The US Fed Giveth and the Fed Taketh Away

Nihilo ex nihilo fit. Out of nothing, nothing comes. First put forward by ancient Greek philosopher Parmenides in the 5th century BC, Thomas Aquinas and St. Augustine later used this axiom to prove that the universe needed a ‘first mover,‘ to get things going.

Even if the whole thing began with some kind of ‘Big Bang’ moment, it still needed a banger to bang it.

Who? God, of course.

We don’t know. But our jaw dropped when we saw how the bangers over at the US Federal Reserve have helped add $20 trillion in US household wealth since 2009 – setting yet another new record. The Wall Street Journal reports:

‘American’s wealth hit the highest level ever last year, according to data released Thursday, reflecting a surge in the value of stocks and homes that has boosted the most affluent US households.’

Ex nihilo? Who cares. It’s there. It’s spendable.

And yet…what kind of wealth comes from nothing? Is it solid and real, like the earth, the moon and the stars? Or is it something else?

It is clearly something else. But what?

Let’s begin by looking at where all that new wealth comes from. Not from the hand of the Almighty, of course…

We are led to believe that the Federal Reserve’s policies are designed to produce a general prosperity; the Fed keeps rates near zero so the entire economy benefits.

But it isn’t true. Only some prosper. Even the headline in the WSJ says so: ‘US Wealth Rises, But Not All Benefit‘.

The Fed’s activist policies distort and corrupt the economy. First, prices are bent. Then, taking their cues from bad prices, bad decisions are made. Before you know it, everything is twisted in one direction or another.

The Fed is largely to blame for the dinosaur houses we see all over the US. Low rates and rising prices tricked Americans into believing that the more house you had the more money you would make.

We didn’t mention it last week, but factories in China can also trace their genesis to the Fed’s low-down interest-rate policy. Americans were lured to borrow and spend; Chinese manufacturers benefited.

Record high earnings, record high margin accounts, record high junk bond issuance, record household wealth gains – all are products of Fed policies.

We quote from the book Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown.

The author, Austrian School economist and former Wall Streeter Detlev Schlichter, was kind enough to send us an advance copy. Says Schlichter,

‘[The financial authorities] can never enhance all economic activity evenly or ‘stimulate’ the economy in some all-encompassing, general way. Every injection of new money must lead to changes in resource used, to a redirection of economic activity from some areas to others, and change income and wealth distribution. Inflows of new money inevitably change the economy and must create winners and losers.’

That $20 trillion in new wealth we alluded to earlier is in the hands of America’s winners. It added little to US GDP…or to Americans’ incomes. It was merely a transfer of wealth. Owners of stocks and houses got richer. Wage earners and savers got poorer.

We have some advice for those on the receiving end of the stock market bonanza: Take your money off the table before it disappears.

After all, it is only a claim on wealth, not wealth itself. And that claim will expire worthless when the Fed changes its policies. The Fed giveth, and the Fed taketh away.

Either the Fed will taper…ending the bonanza. Or it will lose control of interest rates. And when they rise, all the broken records we have been citing become like broken bottles in a street fight. Somebody is gonna get hurt.

For the moment, the 12 members of the policy-setting Federal Open Market Committee are more powerful than God. Since the beginning of the universe, it took about 13,798,000,000 years for the market value of all the world’s assets to reach $20 trillion. The Fed’s ‘Big Bang’ accomplished the same trick in only six years – start to finish.

That does it for us. No more worshipping a guy who has been dead for 2,000 years…or his dad, for that matter. In this Lenten Season, we bow to no man. But for the lady who runs the Fed, the entire economy bends in whatever direction She commands.


Bill Bonner
for Markets and Money

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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. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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