The U.S. Economy Explained
Though many people talk about the U.S. Economy, few people understand how it really works. In this article, I’ll try to explain, in the simplest terms possible, how the U.S. Economy operates.
Since the Federal Reserve bank opened for business in 1914, the currency of the United States (the U.S. dollar) has been borrowed into existence from this private bank (otherwise known as “the Fed”). The reason I say “borrowed” into existence is because every single dollar the Fed has ever created is not, in fact, property of the U.S. government, it’s actually owned by the Federal Reserve bank, and is owed back to that bank, with interest.
Most people mistakenly believe that the Federal Reserve is part of the U.S. Government. It is not. The Federal Reserve is an independent mega-bank, which is actually a private corporation owned by the largest banks in the world. In 1913, the United States Government gave up its Constitutional right to coin money and regulate the value of it and passed that right to a private corporation owned by the Federal Reserve.
The way this private mega-bank works is as follows: the Federal Reserve creates all currency, not the U.S. government, and lends it out to the U.S. government and private institutions (i.e. other banks) - with interest.
You may be asking yourself “If we pay back all the currency that was borrowed into existence, but we still owe interest, where do we get the currency to pay the interest?”
Answer: We have to borrow it into existence.
This is one reason why the national debt keeps expanding. Even if we pay off all the currency that is borrowed, the government still owes interest. In order to pay that interest off, it would need to get more money from the Federal Reserve - which we would, in turn, owe interest on.
Because of this vicious cycle, the national debt can NEVER truly be paid off. It is mathematically impossible. But even more disconcerting than an ever expanding debt is the way the Federal Reserve creates our currency. The process is actually terrifyingly simple:
1. It makes loans to the government or banking system by writing a bad check.
2. It buys something with that bad check.
In the Fed’s own words, published in a 1977 paper called Putting It Simply:
“When you or I write a check, there must be sufficient funds in our account to cover the check, but when the Federal Reserve writes a check there is no bank deposit on which that check is drawn. When the Federal Reserve writes a check, it is creating money.”
So the Federal Reserve is doing something daily what you or I would be thrown in jail for - writing bad checks, and using those checks to buy things.
But even scarier than that, the Federal Reserve is not creating MONEY, it is creating currency.
Currency is legal tender that has no real value other than the good standing of the Government. Money is something of value. However, the United States operates off a monetary system known as Fiat Currency.
A fiat is basically an arbitrary decree, order, or pronouncement given by a person, group, or body with the absolute authority to enforce it. This means that anyone with an army backing him could declare a rock as a type of currency, simply because “They say so.” All paper currency in use today is fiat currency.
It used to be that the United States operated on the “Gold Standard,” which meant that ever dollar the United States printed was backed by a certain amount of gold the government had in its possession. Therefore, the purchasing power of the dollar was directly pegged to the value of gold. This meant that inflation was non-existent.
The reason for this is that when countries experienced economic booms, they imported more goods from countries who’s economy was weaker than theirs. The imported goods were paid for in gold, so gold flowed out of the booming country. As gold flowed out of the countries, their currency supplies contracted (that is monetary deflation).
This caused these economies to slow down and the demand for imports to fall. As the economy slowed, prices fell, making these countries’ goods more attractive to foreign buyers. As exports rose to meet demand, gold flowed back into that country, then the process started all over again. The value of currency - based in gold - was always moving up and down, in a narrow range, maintaining a certain economic equilibrium.
However, under President Richard Nixon, the gold standard was abolished. Now our currency is backed by nothing but the United State’s reputation, which means the Federal Reserve can print as much money as it wants without having to worry about having an equal amount of precious metal to back it up. In this sense, the currency of the United States is really all smoke and mirrors.
But that’s only our government’s role in the economy. It gets even scarier…
Once those newly created dollars are deposited in the commercial banks, the banks get to employ the use of a practice known as fractional reserve banking.
Here is fractional reserve banking in a nutshell: All banks have a reserve requirement, meaning they must keep a certain amount of currency on hand for withdrawals and such. If the reserve requirement set by the Federal Reserve is 10 percent, the bank must keep 10 percent of the currency deposited on hand just in case someone wants to make a withdrawal; however, they are allowed to loan out the other 90 percent of those deposits.
So for every dollar you deposit in your bank account, the banks keep $0.10 on hand and loans out $0.90 (which they, of course, charge interest on).
Here’s the kicker. The banks don’t actually loan out the currency that’s in the accounts. Instead they create new fiat dollars out of nothing and loan those newly created dollars out, which means they too are “borrowed: into existence.
In other words, when you deposit $1,000, the bank can create 900 brand-new credit dollars with nothing but a book entry, and then loan them out with interest.
Then, if those brand-new loaned dollars are deposited in a checking account, the bank is allowed to create another 90 percent of the value of those deposits, and then another 90 percent of that.
This process of currency creation and loans is repeated as often as the bank wants.
Coincidentally, the same year that the Federal Reserve Act was passed, there was also an amendment added to the Constitution: the Sixteenth, which created the dreaded income tax.
Before 1913 there was no income tax. The entire government was paid for by tariffs (taxes on imports) and excise tax (taxes on things like alcohol, cigarettes, and gas). These taxes, and only these taxes, generated enough income for the government to operate. However, because it didn’t generate enough income to pay the interest due to the Federal Reserve - after the Federal Reserve’s creation - the income tax was created so the government could pay the interest owed on the money it spent.
To review:
- Since 1914, we’ve borrowed every dollar into existence.
- We pay interest on every dollar in existence.
- That interest is paid to a private bank, the Federal Reserve.
- The world’s largest banks, not the government, own the Federal Reserve.
- The United States can’t pay off its debt… it can only borrow more to pay the interest.
- Our government created income tax so we can pay this interest.
Seriously - this is how the United States economy operates. And as the Government finds new initiatives that require it to spend money - such as war, social programs, etc. - it must create new money and increase taxes in order to pay for them.
How A Barack Obama Presidency Would Affect The Economy
Now that you know how the U.S. Economy operates, you can figure out for yourself how a Barack Obama Presidency would affect it.
Our entire currency system is built like a house of cards. Money is created out of thin air and lent out in large quantities. This has ensured the U.S. economy continues to grow, but should the Government continue to spend as it has been, disaster could be in the making.
Barack Obama has laid out numerous initiatives which would require more government spending. This would require even more currency to be created by the Federal Reserve, which means the National Debt will continue to grow because of compiling interest on the new money.
Because of the added interest, income taxes would have to be raised to pay for what the Government owes on the newly created currency - and not just income taxes on the wealthy either. Eventually, the wealthy will move their money away and the tax burden will have to be forced onto the poor and middle class.
But as if the prospect of an inevitable income tax increase wasn’t enough, we now have the “Bailout” situation, where the U.S. Government is buying out all the failing banks due to the subprime mortgage crisis.
This means that the government is now going to own the institutions which essentially create more currency!
When the government owns these financial institutions, whats to stop them from creating as much money as they want to spend based off the the money you deposit in the bank using fractional reserve banking?
Answer: NOTHING.
This is no doubt, what will eventually pay for nationalized health care, social security, welfare, etc.
Some of you may ask yourself: “What’s wrong with that?” After all, if this is truly an endless piggy bank, isn’t that a good thing for everybody?
In an ideal world, you’d be correct. However, if you understand the mechanics of a depression, you’ll see why this is so dangerous.
When we take out a loan from a bank, the bank does not actually loan us any of the currency that is deposited in that bank. Instead, the second your pen hits the mortgage, loan document, or credit card receipt we are signing - the bank is allowed to create those dollars out of thin air as a book entry - it is not actually required to have that money on hand, ready to be paid out.
In other words, we are the ones who create the currency. The bank is not allowed to do it without our signature. We create the currency, and then the bank gets to charge us interest on what we just created. This brand new currency we just created becomes part of the currency supply. Much of our currency is created this way.
But when a home goes into foreclosure, a loan gets defaulted on, or someone files bankruptcy, that currency that was created simply disappears. So as credit goes bad, the currency supply contracts, and deflation sets in.
This is what happened in the Great Depression of 1930-1933, and it was disastrous. As a wave of foreclosures and bankruptcies swept the nation, one-third of the currency supply of the United States evaporated into thin air.
Why is this bad?
Because in a deflation, just about everything declines, including wages, prices, gross domestic product, and most importantly for any working American - your income.
However, one thing remains absolute: DEBT.
How much money you owe stays the same no matter what. If you owe $1,000, no matter how much deflation the economy experiences, you still owe $1,000.
When the stock market crashed in the Great Depression of 1929, the Gross Domestic Product of the United States shrank. The Gross Domestic Product of the United States is how much money the country produces. Our National Debt is a percentage of that.
With the Great Depression, debt as a percentage of Gross Domestic Product grew from 180% to 280%!!!!
So to put this in more personal terms, let’s say your income is $100 per month, and your debt payments are $40 per month for things like your mortgage, car payments, and credit card payments. After paying your monthly debt payments, you are left with $60 to pay for food, utilities, insurance, and leisure activities.
In the Great Depression, nominal income fell by 53%. If our economy suddenly became depressed, and the same thing happened again, your income would now be $47 instead of $100.
Now, you might think to yourself: “Okay, but prices would fall too, so my purchasing power would be the same, right?”
Yes and no.
Even though prices would fall to match your income, your debt won’t. That’s a fixed number. So after paying your $40 in monthly debt payments, you’re essentially left with only $7 to meet all your bills, whereas before you had $60. That means you can forget about going to the movies, having hot water, enjoying the benefits of electricity - pretty much everything but eating, and even that may be a struggle.
Now you have to sell your house, but you still owe $5,000 on it and you find out that in the depressed economy, its only worth $2,000, so now $3,000 is added to your debt. Now you can’t afford to even pay your debt, and your car, furniture, and everything else gets repossessed, and you end up penniless and on the street.
This is exactly what happened in the great depression.
So let’s say that an Obama Administration starts borrowing from the newly nationalized banks to pay for its ambitious social programs, and there’s a crisis where people want to withdraw their money and there is a run on the banks.
All of a sudden, the government has to produce the money it owes to the banks, so it can avoid a depression and the people can get what’s rightfully theirs.
Essentially, a huge bill just came due for the government, which it must pay because it owns the banks, or else it would be stealing from its own citizens. In order to pay this bill, and keep the social programs going, it would have to print more money in order to keep deflation from shrinking the country’s money supply and plunging into a depression.
Now, because there’s a new flood of currency, suddenly hyper-inflation sets in. This means your money is now worth less, and prices rise exponentially. This means that the purchasing power of the dollar falls dramatically, and now you’re looking at $1,000 loafs of bread. For a family that only makes $50,000 a year, that is a disaster!
Think this sounds far-fetched? It’s not. The type of hyper-inflation I just described happened in France in 1720, in Germany in 1923, and in Russia in the 1990’s.
This is a very real scenereo in an economy where the currency is not backed by gold or silver, and spending gets out of control. And unfortuneately, it would appear that Barack Obama does not know what dangers his spending plans bring to the American Economy.