Mr. Practical's Guide to Fed Policy

Great summary of what is capital, and why the Fed distorts the economic system.Government's Money-Manipulating Wizardry
He starts with a simple explanation of what capital is:
An example of a productive process might be one of specialization. Two farmers grow their own food, make their own clothes and cut down their own firewood. It takes each 15 hours a day to do all this work. They realize one has better land and the other one makes better clothes so they barter to exchange goods. This bartering results in each working only 12 hours a day. One farmer can then take the extra time and sew more clothes and thus barter it with another farmer for more firewood. The extra clothes can be described as “capital” that can be used to raise living standards. Capital can only be created through the production process.
There's a lot that follows from this in his article, which you should read all of. From this example, you can see that the Fed fools the public into believing there is more capital in the economy by creating debt. People build more things, such as homes, than the underlying ability of the economy to support it demands.

The Fed is having a great deal of trouble devaluing the dollar because there is just so much debt out there that needs to be supported: There is not enough income being generated by the economy so it is defaulting. This is why the banks are being force fed profits by an artificially steep yield curve, to subsidize future losses on debt write-downs. And this is why they are not lending out the vast reserves created by profits at taxpayer expense.

I still believe there is something like $8 trillion to $12 trillion in debt to be written down. It’s possibly more if the government continues down the path of supporting moneydebt at bad prices.

When moneydebt is destroyed by forfeitures, the dollar is being destroyed. When the dollar is being destroyed it rises in value. When the dollar rises in value relatively prices go down.

This is exactly what the market wants, for prices to go down. When prices go down, real savings/capital is released as the risk for reward dynamics become more favorable. This is exactly what the government doesn't want. They want to subsidize debtors by keeping prices and collateral values high. It’s a fool’s journey.

This is why I've taken an extended vacation in the US and keeping my capital safe: I am willing to accept a very low return on that capital because if prices come down 40%, I am effectively earning 40% interest on my capital, which is real.

Risk is very high.
Read the whole thing.

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