What's Causing These Problems

“The crisis from which we are now suffering is also the outcome of a credit expansion. The present crisis is the unavoidable sequel to a boom. Such a crisis necessarily follows every boom generated by the attempt to reduce the ‘natural rate of interest.’” - Ludwig von Mises

The Fed is a non-market force which artificially influences interest rates. By keeping interest rates below the 'natural rate of interest' for many, many years, the Fed has encourage massived debt growth.

Every modern financial crisis (Iceland today, Asia in the 1990s, the Nordic countries in the 1990s, Japan in 1989, etc., etc. etc.) has a striking similarity: a swift and dramatic rise in system-wide debt relative to GDP. Our own crisis is perhaps different only in its magnitude.

Considering that GDP (non-inflation-adjusted) grew 582% over the last 30 years, it is quite amazing that financial debt grew 584% relative to GDP. In nominal terms, domestic financial debt was $337.8 billion in 1977. By 2007, it was $15,751 billion. That is a gain of 4563%. Total domestic debt grew 1384%. Mortgage debt grew 1643%.

The Fed's solution to the problem is more debt. However, the money created from the new debt issuance is not going to prop up housing and asset prices, but instead is going into commodity prices and creating inflation. Read more about Why Assets Are Down And Commodities Are Up.

Fake Ben Bernanke

FakeBen.com

FakeBen is a blog to monitor the Fed and its actions and encourage community participation. At FakeBen, we believe that the Fed policy of the last two decades has created a credit bubble as large as that created in the 1920s. This bubble will lead to either inflation, a recession, or both.