The Federal Reserve Just Made Another Huge Mistake

As stocks continue to crash, you can blame the Federal Reserve, because the Fed is more responsible for creating the current financial bubble that we are living in than anyone else.  When the Federal Reserve pushed interest rates all the way to the floor and injected lots of hot money into the financial markets during their quantitative easing programs, this pushed stock prices to wildly artificial levels.  The only way that it would have been possible to keep stock prices at those wildly artificial levels would have been to keep interest rates ultra-low and to keep recklessly creating lots of new money.  But now the Federal Reserve has ended quantitative easing and has embarked on a program of very slowly raising interest rates.  This is going to have very severe consequences for the markets, but Janet Yellen doesn’t seem to care.

There is a reason why the financial world hangs on every single word that is issued by the Fed.  That is because the massively inflated stock prices that we see today were a creation of the Fed and are completely dependent on the Fed for their continued existence.

Right now, stock prices are still 30 to 40 percent above what the economic fundamentals say that they should be based on historical averages.  And if we are now plunging into a very deep recession as I contend, stock prices should probably fall by a total of more than 50 percent from where they are now.

The only way that stock prices could have ever gotten this disconnected from economic reality is with the help of the Federal Reserve.  And since the U.S. dollar is the primary reserve currency of the entire planet, the actions of the Fed over the past few years have created stock market bubbles all over the globe.

But the only way to keep the party going is to keep the hot money flowing.  Unfortunately for investors, Janet Yellen and her friends at the Fed have chosen to go the other direction.  Not only has quantitative easing ended, but the Fed has also decided to slowly raise interest rates.  The Fed left rates unchanged on Wednesday, but we were told that we are probably still on schedule for another rate hike in March.

So how did the markets respond to the Fed?

Well, after attempting to go green for much of the day, the Dow started plunging very rapidly and ended up down 222 points.

The markets understand the reality of what they are now facing.  They know that stock prices are artificially high and that if the Fed keeps tightening that it is inevitable that they will fall back to earth.

In a true free market system, stock prices would be far, far lower than they are right now.  Everyone knows this – including Jim Cramer.  Just check out what he told CNBC viewers earlier today…

Jim Cramer was tempted to resurface his “they know nothing” rant after hearing the Fed speak on Wednesday. He was hoping that a few boxes on his market bottom checklist might be checked off, but it seems that the bear market has not yet run its course.

The Fed’s wishy-washy statement on interest rates today left stocks sinking back into oblivion after a nice rally yesterday,” the “Mad Money” host said.

Without artificial help from the Fed, stocks will most definitely continue to sink into oblivion.

That is because these current stock prices are not based on anything real.

And so as this new financial crisis continues to unfold, the magnitude of the crash is going to be much worse than it otherwise would have been.

It has often been said that the higher you go the farther you have to fall.  Because the Federal Reserve has pumped up stock prices to ridiculously high levels, that just means that the pain on the way down is going to be that much worse.

It is also important to remember that stocks tend to fall much more rapidly than they rise.  And when we see a giant crash in the financial markets, that creates a tremendous amount of fear and panic.  The last time there was great fear and panic for an extended period of time was during the crisis of 2008 and 2009, and this created a tremendous credit crunch.

During a credit crunch, financial institutions because very hesitant to lend to one another or to anyone else.  And since our economy is extremely dependent on the flow of credit, economic activity slows down dramatically.

As this current financial crisis escalates, you are going to notice certain things begin to happen.  If you own a business or you work at a business, you may start to notice that fewer people are coming in, and those people that do come in are going have less money to spend.

As economic activity slows, employers will be forced to lay off workers, and many businesses will shut down completely.  And since 63 percent of all Americans are living paycheck to paycheck, many will suddenly find themselves unable to meet their monthly expenses.  Foreclosures will skyrocket, and large numbers of people will go from living a comfortable middle class lifestyle to being essentially out on the street very, very rapidly.

At this point, many experts believe that the economic outlook for the coming months is quite grim.  For example, just consider what Marc Faber is saying

It won’t come as a surprise to market watchers that “Dr. Doom” Marc Faber isn’t getting any more cheerful.

But the noted bear at least found a sense of humor on Wednesday into which he could channel his bleakness.

The publisher of the “Gloom, Boom & Doom Report” told attendees at the annual “Inside ETFs” conference that the medium-term economic outlook has become “so depressing” that he may as well fill a newly installed pool with beer instead of water.

If the Federal Reserve had left interest rates at more reasonable levels and had never done any quantitative easing, we would have been forced to address our fundamental economic problems more honestly and stock prices would be far, far lower today.

But now that the Fed has created this giant artificial financial bubble, the coming crash is going to be much worse than it otherwise would have been.  And the tremendous amount of panic that this crash will cause will paralyze much of the economy and will ultimately lead to a far deeper economic downturn than we witnessed last time around.

Once the Fed started wildly injecting money into the system, they had no other choice but to keep on doing it.

By removing the artificial support that they had been giving to the financial markets, they are making a huge mistake, and they are setting the stage for an economic tragedy that will affect the lives of every man, woman and child in America.

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About the Author: The Economic Collapse Blog

  • JohnDille

    GOOD BYE AND GOOD RIDDANCE!!! GO AND WATCH FOX NEWS 16 HOURS A DAY, AND GET YOUR SELF EVEN MORE BRAIN WASHED THAN YOU ALREADY ARE! AND BY THE WAY… I HAVE NO IDEA WHO MIKE IS… SO YOU ARE WRONG ABOUT HE AND I BEING THE SAME PERSON… JUST AS YOU ARE WRONG ABOUT EVERYTHING ELSE! BYE NOW!!!

  • JohnDille

    YEAH… I REFUSE TO KISS UP TO RICH RIGHT WING REPUBLICANS… OR TO ANYONE ELSE, FOR THAT MATTER! AS FOR LYING… I DID NOT AND OBAMA DOES NOT… SO I GUESS THAT MEANS THAT YOU AND YOUR RIGHT WING PROFESSIONAL LIARS AND YOUR BILLIONAIRE RIGHT WING MASTERS LIE CONSTANTLY! NO SURPRISE THERE… THAT IS JUST WHAT RIGHT WINGERS DO!!! RIGHT WINGERS ARE CONGENTIAL LIARS… AND SEEM TO BE INCAPABLE OF DOING ANYTHING ELSE!!!

  • Mark

    You horrible with people. That’s why you flubbed up. Oh and you cannot lie in an interview and say you have a nuclear physics degree. Lying does not get you anywhere and that’s what Obummer will realize soon too. LOL

  • Mark

    Old man,
    Your not worth the time to argue and save from the left wing nut jobs that will destroy the world. Oh, for all I know you don’t even have a degree and your just some lunatic in Idaho with nothing else to do. Hey did you get rid of you MIKE account? I have not him from him I mean you or do I mean him. That’s right….You and him are the same.
    Yours in Capitalism

  • JohnDille

    SO… YOU JUST REPEATED MORE THAN HALF OF WHAT I SAID EARLIER… THEN YOU ARE CALLING ME AND IDIOT FOR SAYING WHAT YOU JUST REPEATED??? NO WONDER YOU HATE AMERICA SO MUCH…. YOU ARE SO CONFUSED YOU THINK YOU ARE LIVING IN COMMUNIST CHINA OR FASCIST RUSSIA!!! POOR MARK… HE HAS NO IDEA WHAT COUNTRY HE IS EVEN LIVING IN… OR IN WHAT CENTURY IT IS!!!

  • Mark

    Dille,

    You are a left wing nut job idiot. You never make sense on anything and basically rant & rave about nothing while doing nothing in those lonely Idaho hills. First, there are over 435 nuclear power plants in the world where 200 will be going into retirement in 25 years. However, many venture capital companies are investing in newer technology such as transatomic power. However, if the left wing loony toons have it their way like you they will do their best to put this industry out of business like so many other industries. The old socialist agenda to take over many industries and let the government run it. Then we can really go bankrupt. YOU PEOPLE HATE THIS COUNTRY SO MUCH IT IS HARD TO KNOW JUST WHAT KIND OF INSANE THINGS YOU WILL DO IN ORDER TO OVERTHROW OUR GOVERNMENT, AND IMPOSE YOUR LEFT WING COMMUNIST IDEALOGIES ON THIS NATION!!! Boy Dille, this sounds familiar doesn’t it.

  • JohnDille

    METHINKS YOU ARE CONSTANTLY ON THIS BOARD BECAUSE YOU HAVE NOTHING BETTER TO DO WHILE YOU WAIT FOR YOUR WELFARE CHECK AND FOOD STAMPS! OR MAYBE YOU ARE JUST DESPERATELY LONELY BECAUSE NO ONE LIKES BEING AROUND YOUR ARROGANT SELF CENTERED SELF!!! OR… MOST PROBABLY… BOTH OF THOSE CONCEPTS ARE TRUE!!!!

  • Joe Cabot

    Plenty of people from non-wealthy, non-influential families have gotten themselves great jobs over the decades. Methinks your claims of Navy nuclear experience and a degree in nuclear physics are a load of crap, along the lines of your amusing babble of being a published economist.

  • JohnDille

    I LIVE IN IDAHO… MAYBE 60 MILES FROM WHERE THEY KEEP THE REMNANTS OF THE REACTOR AT 3 MILE ISLAND. LAST I HEARD, IT WAS MORE THAN 75% MELTED DOWN, AND TOO HOT…. TOO RADIOACTIVE… TO DO VERY MUCH OF ANYTHING WITH… A LOT LIKE THE 3 REACTORS AND THE STORAGE SITE AT FUKUSHIMA…. AND A SMALL SCALE VERSION OF THE CONCRETE ENCASED REACTOR COMPLEX AT CHERNOBYL!!! IS THE OTHER REACTOR AT 3 MILE ISLAND STILL WORKING??? MOST LIKELY… IT WOULD HAVE BEEN AN ECONOMIC DISATER TO SHUT BOTH OF THOSE REACTORS DOWN. ARE THERE ABOUT A HUNDRED OTHER REACTORS STILL IN OPERATION IN THE USA??? YEP… AT LEAST FOR A FEW MORE YEARS… BUT THEY ARE ALL GETTING OLD AND WILL HAVE TO BE SHUT DOWN OVER ABOUT THE NEXT 25 YEARS OR SO! BUT IN THE YEARS AND MONTHS BEFORE 3 MILE ISLAND… THEY PLANNED TO HAVE MORE THAN A THOUSAND NUCLEAR REACTORS IN OPERATION BY THE YEAR 2000…. BUT 3 MILE ISLAND DESTROYED THAT GRAND PLAN…. AND THE CAREER PLANS OF MOST OF MY FELLOW NUKES IN THE NAVY! OF COURSE, YOU WOULD KNOW ALL OF THAT… IF YOU REALLY KNEW ANYTHING AT ALL ABOUT NUCLEAR POWER AND ITS RELATED INDUSTRIES!!! AS FOR DEFENDING THIS NATION AGAINST COMMIES… I HAD ABSOLUTELY NO PROBLEM WITH THAT! IT IS DEFENDING THIS NATION FROM RIGHT WING IDIOTS LIKE YOU THAT HAS ME DEEPLY WORRIED…. YOU PEOPLE HATE THIS COUNTRY SO MUCH IT IS HARD TO KNOW JUST WHAT KIND OF INSANE THINGS YOU WILL DO IN ORDER TO OVERTHROW OUR GOVERNMENT, AND IMPOSE YOUR RIGHT WING FASCISM ON THIS NATION!!!

  • JohnDille

    ITS NOT WHAT YOU KNOW… ITS WHO YOU KNOW… AND HOW GOOD YOU ARE AT BROWN NOSING PEOPLE!!! APPARENTLY, YOU WERE RAISED IN A WEALTHY AND/OR INFLUENTIAL FAMILY, AND YOU ALSO MUST HAVE LEARNED THE ART OF BROWN NOSING PRETTY WELL!!!

  • JohnDille

    GLAD YOU ENJOY MY FILIBUSTERS!!! BEATS TED CRUZ AND HIS GREEN EGGS AND HAM ON THE FLOOR OF THE SENATE ALL HOLLOW, I SHOULD THINK!!!

  • JohnDille

    YOU MUST NOT BE A VERY CURIOUS PERSON…. YOU HARDLY ASKED ANYTHING! AND YOU ARE MOST DEFINITELY NOT A LIBERAL!!! LIBERALS ARE NOT THE TYPE OF PEOPLE TO TWIST OTHER PEOPLES OPINIONS INTO LIES AND BALONEY… THATS A RGHT WING THING TO DO!!!

  • Joe Cabot

    A nuclear specialist in the Navy combined with a nuclear physics degree and you still spent your life in poverty and misery? Wow. Your interviewing skills must be non-existent.

  • Joe Cabot

    Now that was one solidly paranoid filibuster!

  • Mark

    Hey old man,

    Three Mile Island didn’t shut down. Also right down the river there’s Peach Botton nuclear power plant. Many are running and doing well Mr. Know it All. You were in the service???? How come you hate this country so much. Having to defend us against the Commies must have been hard on you. I’m surprised you didn’t jump the fence and join the Red Arrmy.

    M

  • Aaron Ruter

    Thank you for your reply, John. You have answered all my questions.

  • JohnDille

    IN WHAT WAY DO I BASH LIBERALS???? I AM A DYED IN THE WOOL NEW DEAL LIBERAL DEMOCRAT… AND YOU WOULD REALIZE THAT IF YOU ACTUALLY READ AND UNDERSTOOD WHAT I HAVE SAID. AS FOR WHAT I DID IN MY 50 PLUS YEAR WORK CAREER… I HAVE ALREADY TOLD YOU THAT… AND HAVE MENTIONED BITS AND PIECES OF THAT NUMEROUS TIMES IN RESPONSE TO NUMEROUS PEOPLE!! MAYBE YOU ARE NOT AN ACTUAL LIBERAL… JUST ANOTHER RIGHT WING PLANT… OUT TRYING TO STIR UP TROUBLE WITH YOUR RIGHT WING LIES AND BALONEY A MISINTERPRETATIONS OF THE ACTUAL TRUTH!!! IN FACT… MUCH OF WHAT YOU HAVE SAID ON THIS BOARD… HERE AND THERE… POINT TO EXACTLY THAT CONCLUSION!!! I GET THE IMPRESSION THAT YOU HAVE NOT GOT A CLUE WHAT LIBERALS ARE REALLY ALL ABOUT… AND WORSE… THAT YOU DO NOT REALLY CARE… UNLESS IT HELPS YOU SABOTAGE THE LIBERAL POINT OF VIEW!!!

  • JohnDille

    I HAD MY NAVY NUCLEAR EXPERIENCE AND MY DEGREE IN NUCLEAR PHYSICS BEFORE 3 MILE ISLAND DESTROYED THE NUCLEAR INDUSTRY IN THIS NATION, AND LONG BEFORE CHERNOBYL RIGHTFULLY DESTROYED THE NUCLEAR INDUSTRY WORLD WIDE! AND NOW FUKUSHIMA MAY WELL HAVE FINISHED THE NUCLEAR INDUSTRY, FOR GOOD! BUT MARK IS TOO CLUELESS TO BE AWARE OF ANY OF THAT!!! GAAAA!!! VERY STRANGE!!!

  • JohnDille

    SO…. ALL OF YOUR EVIDENCE FOR THAT BALONEY IS… LET ME GUESS… FOX NEWS AND A VARIETY OF CORPORATELY OWNED RIGHT WING TALK SHOW HOTS…. AKA WELL PAID PROFESSIONAL LIARS??? THERE ARE TWO SIDES… AT LEAST… TO EVERY STORY… AND IF YOU WERE TO HEAR THE DEMOCRATIC SIDE OF THE STORY, YOU WOULD REALIZE WHY DEMOCRATS VIEW THE REPUBLICAN PARTY AS A FRONT FOR VERY WEALTHY CRIMINALS AND TRAITORS! CRIME AND TREASON IS HOW THEY GOT SO RICH!!! AND THE REAL UNBIASED EVIDENCE WOULD SUPPORT THE DEMOCRATIC VERSION OF THOE STORIES FAR MORE THAN IT SUPPORTS REPUBLICAN BALONEY AND LIES!!! BUT, OF COURSE, YOU AND YOUR FELLOW REPUBLICANS HAVE NO INTEREST IN THE TRUTH! YOU PREFER TO WEAR YOUR ROSE COLORED GLASSES AND TO TOTALLY IGNORE HOW THE REAL WORLD WORKS… BECAUSE IF YOU WERE FORCED TO SEE THE REAL TRUTH, YOU WOULD BE SO ASHAMED OF YOURSELVES YOU WOULD PUKE!!!

  • Aaron Ruter

    John, most of the things you say concern me as I consider myself a thinking liberal and you spend most of your time bashing liberals! I feel like I need to come behind you and do cleanup work. But, this time your response hit a funny bone.
    I’m still waiting for your answer, John. What did you do for 40 years in the workforce?

  • Mark

    Ya, I forgot about that one. Funny. He claims to have 3 degrees and one of them in nuclear physics. The other two are worthless if he really has them. I can’t see that with him. He complains that he never had a good job. Said he does not believe in nuclear power. Why major in a degree that puts you in an industry you hate. Daaaa. Very strange.

  • Mark

    How about those socialist Democrats? I have the answer to that one which you are to Chicken you know what to answer. They gave us entitlements that got us bankrupt. They let illegals in and promised them the world with welfare. They drove jobs and businesses overseas due to corrupt unions, over taxation, and over burdened regulations. I kind of think they did the most damage. Oh and your President Obummer drove the deficit to a whopping 19 trillion. I don’t know Dille!!! I think maybe you should side with the Republicans on this one. Leave the dark side and come into the light. Maybe if you change your attitude Joe Cabot will give you s job and can learn how to have your own business. Just a thought.

  • JohnDille

    YEAH… I DO HAVE ALL THE ANSWERS… AND A LOT OF THOSE ANSWERS ARE CORRECT BECAUSE THEY ARE BASED ON THE OFTEN GRIM REALITIES THE REAL WORLD HAS TO OFFER. REPUBLICANS, ON THE OTHER HAND, SEE THE WORLD LIKE JOE CABOT DOES… THROUGH A SPECIAL SET OF ROSE COLORED GLSSSES, THAT DRAMATICALLY ENHANCES THE ILLUSIONS AND DELUSIONS AND FANTASIES THAT HE AND OTHER REPUBLICANS SEE WHEN THEY LOOK AT THE WORLD!!!

  • JohnDille

    THIS MICHEAL SNYDER GUY IS LIKE THOSE RIGHT WING MORONS ON JUST ABOUT EVERY STOCK RELATED CHAT BOARD OUT THERE… CONSTANTLY BASHING… APPARENTLY BELIEVING THAT IF HE BASHES HARD ENOUGH, HIS SHORT ON THE PARTICULAR STOCK WILL FINALLY CONFORM TO HIS RIGHT WING FANTASIES, AND CRASH!!! YEA… WE AR IN THE MIDST OF A CORRECTION… WHICH IS A VERY GOOD THING… BECAUSE STOCKS ARE… ON AVERAGE… MAYBE 10 TO 25% OVER VALUED. BUT A CRASH??? HIGHLY UNLIKELY…. THERE IS NO REPUBLICAN IN THE WHITE HOUSE… AT LEAST NOT FOR ANOTHER YEAR…. THOUGH THINGS WILL GO SOUTH… FAST… IF IT LOOKS LIKE REPUBLICANS WILL WIN THE WHITE HOUSE AND RETAIN CONTROL OF BOTH HOUSES OF CONGRESS. EVERY SERIOUS THINKER AND WELL INFORMED PERSON ON THE PLANET KNOWS THAT REPUBLICANS ARE BAD FOR THE US ECONOMIC SYSTEM, AND THUS REALLY BAD FOR STOCKS… BECAUSE STOCKS ARE HIGHLY LEVERAGED TO THE WELL BEING OF THE US ECONOMIC SYSTEM. I SEE ALL KINDS OF GOOD DEALS OUT THERE… BUT I CANNOT AFFORD THEM, UNFORTUNATELY. WILL WE CONTINUE TO DRIFT LOWER??? ALMOST CERTAINLY… UNTIL OIL AND NATURAL GAS PRICES AND GENERAL COMMODITY PRICES FINALLY FIND A BOTTOM… PROBABLY OVER THE NEXT YEAR OR TWO…. BECAUSE MOSTLY WE ARE IN A COMMODITY DRIVEN SLOW DOWN! AND WE ARE IN A COMMODITY DRIVEN SLOW DOWN BECAUSE CHINA IS SLOWING DOWN… BUT MOSTLY BECAUSE CAPITALISTS ARE GREEDY SHORT SIGHTED IDIOTS!!! DRILL BABY DRILL HAS BEEN THE MOTTO OF COMMODITY PRODUCERS ALL OVER THE PLANET FOR MOST OF THE LAST 10 TO 15 YEARS OR SO!!!

  • 1pappap

    IN CAPS!!!!!

  • Mark

    Where’s Dille on this one. He’s got all the answers.