The Federal Reserve's "Bail Out" Bad for Economy?

In a recent conversation with a fellow Defender of Capitalism, I was taken aback by the following comment (paraphrased):

After 9/11, the economy was stabilized because the Federal Reserve released a flood of money into the markets... therefore they are there to help.

And again, we see the Fed "bailing out" the US economy by flooding the market with more money, manipulating rates which have no basis in free market, or reality for that matter, and are doing little more than placing a band aid over a gaping wound!

The Federal Reserve is little more than a group of economist-elites dictating how the market should and will work. There is little room for free market and personal responsibility when one does not trust the free market to work.

So the gold standard is abandoned... The US dollar becomes little more than a figment of our economic imaginations... and we have nothing tangible with which to trade our money in for, should we so desire.

Economics has replaced Christianity as the religion of the US.

How can I say this? Because we need to have more faith that the next person will equally value and accept a green piece of paper as the appropriate medium for commerce. What's more, fewer people are carrying cash on hand, so we take it on faith that when I swipe a plastic card through a machine, that I will, in good will, back it up with a stack of green paper. Everyone has faith in the mighty dollar... but are we at a point where we should be questioning our monetary system?

Yes.

The cause of economic issues prior to the Federal Reserve was a constant run on banks. It used to be the case that wealth was measured by how much gold or silver you had, or was had by the powers issuing the currency. It used to be that banks worked independently, and were expected as a private bank to be able to back a "deposit".

What was the case, however, was that "your" deposit of $100 was taken and divided up to the fellows behind you in line asking for loans or withdrawals. So should you change your mind and want your money back, assuming that your deposit was all the bank had so far that morning, the bank would be unable to give you the money that was yours... there was nothing tangible on hand, BUT the US Treasury had promised that for every dollar in circulation, there was One Silver Coin in the treasury, and they could request that coin. (It is fascinating to collect old US currency, and actually read what was printed on it!)

So the cause of economic strife was that there was not enough money to be handed out... so the Federal reserve came up with a brilliant idea... Print More!

The problem is that with the production of more money, you get something called Inflation.

Now it takes two green pieces of paper to get your one coin (in this example). The price of silver doubles, the price of bread doubles, the price of everything doubles!

In a free market, there is supply and demand. The Demand dictates the production of the Supply, while the lack of Supply drives the cost for Demand. This is helpful with new industry, as early high costs fund the Research and Development necessary for establishing a healthy industry... and when the ability to produce more allows an increased supply, the cost can lower to allow wider distribution at a lower cost, though the revenue is still coming in at the same rate (or roughly the same).

However, the Federal Reserve has eliminated the basis of free market... every time the market tries to correct itself, the Fed interjects, causing additional inflation, driving the value of the dollar down, and ensuring that when this market is actually allowed to correct, it is going to make the Great Depression look like a Maypole Festival.

When your system is based on faith, and not gold... and when your market is driven by manipulation, not free market economics... well, you are in the midst of a system on the brink of collapse... Especially when people begin losing their faith in your currency...

I say to the Fed, "Stay out of it! You caused the Great Depression, and now you are looking to outdo yourself! Let the Free Market work! We don't need our currency manipulated any more!"

I should have taken my own advice years ago... invest in Gold... Maybe it is not too late! Gold is most likely going to hit $1000 an ounce... what does that say about the strength of our dollar!

Not much!