More than a decade ago several insightful people recognized that the bond market as it related to the then AAA-rated mortgage-backed bonds was a well-crafted illusion. The eventual default in these bonds fostered a market meltdown which was within hours of totally freezing up markets, creating a global financial crisis. The stock market reflected this crisis by the Dow Industrial Index declining from 16,437 in October of 2007 to 8,207 in February of 2009, a 50% decline in less than a one and half year period.

There were many prudent observers who, after the fact, brilliantly explained the reasons building up to the crisis.It was observed that incomes for workers, on an inflation-adjusted basis, had not gone up since the early 1970’s. For people to maintain their expenditure level and previous lifestyle, it was argued, consumers borrowed money from equity in their homes. Alas, when the borrowing reached a certain limit, they could neither borrow more nor service that debt, and it started mortgage defaults and its resulting crisis in the mortgage bond market, eventually spreading and encompassing broader markets.

In order help recover from this financial abyss, the Federal Reserve flooded banks with an unimaginable amount of fiat money. The banks themselves were failing and needed bailing out, and the Fed did not disappoint. Indeed they created so much liquidity, that they even bailed out major banks in Europe – in total creating trillions of dollars. The stock market started recovering, and over time reached into record price territory. The long-held market wisdom of “don’t fight the Fed” was reaffirmed once again.

Central bank intervention in our economy now spans more than a century. One constant of their policy is to print more money every year. While the annual rate of such inflation over a few short years appears hardly worth paying attention to, the power of compounding these rates since its inception has reduced the original purchasing value of a dollar in 1913 to just about three cents today. It was understood that accelerating money growth generally brings lower interest rates, which with easier access to credit then provides stimulus for an economy. Contrariwise, a slowdown in money expansion, or a rare decline in money supply, would raise interest rates making credit more expensive, and slow an economy. This has been the Fed’s standard policy since its founding, and our economy generally has tended to respond more or less in expected fashion to their actions.