The Austrian Way: How the Fed turned us all into traders?

In last week’s vent I mentioned how bubble finance and the deformations in capital markets had ‘fucked us up proper like’ as the lovely Cheryl Cole would say, if she was interested in economics as some of are. (We can only but dream).

How did we get here you might say?

Well in my mind the phenomena we’re looking at get moving in the early 1970s after Nixon’s Camp David fiasco. This is when the financial party started.

After blaming those ‘evil speculators’ for the decline of the dollar instead of looking at the US living beyond its means for so long, Tricky Dick let the dollar free off that inconvenient, brutish gold stuff that was rapidly being drained from Fort Knox and Westpoint, as central banks around the world swapped their dollars at the Gold Window for bullion.

From this point on Friedmanite floating money and the US T-Bill Standard enabled an at first slow but then ever faster deformation and destabilisation of financial markets around the world.

Owning and then corrupting the world’s reserve currency enabled this all to occur in the Bretton Woods II era.

Bull market culture takes hold

The party gets started in the 1970s when continued mismanagement of the now fiat dollar helped fuel stunning bull markets in gold, silver and other commodities too. This bull market wasn’t such a mainstream affair and enjoyed more by a few professional money runners than households. Few played hard in the commodity markets in those days – as Jim Rogers says, they just weren’t sexy.

Nonetheless Main Street watched on and lots of the baby boomer generation noticed the noise around rising gold prices and read about those naughty Hunt brothers and their silver trading.

From here the party widens to include Main Street and truly heats up, as between 1982 and 2000 the S&P 500 rises from 110 points to 1,485 with Mom and Pop investors participating heavily. This mother of all bull markets represented a 13.5 times gain at an annual compound rate of 15% and, promoted by academic cheerleaders like Professor Jeremy Siegel and his works like ‘Stocks for the Long Run’, caused a seismic shift of thinking about saving and investing at the household level.

There had never been anything like this equities mega-bull in modern financial history but with Mom and Pop now feeling like investment geniuses the party is now ready to continue in heady new ways post 2000. The 1997 – 2000 uberspike in tech stocks might also be said to act like a cheeky pill on the side of the main party, to add to all the rest of the fun we’ve been having around the Fed-provided punch bowl.

The death of saving and frugality

We now arrive into the new millennium where the let’s get rich quick call from an ever bolder Wall St has been swallowed hook, line and sinker by 10-pints-drunk Mom and Pop.

Now not only have the Fed and the other following central banks become hostages to financial markets and investment bankers, but to a newly speculative Main Street too, with household wealth now being so heavily tied to the fortunes of the stock market.

Our kind and wise central bankers then double down on their wrong-headed policies, not wanting to let asset prices reset to more normal levels based on realities like current and future earnings, not cheap money. Greenspan, Bernanke and their international brethren keep on goosin’ the economy as too many people want the party to continue.

This allowed Mom and Pop to keep on playing at the financial casino and throw their dice in new bull markets that are getting going.

David Stockman articulately describes this marker point in financial history:

‘Having fostered a bull market culture of stock market gamblers during the 1990s, the Fed simply broadened the casino’s offerings after 2001 to include housing, real estate and derivatives’.

Prudent saving habits and frugality have now been replaced by bubble finance and bull market thinking in the space on one generation. Deferred consumption and sacrifice isn’t very attractive when compared to perpetual windfalls and capital gains arising from the financial casino and cheap credit.

Today ‘the markets are a lie’ call long-time money managers as veteran’s like Stanley Druckenmiller check out of the game fearing for the future and too much potential downside ahead. The financial party has lasted quite a few decades so far, but parties cannot last forever.

We are all traders now in these perverted, rigged markets.

Love Bogpaper? Follow us on Twitter via @TheBogpaper and @AustrianWay.

9 comments on “The Austrian Way: How the Fed turned us all into traders?

  1. stodders
    October 1, 2013 at 7:48 pm #

    Just interested to know what @AustrianWay invests his money in if not the stock market (assuming of course that he does earn money with which to invest)?

    • theaustrianway
      October 2, 2013 at 8:02 am #

      Hi Stodders,

      Thanks for reading and the question. Here’s a rough break down of how I spread it around:

      10% gold bullion
      15% silver bullion
      5% fiat currencies (I favour Sing dollar and Norwegian Kroner)
      7 – 10% gold, silver mining shares
      60%+ private equity

      I also have a token few hundred pounds in Bitcoin, Litecoin and Feathercoin. This is more playing and punting in a new market for private monies.

      How about you?

  2. therealguyfaux
    October 2, 2013 at 2:13 am #

    The Fed chairman in the 60’s (and a bete noire for Richard Nixon) was a gentleman by the name of William McChesney Martin who was responsible for that famous likening of the Fed to a punch bowl; i.e., the Fed chairman is in charge of taking away the (presumably spiked) punch bowl before the partygoers get too out of control. But since his tenure, it seems that another phrase involving a punch bowl has been probably just as apposite. Not only has the turd been ignored by most; there are some who might feel it even lends a certain je ne sais quoi to the taste of the punch.

    • theaustrianway
      October 2, 2013 at 7:51 am #

      Hi therealguyfaux,

      Thanks for reading and for your comment.

      You’re spot on with your appreciation of William McChesney Martin – he was a rare ray of light in a recent roster of nutters. He made a stunning team with president Eisenhower, who although a soldier, was very conscious of the influence of the military industrial complex , fearful of the influence of military during peacetime and a real stickler for balancing the US books.

      Ike and Martin were a temporary dream team I my mind, however, when these things are based on ‘a few good men’ they can never last forever. It is for this reason that I don’t believe in central banking, but trust much more in gold. You’ve probably all heard this quote before from GB Shaw:

      “You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold.”

      I’ll be taking a look at how Wall Street got huge next week. Stay tuned!

      • therealguyfaux
        October 2, 2013 at 3:06 pm #

        Of course, it was George Bernard Shaw who once observed that any government who robbed Peter to pay Paul could always count on Paul’s vote.

        And it’s Guy Faux who observes, that any government, who could rob Peter to pay Paul, will eventually get around to robbing Paul as well– it’s only a matter of time…

  3. silverminer
    October 2, 2013 at 9:01 am #

    You can trace the problem back to 1913. Didn’t we have the same scenario during the “roaring 20s” then the Great Depression? It’s Jefferson’s warning playing out.

    “I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

    • Norman B
      October 4, 2013 at 10:41 am #

      I absolutely agree with you. I am currently reading The Creature from Jekyll Island by G Edward Griffin about the founding of the Federal Reserve. It might just have been the biggest scam that has been pulled on the world.

      Of course it suited the politicians to allow the Fed to set up. After all, the creation of extra money out of thin air opened the chance for them to use far more money than they had been used to. In addition, it meant that they could introduce a new wealth tax – called inflation.

      • silverminer
        October 4, 2013 at 8:21 pm #

        Thing is, Norman, the US Government had issued a fiat currency itself in the past (the United States Note otherwise known as the Greenback). They didn’t need the Fed to achieve this.

        All the creation of the Fed meant was that now the US Government has to pay interest on bonds to the banking system who just created the money to buy the bonds out of thin air! Rothschild, Rockefeller, Morgan et al are laughing all the way to the bank (as they owned the bloody thing).

        Now the US has a national debt approaching 100% of GDP and is teetering on the edge of bankruptcy. Had it persisted with the Greenback, issuing fiat currency as credit and spending it into the economy, there would be no national debt! Yes, there would have been inflation if they printed too much (as there is now) but at least those harmed (the public) would have also benefited from the initial money creation (through lower taxation).

        I don’t advocate fiat, I’d rather have gold, but if we have to have it then at least have it issued by the Government not by a private banking cartel. There is no good reason for this and we should end the practice immediately.

  4. Tim
    October 2, 2013 at 4:28 pm #

    don’t fight the Fed.

    Not sure how you figure your gold/silver/private equity portfolio works out in any realistic scenario but good luck to you.

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