Trevor Dobbs, Staff Writer
I am beginning to become very concerned about the state of the U.S. economy as well as the economy of the entire world as of late, as it is clear that the United States Federal Reserve once again seems to be putting us all at risk of a crash in the economy via the hiking of interest rates at a faster rate than debt holders and banks will realistically be able to handle. Some may disagree and question the validity of such a statement, to which I would direct them to nearly every single time the United States had a crash; it was always the admitted fault of the Federal Reserve, whom even went as far as to claim responsibility of such and offer their apologies each time. While it is unclear exactly when it will happen, I honestly feel that this giant debt bubble that has been forming for years may burst soon, as an increasing number of people may begin to default on that debt. If this happens, we could potentially see a worse situation than what occurred in 2008. Most economist put the probability of this crash at 60 percent within the next two years, but nobody truly knows when it will happen; most agree though on the fact that it may happen soon. With the instability of geopolitical and economic events around the world such as the Italian bond market, the uncertainty of Brexit, the falling currency values of developing economies such as Argentina, Brazil, Turkey, etc., this could not be happening at a worse time; the risk that this could be the straw that breaks the whole world’s back is very real.
The job of the Federal Reserve, or “the Fed” as they are often called, is to control the supply of money. They are supposed to make sure that when times are bad, such as when unemployment is high, money is pumped into the economy via low interest rates; people find it easier to borrow and so they do and as a result, the economy grows when people get returns on those investments. When the economy is doing well, it is the Fed’s job to, for a lack of better words, “to take away the punch bowl just as the party gets started;” to make sure the money supply is kept under control to keep the economy from “over-heating” (i.e., inflation getting out of control). The Fed primarily accomplishes its goal of modifying interest rates by two ways, by regulating the amount that banks have to keep in their reserves to avoid “bank runs” (not being able to distribute money to account holders), and by controlling the money supply via the purchasing and sale of government bonds. This affects consumers by either encouraging or discouraging consumers from getting loans for cars, houses, credit cards and other items. A person is less likely to borrow if the interest rate is higher and is more likely to spend when interest rates are lower, thus slowing the rate of inflation to sustainable levels.
Unfortunately, as we see in so many times throughout history as well as the present, the Federal Reserve is very short sighted and does not respond appropriately to the state of the economy. At times, I have to admit, I wonder if the people working at the Federal Reserve are on our side, since they seem to be repeating the same mistakes that lead to the subprime mortgage crisis of 2008, which helped to lead to the greatest recession in American history. While I can completely understand why the Fed would have an interest in hiking rates in the long run, since the economy is performing very strong with near full employment in many sectors and they would almost have to hike rates to prevent inflation from getting out of control, I feel that they are doing so at a rate that is too quick for consumers and investors to adapt to.
For example, say you have a home with a nonfixed mortgage rate, if that rate goes up a little bit per payment (as you probably realistically expect it to, or at least you should), you can pay those extra amounts each payment without any issue; if those payments go up suddenly and by huge margins time after time, however, this could completely catch you off guard and you may have trouble paying. When masses of people don’t pay and/or file foreclosures, the banks lose a lot of liquidity, which prevents them from giving out new loans at best, reducing economic growth massively, causing the onset of recession (which leads to an economic snowball effect which further perpetuates the cycle as people become massively unemployed) and at worst, the banks completely fail.
Why might this be happening, some might wonder. Why on earth would they be rising interest rates so quickly if this is a potential outcome? Nobody knows for sure, but I have a feeling greed may be the reason. It would come to no surprise to anyone if I told them that the banking and financial elite of the U.S. makes out like bandits during such periods, as they always have reassurance from the government that their losses will be socialized via guaranteed taxpayer-backed loans while at the same time privatizing all of their profits for their own personal gain, reaping the benefits of cheap properties that flood the real estate market as people foreclose at rapid rates. Many people might be surprised though to know that the Federal reserve is NOT a part of the U.S. government in any way, rather, it is a group of privately owned banks.
Indeed, the fault of such a system is that it almost gives incentive to the financial elite to repeat the process, because they can only benefit with such a system at a little to no cost. The reward is very high, and the risk is little to none; what logical financial elite wouldn’t want to cause another economic crisis? These issues are, and always have been, the problem of those outside of such a class, the working class people of America, the middle class and the poor; these are the people whose tax dollars ultimately will bail out the banks if another such crash happens, these are the people whom are going to lose their jobs, their homes and other assets due to foreclosure and bankruptcy while the same people that caused the crash are going to rake in record profits.
All in all, it is clear that the Federal Reserve is (purposefully or not) driving us off the economic cliff. I do sincerely hope that we don’t have to repeat the events of 2008, but I have no reason to believe such a period won’t be repeated due to the fact that the underlying issues of the last crash did not get fixed.