Guest Post: The Pusher Has Made Us All Junkies

Originally posted at Monty Pelerin's World blog,

A recent post described the Federal Reserve (not Goldman Sachs) as the true vampire squid.


A Predator By Intent

At the Fed’s founding, a few astute critics saw the Ponzi Scheme that it represented. Congressman Lindbergh had this to say:

This [Federal Reserve Act] establishes the most gigantic trust on earth. When the President [Wilson} signs this bill, the invisible government of the monetary power will be legalized….the worst legislative crime of the ages is perpetrated by this banking and currency bill. — Charles A. Lindbergh, Sr. , 1913

Lindbergh was hardly alone. Here is another comment by a legislator:

We have, in this country, one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board. This evil institution has impoverished the people of the United States and has practically bankrupted our government. It has done this through the corrupt practices of the moneyed vultures who control it. — Congressman Louis T. McFadden in 1932 (Rep. Pa)

These were two of several  US legislators who objected vehemently to the creation and operations of the Federal Reserve.

These objectors  were neither prescient nor lucky in their assessment of central banking. Central banking had always been the goal of the monied and financial classes. The most successful banking empire stated:

The few who understand the system, will either be so interested from it’s profits or so dependant on it’s favors, that there will be no opposition from that class. — Rothschild Brothers of London, 1863

This position was stated a half-century before the Federal Reserve was instituted.

Today’s Federal Reserve

Today Fed critics are growing to a large and vocal force. Before this crisis ends, I suspect that many more will have joined this group.

The Fed is at a critical point, one would hope an existential one,  in its history. Its necessity and value are no longer blindly assumed. Its ability to affect positive economic outcomes are correctly seriously in doubt. Its importance and necessity are under fire.

The Fed is now beginning to be likened to the phony wizard in “The Wizard of Oz.” It increasingly is disbelieved in its claims and seen by a large minority of the population as a charlatan. Ron Paul is responsible for getting his views through to the masses, including popularizing the notion that the Fed is an evil force rather than one for good.

The Fed reached a decision point recently regarding its QE policy. They came to a fork in the road and, in effect, punted. The left fork represented additional stimulus while the right was a reduction in stimulus. The Fed did nothing. It was paralyzed and chose neither fork. They still stand at this juncture, unsure of which path to take.

The Reason For Paralysis

The Fed should never have set out on this road to perdition. At this point neither fork is palatable. That is because of the dependency effects created by monetary expansion. Alasdair MacLeod describes the problem:

What is not generally appreciated is that once a central bank starts to use monetary expansion as a cure-all it is extremely difficult for it to stop. This is the basic reason the Fed has not pursued the idea, and why it most probably never will.

Years ago, I remember Milton Friedman discussing the point made by Mr. MacLeod. Friedman was careful to distinguish between the level of the money supply and the rate of change in the money supply. He believed that the rate of change was the important variable in regard to short-term economic activity. A decrease in the rate of money production, in Friedman’s opinion, would slow economic activity.

That summary is an oversimplification of Friedman’s position. Friedman did not believe that changes in the money supply could influence economic activity in any long-term sense. To the extent that changes in the rate of money creation surprised the public, economic actors would be forced to alter their expectations and behavior. That view was the basis of McLeod’s comment.

The Fed Will Stop, One Way Or Another

The Fed will stop. That is a certainty. When and whether they stop willingly or markets stop them is a different issue. The Fed stopped twice before recently, only to restart when the economy and financial assets began to slump. I suspect they will stop again, willingly but then follow the previous pattern. Whether they stop at QE4 or 5 or 8, ultimately they will stop completely or be stopped by markets.

The option of standing in place was attractive only because the two other options were deemed unacceptable. Increasing the level of stimulus was not seen as necessary (yet). It also had the disadvantage of contradicting all the optimism expressed by the political class and the Fed themselves. Decreasing the stimulus was apparently seen as too great a risk, ala the Friedman rate of change issue. Chris Martenson deals with this issue (my emboldening):

The simple truth, as I see it, is that the Fed now knows that as soon as it takes the punchbowl away, all of the apparent wealth evaporates and the market crumbles.  Here we might note that if several years of truly historic money printing has not yet provided enough self-sustaining recovery, why exactly is it that the Fed thinks more of the same will do the trick?


Something just does not add up in this story.  What is it that they are not telling us?


Well, one thing that really does not fit in this story is that oil over $100 per barrel.  As far as I am concerned, there will be no such thing as a resumption in the type of growth the Fed wishes to see before it willingly begins tapering (end eventually unwinding), because of the price of oil and debt levels that are still far too high.


Which means the Fed will keep on printing money until something happens.  More bluntly, I think the Fed will keep printing until some form of market accident happens that forces it to behave differently.


When that happens, the Fed will be following, not leading. And many will be cruelly punished for believing that the Fed had some magical ability to re-write economic laws.

The Fed As Pusher

The process the Fed is wrestling with is no different than that of the drug addict. After a certain point, dependency develops. Then the withdrawal process is so painful it is not willingly accepted. The drug analogy holds in other respects:

  • The addict is forced to increase doses over time to achieve the same “hit.” So too is the Fed. Holding stimulus injections at $85 billion will eventually not be enough to sustain the good feeling which currently exists. That is the point made above by Mr. MacLeod.
  • The addict cannot continue forever. Laws of nature limit the amount of punishment he can inflict on his body. Severe pain can be avoided only by substituting death as an outcome.
  • Economies have limits. Like addicts they become increasingly dysfunctional as the long-term effects of the “feel-good” drug take their toll. Distortions in prices, debt levels and capital mis-allocations are the signs of harm. That is the point the economy is at now (and probably has been for a decade or more). Real growth ceases under such conditions. We get poorer.
  • The laws of economics may be deferred, but they cannot be repealed. Economies eventually “die” just as junkies. History provides innumerable examples of governments drugging their economies to death. The economic coroner ultimately pronounces the death as either from a deflationary collapse of a hyperinflationary blow-up. Neither diagnosis is correct in terms of the cause. It is like saying a cancer patient died of heart failure.

The drug analogy is appropriate up to a point. Here is a major problem with the analogy. The drug addict brings the outcome on himself. Those who will suffer the most for the Fed’s actions are not responsible for the pain they will endure. The Federal Reserve has “pushed” it on them in the same way that a pusher provides free drugs to kids in an attempt to hook them. In a way, one might say the criminal overlord, the Federal Government, is responsible as it directed the Federal Reserve (regardless of the “independence” myth that is so often raised).

Regardless, the pusher has made most of us junkies. We have been forced into an economic haze that seems real but is not. Whether we know it or not, we are hooked. A great “drying-out” period lies in front of us. Few have understanding of what “economic cold turkey” means, but we will all learn.