The Fed saves its own ass at your expense

Marco Polo never actually set foot on Japanese soil. But that didn’t stop him from writing the most wildly exaggerated tales about the immense, incredible wealth of Japan– which he called Cipangu.

Supposedly Marco Polo had spoken to merchants and traders who’d been there, but it’s entirely possible he made it all up—typical for Marco Polo and his tall tales.

Nevertheless, about a century and a half later, a young Italian sailor devoured Polo’s writings and became convinced he had to lead an expedition to Cipangu and exploit the unimaginable wealth described in Polo’s stories.

That sailor, of course, was Christopher Columbus. After years of struggling to secure the necessary investment, he finally set sail in 1492. When he landed in Hispaniola, he thought he’d found Asia.

The local chieftain greeted Columbus with gold. So Columbus, channeling his inner Marco Polo, sent a letter home in the spring of 1493 describing the incredible wealth and gold riches of the discovered island.

Word spread quickly—well, as quickly as could be expected in the 15th century. But eventually, other explorers mounted their own expeditions.

In 1521, Hernán Cortés sent gold and silver from Mexico back to Europe, which arrived in Brussels that August. The artist Albrecht Dürer, traveling through Brussels at the time, described the gold pieces as big as the sun, and the silver as big as the moon.

Ten years later, in 1532, Francisco Pizarro ambushed the Incan Emperor, Atahualpa, who had to pay a literal king’s ransom in silver and gold.

Before long, mines across Latin America were producing vast amounts of precious metals, and Spanish treasure ships were crisscrossing the Atlantic, transporting gold and silver back to Europe.

The King of Spain couldn’t believe his newfound wealth. But there was a side effect.

All this new gold and silver flowed into the Spanish economy (and also the economies of other European kingdoms). Yet farmers were growing the same amount of food. Artisans were making the same number of shoes, hats, and clothes.

In short, the supply of goods and services in Europe remained unchanged, yet the supply of money circulating in the economy increased dramatically.

The natural consequence was a bout of inflation that lasted more than a century. Economic historians refer to this period as the “Great Inflation” or sometimes “Price Revolution”.

It’s extraordinary that modern-day “experts” can’t seem to figure out this basic principle.

During the pandemic, the Federal Reserve increased the money supply by trillions of dollars, practically doubling the size of its balance sheet almost overnight in early 2020.

And unlike the Spanish in the 1500s, the Fed didn’t have to mine any gold and silver– they just push some buttons, and, poof, trillions of dollars of new money.

At the same time, though, throughout 2020-2021, people were told to stay home, cower in fear, and NOT work. This resulted in a DECLINE in goods and services in the economy.

In short– the supply of money increased dramatically, while the supply of goods and services decreased. The result? Inflation. And the problem still hasn’t been fixed.

The Fed has been playing the ‘hero’ role for most of this year, acting as if they saved the economy and slayed the evil inflation monster once and for all.

Well, the most recent inflation report finally put an end to their hubris. Inflation is up, and even the Fed can’t deny it any longer.

Bizarrely, at this week’s policy meeting, the Fed decided to CUT interest rates… which is pretty much the opposite of what a central bank is supposed to do when battling inflation.

But we’ve already discussed why they’re doing this: the Fed is saving its own ass at your expense.

Throughout the pandemic, the Fed used its trillions of dollars of newly-created money to buy US government bonds at a time when interest rates were at all-time record lows (i.e. bond prices were at record highs).

But then interest rates rose significantly in 2022, so the value of the Fed’s bonds plummeted. As a result, the Fed’s losses now exceed $800 billion, making it the most insolvent bank in the history of the world.

It’s crazy to think that the most systemically important bank on the planet is insolvent. But that’s the truth.

The only way for the Fed to become solvent again is to inflate the value of its bond portfolio, which means cutting interest rates—even though this won’t arrest inflation and risks making it worse.

Bear in mind, these people failed to anticipate the consequences of printing trillions of dollars and slashing interest rates to zero back in 2020. They failed to notice inflation when it was obvious in 2021. They called it “transitory.” They failed to act.

And when they finally did act in 2022—far too late—they failed to anticipate the consequences of their rate hikes, including the bank failures we saw in 2023.

Now inflation is rising again, but they’re cutting rates. Totally backward policy. It’s sort of like how Congress tries to spend and borrow its way out of debt.

Sure, these people at the Fed are human beings. They’re fallible and will make mistakes just like anyone else. Yet they’ve been so consistently wrong on just about everything… while at the same time their mistakes affect the lives and livelihoods of hundreds of millions of people.

What’s really strange is that this system is completely involuntary. Everyone alive is substantially affected by the Fed’s decisions, but we don’t elect Fed leaders. Only a handful are even appointed by the President. The rest are appointed by commercial banks like Citibank and Bank of America, which technically “own” the Fed.

For a country that claims to be a beacon of representative democracy, it’s crazy that the people who have the most influence over our financial lives are unelected “experts” who have been consistently and woefully wrong at almost every turn.

Source

Simon Black is an international investor, entrepreneur and permanent traveler. His daily letter is both educational and entertaining, and we suggest that those who want unbiased, actionable information about global opportunities sign up for Sovereign Man’s free, actionable newsletter at http://www.SovereignMan.com.

From Simon Black of SovereignMan.com

Source: https://www.schiffsovereign.com/trends/the-fed-saves-its-own-ass-at-your-expense-151918/