Central Banks: The Root of All Economic Evil

France was in a bind.

In the early 1700s, the country had run up astronomical debts from endless wars with the British. They needed money… desperately.

So, John Law — the first central banker in France — turned the Mississippi territory France had just acquired into a stock company.

Stocks were a new trend. People weren’t prepared for the crash that comes when stocks teeter too high. So, they went all in… and what resulted was one of the fastest, most exponential bubbles to build and just as quickly burst that the world has ever seen.

It took just two years for this venture to became a popular get-rich-quick scheme. Shares or parcels of land were sold to the public and financed by the government at lower-than-market rates.

Little did buyers know, the land was basically a swamp, far away so no one could see what they were getting.

Thus, the Mississippi Land Bubble peaked in 1720… then crashed over 90% in just over a year.

It’s one of the classic examples of political manipulation, and the first major financial bubble in modern history. And yes, it was engineered by a central bank.

England had a similar bubble when it turned its monopoly on trade with the South Seas Trading Company into a public stock — to pay off its debts from the same war France had with them.

These governments didn’t concern themselves with paying their debts in a more sound, responsible way. They manipulated the market to create an artificial bubble for their own advantage.

The U.S. government had its own land scheme in the early 1800s. In an effort to get people to populate the newly acquired Midwest following the Louisiana Purchase, they offered raw land at bargain rates and — you guessed it — low cost government financing.

It was the greatest real estate bubble in U.S. history. And it burst just as quickly.

By the early 1840s, Chicago real estate fell over 90%, along with most of the Midwest.

It got so bad that it turned into the worst depression the country had seen, between 1836 and 1843.

Then came the U.S. Federal Reserve… created to offset the extreme volatility in the economy and interest rates created by that very depression and more to follow into 1896.

A near-century later, after years of stimulus and lower interest rate policies, an even greater depression happened — the Great one, itself.

This was no accident…

When these political entities constantly stimulate the economy in every correction, it never has a chance to rebalance. All we get are greater bubbles, greater bursts, and greater financial crises as we scramble to rebalance the debt and the financial bubbles that resulted.

But until recently, these bubbles were never orchestrated on a global scale.

Now, the greatest market manipulation in all of history has been globally coordinated by the world’s central banks, who have gone wild with endless money printing to keep the bubble that started in the mid-1990s from bursting.

What’s more, that bubble was already out of control due to decades of manipulation prior.

How do you think we got the Great Recession of 2008 and 2009? It resulted from endless debt growth, and central banks fostering financial bubbles through unprecedented liberal lending policies.

To make it worse, our own Fed decided to ignore the consequences and stop the bubble from fully bursting. Why delay the recovery when we can get it right now?

I don’t know about you, but I lose sleep at night knowing that’s the logic of people charged with controlling our economy… because it shows they obviously don’t have a clue what the economy is all about.

We have stock markets at much higher highs, despite feeble economic growth. We have sovereign bond markets at zero short-term and zero-to-negative long-term rates adjusted for inflation.

It’s political manipulation at its finest… and it takes a government buying massive amounts of debt with money created from thin air.

You know what the effect is on bond holders, but here’s a chart just to drive it home a little further. It’s the U.S. 10-year Treasury bond, adjusted for an average of 3-year inflation rates.