Financial Sense

The US Economy has become a "Fiat Economy"

by Chuck Young, Rebel Traders | December 17, 2008


Ask yourself this question…

Why has the Federal Reserve essentially created a ‘zero interest rate policy’ for the United States today by cutting the Fed Funds rate to near zero?

If your answer is ‘to create economic growth’ then I must tell you that you are listening to Jim Cramer too much.

The correct answer is that the Federal Reserve is desperately trying to ‘create credit growth‘, not organic economic growth. When the United States lost its status as a manufacturing powerhouse in the 1970’s and the nation became ever more dependent on a consumer driven ’services industry’ the only way to show any growth was to keep the availability of money growing.

The past decade of credit growth was pushed so high that when it fell over the edge it sent the economy of the United States into a free fall. When credit is removed from the system the true health of the economy was revealed.

Credit is merely a disguise for real growth

12-16-2008 8-54-15 PM.pngThe collapse of the credit system in this country last year has pulled the mask off the real economy. And what has been revealed is that there was nothing behind it. The only growth obtained (as reflected in the US GDP) has been a direct result of credit growth.

This chart shows the personal savings rate of Americans for the last half century. Notice that in the early 1980’s the ability of people to save money began to decline. Ever since that time that ability to save has continued to dwindle up to this day.

12-16-2008 9-19-42 PM.pngNow compare the chart above to the chart of the Dow Jones Industrial Average from the past 40+ years. Notice anything? The economy (as measured by growth in the stock market) increased as savings deteriorated. How did the Government make up for this decline in the real economy? By transforming the U.S. into a ‘credit nation’, that’s how.

The economy of the US has become so dependent on credit growth to sustain itself that it will go to extreme measures to keep it going, even if it means the possibility of runaway inflation down the road.

Tuesday’s 75 basis point rate cut by the Federal Reserve is indeed historic. So far every rate cut over the past 16 months has done nothing to improve the real economy, and it has done very little to improve the forged (credit) economy either. So why is it all of a sudden that many in the media are claiming that this ‘is the one that will do it’? Well maybe because there is nothing left in Ben Bernanke’s arsenal, that’s why.

The Federal Reserve has now used up all of their ammo to plug the leaking holes in the credit bubble. And with each bullet Mr. Bernanke fires at the deteriorating credit bubble he is actually inflicting more and more wounds on what is left of any real economy.

Any nation that needs a zero interest rate
policy to stay above water can’t swim on its own.

With the historic rate cut by the Federal Reserve the Government has used up their conventional tools to stimulate the credit markets. Maybe Ben Bernanke thinks that this is some kind of a video game that when you reach 10,000 points you get another life and get to keep going. Sorry Ben… you have now used up your ‘lives’ and it is now ‘game over’. So Ben has to create a new game, one that has not been played before. Maybe he ‘thinks’ he can win at this one.

[...]The focus of the Committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant.[...]

Hank Paulson and Ben Bernanke will do everything possible to prevent you from saving money. They are preventing the ’system’ from re-balancing itself so that organic growth can be revealed and then kindled. They will stop at nothing to force people to take on more debt (that they already can’t afford), and will create a temporary floor under the housing market to give the illusion of increasing value. All the ingredients needed for a future disaster that may very well be even larger than what we have now. Hank and Ben are playing with a ticking time bomb…
What happens to a person who keeps blowing air into a balloon that has a hole in it? Well if they are not smart enough to know their efforts are not working and keep blowing they will pass out and collapse. If the US Government does not stop trying to blow air (credit) into a deflating balloon riddled with holes then the same fate will be in store for it.

Simply put… the excess credit growth must be allowed to deflate without intervention and prices must be allowed to adjust to the real economy (not the forged one). The desperate measures to keep credit growth going, at any cost, are to prevent you from seeing the economy without its mask.

The US has now set the stage for a zero growth economy not unlike Japan’s ‘lost decade’… or worse.

The economy of the United States has been transformed into a ‘fiat economy’

Copyright © 2008 Chuck Young
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Chuck Young | | Palmyra, NJ USA | Email | Website

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