Just Accept The Giant Federal Reserve Lie And Make Money From It

December 18, 2009

96

Argument to be practical, not idealistic, when it comes to making money in the markets. – Ilene

Just Accept The Giant Federal Reserve Lie And Make Money From It

Courtesy of Vincent Fernando at Clusterstock/Business Insider

Bernanke Serious Investors need to always remember to separate their economic and political ideals from the act of making money in the market.

We’re reminded of this after seeing Robert Ebeling at Mises deliver the same old radical free markets argument about how we should end the fed:

1) Fed funds rate manipulation leads to a fake price of money in the market, which 2) leads to unsustainable asset bubbles.

Thus 3) we should end the fed and let the market show us the real price money.

Robert Ebeling from Mises: What is being ignored is the more fundamental question of whether the Fed should be attempting to set or in?uence interest rates in the market. The presumption is that it is both legitimate and desirable for central banks to manipulate a market price, in this case the price of borrowing and lending…

Interest rates, like market prices in general, cannot tell the truth about real supply and demand conditions when governments and their central banks prevent them from doing their job. All that government produces from their interventions, regulations and manipulations is false signals and bad information. And all of us suffer from this abridgement of our right to freedom of speech to talk honestly to each other through the competitive communication of market prices and interest rates, without governments and central banks getting in the way.

Great.

The problem is, while his words may ring true with our economic ideals, they fall flat from an investment perspective. Hate to say it, but political realities necessitate a federal reserve and the manipulation of interest rates. If you’re betting for an end to the fed, good luck.

Thus from a practical stand point, fed outrage is a waste of time if you’re trying to make money and these kinds of issues should be saved for the dinner table. The more productive approach, as an investor, is to accept the fact that the fed will be manipulating the market, and position yourself to take advantage of it. The same goes for the politically motivated outrage over government stimulus, which is a whole other can of worms.

Still, as an academic piece, Mr. Ebeling’s article is a great read.