Act I

The Creation of the Fed

The Federal Reserve System, often referred to as the Federal Reserve or simply "the Fed," is the central bank of the United States. It was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system. The Federal Reserve was created on December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law.

Today, the Federal Reserve's responsibilities fall into four general areas.

Conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.

Supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers.

Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.

Providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation's payments systems.

Upon its creation in 1913, twelve central banks all act as a lender of last resort for their regions. Federal Reserve Board is above these central banks that act as a regulatory agency. Originally FRB was only allowed to veto decisions not make them. This caused paralysis in the original system as they all couldn’t agree further fuel for the beginnings of the great depression.

The Great Depression

World War 1 had only ended 10 years after the start of the Great Depression in 1929. All of Europe bankrupted themselves after WW1 because they financed it by borrowing. Their Debt to GDP levels were something like 200-300%. They paid for it by inflating the debt away. The Allies demanded reparations to Germany because they owed the U.S. The U.S. refused to forgive these debts. The Germans thought this was completely unfair and never wanted to pay.

Debt to GDP Ratio: Most countries around the world rely on sovereign debt to finance their government and economy. When this debt is used in moderation, it can position an economy to grow more quickly. This is much like using debt to finance a business.

The debt-to-GDP ratio is a financial measurement for a country, similar to a business' debt to equity ratio. Both ratios are designed to help interested parties determine if a country has too much debt. It is a measurement of financial health.

There is no set ideal ratio for a country to have to indicate it's financial health. However, when the ratio is used with other information, it can help you develop a working concept of a country's health. This can help you decide whether a country's economy is worth investing in.

U.S.'s debt-to-GDP ratio is expected to eclipse 120% this year. To put these figures into perspective, the U.S.’s highest debt-to-GDP ratio was 121.7% at the end of World War II, in 1946. Debt levels gradually fell from their post-World War II peak, before plateauing between 31% and 40% in the 1970’s—ultimately hitting a historic 31.7% low, in 1974. Ratios have steadily risen since 1980 and then jumped sharply, following 2007’s subprime housing crisis and the subsequent financial meltdown.

One of the consequences of WW1 was massive inflation which caused hyper inflation in the early 1920’s. Central Bankers spent most of the mid to late 1920’s trying save the British pound from collapsing. They actually went back to the Gold Standard because they thought it was the cure for hyper-inflation. They were wrong. The world suffered from the shortage of gold in the 1920’s as there was not enough to go around (2/3 of the Gold was with the U.S. because of WW1, capital flights, payments etc...) Main problem was Britain went back to the old exchange rate for XAU/GBP (Gold / British pound.) Which caused the British pound to be over valued. In 1927 the central banks got together to discuss a way out of the mess they created. They decided to lower interest rates for European countries to pay back the debt at a lower cost. It was in July 1927 which also happens to be the start of the stock market bubble (within 3 months the stock market was up 21% and never looked back thereafter.) then burst October 1929. What occurred afterwards is what they teach you in school about how there was a run on the banks. (A banking crisis started in 1931, eerily quite the opposite of what we saw in 2020. With the Fed injecting liquidity to central banks and repo markets in 2019.)

Eventually through the 1930’s Britain, Italy and Germany all defaulted on its war debts and going off the gold standard…which then started the recovery.

It is interesting that the ideology of "the gold standard" is that somehow if everyone uses gold everything is resolved. The historical data shows that what actually happens is people simply hoard and/or stop spending money in the economy, therefore no economic progress, then all you have is one or two piles of gold in the world and nothing to show for it, oh except war, famine and depression.....but at least you have your pile of gold.

Act II

Slow & Steady Transition to China

Boiling a Frog: 2008 through 2020

The boiling frog is a fable describing a frog being slowly boiled alive. The premise is that if a frog is put suddenly into boiling water, it will jump out, but if the frog is put in tepid water which is then brought to a boil slowly, it will not perceive the danger and will be cooked to death. The story is often used as a metaphor for the inability or unwillingness of people to react to or be aware of threats that arise gradually rather than suddenly.

During the 2007–2009 recession, US real GDP fell $650 billion (4.3%) and did not recover its $15 trillion pre-recession level for three years. That recession didn’t have the psychological impacts unique to today’s current pandemic.

Former Federal Reserve Chair Janet Yellen recently said some startling things. On April 6, 2020, Yellen told CNBC’s Sara Eisen on Squawk on the Street, “The Fed…is far more restricted than most other central banks….” (So far, so good. That’s why the U.S. has had one of the least-bad paper currencies. It’s “only” lost 90% of its purchasing power since 1950. Most paper currencies have fared much worse.) “It would be a substantial change to give the Federal Reserve the ability to buy stock….” “I frankly don’t think it’s necessary at this point. I think intervention to support the credit markets is more important, but longer term it wouldn’t be a bad thing for Congress to reconsider the powers that the Fed has with respect to assets it can own.”

When did junk bonds and unfunded municipal pension liabilities become good collateral for the U.S. Dollar? Equities…whaa?

Black Rock Standing by to Exit Scam America

With some $7 trillion under management, Larry Fink’s mutual and exchange-traded fund specialist is by far the largest such group on the planet. Its funds typically own 5% or more of listed U.S. companies, often making the BlackRock complex the largest shareholder. The expertise it gleans from its global presence made it the go-to place for the Federal Reserve to get urgent help with parts of its multi-trillion-dollar coronavirus rescue package. In March, the U.S. central bank handed BlackRock’s financial markets advisory unit its bailout mandate without a competitive process. Questioned by Senator Martha McSally last month, Fed Chair Jay Powell said speed dictated the choice and the Fed would eventually rebid the contract. Looking further you find a strong conflict of interest with Mitch McConnell and his wife Elaine Chao very much b...