Donald Trump has correctly identified the Federal Reserve (the Fed) as the main culprit behind the recent economic downturn although unfortunately his ire directed at the Fed is for all the wrong reasons. Since the Fed’s “modest” summer rate cut, stocks and bonds have done precisely the opposite of what they were supposed to do. The slashing of already low interest rates was supposed to signal the end of a period of so-called “quantitative tightening” and help to free up money that would be injected first and foremost into stocks.
Instead of accomplishing this, the opposite was achieved. The Dow Jones took a massive tumble in the wake of the Fed’s decision whilst the bond market in the US experienced an inverted yield curve which is typically a tell-tale sign of a recession - aka, a sign of a bubble about to burst. Bond markets in Europe have in many cases performed ever worse in recent weeks. All the while, gold continues to be bullish for all the predictable reasons - it is a consummate safe haven in uncertain times.
But whilst some blame the trade war for causing the mess and whilst the Democrats and Republicans continue to blame each other as is to be expected in the run-up to the 2020 election, the main problems all boil down to the Fed.
At the moment, America is not a fully command economy but nor is it the fully fledged free market economy that most people think that it is. In a full scale command economy, central planners control the means of production, production quotas, employment quotas, wages and prices whilst summarily manipulating the nature of money and currency on a continuous basis. In such an un-free economy, a free economy still exists: this free economy is called the black market.
Centrally planned economies typically use the force of very strong law enforcement to prohibit a parallel market economy from developing below the surface of the totally planned economy. Even so, a black market has existed in every major command economy in modern history. If people are willing to literally risk their lives to engage in economic practices dictated by the market rather than by central planners, there is little hope that a semi-free economy like the current US model could use the powers of soft force and strong persuasion to fool the wider public forever.
At the moment, the US exhibits several signs of a command economy ranging from controls on taking capital abroad to crippling regulations on industry and commerce. When all is said and done, the Federal Reserve remains the largest hallmark of a command economy structure in modern America in spite of being a technically “private and autonomous” body. In reality, the Federal Reserve functions more like a 20th century politburo combined with a 19th century style central bank than anything that is legitimately private or autonomous. But it is not just the peculiar, highly secretive and thus far ‘un-auditable’ nature of the Fed that presents the biggest dangers to a healthy American economy. The biggest problem with the Fed is actually what it does in public - the manipulation of the money supply.
Ever since Richard Nixon closed the gold window in 1971, the Fed has used and abused its control over a fiat dollar to manipulate the American and much of the global economy. By proclaiming interest rates artificially rather than allowing the market to determine interest rates and through the ever more frequent monetisation of debt, the Federal Reserve attempts to rig the market through a process of monetary control that has led to decades of inflation wherein the value of a a fiat dollar has more or less continually fallen when measured against the stable money that is gold.
This manipulation has caused multiple recessions as a result of the fact that one can fool the market for a while but one cannot fool it forever. As such, when the Fed floods the market with fiat money, some people (particularly those at the top who are the first to receive the freshly printed dollars) see their material condition improve. Yet rarely if ever does this newly found “counterfeit” wealth trickle all the way down to the poorest. Most horrifyingly, savers and those on fixed incomes see the purchasing power of their dollars decline almost immediately. Thus, the inflation that the Fed deviously calls “stimulus” is instantly harmful for ordinary people and only temporarily helpful to the super-rich. To put it simply, the Fed’s pro-inflation policies make the rich temporarily richer whilst making the poor and those on median incomes permanently poorer.
When the super-rich become flush with fresh money from the Fed, they tend to pour such money into major assets. After a while, it becomes clear that these trends are unsustainable. When this reality is met with a parallel reality of malinvestment among the super-rich who are often too clever for their own good, the asset bubble created by the Fed’s “easy money” policies bursts, thus creating a recession. Such recessions are a result of a market correction against an essentially artificial upturn in the economy. The reason it is appropriate to call such upturns fake is due to the fact that they are not generated by an actual increase in productivity or tangible wealth but are instead merely the result of an economy going deeper into debt whilst reducing the value of the national currency. Because the US dollar is the international reserve currency, whenever the Fed makes a foolish decision, its effects are felt around the world.
Over the years, the Fed has been chaired by some decent people trying to do their best to improve the economy. The flaw however is systematic rather than personal and this is the case for two main reasons. First of all, one cannot anticipate any market trend with 100% accuracy. If such flawless anticipation were possible, the entire history of the world would be that of a command economy rather than a history of evolving styles of market economies. By definition, trends in a market economy happen in real time and they are the results of events happening in the real world. They are not the result of carefully managed central planners who think they can have a 100% accuracy rating in terms of having their desires and their anticipations converge without error. Whenever the market’s reality contradicts the anticipation of central planners, the economy as a whole will automatically side with market trends in the real world rather than with the wishful thinking of central planners.
Secondly, because one cannot anticipate and therefore one not control the market, the most reliable source of money is something whose value is intrinsic, free from any government control and historically stable. In this respect, all roads lead to gold. Whilst gold cannot prevent recessions, a classical gold standard can minimise the effects and length of a recession whilst also limited the number of recessions that an economy faces over the years. A gold standard has the following clear advantages over fiat money:
-Because the value of gold money is stable, housing tends to be vastly more affordable than under a fiat money system. As fiat money loses value under the Fed’s monetary expansion/pro-inflation policies, speculators seek to buy up property as a means of storing/retaining value. This has the effect of creating artificially inflated housing prices which push people who seek to buy a home to actually live in out of the market. If that wasn’t bad enough, those using newly printed money to buy up homes at unsustainable prices have time and again caused recessions when this property bubble bursts.
Individuals artificially driving up property prices to the detriment of those seeking to buy their first home are the same people who eventually kill their own golden goose after the markets refuse to be permanently fooled by outlandishly inflated housing prices caused by a frenzy of people living beyond their means in an attempt to shelter themselves from the perils of fiat money.
In a gold economy where money is itself a genuine and sustainable asset, housing bubbles of the sort the western world has experienced in recent decades simply do not happen. When money remains stable, the appreciation of property prices is dictated by events in the real world (aka real supply and real demand) rather than through a cyclical game of speculation. Such real world trends are never as manic/depressive as the property bubbles created by irresponsibly inflationary policies in a fiat money economy.
-The gold standard is both pro-stability and pro-growth. When a currency is sound, it is possible to achieve low interest rates without inflation.
-The gold standard also helps people on fixed incomes as well as savers. Savers (especially the elderly) are usually the first to suffer through the Fed’s inflationary policies which are deviously called “stimulus” or “quantitative easing”. By increasing the supply of fiat money, those with a fixed amount of savings will see the purchasing power of that dollars decline with near immediate effect.
Those on a set weekly or monthly wage (aka the vast majority of employed people) won’t fare much better. Whilst proponents of fiat often claim that wages will rapidly increase in-line with inflation, in reality this “magical formula” never happens in the way it is supposed to do.
In a system in which central planners constantly inflate the fiat money supply, price increases are experienced with almost immediate effect due to the declining value of the fiat dollar. Yet at the same time wages are often slow to increase and even when they do, they hardly ever catch up with the increased costs of living that stem from the Fed’s inflationary addiction.
It should not be a mystery as to why in the 1950s in the United States, a man with an ordinary job could afford a decent house and one or two cars on a modest income. Today, even when both a husband and wife work full time in ordinary jobs, the idea of buying a home and two cars with cash seems like a concept from a foreign planet rather than one from a recent past. Fiat money makes everyone poorer except for ultra-rich speculators who are able to use tomorrow’s money at yesterday’s prices before anyone else begins to notice.
-When countries use gold to settle international transactions, infamous trading deficits are dramatically lowered. The internal conditions of particular countries which determine the worth of their exports on the global market are usually less significant in creating dramatic trading deficits and surpluses than are the dramatic differences in global exchange rates among fiat money economies. If countries paid for goods on the international market using gold rather than fiat money, deficits would be automatically lowered and no one could be accused of “currency manipulation” as a means of achieving a favourable balance of trade. This would help to keep prices honest and it would also protect jobs in economies that are suffering due to trade deficits caused primarily by artificial exchange rates.
-Gold limits government’s ability to spend endlessly on frivolous affairs including war. The First World War led Britain to break from its gold standard and America’s war in Vietnam was a major contributing factor to the end of the Bretton Woods system. Gold doesn’t like war and war doesn’t like gold.
-Gold does not rely on any government due to the fact that gold is both universal and beyond the control of central planners. Gold is consequently a great equaliser among men and nations. The value of gold has historically been far more stable than supposedly more “modern” alternatives. This means that a gold coin in one’s pocket is safe not only from inflation creating central planners but it is also free from the cruel tendencies of authoritarian government. In a time of war, one’s paper money might be totally worthless across an international border but gold will always carry its value in any place and at any time.
In conclusion, if Donald Trump really feels he is the “chosen one”, he should use this vested position not to attack China and not to attack the Fed for being too cautious but he should instead attack the very nature and long standing reality of the Federal Reserve. If Donald Trump can see that a recession might be on its way, this would be the ideal time to use a cooling down period in economic growth in order to set in motion the reforms necessary to guarantee economic stability and freedom for the long term.
If Trump were to audit and eventually close the Federal Reserve, he would be correcting the single biggest internal mistake in American history.
