It helps to look back to the very creation of the Fed in 1913, to see just how much they’ve screwed up.
Prior to its inception, there was a long series of depressions between 1835 and 1896, followed by the severe panic in 1907 that continued to wreak havoc on the fragile banking system. The Federal Reserve Act was passed to offset these poor economic conditions, high volatility in interest rates, and stimulate borrowing — to say nothing of money printing and QE.
After the Fed was created, volatility went down and so did interest rates. It seemed like a success!
But for all the “good” it did, what we failed to see was that the Fed was feeding and exaggerating a natural bubble… we were just too drunk on the results to notice.
The bubble started around 1914 with World War I.
For us, it was a total boon! It was Europe’s war at first, but they needed the military machinery and food to supply it, and America just happened to be the up-and-coming industrial power to do the job. It didn’t hurt that Henry Ford had just launched his new assembly line, making us the new leader in production efficiency.
That catapulted us into a major exporter and first world economy virtually overnight.
After the war, the world boomed like it hadn’t before, and countries all over the planet went on a debt spree — especially the U.S., encouraged by liberal monetary policies.
The U.S. kept expanding its capacity, and Europe quickly came back online. That caused the 30-Year Commodity Cycle to peak right on cue in 1920, and tractors entered their own bubble from 1916 to 1929, revolutionizing agriculture at the most inopportune time.
The 1920s developed into a broad bubble of excess production by farms and businesses, excess borrowing and expansion by consumers, and stock speculation — everything you’d expect in the fall economic season. In 1929, 40% of bank loans were fuel for stock speculation.
You all know what came next.
Long story short, it is no accident that the greatest depression in U.S. history came less than two decades after the Fed was created.
That kind of excessive lending and spending always happens in the fall bubble boom season of our long-term economic cycle. Central banks tend to only feed those bubbles by setting interest rates even lower to keep the party going, preventing necessary resets and recessions along the way.
But what happened after the depression was nothing short of shocking.
From 1933 forward, the world economy had the greatest boom in history. What’s more, it happened by its own natural forces. Governments back then hadn’t figured out you could temporarily offset a correction with endless QE.
Even if they had figured it out, public debt wasn’t high enough to finance! There were no “mortgage-backed securities” like we have in our current Candyland. We could have bought total government debt at a mere 18% of GDP in just six months!
Today, our situation is much different.
Now what central banks are doing is stimulating their economies the moment weakness starts to show itself, disrupting the natural order of things. Such policies never allow the economy to rebalance and can only lead to a greater bubble burst ahead.
The Great Depression was inevitable, but it was only made worse by Fed interference in the economy by driving the bubble to further highs than it otherwise would’ve seen… causing it to fall further, as well.
Now, interference is much worse than it ever was then.
Central banks are trying to create a painless economy so we never have to experience a Great Depression again. That just means when we finally reset, it’s going to hurt a whole lot more… and even worse, it’s delaying the great boom in innovation and productivity to follow.
I obviously didn’t live through the boom of the 1930s and ‘40s, but I’d sure like to get an idea for myself what it looked like… and frankly, I’m getting sick and tired of waiting.
As bad as such a reset will be, it is completely necessary and will create the underpinnings of the next U.S. and global boom… if central banks would just let the economy heal itself.