The great economist and social philosopher Adam Smith famously observed, at the beginning of the Industrial Revolution, that the productivity of its people are the wealth of a nation. Precisely! The more a nation’s people produce goods, the more money in the system to spend, generating more jobs and firming up a country’s economic strength. Further, in such a scenario the laws of supply and demand work as intended.
In 1913, and in response to some financial panic, the United States created the Federal Reserve System (“The Fed”), and charged it with maximizing employment, stabilizing prices and moderating long-term interest rates. When financial distress occurs, the Fed makes certain economic choices to try to dispel the trouble. And though debatable of whether it’s met the challenge, the Fed had the strength to address the situation presented by the Great Depression and the Great Recessions. However, in the modern service economy The Fed has become outdated and been rendered impotent to handle what I’ll call “The Big Fall” a major, and likely devastating, correction of the economy.
Generally, asset inflation or appreciation is a good thing as it creates wealth. However, if the assets value increases to a point that’s illogical, then a sudden correction can destabilize the economy. The subprime housing market of 2007 remains a perfect example. In that case, we had irrational pricing and sales in subprime housing along with a deflationary pressure in employment so when people lost their jobs, they defaulted on their mortgage, and the rest was history. The only real tool The Fed had was to dampen the irrational, yet delicate housing market was by increasing interest rates, like using a sledgehammer to trap an ant.
Fast Forward to now, where we have a stock market frenzy beyond anything we have ever seen. In 2017, we saw a 17% increase in the size of the stock market while only a 2% rise in GDP. This isn’t just irrational asset inflation, its ridiculous. Asset appreciation directly correlates with market demand, so productivity remains tied to asset prices. Therefore, a very serious danger looms out there when a market correction occurs because when the price drops out, so will demand as well as our nations productivity, and The Fed will have no way to help as interest rates are already extremely low.
At that point, we will be in midst of a terrifying economic event with no seeming end. Historical collapses have causes, and so too will The Big Fall. Stay tuned to find out how and why.
One man, Justin Wolfe, sees that the entire economy had been rigged for the wealthy and seeks to change that for good when he runs for President in 2024:
“The outdated Federal Reserve, designed poorly from the onset, will be the first of many federal systems I will overhaul as President.” — Justin Wolfe.
“The economy has always been an intricate machine, and it’s about time the Federal Reserve stops smashing our financial system with its sledge hammer.” — Justin Wolfe.
“We can live in an economy without recessions, without fear of scarcity but we choose to let the federal reserve fill our lives with dread and constant shortage.” — Justin Wolfe