How to Save the Free Market from the Fed… and Get Paid Doing It
Most people, including Wall Street investors, don’t realize that we don’t have free markets. We operate under a command economy, not unlike manifestly socialist or Communist countries, or dare I say, banana republics.
Who is at the helm of the command center? The Federal Reserve System, America’s private central bank. That’s right, the Fed’s a private institution. It’s not a branch of the government.
The scary truth that 99.9% of Americans don’t know is the Federal Reserve owns the U.S. money supply. Not the American people, not our government. Sure, the Treasury Department prints and coins the Fed’s money, and the Secretary of the Treasury’s signature appears on every Federal Reserve Note, as if the trillions of dollars of printed bills are government-issued. But that’s just part of the greatest ruse in the history of the United States.
This matters because time and again, the Federal Reserve’s manipulation of the money supply has led us into an inevitable cycle of boom and bust that wreaks havoc with markets. It impacts millions of Americans like you by destroying the wealth you’ve built up in your 401k, pension accounts, mutual funds, and other managed portfolios.
We’re now in the “bust” phase of the cycle, with the Fed pushing interest rates higher to combat inflation, and we’ve seen the consequences – an extraordinarily bad year for the stock market in 2022, with an estimated $8.2 trillion in losses.
This will, of course, turn around. But when it does, it’s going to put us directly on course for another market crash and potential recession. In a sense, it’s designed to do that.
There is a way forward, but it requires bold action, and I think now is the time to start calling for it. And the best part is, while we’re pushing for change, we can get paid for it because we know where this is all going to lead.
We’re talking about nothing less than saving the free market. Let me show you how.
Here’s the Biggest Con Ever Pulled on the United States
The Federal Reserve Act of 1913 was a stroke of pure, evil genius. A few years earlier, in November 1910, a handful of the richest, most powerful bankers in the U.S. and Europe and their agents got together in secret, on a private island off the coast of Georgia, to design a “System” to backstop each other’s banking interests in the event of future panics and bank runs. (They wouldn’t call it a bank because banks were hated at the time.)
They modeled their System on the Bank of England and the Swiss National Bank and engineered the election of a president who would sign their draft legislation into law. Through clever manipulation, they saw their monster come to life.
If any of the architects of the Federal Reserve Act were to offer an honest elevator pitch to legislators who would have to vote on it about what they were crafting and who it would benefit, it would go something like this:
“As a private central bank, with ownership of the country’s money supply, which you will cede to us, we can stand apart from your politics but back all the spending you want to get all the votes you need. You won’t have to tax the public much, thanks to us always being able to manipulate interest rates and make the public debt affordable. If that debt fails to attract buyers, we’ll be the buyers of all the debt you issue.
Not only that, we will also safeguard the banking system so banks don’t experience messy runs and instill public confidence in banks so hard-working Americans know their money’s safe. The economy will grow with the money we print and from deposits we lend out, and the country will prosper.”
Not without a lot of laughter from honest politicians, as few as there were then (or now for that matter), the legislation passed and the new president elected for the task – Woodrow Wilson – signed the Act into law on the day before Christmas Eve, 1913.
There’s a lot more to the story of the greatest and most brilliant ruse ever perpetrated in or on America, which you can read all about in exquisite detail in G. Edward Griffin’s masterful and seminal expose, The Creature from Jekyll Island.
But history is always informative, the full story of Fed manipulation is long, so I’ll fast forward to modern-day manipulation and boom-bust cycles the Fed has ignited and doused, like firemen setting an edifice ablaze then coming to everyone’s rescue, courtesy of artificially manipulated interest rates.
How the Federal Reserve System Has Wrecked Markets
The October 1987 stock market crash was preceded by rising interest rates globally, but higher rates didn’t cause the ’87 crash.
Rates were ticking up as the growing U.S. trade deficit and declining U.S. dollar fed inflation concerns. Meanwhile, equity prices were outpacing earnings growth partly due to leveraged buyout speculation being fueled by favorable tax treatment that allowed interest expenses on buyout debt to be deducted. At the same time this was happening, new investors, including pension funds, were moving aggressively into stocks.
The crash was caused by institutions enjoying robust gains after being sold untried and untested “portfolio insurance” products by fee-crazy Wall Street banks and brokerages.
When stock prices started falling on Black Monday, portfolio insurance schemes kicked in. As prices fell, insurance purveyors offset losses for their clients by shorting futures. The problem they didn’t bother modeling was what would happen as everyone selling futures short, per their insurance programs. What happened was, they pushed benchmark index futures prices down, which drove further selling in the cash market, which triggered more insurance shorting, which impacted all the clients who were sold similar insurance products. It ended up being one gigantic negative feedback loop, which nobody bothered testing or figured out would happen.
Needless to say, the Fed unleashed its liquidity hoses to control the conflagration. With the crash quickly under control and lowered interest rates greasing price growth, 1988 saw inflation rising above 5%, prompting the infamous Alan Greenspan-led Fed to raise rates quickly, to just above 9% by early 1989.
That overreaction led to a recession in the early 1990s.
But not letting what ended up being a mild recession play out, Greenspan aggressively pushed rates back down to below 3% by late 1992, which again fueled economic and stock market growth.
The New York Times lauded Greenspan’s performance later in the 90s declaring, “Greenspan makes a winning bet in the mid-1990s, resisting pressure to raise interest rates as unemployment declines. He argues that increased productivity, including the fruits of the computer revolution, has increased the pace of sustainable growth. Indeed, the Fed finds itself debating whether there is such a thing as not enough inflation, and a new Fed governor named Janet L. Yellen plays an important role in convincing Mr. Greenspan that a little inflation helped to lubricate economic growth.”
At the same time, the cryptic communicator of Fed policy, Chairman Greenspan, commenting on the dot-com boom warned about “irrational exuberance” in 1996, all the while feeding the beast with artificially low rates.
Of course, that market bubble popped in the spring of 2001, right when the Fed got rates back up to 6%.
But it wasn’t a 6% federal funds rate that caused the crash! It was artificially manipulated lower than free market-clearing rates that fed the “irrational exuberance” in the first place. The reality check came, and the market imploded when investors-cum-speculators figured out “eyeballs” weren’t the same thing as earnings.
Hence another crisis caused by the Fed, financial not economic. But despite that, these cyclical financial meltdowns, the byproduct of artificially manipulated interest rates, impact all aspects of the economy from consumers’ access to credit to capital allocation across businesses.
And what did Greenspan’s Fed do then? Of course, they lowered rates again, dramatically this time.
By June 2003 fed funds were down to 1%, setting the stage for the subprime build-up and subsequent meltdown in 2008, the Financial Crisis, and the Great Recession, and eventually quantitative easing and ZIRP (or zero interest rate policy).
How did artificially manipulated low rates fuel the subprime debacle? With rates low, yield-starved investors started buying packaged subprime mortgages that were easy to convene since lenders were making mortgages to anybody regardless of credit status, knowing they’d all be packaged into subprime deals with juicy yields everyone was clamoring for. Bankers then created derivative products on these loans, sliced and diced and structured them, and traded all of it like nothing they’d ever created before.
Once again, the bubble inflated by artificially manipulated low rates blew up, and of course, the Fed then had to drive rates down lower, to zero again, and kept them there as long as it would take for their big bank constituents to become solvent again. They went past solvency – they become profitable again, grew exponentially bigger than they were before the Financial Crisis, and eventually declared record earnings and profits.
Besides their interest rate see-sawing and managing the blow-ups they caused, the Fed’s been warehousing the government’s debt obligations, more than $8 trillion worth.
How else could politicians have spent so much on buying votes with stimmy checks and student loan forgiveness and the myriad programs they concoct, and issue trillions of dollars of debt without crowding out private borrowers and causing interest rates to skyrocket?
Now, all that spending and free money have come home to roost in the form of inflation. And the Fed’s raising rates per its original “mandate,” price stability. Even while they’re raising rates, markets are trying to front-run what they know will be the inevitable U-turn when the Fed “pivots” and lowers rates because they drive the economy into a recession.
It’s all so maddening. And manipulative. And unnecessary.
We’re not a banana republic, a Communist country, or a socialist nation, though we’re more than halfway there thanks to the central command manipulations of the Federal Reserve.
Now is the time to seriously plan on ending the Fed, because we don’t need them to save us from any crisis they caused, we only need them to stamp out inflation.
Or do we? No, we don’t need them for that.
How We Could Save the Free Market
Now’s the time to end the Fed because they’ve already raised interest rates. They can stop and be gone. We don’t need them to raise rates to combat inflation.
If the Federal Reserve Act was overturned today and replaced with the Taylor Rule, a formula that controls the money supply and ultimately interest rates based on the economy slowing too much or growing too much, along with some price stability parameters, rates would rise based on that simple formula that anyone can follow. It’d be based on non-partisan, government disseminated data, and a hell of a lot more reliable than what we have now.
The Taylor Rule, which Stanford economist John Taylor introduced in a 1993 paper, is a numerical formula that relates the FOMC’s target for the federal funds rate to the current state of the economy. While Taylor intended the rule to be a guideline for the Fed, it’s so simple and transparent and can do what the Fed does, only better, because it’s not subject to manipulation for the benefit of any constituents, or subject to human foibles or agendas.
Here’s the formula:
r = p + .5y + .5(p – 2) + 2 (the “Taylor rule”)
r = the federal funds rate
p = the rate of inflation
y = the percent deviation of real GDP from a target
Talk about ending the Fed and replacing it with the Taylor Rule, or any number of iterations of the Taylor Rule as tweaked by other economists who almost all agree it could replace the Fed, should start now.
The timing is perfect.
Yes, interest rates would keep rising under the Taylor Rule, because inflation hasn’t been tamed. But the Fed’s going to have to raise them anyway, maybe a lot more, because inflation isn’t “transitory” and there’s fairly universal agreement that raising rates is the right call. That’s from everyone following the Taylor Rule, including critics of the Fed and economists and analysts telling the Fed what it should do based on the Taylor Rule.
And now that you know what’s going to happen, you can play it and make money on it. It’s easy. The play is buying the ProShares UltraShort 20+ Year Treasury (TBT). You can buy shares directly or call options if you prefer to be more speculative. TBT is an inverse, leveraged ETF that goes up when Treasury yields go up and interest rates rise.
We’ve been making money on that in my subscription service. Come join us and take a stand against the Federal Reserve’s chokehold on America.
Leave a Reply