Where to begin… Well, let’s get to the lie: The Federal Reserve Chairman, and more importantly the United States Federal Reserve, has control over the U.S. Dollar.
Before I get started with this (hopefully not lengthy) write-up, we need to get some things straight. This blatant stupidity that I mentioned is referring to the, once jestful, idea that the Fed “creates money” or that “Trump won’t let this market collapse”. It does not, and he can’t stop it. They don’t even print the money, the Treasury produces the cash supply and sells it to the Fed, who then distribute it to financial institutions. It is the government’s way of supplying liquidity to the domestic and global economy, but that money isn’t “created” until the private banks act on it (a fundamental problem that I’ll discuss later). Most actual money that exists in the economy isn’t even “real”, it’s virtual and exists only on banks’ balance sheets. Private banks “create money” by lending.
Some initial background, key factors, and issues:
When the gold-standard was removed and the dollar no longer had a physical backing, the lawmakers decided that they didn’t want to legally define “money” (the dollar was previously defined by a weight of gold). Removing the economic strain of having a currency tied to a physical thing wasn’t a bad thing in-and-of itself, as this allowed huge expansions of balance sheets, and thus trade and economic growth. The problem was that the people writing the monetary and fiscal policy didn’t define what “it” was that they are making laws for. How can you create rules for something that neither you, nor anyone, can fully understand as a result of not even having a set definition. This has been the reoccurring and fundamental problem with not just the U.S. monetary and economic system, but the entire global network of trade. (The reason for why this affects other countries is for a set of other underlying factors/issues that I’ll address)
Then, in the 70s and 80s, with the monetary shackle of gold finally removed, we saw the birth of new business/lending practices, accounting tricks, financial vehicles, etc. This was when our current system was essentially started. The whole world wanted to get in on the action, but global trade was encumbered by the slow process of transporting physical currency notes, so the economic world leaders came up with this idea of “globally synchronized growth”. At that point they decided to tie together their economies and removed cash reserve requirements for international lending. Now, all of sudden, global banking was backed by collateral. This, along with increasing accounting trickery, started a convoluted web of currency dispersion. Being the world reserve currency, every nation in the world needed to get their hands on dollars, which caused the explosive inflation rates seen throughout that time. This was a period where the world was ACTUALLY being “flooded with dollars” (we’ll get back to this).
Previously, the Fed’s tool to combat inflation was by controlling the gold storages, so when they decoupled the dollar into a fiat currency, they created the Federal Funds Rate, which in theory gave them control over dollar prices, and for a long time it did. The problem is that they weren’t controlling the Federal Funds Rate. The Fed, through the form of the Federal Open Market Committee, set a Federal Funds Target Rate, but the actual rate (Federal Funds Effective Rate) is just the weighted average of the interest rates on inter-bank lending. The banks themselves price the interest rate when they lend, and the reason the FFR worked was because the banks simply just agreed to use the target rate. Alan Greenspan, who was probably initially shocked when Paul Vlocker told him this, made it famous, as he would make a huge deal about it and go publicly every seven weeks to the bureaucracy to announce “the FFR” and the institutions listened, but to them and everyone else it seemed like the Fed was controlling it, and as a result, the dollar prices.
Now how does this tie into my point?
Well, if you have followed what I’ve said up to this point, you should’ve started to see why this “lie” is important. As long as the banks think that the Fed was “in control”, then it was a self-fulfilling prophecy, as the effective interest rates followed the target rate and inflation was controlled. IF, though, apprehension appears in the system, it stops working, and that’s exactly what happened in 2007. Financial institutions saw the explosive rise of extremely risky business practices and must’ve considered what had happened just a few years earlier, because banks didn’t want to loosen their lending, and it was apparent in the FFR. In mid-2007, there was a sharp increase in inflation, so on August 7th, Ben Bernanke announced the increase in FFR. But weeks later the FFR hadn’t changed, and the Fed, not understanding why this happened, just shrugged it off and quietly decreased their target rate to match the effective rate. This was a red flag for the bankers, who then decided to start tightening as a result. Later that year though, inflation continued to rise sharply, so an even higher target rate was announced and this time the effective rate didn’t stay the same, it actually decreased, and by a lot. The banking industry was stunned, and suddenly domestic banks stopped lending, which starved international banks of dollars, and as a result they started selling off collateral in the form of US equities, causing the markets to begin drop. The crash though didn’t happen until Bear Stearns failed, because that cemented this distrust throughout everyone in the world.
The thing is, though, and the reason why this is the “most important lie of the last 50 years”, is that the system broke on that fateful day in August 2007, and nothing that anyone has done has even remotely fixed it. The steps taken by other nations (i.e. socialism, populism, yellow jackets, etc.) have made things way worse. Banks no longer trust the system and, despite a few small periods of growth here-and-there, have increasingly tightened lending, thus starving the world of dollars. Along with this, about 80% of global collateral was wiped out in 2008-2009. Since then, this global shortage of dollars and liquidity has been at the heart of every market crash/correction and recession around the world, including the collapse in March.
Our global monetary system is fundamentally broken and, despite what anybody says, it is not fixed, and will not be fixed any time soon. Bond yields have been decreasing consistently for the last 50 years and are now stuck at 0, and in some cases are negative. The system has reached its limits. No amount of QE will “flood the world in dollars” because institutions are hoarding cash because they know how delicate the system is, and the Fed thinks that if they can keep this charade up long enough that maybe it’ll figure itself out, which is why him, Trump, big media, corrupt agencies, etc. are all pumping the market with exuberantly optimistic news and data. This stupidity is the exact thing that the Fed wants. The real joke of it all is that smart financial practices are the downfall of our current global monetary system that was designed to run on ignorantly high-risk business practices.
There’s so much more ridiculousness to any of this than any person could ever tell, but if you want to learn more about this stuff, check out Jeffrey P. Snider, as he’s been researching global banking for 20 years and has been the only person that I’ve found that is either looking into this stuff or actively trying to spread the truth behind it all.
How should you play this on your RobinHood app? Well, look at the S&P500 chart since 2017 and consider what I just told you. Furthermore, consider the insane amount of economic damage the lockdowns have done to an already extremely fragile system.
What you should be thinking to yourself is: “Wow, whenever the market starts looking a little risky there’s a correction, and when it starts looking really risky there’s a crash. Maybe that has something to do with what OP said about institutions hoarding dollars when things look risky, and foreign banks needing dollars sell off US equities because there’s a global collateral shortage. I should probably consider against buying call option contracts or holding over-inflated stock shares when the market is looking like it’s at that point. Oh wait, look, the S&P is at the exact same level that is was during many of the crashes since 2017, and the Nasdaq is at all-time highs.”
Sorry for the rant. Stay safe. Very bumpy ride ahead.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.