Thursday, December 08, 2016

From Our Archives ..
June 20, 2013
Loss of Faith in Institutions
Like the Federal Reserve
Cannot Be Fixed 
with More Cheap Credit
Charles Hugh Smith* explains how the Federal Reserve has created a doomsday machine, nurturing moral hazard in the entire economy with a flood of cheap credit & low interest loans & mortgages .. everyone is thinking "you can't lose" because the Federal Reserve will be there to save the day & extend more cheap credit if necessary .. "An abundance based on the central bank spewing trillions of dollars of cheap credit and free money (quantitative easing) is artificial, and it has generated systemic moral hazard. This is a Doomsday Machine because the Fed cannot possibly backstop tens of trillions of dollars of bad bets on stocks, bonds and real estate. Its power is as illusory as the abundance it conjured. Once the losses mount, the punters who believed the Fed 'had their back' will realize it was all a con. They will lose faith in the Fed and its promises of permanent abundance, low rates and rising asset prices. This loss of faith will trigger what I call the delegitimization of both the markets and the institutions which have essentially promised a permanent upward bias in assets, i.e. the Federal Reserve and the other central banks that have conjured the same illusion. This loss of faith in key institutions cannot be fixed with more cheap credit or subsidized mortgages; delegitimization triggers a fatal decoherence in the entire Status Quo."
LINK HERE to the essay
[Cliff Note: Our theme point emphasizes the importance of sound money .. a constitutional restraint on anyone with the power to create money. Modern money has been altered to be nothing more than credit. We all should have heeded Austrian Economist Ludwig von Mises: "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system."]

No comments: