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The Problem with Having Managed Economies

The Problem with Having Managed Economies
By Todd Strandberg

There is probably no nation on earth that has a completely free economy. Although most western countries are nowhere near what it is like in China or the old Soviet Union, things have gotten pretty bad. The central banks of most western nations now assume that they have a duty to manage the general direction of the economy.

Whenever a government tries to manage markets, the typical result is a disaster. President Erdogan of Turkey has been fixated on strengthening his economy by lowering interest rates. This move has caused the national currency to rapidly decline in value.

Erdogan’s fervent belief that high-interest rates cause inflation is why he refused to abandon his crazy plan. The more the Turkish lira plunges in value, the more Erdogan screams for lower rates.

Turkey’s consumer prices have soared by the highest rate since 2002. Independent economic institutes such as the Inflation Research Group (ENAG) calculated last month’s annual inflation rate at 82.8 percent. Erdogan did cause the value of the lira to briefly soar when he announced that Turkey’s central bank would ensure the value of people’s bank accounts. It quickly dropped again when it became clear that the central bank could only accomplish this task by printing vast quantities of the lira.

After the Federal Reserve declined to guarantee its loans as it did for Bear Stearns, the bankruptcy of Lehman Brothers triggered a cascade of other firms to become insolvent. From Lehman Brothers on, no other large financial firm was allowed to go into bankruptcy. Even banks that were in good shape would be given huge amounts of money.

The Federal Reserve has rapidly gone from helping the financial system when it gets into trouble to managing the markets from almost a day-to-day basis. If the stock market goes down 500 points, alarm bells sound at the Fed, and the Plunge Protection Team starts buying S&P futures. Another way that the Fed regulated stock price is by giving money to member banks that pass it on to Hedge funds that buy up stocks.

Over the past few weeks, I’ve been reading up on the source of government taxes. From listening to various experts on the financial system, I’ve learned why the stock market and real estate are so important to the government.

In the early days of American history, the federal government’s income was raised primarily from taxes it placed on imported goods. It wasn’t until World War I that people started paying income tax. As time passed, more and more people were paying fewer taxes. About half the people in America don’t pay any federal taxes.

The government gets a huge amount of its income from the sale of homes and stock. During the Financial crisis of 2007–2008, the IRS lost 35% of its tax receipts from the decline in home prices. The only direction that equity prices are allowed to move is in the up direction.

All this pump by the Fed has created a massive stock bubble on Wall Street. Apple Inc. just became the first company to have a $3 trillion stock price. Five years ago, Apple was only worth $500 billion. A six-fold return for a company this massive in size should not be possible, but now on Wall Street, any valuation gain can happen. Tesla’s 23-fold rise makes Apple look like a “dead money” stock.

If it wasn’t for the COVID-19 stimulus spending, Washington could have had a huge surplus. That’s not how federal money spending works. Give any government $200 billion, and it will spend $350 billion. If Elon Musk cashed in his $340 billion in stock and had to write a $100 billion check to the IRS, we would soon be another $1 trillion deeper in debt.

The greatest danger is that soon few people will be writing checks to the IRS from their capital gain sales. Vast numbers of people have stock on margin that is at levels worse than the 1929 crash. Millions of employees are rich, on paper, because they were issued options as payment. Many people who own real estate borrow against the equity value of one home and buy another one.

The global financial system has survived so many crises in the past 14 years, I can only conclude that the hand of God is holding things together. Terry and I talk about this situation many times, and we can only presume that this monetary madness has a connection to the rapture.

“But ye, brethren, are not in darkness, that that day should overtake you as a thief” – (1 Thes 5:4).

– Todd

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