What IS That Stuff in Your Wallet? |
All Mensans know the world turns on the most obvious things, the things we see so often that nobody pays any attention to them. The phrase “Federal Reserve Note” at the top of the U.S. dollar bill screams I.O.U., but how many people understand what that means? Even people who understand the nature of debt-based currency generally fail to grasp the effect it has on their lives, past, present, and future.
What if I were to tell you that today’s headlines can be explained by that three-word phrase “Federal Reserve Note?” Here they are, from today’s Arizona Republic (Sunday, 6/9/02):
Arizona’s economy lagging
Downtown at crossroads: Business leaders fear stagnation, push development
And the teasers above the headlines:
Caroline Kennedy asks, Do you have courage? - USA Weekend
Arizona outlook: The hottest jobs - Business
It certainly does take courage to live in these unprecedented times. Entire
industries have relocated out of the U.S., leaving the laid off workers scrambling
for the remaining jobs. But why are industries leaving the U.S.?
Why is the economy lagging? Why does development have to be pushed? Why do we fear stagnation, which used to be called leaving well enough alone? To answer these questions, I need to take you to the bank. Don’t worry, this won’t take more than 10 minutes, but you need to know how money is created.
All money everywhere comes from a central bank. All central banks are private corporations, in the business of making a profit for the owners. In the U.S. the central bank is called the Federal Reserve Bank, a name purposely chosen to give the false impression that it is part of the government. Isn’t it just a little strange that the website of a private corporation like the Federal Reserve bank, www.federalreserve.gov, has a .gov extension?
The following example is synthesized from Modern Money Mechanics, a publication of the Federal Reserve Bank of Chicago. You can read all 48 boring pages, if you like, at www.geocities.com/tthor.geo/mmm3.html. This simple example illustrates the most common method of money creation in the world today.
Joe is a federal government contractor who is owed $10,000. In order to acquire the money owed to Joe, the government places a bond on deposit with the Fed in exchange for a credit of the same amount in the government’s Treasury account. A bond is a debt instrument, i.e. the Fed is loaning money to the government. The collateral of the loan is the legal authority of the government to collect future funds from the public in the form of taxes, licenses, fees, etc. The use of bonds is not the only method by which money is created out of debt, but all money is created out of debt. You may have heard that the currency is debt based from groups such as those in the Patriot movement, but that’s only the beginning of the game. When the check gets to the commercial bank, the process of fractionalizing begins.
Joe takes his $10,000 check down to the local commercial bank and deposits it. We’ll pretend this is the only currency this particular bank has. The check enters the bank’s accounting system as two balancing entries, as a deposit to Joe’s account and as available bank reserves. At this point, cumulative deposits and total available reserves are each $10,000.
The required reserves consist of the percentage of the available reserves that cannot be loaned out, in this example $1,000 because we’re using the typical reserve requirement (set by the Fed) of 10%. The rest of the reserves are the excess reserves. What does the bank do with excess reserves? In the Fed’s words, “Because excess reserve balances do not earn interest, there is a strong incentive to convert them into earning assets (loans and investments).” So $9,000 (90% of available reserves) is loaned out to Chuck.
What does Chuck do? Naturally he deposits the check into the bank; we’ll say it’s the same bank Joe uses. Joe’s check is no longer part of the available reserves because 10% of it went to required reserves and 90% went to excess reserves, so available reserves are now $9,000, the amount of Chuck’s check. Excess reserves are now $8,100, 90% of Chuck’s check, and this is loaned to Bill. But Chuck’s deposit is added to cumulative deposits, which is now $19,000 (Joe’s check plus Chuck’s check).
Of course, Bill deposits his check in the bank and this brings cumulative deposits to $27,100. The excess reserves from Bill’s check, $7,290, are loaned out to...and the process repeats until excess reserves are gone. But there are two things happening through the whole process: Cumulative deposits in the bank are rising and the debt load of the public is rising. As a matter of fact, the cumulative deposits entirely represent debt. In other words, your bank deposits are actually nothing but somebody else’s debt, and so is the money in your wallet. By the time the excess reserves from the original $10,000 are used up, cumulative deposits have reached $100,000 and total loans have reached $90,000.
The fact is that all currency is created from debt through this mechanism. The government has debt, yes, but the $10,000 of government debt created to pay Joe has been fractionalized into $90,000 of public debt. The entire world economy is created through borrowing at compound interest. And the interest attached to that portion of the $90,000 borrowed by corporations is added onto the cost of goods and services, which is one of the major causes of inflation.
This is why development must be pushed. This is why we fear stagnation. This is why the economy must continue to grow. Since no money is ever created without borrowing, we must borrow to grow the economy, and we must grow the economy because of the compounding of interest. Only the principal is loaned into existence, not the interest. The interest cannot be paid without future borrowing to create more currency. This is why half of all mortgages are refinances and why the money supply turns over about once a quarter.
Because of compound interest on public and private debt, the CPI (Consumer Price Index) is an exponential curve beginning in 1913, the year the Federal Reserve Act was passed. The CPI was relatively flat until it turned the corner in the 1970s and early 1980s, but today the exponential curve of the CPI is virtually vertical, forcing more and more businesses and more and more industries to make the choice of either relocating outside the U.S. or cutting employee benefits and pensions to the bone to survive.
Do you see why we’re in a jobless recovery? Do you see why consumer confidence
is critical to the economy? Once you understand the truth about money, you can
begin to plan for your future needs in a realistic fashion.
— Jamie Berry is a Personal Financial Strategist in Glendale, Arizona who assists
clients to prepare personal financial and life planning strategies for exponential
growth in all areas of their lives. 623-463-3490.
http://www.strategicwealthnet.com