Archive | February 2016

False Money

Money is supposed to be a reliable medium of exchange, but the one used today is filled with such controversy that “the most marketable commodity” is becoming more and more untrustworthy. Even so, thousands and thousands of people continue to place it as a means of security. Would you trust in counterfeit money? I hope that through this essay you see the illusion that today’s monetary system has become, only real in the mentality of people, but false in the essence of its structure.

The concept of counterfeit money is not new, it actually has centuries of history. Initially, counterfeit money involved mixing a precious metal with a base metal, like silver   or gold with copper. This process was and is known as debasing money and it had and has terrible consequences in an economy. Debasing money gave people the opportunity to be richer and thus introducing greater amounts of coins into circulation, causing greater demand. Greater demand increased prices and once sellers realized that what they were being payed was not honest money, products or services were debased. Only those who received the first distribution of the counterfeit coins were the beneficiaries of such acts, because people had not yet realized that the money being used was not worth what people said it was. Yet, as redistribution of the coins in the economy occured, later receivers of the money were hampered. Prices increased and product quality decreased. This was and is obviously a crime that demonstrates the love of money at its height along with the exposure of despicable corruption.

Theft is unrighteousness, however, today it is legal if you belong to an elite, government-approved group of people in charge of producing paper money. As we have said it before, money is the word we use to define the most acceptable medium of exchange. Money came to existence through barter. Nevertheless, things were passed to the control of the government very fast when banks began issuing paper notes that were not representing gold but the debt generated by interest rates instead. To limit the amount of paper money bankers could print and because of the fear of bank runs, a Federal Reserve was created as a lender of last resort to help comercial banks surpass difficult circumstances whenever they were being pressured by their clients.

Simply speaking, bank owners realized they were the only ones who knew the exact amount of gold stored in the vaults. Since the clients didn’t come back for their gold to use it in exchange, but instead used the paper notes representing the gold they had in storage, bank owners began printing more paper notes for themselves. These paper notes were not backed up by gold, but by the greed of the bankers who wanted to buy goods with illegitimate or counterfeit money. They were backed up by thin air. When people realized that there was more money circulating in the economy than there actually was stored in the banks, they all at once began to remove their deposits from the banks. This left many banks in bankruptcy. However, many times again the people’s trust was restored and many times again it was destroyed, until the government approved a Federal Reserve System to bail out untrustworthy banks from bankruptcy.

But, how does this System work? Believe it or not, it is very subtl in its deception and very simple. Let’s show it through an example. The Fed, to create money, only has to have 10% of the total amount created worth in gold. The Federal Reserve System has 100 dollars worth of gold stored in its vaults. This means that it can create ten times more of that value to lend that money to comercial banks. The newly created and lended 1,000 dollars backed up by nothing become the reserve of the comercial banks. If the Federal Reserve System only requires the comercial banks to hold 10% of those 1,000 dollars in reserve, then the comercial banks can create ten times more of that reserve through fractional reserve loans. The comercial banks create ten thousand dollars out of what people owe (debt). That’s why it’s called fiat money. It’s based in unfulfilled promises, not in tangible things with real value.

Another way the Federal Reserve increases credit is by buying government securities (debt). When they invest in government debt, the interest rates governments have to pay are lowered or eliminated entirely. This acquisition of government securities allows the central bank to create more money out of the debt increasing the credit available. Credit that will help the government continue its projects without having to eliminate its debt.

The Federal Reserve also controls interest rates by creating money or reducing money. They set a discount rate on interests. When the Fed lowers interests, commercial banks borrow more money from the Federal Reserve and increase their funds to lend. Obviously bank credit becomes cheaper and interest rates are lowered on every bank loan and credit card. People borrow more from banks and the amount of money in the economy is increased.

Businesses are mesmerized by artificial low interest rates. They begin to borrow more from banks to start investing in long-term projects. However, people continue to buy from businesses at the same or higher rates because there is more money circulating in the economy. Money that banks created out of nothing. This increase in spending causes greater demand. Greater demand raises prices. Businesses instead of focusing in catering to the current demand, they keep investing in future projects. This either causes products to be debased, a shortage of supply, or business’ bankruptcy.

When the money supply normalizes, there will be a bust. Many businesses will be gone, prices will be over the rooftops, people will be out of jobs, and there will be a recession or depression. No one payed the debt and much of the money created was because of the promise people made about paying that debt. The currency will be debased. Many banks will be bailed out of bankruptcy and the cycle will start all over again.

Why? Because the government needs credit to continue its expansion. It is much easier and less noticeable to create money out of nothing to fulfill projects than to tax people. You don’t see people protesting on the streets when the banks increase the money supply, as a matter of fact, many people welcome it. Yet these actions cause the same effects as counterfeit money.

All this to say that he money you and I use is counterfeit money. All those bills you see printed or think you have stored in your bank account are really just digits that you choose to give value to. They are not backed up by gold or silver, they are just green papers and digits backed up by a collective mentality that continues to give tremendous value to them.  Take a moment and think about the effects counterfeiting had in the past: price inflation, more money circulation, debased product quality, unsatisfied clients/buyers, disconfidence in the market and economy in general, plus a demonstrated deficiency in the capability of human justice.

When banks today create digital money out of nothing we see the same effects in the economy and market. What’s worse is that the Federal Reserve System, a central bank, and all the commercial banks encourage these effects, which are origins of the boom-bust or business cycles. Our money only represents an illusive or imaginative value. Money is not worth what we buy with it. Those things have value in themselves, just like gold and silver, but today’s currency is literally mere digits.

Some might say, “So, who cares? What’s the big deal? At least those digits get me things.” Well the problem is that having digits as money gives the government and banks unlimited power to control the economy through the monetary supply affecting prices, wages, product quality, business’ success, jobs, and wealth in general. If it was easy to counterfeit gold coins, if it was easier to counterfeit paper bills, how much easier is it to counterfeit digits, and even more, to create them? One, two, three, one thousand… it is very simple, all one has to do is hack into the system or run the system.

However, the bigger problem is that if the Federal Reserve System legalizes the actions of central and comercial banks, which cause the same effects as counterfeiting, doesn’t that make them equal to counterfeiting? What they do is legalized theft protected by badges and guns. It’s schizophrenic because they basically punish counterfeiters whom aren’t approved by the government. Why do they get away with it? Well because most people ignore the process and because their actions are not perceived at least after six months.