Rigging the Federal Reserve Made the Rich Richer

It may be easier for a camel to pass through the eye of a needle than for a rich man to enter the kingdom of Heaven. But in the last 30 years, there were many who were willing to give it a try.

Besides, the game was rigged in their favour. In effect, they got low-interest loans from the Federal Reserve, and used the money to run up their stock and bond prices…to buy their own shares…fund their crackpot programmes…and fill their pockets with outrageous salaries, bonuses, and dividends.

The fix is still in

Long-term Diary sufferers are well acquainted with this scam.

It is why the rich are so much richer today than they were 30 years ago.

It’s why the Dow is near record highs — and 15 times higher than it was after the crash in 1987.

It’s why so many of America’s hot new capitalist businesses — such as Uber, Lyft, WeWork, DoorDash, Tesla, Wag, Peloton, and Postmates — are said to be worth billions, even though none of them has ever earned a dime. (Losing money means they destroy capital; they don’t create it.)

It’s why we have $73 trillion of debt nationwide (public and private) — including $25 trillion that has been added over the last 10 years. And it’s why this debt is more than twice the traditional US debt load.

It’s why the elite have more influence than they did 30 years ago (they have more money to throw around)…and why Washington’s suburbs have become among the richest in the nation.

It’s a big part of the reason the economy has slowed down…real wages have stagnated…and corruption has increased…

And — who could forget? — it’s why Donald Trump was elected president. Voters lost faith in the elite of both parties and turned to a rascal outsider.

And today, the ‘fix’ that caused all this is still in. So, we ask…could it pay off for us, too?

Gold told the tale

The trouble with fixes is that they don’t always stay fixed. Recall the 1970s. In 1971, the feds pulled a fast one, switching out the old, reliable, gold-backed US dollar for funny money — ‘Federal Reserve notes’ with no backing of any sort.

As sure as night follows day, consumer prices rose. By August, inflation had hit 6%. Richard Nixon panicked, putting up a system of wage and price controls. By 1974, inflation was running hotter. Gerald Ford came out with the Whip Inflation Now buttons.

Neither of these stunts had any effect on inflation.

And gold told the tale. In 1970, you could buy an ounce of gold for $36. By the time Nixon appeared on TV with his wage and price controls, it was already selling for $42. When Gerald Ford introduced the WIN buttons, it was trading at $150 an ounce. And it was at over $600 an ounce when inflation hit 14% at the end of that decade.

Volcker’s bitter medicine

It was then that financial newsletter author Howard Ruff read the writing on the wall. The fix was still in, he reasoned. The feds had their funny money; they weren’t going to give it up. And they weren’t going to back off from any of their boondoggle spending. So, inflation had to go higher…and so did gold.

‘Gold will soon hit $5,000 an ounce,’ he predicted to a thrilled crowd of goldbugs in New Orleans.

The fix was in, all right. But it wasn’t the simple fix that Howard imagined. Or, to put it another way, there was a way to keep the fake new money from blowing up…at least for a while.

Fed chief Paul Volcker found it. Volcker, who is still alive, was not an academic like his successors Ben Bernanke and Janet Yellen. And he was not a status-seeking hustler like his immediate successor in the Eccles Building, Alan Greenspan. Volcker had been part of the Nixon administration when the fateful decision to abandon the old dollar was made. He felt it was his duty to make the new system work.

But it was a classic ‘Inflate-or-Die’ trap. The only way to sustain the inflationary boom was to add more inflation. The alternative, of course, was to die.

Volcker’s wife begged him not to take the job at the Federal Reserve. It would mean a big cut in his income. And he would have to endure the slings and arrows of an outraged public.

But in August 1979, Volcker took over at the Fed. His mission was to kill inflation. This he did by hiking the Fed’s key lending rate up to 20% in June 1981. Mortgage rates hit 16%. This produced the worst recession since the Great Depression.

Senators and congressmen called for Volcker’s head. He was burned in effigy on the Capitol steps. Economists from all across the nation urged Ronald Reagan to send him packing.

Volcker’s medicine was so bitter, we shudder and wonder how he…or the nation…survived.

But it worked. He fixed the fix. Inflation went down. And gold didn’t rise to $5,000 in the 1980s…or in the 1990s…or so far in the 21st century.

Funny money

But, alas, that’s not the end of the story. The funny money is still there. And the movers and shakers rely on it now more than ever. Both federal debt and federal deficits are running more than 50 times higher than in 1971.

Once again, it’s ‘Inflate or Die.’

But now, there’s no Paul Volcker anywhere in sight.

The fix is in deeper, in other words.

Tomorrow, we’ll see why, this time, the fix can’t be fixed…and why Howard Ruff may turn out to be right, after all…but 40 years ahead of his time.

Stay tuned…

Regards,

Bill Bonner


Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance.


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