The phenomenon of currency debasement, rampant inflation of asset prices, and the cyclical nature of economic booms, bubbles, and crashes have all become hallmarks of modern central banking. This mismanagement is exemplified by the actions of the Federal Reserve.
Recent financial catastrophes reveal a troubling correlation between the Fed’s cycles of interest rate hikes and market meltdowns. After the dot-com bubble burst, the Fed lowered interest rates to stimulate the economy, inadvertently inflating a substantial housing bubble. The subsequent interest rate increases were intended to deflate this bubble, but instead, they triggered its spectacular collapse.
Similarly, the dot-com bust was closely linked to the Fed’s decision to raise rates. After slashing rates to protect the financial markets from the fallout of the Long Term Capital Management crisis and the 1997 Asian financial turbulence, the Fed’s attempts to rein in the speculative frenzy resulted in a dramatic market plunge — a sobering reminder that the Fed’s solutions frequently lead to new problems.
These cycles of inflation and deflation created by the Fed are not just historical anomalies; they persistently plague our current economic landscape. Perhaps some might argue these issues are behind us, or that the Fed will finally get it right this time. However, history tells a different story.
Time and again, central bankers fumble their responsibilities. Just this week, after the January Federal Open Market Committee (FOMC) meeting, the Fed announced it would maintain the federal funds rate at 2.25 to 2.5 percent.
Is this rate appropriate? Is it harmful? Given that it’s dictated by a group of centralized planners rather than established by market dynamics, it’s safe to say that it’s fundamentally flawed.
For those who remain skeptical of this viewpoint, consider this: Central banks consistently destabilize financial markets, and their record of errors is undeniable.
A Downright Disgrace
This assertion is not just conjecture; it’s irrefutably evident. Yet, like witnesses to a slow-moving disaster, we cannot avert our gaze. This ongoing debacle is both fascinating and disturbing, stretching its tentacles into every corner of the globe.
Several years ago, while visiting relatives in Mexico City, the true madness of central banking revealed itself to me in a most unexpected place. This account serves as a stark reminder of the absurdity inherent in central banking practices. Before diving into this tale, some context is necessary.
Both U.S. and Mexican currencies have transformed radically over the years. Once, they were as dependable as the dawn chorus of roosters. Now, they are as unreliable as a politician’s promises. This isn’t merely conjecture; it’s a reality we ascertain by holding tangible relics of the past: silver dollars and silver pesos.
One example, the Peace Dollar, was minted in the 1920s, where it represented a dollar with 0.77344 troy ounces of silver. In contrast, the 1922 Un Peso from Mexico also had a face value of one peso, with 0.3856 troy ounces of silver. The exchange rate was straightforward: two pesos equaled one dollar. Today, however, both currencies have devolved into mere paper promissory notes issued by their respective central banks, and their values rely heavily on governmental credibility and military might.
Currently, 19.14 pesos are required to purchase a single dollar, underscoring Mexico’s historical struggles in managing its currency compared to the U.S. However, when measuring through the lens of silver, the situation becomes even more stark.
In the 1920s, silver cost about $1.29 per ounce; today, it stands at $15.94. This represents a staggering 1,136% increase in dollar terms. The mismanagement of the dollar by the U.S. Treasury, aided by the Federal Reserve, is evident. In pesos, the situation is far worse: from 2.58 pesos per ounce of silver in 1922 to a jaw-dropping 305.09 pesos today — an increase of 11,725%.
The Categorical Insanity of Central Planning
A brief stay in Mexico City quickly reveals the devastating impact of government policies. The systematic destruction of the currency has led to the erasure of a prosperous middle class, visible in every corner of the city. Yet, remnants of this class linger in the cracks of decline.
Interestingly, the decline of the middle class is not unique to Mexico; it’s increasingly apparent in major U.S. cities as well. This unsettling trend is a troubling consequence of government stimuli funded through deficit spending—a cost borne largely by the middle class. However, that discussion belongs to another time.
Now, let’s return to the root of the issue: the alarming reality of central banking, as illustrated during our visit to the small town of Tepoztlán, approximately 80 kilometers from Mexico City. We went to meet Tío Carlos, my mother-in-law’s brother, a man gifted in unconventional healing arts.
Tío Carlos has no formal medical training—he is not equipped for complex surgeries. Yet, to the community, he is known as El Doctor. When someone believes they are afflicted by malevolent spirits, they seek out El Doctor for a “Limpia” or spiritual cleansing, wherein he utilizes a raw egg to absorb negative energy. It sounds far-fetched, but such practices have persisted in Mesoamerica since well before the advent of central banking.
While Tío Carlos may not fully grasp the intricacies of central banking, he certainly recognizes the unfortunate reality that his country’s currency has become nearly worthless over the years.
In contrast to Tío Carlos’s harmless, albeit peculiar, methods, central banking represents a starkly detrimental force with far-reaching consequences.
Sincerely,
MN Gordon
for Economic Prism
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