Tradin’ my time for the pay I get
Livin’ on money that I ain’t made yet
– from ‘Five O’Clock World’, by the Vogues (1968)
In Part One, I explained the sources I used to educate myself about economics generally, and specifically the contemporary US economy. In Parts Two and Three, I encapsulated the facts I’d learned.
Today, I’ll explain the conclusions I’ve drawn from my research. If you disagree with those conclusions, I suggest you read my sources, and others of your choosing… then draw your own conclusions.
First, unless consumers learn to live within their means, they will never get out of debt. While that may sound like old-fashioned common sense, that’s a trait that seems to be in short supply.
Credit card interest rates are now well above 20%. As inflation results in higher consumer prices, the commoners are being forced to put ever more of their purchases on credit, and are only able to pay less toward the balances each month.
From the perspective of individuals, and families, getting out from under consumer debt is the single best thing they can do for themselves. That will be especially difficult for those who have come of age in the era of historically low interest rates which have acclimated them to ‘easy money’ credit card buying habits.
I’ve expressed what at first reading sounds like discouragement of investing in the stock market. But it’s not. I only discourage investing with all your savings or borrowed money.
During my career I participated in a retirement plan through my employer (the State of Florida) that invested in the market. That investment is now part of my retirement income.
The State Office of Financial Services monitored the administration of my plan by a third party private institution — so it was not as risky as relatively unregulated institutional trading. The State made no contributions, so all the investments were with deductions that I could afford to spare from my salary.
In choosing my investments, I followed the same rule as when I go to a casino — I only bet what I can afford to lose. So my investment decisions risked only loss of extra income, not my savings or borrowed money. Investing in the stock market with their savings and borrowed money is what wiped out millions of people in the 1929 stock market crash.
Consumer frugality may help individual families. But it won’t solve the bigger problem resulting from plundering by the financial industry caused during a decade of the Fed’s easy money policies.
The economy is now based on borrowed money. which is great for those who profit from the interest payments on that debt, but not the borrowers. Inflation can (will) cause that debt to default — and throughout history widespread debt default has resulted in economic collapse.
Whereas in the past the Fed could counterbalance the inflationary effects of low rates by a period of higher rates, that historical model may not work any more, for one unprecedented reason. The astounding high amount of government debt. While even the most reckless individuals and families eventually recognize there is a limit on their overspending, there seems to be no limit on what the federal government believes it can spend with impunity. So how does that effect interest rates?
The government borrows the money it spends by selling government bonds. The largest buyer of those bonds is the Fed – which they then either resell, or hang on to as a way to control the money supply, and (theoretically) control inflation . (How that is done is too complicated to explain here.). The value of those bonds is based on the federal governments “full faith and credit” in backing the bonds. If there becomes a question about that guaranteed backing, there is a serious problem.
A major market for US government bonds is foreign investors and governments. This has to do with the exalted status of the U.S. dollar as the “international reserve currency” (which I’ll get into in a separate column). Without that ‘reserve currency status”, U.S. government bonds would have less value, thus there would be less of a market for them, and the federal government would be in financial trouble.
For our purposes here, suffice it to say that the value of U.S. government bonds ain’t what they used to be, in part due to the decade of low Fed interest rates and, more importantly, seemingly out of control federal spending. Consequently, unless the federal government does something to reduce its own debt, what the Fed does with interest rates may be meaningless.
If that happens, the entire economy will collapse. And the economic difficulties us commoners are experiencing now will pale in comparison. It could be a 1930s era depression… or worse.
I realize that sounds like ‘prepper’ doom and gloom. But it’s not based on what I’ve heard from social media alarmists. I don’t participate in any social media, and wouldn’t listen to that sort of people if I did.
My conclusions, and concerns, are based on what I’ve learned over the past few months of intensive study of classic economic theory — and how the U.S. economy is failing due to what is turning out to be mind-boggling incompetence by the Fed.
But is it merely incompetence?
The result of what the Fed policies since the 2008 recession have done is to make the elites very rich at the expense of us commoners, who are being manipulated into ever more debt owed to the big financial institutions, which are owned by the elites.
That would suggest that Edward Griffin’s conclusion about the Fed being the instrument of a cabal — a central bank concentration of economic power to turn the rest of us into debt serfs — may not be as much of a conspiracy theory as it initially sounds like. He may be right! Decide for yourself.
From what I’ve learned, our economy is in serious trouble. The powers-that-be have created a system that inhibits, rather than nurtures, the free-market capitalism that was the foundation of why our founders separated us from Great Britain. And we commoners are suffering the consequences, while being propagandized by the elite-controlled media that it’s for our own good.
The greed of the economic aristocracy is pushing the commoners to the limit of what they will tolerate. Throughout history that socio-political dynamic has inevitably lead to the same result. A result I dread — and hope to avoid.
Hopefully we can avoid such an inevitability by the election of a Jacksonian populist who will put the interests of the commoner majority above those of the economic aristocracy and the federal bureaucracies that serves their elite interests.