The FED De-Coded
Why Today’s Investors Must Pay Attention
Most investors sense that the financial world has shifted. Inflation remains stubbornly high, asset prices are stretched, and geopolitical tensions have reshaped the global landscape. But underneath all of these visible stresses sits a deeper, more structural issue—one that rarely makes the nightly news yet quietly shapes everything from interest rates to retirement portfolios.
That issue is the design of our monetary system itself.
And if you truly want to understand why the risks today feel different than in past cycles, it helps to look beneath the surface.
An article recently written by Jeff Thomas, “Understanding the Federal Reserve,” offered a blunt explanation of how the Federal Reserve actually operates. Whether or not you agree with its tone, the underlying mechanics deserve attention—especially for investors trying to navigate what I believe will be a historic market reset.
Today, I want to break down those ideas in plain English and translate what they mean for your money.
The Fed’s Engine: Debt In, Money Out
The Federal Reserve carries an aura of complexity. Most people never look past its jargon: open-market operations, reserve ratios, balance-sheet normalization, liquidity backstops, and so on. But when you strip everything down, the Fed’s primary function is surprisingly simple:
The U.S. government issues debt.
The Federal Reserve buys the excess.
New money is created in the process.
This isn’t theory—it’s the backbone of modern monetary policy.
Here’s the basic sequence described in the article:
The government wants to spend more than it collects, so it issues Treasury bonds.
If private buyers won’t absorb all of that debt, the Federal Reserve purchases the remainder.
The Fed pays with money it creates from nothing, essentially writing the government a check that did not previously exist.
The bonds it receives become the banking system’s “reserves,” allowing more lending and expanding the money supply further.
This cycle—debt creation → monetization → expansion of credit—is the foundation of the entire system.
It also explains why inflation is not an accident.
Inflation is the design.
Why This Matters for Today’s Inflation Problem
Inflation is a monetary phenomenon. When new money is created faster than goods and services are produced, purchasing power falls. It’s not a moral failing, not a temporary glitch, and not an issue solved simply by adjusting interest rates for a few months.
It is a structural feature.
According to the article, the U.S. dollar has lost more than 97% of its purchasing power since the Federal Reserve was created in 1913. That is the inevitable result of a system built on perpetual debt expansion.
And this is one reason I’ve been telling clients—and readers of this blog—that inflation is not likely to return to 2% quickly. We may see brief periods of improvement, but inflation’s underlying driver is the debt-monetization mechanism itself.
When the government runs a deficit of trillions yearly, and the Fed absorbs a massive portion of it, the outcome is predictable:
More currency.
Less purchasing power.
Higher long-term inflation.
This is why I believe we are living through one of the most unusual financial environments in history—one that demands a more adaptive investment approach.
Why Markets Become Overpriced Under This System
If money creation fuels inflation, it also fuels inflated asset prices.
When the Fed increases liquidity by buying government bonds, interest rates fall and money flows into risk assets: stocks, real estate, and anything with yield. Asset prices rise—not purely because businesses are earning more, but because more dollars are chasing the same number of assets.
This helps explain why:
Equity valuations today sit near historic extremes
Real estate prices remain elevated despite weak affordability
Investors feel uneasy because prices look out of sync with fundamentals
Cheap money does not just encourage borrowing; it encourages speculation.
For over a decade, the markets were conditioned to believe that the Fed would always step in—always lower rates, always provide liquidity, always keep the game going.
But when inflation surged, that era ended.
And the market has not fully adjusted to the new reality.
A System Built on Imbalance Cannot Stay Balanced Forever
The article makes a strong case that the current structure ultimately leads to instability. Whether or not one agrees with its tone, the logic is sound: if the supply of money keeps increasing faster than the production of goods—and if debt keeps rising faster than the growth of the real economy—eventually something has to give.
The strain shows up in multiple places:
Higher consumer prices
Government debt growing faster than tax revenues
Investors stretching for returns
Asset valuations far above historical norms
Political pressure on the Fed to “do something”
This environment is exactly why I believe we are on the edge of a major market correction—a correction that may prove painful but ultimately restorative.
When a system relies on perpetual stimulus, even a modest tightening can expose the vulnerabilities underneath.
And we are no longer in a world of easy money.
