Blame the Federal Reserve, Not China, For Stock Market Crash

The Federal Reserve’s inflationary policies distort the economy, creating bubbles, which in turn create a booming stock market and the illusion of widespread prosperity. Inevitably, the bubble bursts, the market crashes, and the economy sinks into a recession.
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    Analysis– Following Monday’s historic stock market downturn, many politicians and so-called economic experts rushed to the microphones to explain why the market crashed and to propose “solutions” to our economic woes. Not surprisingly, most of those commenting not only failed to give the right answers, they failed to ask the right questions.

    Many blamed the crash on China’s recent currency devaluation. It is true that the crash was caused by a flawed monetary policy. However, the fault lies not with China’s central bank but with the US Federal Reserve. The Federal Reserve’s inflationary policies distort the economy, creating bubbles, which in turn create a booming stock market and the illusion of widespread prosperity. Inevitably, the bubble bursts, the market crashes, and the economy sinks into a recession.

    An increasing number of politicians have acknowledged the flaws in our monetary system. Unfortunately, some members of Congress think the solution is to force the Fed to follow a “rules-based” monetary policy. Forcing the Fed to “follow a rule” does not change the fact that giving a secretive central bank the power to set interest rates is a recipe for economic chaos. Interest rates are the price of money, and, like all prices, they should be set by the market, not by a central bank and certainly not by Congress.

    Instead of trying to “fix” the Federal Reserve, Congress should start restoring a free-market monetary system. The first step is to pass the Audit the Fed legislation so the people can finally learn the full truth about the Fed. Congress should also pass legislation ensuring individuals can use alternative currencies free of government harassment.

    When bubbles burst and recessions hit, Congress and the Federal Reserve should refrain from trying to “stimulate” the economy via increased spending, corporate bailouts, and inflation. The only way the economy will ever fully recover is if Congress and the Fed allow the recession to run its course.

    Of course, Congress and the Fed are unlikely to “just stand there” if the economy further deteriorates. There have already been reports that the Fed will use last week’s crash as an excuse to once again delay raising interest rates. Increased spending and money creation may temporally boost the economy, but eventually they will lead to a collapse in the dollar’s value and an economic crisis more severe than the Great Depression.

    Ironically, considering how popular China-bashing has become, China’s large purchase of US Treasury notes has helped the US postpone the day of reckoning. The main reason countries like China are eager to help finance our debt is the dollar’s world reserve currency status. However, there are signs that concerns over the US government’s fiscal irresponsibility and resentment of our foreign policy will cause another currency (or currencies) to replace the dollar as the world reserve currency. If this occurs, the US will face a major dollar crisis.

    Congress will not adopt sensible economic policies until the people demand it. Unfortunately, while an ever-increasing number of Americans are embracing Austrian economics, too many Americans still believe they must sacrifice their liberties in order to obtain economic and personal security. This is why many are embracing a charismatic crony capitalist who is peddling a snake oil composed of protectionism, nationalism, and authoritarianism.

    Eventually the United States will have to abandon the warfare state, the welfare state, and the fiat money system that fuels leviathan’s growth. Hopefully the change will happen because the ideas of liberty have triumphed, not because a major economic crisis leaves the government with no other choice.

    Copyright © 2015 by RonPaul Institute. Permission to reprint in whole or in part is gladly granted, provided full credit and a live link are given.
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    • Pat Kittle

      Do we need to name the “tribe” almost entirely responsible for the Federal Reserve?

    • larry ripley

      That’s like trying to read science fiction or something garbled, perhaps a current update on Alice in Wonderland, there is no organization in the world that is more audited than the Fed. Everything the Fed does is published. There are no secrets. The complaints in the comments below are incorrect. The Fed has not really pumped up the money supply. The numbers went up but the money never made it into circulation and is being returned to the Fed.The stock market has gone up because it was the only place one could invest and get a decent return. Nothing else could meet the desire for better returns with lower risk. The stock market will remain the way it is until the Fed raises interest rates. Ron should stay retired and leave the Fed alone.

      • Coonhound

        Just how do you explain the mathematical impossibility of covering all the dumped UST-Bonds coming from every other country around the world then? 3 QEs? Get real they run those printing presses full tilt EVERY MONTH. We dont take in enough to balance the budget let alone cover all the bond dumping. Go back and retake Econ 101 or admit you are a troll, either way you are not doing anything but obfuscating what is a criminal ponzi scheme that is devaluing Americans hard earned dollars which will soon be worthless as major nations, b4 YUAN joined IMF basket of Reserve Currencies, set up trading hubs just to avoid using the toxic instrument of US Imperialism-the dollar. Ever find it amazing how each country we invade and place sanctions on (if they can fight back ie Russia) discontinue use of the petrol dollar (Iraq/Libya/Syria/Iran[?]) Wake up dingleberri.

    • Mark Perdue

      Please, don’t just print that we are on the fiat system of money. Tell them what this really means.
      In 1968 money had to be backed by gold. 25% of the monetary supply had to be backed by gold. If the government wanted to print more money, they had to get more gold. In 1968 there was only 41.7 Billion Dollars in Print. Today there is 1.385 Trillion in Print.
      In 1968, minimum wage was $1.60. The equivalent is $53.14/hour in today’s money. So, are you making less than minimum wage now???

      The issue is that the government keeps printing massive amounts of money to cover up their problems. But let’s make this easier for the average person to understand.
      If you bought a house in 1990 for $50,000 and paid in cash, and you sold your house today for $150,000, how much profit did you make?
      In 1990, there was 225 Billion in print. Today there is 1.385 Trillion. So, the value of your dollar is much lower. To BREAK EVEN on the sale, you had to sell the house for $307,777. So, you didn’t make $100,000 on the sale, you lost $157,777 on the sale. Try this argument with the IRS, because they don’t care what the government does to devalue your money.

      This is the issue. The government is stealing from us at an alarming rate.

      • disqus_ucIWLiTToR

        I was actually earning $1.60 an hour in 1968. Gas was about 40 cents a gallon. Now gas is about $3 a gallon and people are making $12 an hour.

    • GALT

      Consider the claim that “corporations” are “required by law” to
      act in the interests of their shareholders?

      Since when is it in the “interest of shareholders” to destroy the economies
      of countries, upon whose “consumption” their continued existence depends.
      No sales = no profits…….therefor, corporations are NOT doing what the “law”
      requires…….which solves the problem……for anyone that really wants
      “to solve the problem.”

    • jmillsintacoma

      If America returned to a gold-based money system, or some other stable money – meaning there was no Federal Reserve to “distort” the economy and cause “bubbles,” a booming stock market, and the “illusion” of prosperity, then presumably there would be “real” prosperity. And, given that real prosperity, one would expect the prices of most corporate stocks to rise in response.

      How can one tell the difference between stocks that rise due to “real” prosperity, distinguishing that observable phenomenon from stock prices rising due to the “illusion” of prosperity and “distortions” of the market?

    • TecumsehUnfaced

      “he Federal Reserve System is not Federal; it has no reserves; and it is not a system, but rather, a criminal syndicate. It is the product of criminal syndicalist activity of an international consortium of dynastic families…. to give international conspirators a monopoly of all the money and credit of the people of the United States; to finance World War I through this new central bank, to place American workers at the mercy of the Federal Reserve system’s collection agency, the Internal Revenue Service, and to allow the monopolists to seize the assets of their competitors and put them out of business. ”

      The Federal Reserve is functioning exactly as it was designed to do. That is why it must be abolished. The syndicalists operating it must be trapped, relieved of all their ill-gotten wealth, which is then used to rebuild the country they have so mercilessly plundered for over a century.

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