Debt and The Fed

When the walls come tumbin' down
When the walls come crumblin' crumblin'
When the walls come tumblin' tumblin'
Down
--John Mellencamp

I have little doubt that the Federal Reserve, and the modern central banking model in general, will some day be buried in the scrap heap of history. Whether it is placed there or whether it is randomly stratified in the ruble of economic and social collapse is another question.

Rand Paul makes some astute comments about the Fed in a recent screed against the institution. He notes its impact on the US dollar, observing that once upon a time the USD was backed by gold. Then it was backed by the "full faith and credit" of the US government. Now the dollar is "backed by used car loans, bad home loans, distressed assets, and derivatives."

Not to mention $18 trillion in federal debt...

In fact, Paul suggests that "the reason we have the Fed is because we have debt." This is true. A primary objective of the Fed today, one that does not precisely appear on its official list of charges, is to prevent an over-leveraged financial system from collapsing into insolvency.

But the reverse of Paul's suggestion is also true. The reason that we such large debt and leverage today is because of the Fed. Through its monetary policy agenda the Fed has facilitating borrowing far beyond what an unhampered system would permit.

Now we are caught in a vicious reinforcing cycle of more debt and intervention to prevent cataclysmic decline from that debt.

We can proactively reverse this cycle and our debt load by removing the Fed from the picture. Or we can reactively experience the wrath of market forces that, at some point, will no longer tolerate suppression by the Fed.

position in gold