble running through its phases is now complete.
