Rodney suggested on Monday that the Fed does a whole lot more harm than they do good… so what is the point of the Fed, anyway?
It helps to look back to the very creation of the Fed in 1913, to see just how much they’ve screwed up.
Prior to its inception, there was a long series of depressions between 1835 and 1896, followed by the severe panic in 1907 that continued to wreak havoc on the fragile banking system. The Federal Reserve Act was passed to offset these poor economic conditions, high volatility in interest rates, and stimulate borrowing — to say nothing of money printing and QE.
After the Fed was created, volatility went down and so did interest rates. It seemed like a success!
But for all the “good” it did, what we failed to see was that the Fed was feeding and exaggerating a natural bubble… we were just too drunk on the results to notice.
The bubble started around 1914 with World War I.
For us, it was a total boon! It was Europe’s war at first, but they needed the military machinery and food to supply it, and America just happened to be the up-and-coming industrial power to do the job. It didn’t hurt that Henry Ford had just launched his new assembly line, making us the new leader in production efficiency.
That catapulted us into a major exporter and first world economy virtually overnight.
After the war, the world boomed like it hadn’t before, and countries all over the planet went on a debt spree — especially the U.S., encouraged by liberal monetary policies.
The U.S. kept expanding its capacity, and Europe quickly came back online. That caused the 30-Year Commodity Cycle to peak right on cue in 1920, and tractors entered their own bubble from 1916 to 1929, revolutionizing agriculture at the most inopportune time.
The 1920s developed into a broad bubble of excess production by farms and businesses, excess borrowing and expansion by consumers, and stock speculation — everything you’d expect in the fall economic season. In 1929, 40% of bank loans were fuel for stock speculation.
