Question: Why did the US Fed haul down official interest rates by main force from 6.50% to 1.75% in one year - 2001?
Answer: In a desperate attempt to resuscitate the rampant monetary inflation (through credit creation) of tha last half of the 1990s. The inflation of the 1990s, and especially the last half of the 1990s, had gone into US and global stock markets, and the US market had keeled over in the previous year - 2000. Either the Fed had to resuscitate the stock market and prolong the "wealth effect" which gave US consumers the "confidence" to go on borrowing and spending, or they had to ignite something else which would have the same effect.
Question: Was the Fed successful?
Answer: Not in reviving the stock market, what accomplished that was the WAR against Iraq in early 2003. But the Fed did manage to prolong the "wealth effect" because their obscenely low interest rates - which remained at or below the 2.00% level for just over three years, from November 2001 until December 2004 - led directly to the US housing bubble. This led to an even more frenetic inflation (again through credit expansion) as home "owners" borrowed against the increasing valuation of their houses in order to go on spending and consuming.
Question: Would either of these booms, the one in the stock market or the one in the housing market, have taken place if the Fed had not blatantly manipulated the money supply and held interest rates at a small fraction of where they would have been set by a free market?
Answer: No, of course not. Neither the money nor the incentive to borrow necessary to blow either of these investment bubbles would have existed.
Question: What is the most absurd of all the tasks for which the Fed (or any other Central Bank) claims to be indispensible?
Answer: No, it is not the maintainance of "price stability", although that is certainly absurd on the face of it in a so-called "free market". No, it is not the preservation of the "strength" of the currency, although the idea that one strengthens a currency by creating more of it through any and all means at one's disposal is equally absurd. The crowning absurdity of all the Fed's tasks is that of being the nation's premier "inflation fighter". That is the equivalent of dressing up a mob of rampant pyromaniacs and using them to man the fire department.
Only two simple concepts need be grasped to understand fully the REAL role of the Fed (or any Central Bank). The first is that, properly defined, the term "inflation" means AN INCREASE IN THE TOTAL STOCK OF MONEY. The second is that in order to function, a Central Bank MUST have a total and legal monopoly over the control of both money itself and the way it comes into existance through the lending practices of the banking system and through the direct conversion of debt issued by the government into money.
A Central Bank is the ENGINE of inflation. Its fuel is the legal tender status of that which it issues as money. Its "efficiency" is the banking laws which allow the commercial banks to build an inverted pyramid of debt through fractional reserve lending. The brake on this infernal machine is in place only when the Central Bank must REDEEM what it issues as money in money itself. Historically, that money itself has been Gold (and/or Silver) for almost three thousand years. But since 1971, no Central Bank has been legally liable to REDEEM what it issues as money in anything, except more of what it issues as money. There has been no brake at all on any Central Bank - including the Fed - since 1971.
For a brilliant analysis of what that has done to the "society" in which the Central Bank functions, and even more important to the individuals which make up that "society", please read (if you have not already done so) this piece. It is at the von Mises Institute website. It was written by Karen De Coster and Eric Englund. And its title is: Will The Federal Reserve Create The New Socialist Man? This article is a genuine MUST READ! Please do not miss it.
What, according to this article, has been the effect of the Fed's money machinations on the individual?:
"As our fiat money perniciously lost value, time preferences shifted upwards as it made more sense to spend a depreciating currency today than save for the future. And, better yet, what is more seductive than to borrow ever-depreciating fiat money – as heavily encouraged by the Federal Reserve – and pay the principal back with money that has become worth even less? Gradually, savings becomes a vice, profligacy a virtue, and the character of a people regresses to a permanent state of adolescence — as all sense of value is forgone in favor of instant gratification.
And, having had no brakes at all on their ability to create "money" for two generations, what does the Fed actually face in the immediate future, as opposed to what the financial markets and Wall Street HOPE it faces? For the answer to that, please see this piece from Peter Schiff on 321Gold - The Reality of Stagflation
On June 29, the Fed raised rates by 0.25% for the seventeenth time in a row. The last two years has seen the most predictable (and therefore least effective) Fed attempt to produce a "soft (economic) landing" in its history. There is no chance whatsoever of anything but the hardest of "landings" and the markets are beginning to realise it. On June 29 and 30, the spot future price of Gold soared $US 38.70 or 6.7% - including the biggest one day rise thus far in its post April 2001 bull market - the $US 27.10 leap on June 30. The US Dollar promptly cratered on the foreign exchange markets, with the $US index (USDX) falling 1.6% on June 29-30. And on Wall Street, the "relief rally" lasted precisely one day.
To worry about the insidious effects of inflation NOW is to have been asleep for at least the past decade. To harbour any hope that the Central Bank can painlessly correct the economic and financial imbalances they have been so instrumental in creating and nurturing to their present monstrous size is to clutch at the most broken and threadbare of straws.
As we said here last week: "When the US real estate market "goes", the US consumer will "go". When the US consumer "goes", the US economy will "go" - consumer spending making up 70-80% of it. When the US economy "goes", the US Dollar will "go". And when the US Dollar "goes" - so will Gold - in the opposite direction."
Didn't take long to get started, did it?