Incremental Steps To The New Normal


The sell off in the stock and bond market, the week of June 20th, at a hint by Ben Bernanke that he might ease out of Quantitative Easing in the not too distant or distant future, is evidence that the financial markets are a bubble activity blown up by the Fed’s double edge sword of printing counterfeit money and artificially lowering interest rates. We witnessed more evidence the following week when first Quarter GDP numbers were revised down. This started a rally in the stock market because investors know that if there are bad aggregate numbers, the Fed will keep electronically printing money. Money going into the market is what drives the overall market upward. Understanding how these two sides of the Fed’s interventionist coin creates the artificial prosperity that eventually has to be liquidated, is very difficult because of the abstract nature of what is involved. We have been trying to explain these abstract concepts, in a variety of ways in order to make them understandable. It takes years of reading to truly grasp these concepts and organize them in your mind in a way that you can make them understandable to someone who has never read about The Austrian Business Cycle Theory. A lot of what we write about here is repetitive, but the only way to  learn something is through monotonous monotonous repetition.


You receive money in exchange for a good you produce, or a service you provide. The person who exchanges money for what you have produced, has also produced a good or service in exchange for the money that was used in your exchange. So really what is being exchanged is actual goods and services, and these exchanges between real things are less complicated because of the use of money. As we have stated in other posts it is hard for me to exchange a hat for a portion of your cow, but if we know that a hat sells for $10 and a cow sells for $2500 we also know that the ratio is 250 hats for one cow. The problem is it’s difficult to  find an owner of a cow who will take 250 hats in exchange for his cow, and we also know that it’s not possible to exchange 1/250th of a cow for 1 hat. Using money is how a numerical value is placed on every good and service in relation to every other good and service produced in the market, and is how we exchange goods more efficiently.


Money is essentially a certificate of purchase. Legal Tender laws make money a claim on what someone else has produced. What would happen if you printed say $50,000 worth of counterfeit certificates of purchase? You would have a claim on $50,000 worth of someone elses production, without any corresponding production to back up these claims. You would be stealing $50,000 worth of what has been produced. If the Fed gave you this counterfeit money it would still be theft. The only difference is you wouldn’t feel as bad about the theft because you were given these certificates of purchase by a quasi Government agency,which means it has to be alright.


The counterfeit certificates of purchase go to the banks first, and because they are not loaning money out, it is finding its way into the financial system through stick and bond purchases. This is causing the stock market to go up and bond yields to stay low. Whoever said, “this is money in search of mischief “, could never state a more true statement.


The Fed has placed the economy on a high wire with no net. It has gone too far with its money printing and there is no escape from the consequences of this policy. When the collapse happened in 07-08 they injected counterfeit money into the economy to try to stave off the liquidation of assets, and also to stimulate the economy so it could eventually breath on its own. Unfortunately injecting counterfeit money into the economy is what caused the housing bubble in the first place. In 07-08 the economy tried to cure itself by liquidating activities that were not productive. The Fed’s money creation temporarily stopped the market’s attempt to cure the problem, a problem that was originally created by the Fed. We are now at a point where they can’t stop printing, because even a hint that the Fed might quit counterfeiting money starts a liquidation process, and they can not let this happen on their watch.  As the counterfeiting continues more unproductive activity will be created which, at some point, will have to be liquidated. So let’s be clear about what is happening, stopping the counterfeiting will create an immediate liquidation problem, and keeping the counterfeiting cranked up will create a bigger liquidation problem in the future.


The Fed knows that there has to be an eventual liquidation of unproductive activities and assets that were created by all of this counterfeiting. These central planners are trying to slowly liquidate these unproductive activities and assets in a downward stair step method. They allow, or force, asset prices to fall a little, hoping they hit a step on the way down to break the fall. The market languishes on this step for a while and people eventually get use to this new level, or (new normal). They’re hoping this slow liquidation happens in incremental steps so nobody actually sees what is happening. Just because we get use to each new normal step on our way down the staircase, doesn’t mean that the cost, to us, of this liquidation will be any less, in fact it will be more costly because the Fed produced more misallocations in it’s attempt to stop the market from correcting.

Related articleDoes The Supply Of Money Have To Increase To Accommodate Increasing Production? by

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Related articleThe Party Is Over, at

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One Comment on “Incremental Steps To The New Normal”

  1. Danny Wright Says:

    All I can say is, keep up the good work.

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