The above picture I'm posting is a history of the federal funds rate (the blue line), the interest rate that the Federal Reserve (our central bank) fixes in order to give the economy a "push." The red line, the S&P 500 financial index, is an aggregate of the value of 500 of the top publicly traded companies in the stock market. 

As we can see, in recent history, when the Fed sets rates low, investing (especially in the stock market) takes off. This is one of the reasons why the Fed and central bankers like to lower rates, which stimulates more people to either go out and get loans to invest in new projects, or to leverage their assets by borrowing money to invest with. 

Notice how the federal funds rate has been on the decline since 1980. This stimulated some of the growth in the market, but we also must remember, that between 1980 and today, technology and productivity was rapidly improving as well. Innovation is a sign of a healthy economy. As technology improves, so do the lives of all people, rich and poor alike. A rising tide lifts all boats. 

The 1990's was a time known as the "Tech Boom," when companies began moving online and exploiting the capabilities of the internet. Because it seemed that ALL these "tech" companies were a safe and sound investment, it was easy to get a loan if you were starting some technological company during this time. This was what investors and bankers thought, and they had good reason to as well. This was the time when your parents should have bought stock in Apple, Google, etc. You would all be filthy rich today if they had. 

However, it was a little too easy, as it would turn out. Some companies ("start-ups") could literally walk into a bank, say they were a tech company, and voila, they got a loan. Now, due to the nature of the market being competitive (and no industry is really as competitive as the tech industry), some of these businesses lost out because they didn't have a superior product, or their business model didn't make any money. 

People invested all their eggs in their tech companies' baskets, hiring workers, and invested in long-term projects. However, when the market beat them, they had nowhere to turn to. This is the market acting like the human body. It eats food (investment), that leads to energy and health (economic growth) and gets rid of its waste (unprofitable businesses) by pooping (unprofitable businesses failing). 

What really turned the natural "pooping" of the economy into fully fledged explosive diarrhea was how high these companies' stocks had risen without first making a single dollar. Not only were the people running these unprofitable businesses in trouble, but so where the people who had invested in them without a second thought. The market was in a speculative frenzy. Investors were buying and re-buying stocks in these companies, causing the price to raise. It was only until these projects came to fruition, and the successful companies (Google, Amazon, Apple, Overstock, etc.) proved victorious and beat the competition years later (after money poured into unsuccessful and successful businesses alike), that the damage was done. The market had rewarded those companies who were the best, and pooped those out that weren't as good. This isn't all bad. When those who worked in the unsuccessful enterprises are released into the market, they're freed to do different things that they could do better, while the Apples and Googles run the tech industry. 

However, because so many Wall Street Bankers and large investment firms were hurt by the "Pooping," also called the ".Com crash," the federal reserve stepped in to try and "save" the economy. As we can see, in 2001, they lowered the federal funds rate quite deliberately in order to counter-act the stock market crash. Of course, it now became easier to borrow money, and it did stimulate demand again. 

This time, investors knew who the successful tech companies were, so they looked to invest their new long-term projects elsewhere. Where did they find these projects? Housing. 

Around this time during George W. Bush's disastrous presidency, the Federal Government decided "everyone should be able to afford a house." They began to give banks and lenders incentives to lend to those less fortunate, shielding the banks from the consequences of risks that otherwise might be present in a free market. If you eat junk food all the time, you're going to get sick (or fat). If someone can give you a magic shot that makes you less fat, or sick, or take away the symptoms of the sickness, you might feel like you can eat even more junk food. Now, if you're thinking properly, you're saying to yourself: "The shit's gonna be really, really bad."

The government put more emphasis through the Department of Housing and Urban Development, and creating loan types that tried to reach out to the poor, and ethnic minorities. It's really quite sad, actually, that the Government assumes that Minorities are inherently poor. If I said, "_____ people need more help because _____ people are poor," I would be called a racist. But if the government says it, they're noble. No, they're racists, too. In fact, the United States Federal Government might be the most historically racist entity in history, but I digress, back on topic. 

In addition to the new low interest rates combined with the incentive to give loans to riskier borrowers (white, black, yellow, and purple alike), the housing market boomed. People bought houses with loans they could pay back cheaper (lower interest rates, remember?), and then when the value went up because there was someone else who wanted to buy, they sold it again. What does all this house buying and flipping and prices going up remind you of? It kinda sounds like a stock market. Well, actually, it sounds like a casino game, but I guess they're the same thing. 

People saw amazing opportunities in the housing market (even my own father).  Construction companies hired more workers, there were more jobs for Lenders and Loan Officers, and every day it seemed more and more realtors went into the business. Because there were huge (or as Trump would say, "Yooge") opportunities to make a lot of money, talent from across the country entered into this industry. 

The gains didn't stop there, investors in the stock market started buying "Mortgage Backed Securities." These were basically stock in a bunch of loans that were all bundled together. As people paid back their home loans, the investors in these Securities collected a little bit of money. And since there were a lot of these securities, there was a lot of money involved. As housing prices rose, so did the amount collected and paid out in these securities, and because interest rates were low (Thanks, Fed) people continued to buy and flip houses, driving the prices up higher. 

However, because money was so easy to come by, banks started giving loans to people that they knew there was no way they could pay back the loans. People didn't even have to prove how much money they made when applying for a mortgage. Now pause and think for a moment. Why would you give someone money if you knew they couldn't pay it back? You wouldn't. 

What happened was, when these banks made bad loans, they could group them with even more seemingly healthy loans, and sell the securities to Wall Street, and make some easy money. They were able to put a raisin in with their chocolate chip cookies, which let them make more chocolate chip cookies, and sell them to investors. 

Stocks are going up and up and up around this time, and if you look at the red line on the graph, it kinda reminds you of the time right before the .Com crash. Times were great, everybody was getting rich, just like in 1997 (before the crash) and the 1920's (before the Great Depression). Guess what? It was time to poop. 

Housing prices had become so inflated, that many people got into these loans for their houses only expecting to live there for a couple years at most, then they would sell the house because the value of the homes would magically go up, right? Well, eventually, they didn't. People realized that the price of homes was too much, and the housing bubble popped in 2008. People were stuck in their "underwater" homes, meaning, the value of the home was suddenly less than what people were paying for them. 

People couldn't afford to pay back their loans, whether they were raisins or chocolate chips, and the market crashed again. In fact, its really quite suspicious that the S&P 500 index reached right around where the .com bubble was before it crashed again. Everyone connected to the housing industry crashed. The people who moved jobs were out of work, and investors who thought they were buying chocolate chip cookies suddenly got a bite full of those nasty Oatmeal Raisin monstrosities. 

Once again, the market crashed, and it wasn't just limited this time to people involved in unsuccessful technology companies and their investors. This time, it was almost everyone in the housing industry, their investors, AND the people who had bought overpriced homes. This crash was even worse. So what did the Federal Reserve and newly elected President Barack Obama do?

They solved the economic pooping problem by lowering rates to "stimulate" more growth and consumption to keep other investors from going under (shoving junk food in the economy's mouth) AND they even loaned money to  businesses who made poor investments, like AIG, GM, and Goldman Sachs, to keep them in business (putting a cork in the economy's butthole so that it can't poop). 

Of course, the economy still did poop. Small and medium sized businesses who don't have the resources to pay off politicians went out of business, and many homeowners in previously hot markets (mainly on the east and west coasts), paid the price. But the big businesses who pay for the Politician's upcoming campaigns? Those same Politicians made sure that they were safe. 

We were told that they were "too big to fail," well that's because if they failed, the Politicians have a hard time raising money, and then they fail too. The only people who don't want the economy to poop, are the people who are really the shit. Lower, middle, and even some upper-class families became the poop, while big cronies got to stick around. 

Because the 2008 crash was so much worse than in 2001, and had more far-reaching consequences, the Fed lowered rates to the lowest they had ever been in recent memory. Basically, even today, the interest rate is almost zero, meaning banks can borrow from the Fed and from each other at little to no cost, getting rid of many risks, and stimulating consumption. 

The federal funds rate has flatlined since 2009. Also, the Fed has gone through 4 rounds of Quantitative Easing, an open market policy in which they buy stocks, bonds from Wall Street, and securities from the Government, which drive up prices and supposedly bring the economy back from the grave. Well, what it really brings back is akin to a cocaine-addicted zombie. 

Earlier this year, there were hints that the Fed was going to raise rates. The reason they would want to do this is during the supposed economic recovery they don't want to risk printing too much money and causing unnecessary inflation. Despite the supposed economic growth over the last 5 or 6 years, however, the Fed has kept rates low. Why? Because they don't believe that the recovery is real. 

The economic recovery isn't the sick person getting healthy again. It was a sick person who had discovered cocaine, and is running on a high. They know that if they raise rates, they're taking away the addict's drug, and withdrawal will happen. 

Which brings us to today. The recent stock market fluctuations have nothing to do with China, as much as economic pundits and politicians on both sides of the aisle will have you believe. They always want to point the finger elsewhere, like a magician performing his trick. Of course, China is having their own troubles as well, but that's a different discussion altogether. 

I worked with my family in the mortgage business for two and a half years. And let me tell you, when the Fed makes their quarterly announcement, the whole world drops what they're doing and listens. When they hear that the Fed is thinking about raising rates, what they hear is "oh no, my cocaine is going to go away" and the start making preparations for the crash. 

The economy of today is NOT based on real prices. Real prices come from producing, consuming, saving, and investing of all participants in the marketplace voluntarily acting in their own self-interests. Instead, what we have is a group of people who think they are God, who believe that they are above the market. They think they can guide, and plan, and fix the market like you would fix a car. The market is not a car. It's an organic being with its own immune system. Believe it or not, interest rates and stocks provide a real and  actual value in society when prices reflect that of the market. But such policies that arbitrarily lower interest rates across the board, and government regulations that tie businesses' hands behind their backs, is akin to giving the Market's body AIDS. 

The Fed and the Government, through interest rate manipulation and bailouts, has effectively gotten rid of the market's waste-ridding properties and immune system. Now, interest rates have been at or near zero for six years (see above graph). The Fed is out of ammo, and one way or another, whether rates rise or not, the next crash is coming. 

You see, the Fed and Government thought they were just kicking a can down the road. It wasn't a can, and it wasn't a road. They were pushing a snowball down Mt. Everest, and each time they try to step in and "fix" the market's problem for political gain (to win another election, blame the other party, or consolidate their own power), the snowball gets bigger and bigger each time. 

This economy is built on a house of cards, and when the card house falls, guess who will be blamed? The market. Well, I hope you all know by now that this is NOT how the free market works. You can't inject a deadbeat with Cocaine and call him productive. We do not have a free market, we have a false market, and an unsuccessfully central planned market. Unfortunately (or fortunately), the market always wins in the end. You can't defy gravity forever, and you can't defy the laws of economics. 

So ends Update #2 for today. Thanks for continuing to read!