"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
-- John Maynard Keynes, from The Economic Consequences Of The Peace
The government of the United States is inflating the money supply at an unheard-of rate, in order to “solve” the financial crisis which it was influential in creating:
Look at the figures from the Saint Louis Federal Reserve Bank. In August 2008, the money supply was at $847.288 billion.
Nine short months later, it is now at $1,774.672 billion!
The government has doubled the money supply in just the past nine months! And you wonder why prices are rising? The Geithner Treasury plans on $2 TRILLION dollar budget deficits for the remainder of his term. What will happen to the money supply? It will balloon out of control, despite the laughable Federal Reserve promise to “withdraw” that money from circulation. Because of the fractional reserve banking system, every dollar issued creates nine more dollars. What will happen to inflation? It will go out the roof.
Why is the US government so set on printing money and turning the US dollar into monopoly money? It’s their insane solution to the derivatives crisis, which is at the heart of the world financial crisis.
When governments become bigger, they borrow and print more money to fund their new programs. This increases the money supply, which causes inflation. Inflation is nothing more than too much money chasing too little goods and services. The only legitimate way for a government to get money is through the taxation of the wealth-creating “private” sector. (The public sector is usually called the governmental area and the private sector is usually called the wealth creating part of the economy, but these two are misnamed. The wealth creating public sector is the arena of 320 million people, all making free will economic choices. The government sector is usually controlled by a very small private elite, who set policies for the benefit of special interests, who in turn fund the political campaigns of elected representatives).
The government sector of the economy creates debt. The “private” sector creates wealth. Therefore, the growth of government is always accompanied by increasing debt and a devaluing of the currency. When government gets too large, it shrinks the wealth creating sector of the economy by siphoning money into government programs, which then makes it necessary to raise more taxes, which further shrinks the private sector. It’s a vicious circle. Every tax dollar the government gets takes money out of your pocket and hands it to a bureaucrat who thinks he knows better than you how to spend your money.
Politicians throughout history have discovered a way around the unpopularity of taxation: the printing of money. The printing of money to find government programs has been going on for millennia, but it was legitimized in economics through the creation of the term “stimulus.” It is true that the printing of money, AT FIRST, creates an economic stimulus, as people have more in their pockets. But eventually, prices rise. This is very simple, friends: when the supply of money is too low relative to the amount of goods and services produced in the economy, prices fall. When the amount of money is too high, prices rise.
How can the printing of money solve the financial crisis? The answer is, it can’t. But the dummies in Washington think it can, apparently.
As of December 2008, according to the Bank for International Settlements (http://www.bis.org/statistics/otcder/dt1920a.pdf), the world’s banks are holding derivatives (financial instruments based on, or derived from, actual assets like mortgages, stocks, and bonds) valued at over $591.963 trillion dollars. The underlying market value of these assets is a mere $33.889 trillion!
This is actually an improvement from June 2008 when the figures were $683.726 trillion in outstanding derivatives contracts, based upon $20.363 trillion in assets! Here is the world financial crisis on a nutshell: a grossly over-extended derivatives sector, where nominal (stated) values of financial products bear no resemblance to their actual values.
An example of a derivative is a mortgage backed security:
In order to understand the world financial crisis you have to understand the process of securitization.
A security is a collection of assets, packaged and sold to third parties. A mortgage, for example, is an asset because the mortgage holder receives the monthly payment of principal plus interest from the mortgagee. Securities banks can make money because securitization allows the bank to simply package and sell financial products, like mortgages, and collect a fee. In a mortgage pass-through security, for example, the investors receive the mortgage payments, and the originating bank collects a servicing fee. The originating bank can also sell the right to service these mortgages to a third party.
So, for instance, a bank could package up a bunch of mortgages and sell them to a third party (a private investor or another bank) and collect their fee. A bank could do this many, many times, buying mortgages and re-selling them, creating their own structured products (a structured product is a collection of assets or other securities), and/or buying structured products from other banks. Mortgages can become so sliced and diced that an investor (or even the issuing bank) cannot trace the actual mortgages upon which the mortgage backed security is based. This is how financial markets can grow out of control, like a cancer.
Over the past few years, banks have created markets based upon a number of assets (not just mortgages), but have had little incentive to identify the assets or their value. This occurred because the Fed did not monitor the dollar carefully enough, and the government relaxed regulation of the financial markets. Guess who was head of the Federal Bank of New York (the most powerful of the Federal Reserve banks) during this period? None other than our tax- evading Treasury Secretary, Timothy Geithner.
Properly valuing a financial instrument is called marking to market. A mortgage backed security, for example (lets call it BBMBW – Billy-Bob’s Mortgage Blueprint for Wealth), if it were periodically marked to market by the originating bank, would trace back all of the assets upon which it was based, assess the value of each mortgage, and come up with a present-time market value for the product. How many of the BBMBW mortgages, for example, are now in default? If 10% of the mortgagees are no longer paying, the investor’s cash flow decreases, and his investment decreases in value. Marking to market is not only honest, but it’s just common sense.
The Madoff scandal is just one of many examples of greedy and dishonest private financiers fleecing their clients. But Bernie Madoff is small potatoes compared to the gigantic rip-off now being perpetrated by the United States government on the American people, and international investors holding dollar denominated investments.
In 1999, Congress passed the Gramm-Leach-Bliley Act, which destroyed the firewall between commercial (deposit) banks and securities banks, and led to the sub-prime mortgage crisis. GLBA allowed commercial banks to engage in the securities process. Now, instead of a bank making money primarily from loans – in which it had to verify the status of the borrower and make sure he or she was qualified for a mortgage – a commercial bank could now engage in the creation of its own mortgage backed securities products. Before, a bank couldn’t make money unless it had made a solid loan; otherwise, if the borrower defaulted, it had to write off the loan as non-performing and put it in the liabilities section of its balance sheet. In the U.S., banks sent “mortgage brokers” - a fancy name for salesmen – out to every Tom Dick and Harry and created a market in “sub-prime” mortgages, which encouraged persons who couldn’t afford a mortgage (or a bigger mortgage) to take the plunge.
Since many of these mortgages were government guaranteed, through quasi-governmental agencies like the Federal National Mortgage Association (Fannie Mae), the Government National Mortgage Association (Ginnie Mac) and the Federal Home Loan Mortgage Corporation (Freddie Mac), these agencies also became overwhelmed with debt. Amazingly, even though the federal government guarantees the mortgages of these organizations, their debt does not show up on the government’s balance sheet! This is just another example of governmental incompetence and stupidity, which we, the people, will pay for through the inflation tax and a crippled economy.
What is the Geithner Treasury’s solution to the financial crisis? I talked about this in an earlier post: TALF: Term Asset Backed Loan Facility. How do you spell TALF?
Instead of honestly valuing bank assets to market, the government’s solution is to “buy back” these overvalued assets at their nominal values, thus creating a mountain of new debt. The plan is for the government to find buyers for these toxic assets, by guaranteeing the risk an investor would take in acquiring them. That is why the Obama administration plans on creating over 8 trillion more dollars of new debt in the next 4 years.
This plan is financially insane. You cannot solve a financial crisis by simply printing more money. But try telling that to our so-called “representatives” in Congress, and to the President.
A further expansion of government influence into health care will cost trillions more. Ask the state of Massachusetts how they’re doing with their full coverage, government-run health care system. http://www.cato-at-liberty.org/2009/06/ ... re-reform/.
Massachusetts politicians promised that the insurance mandate would reduce medical costs. They also estimated that health insurance premiums could drop by 25-40%. Instead, premiums rose by 7.4% in 2007, 8-12% in 2008, and are expected to rise 9% in 2009.
The new government guaranteed health care plans are nothing more than a transfer of wealth to pharmaceutical companies. “Health care,” of course, means allopathic medicine: prescription drugs and surgeries. When every American is required to have health care, the big drug companies will make out like bandits. The United States is already a nation of prescription drug addicts: what will happen when full coverage for every man, woman, and child is mandated? Moreover, I guarantee you that when Congress gets through writing these bills – or should I say, when special interest lobbyists get through writing them -- alternative health care will not be covered, or will have very little coverage. Just like the Department of Energy spends 95% of its budget on fossil fuels and nuclear energy, while alternative, cleaner, and more abundant energy research gets short shrift.
This is what happens when a nation allows its government to grow too large.
Collectivism, under any guise (socialism, capitalism, communism, or any of the “isms,”) takes away the power of the people and gives it to a small elite in government. It is time for the American people to wake up to what is happening in the United States: a massive transfer of wealth and power into the hands of an incompetent and corrupted government.
Isn’t it time we began to think for ourselves? When are we going to step into our power as individuals and abandon the “follow-the leader” paradigm? Until we do, our society will become more and more hierarchical, with more and more power at the top.
As a final note, here’s something funny and tragic: an article in the stupid, asinine propaganda rag of the old Soviet Union, Pravada (which means “truth” in Russian, ha-ha, what a joke) about the decline of American society and economy. It’s pretty bad when Marxists and Communists call us out!
Next week: the source of governmental corruption: the “national security” establishment.