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The Fed’s Recovery Plan Is Based on Fooling Everyone Holding Dollars

By: Steve Johnson

12/8/2009 - 25 Comments

The Fed’s monetary policy to flood the market with new money is essentially an attempt to trick everyone holding dollars and assets priced in dollars into accepting the new money at face value.

The Fed has been playing this game for decades, motivated by political agendas and driven by congress to spend money much faster than the nation can produce wealth.

This game is coming to an end as everyone from foreign central banks to the U.S. public are quickly catching on – as noted by the recent calls to replace the dollar as the Reserve Currency by foreign central banks and the tea party rallies to ‘End the Fed’ and stop the creation of new money.

Economic Recovery

The success of the Fed’s economic recovery plan is based on fooling everyone into accepting the new money they have injecting at face value.

If the Fed’s monetary policy succeeds in creating the illusion of an economic recovery, then they will have fooled a lot of people.  If they fail, no one was fooled.

For the first year since August of 2008 when the economic crash started, almost everyone agreed (or was fooled) into thinking that creating new money (with ultra low interest rates and injecting new money into large banks) was the solution.

Almost every central bank in the world followed suite by lowering their interest rates and flooding their economy with their own new money.

Trying to Avoid the Correction

The economic correction cannot be avoided because the marketplace, which is made up of people like you and I, will not accept the new money at face value.  New money pushes prices higher and higher until the point at which consumers are no longer willing to pay.

That is the point we reached when the housing market started to collapse in 2007.  After that point is crossed, bank loans start to decrease, causing the supply of money to contract and prices begin to drop.

The solution is to remove the new money that was injected into the economy by letting prices drop until the new money is removed by way of bankrupt businesses and banks.  After the new money that was added is removed, the economy will stabilize and begin a normal growth rate. 

But if the process is interrupted and the new money is not allowed to be completely removed, then it will continue pushing up prices until some day when consumers refuse to pay and the process of contraction will start over again.

The current monetary policy is just that, an attempt to stop the process of price deflation by injecting even more new money into the economy to push prices back up.

This is what that Fed has done and continues to do. They have stopped the new money that was artificially added over the past decade from leaking out of the economy by injecting even more.

Compounding the Correction

The marketplace can only be fooled for so long and sooner or later it will refuse to accept the new money. 

One of the best solutions throughout history has been to stop using government issued money and move into precious metals that no government can control the supply of. 

This is in effect rejecting the face value of the new money being issued by the central bank.  The increasing price of gold is proof that many are not fooled and are refusing to accept the loss of their wealth. 

This is a clear indication that the world is not going to accept the new money at face value and this could soon become a major threat to the issuing central bank of the dollar - the Fed.

If the Fed cannot continue to fool the majority of dollar holders, they will have no choice but to stop issuing new money and let the economic collection take place.  This is a very unpopular and politically damaging decision, and therefore unlikely. 

Fed to Continue

Based on what that Fed Chairman, congress and the President have said, I fully expect them to continue the stimulus until their last breath.  Just today, Obama said the U.S. must continue to "spend our way out of this recession".  They are convinced that a reverse in monetary policy will trigger a market collapse and a political disaster, which they are unwilling to face

What this means for the U.S. is that the marketplace appears to be partially fooled for the moment, but everyday more and more people around the world are realizing what is going on by purchasing gold

The U.S. economy will eventually complete the correction that it began last year, only much more businesses and banks will need to go bankrupt to remove the additional trillions more that the Fed adding. 

The Fed is not fooling the marketplace and therefore will not be able to create the illusion of an economic recovery out of nothing.  At this point, the contraction is likely to continue no matter what they do.

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