Thursday, October 4, 2007

The Root of All Evils

In my last commentary "Pondering the Meaning of Money", I attempted to define money in its simplest terms - what it is, how its created, and how it affects our purchasing power in a credit-based economy. Today I would like to expand upon the social ramifications inherent in our monetary system.

The implications of globally expanding debt and inflation on international trade and governments has historically always lead to impoverishment, war, and the ultimate concentration of power and control in the hands of a few whom I will call The Elitists, those who belong to the oldest of money. These are the families who truly rule the world, surrounded always by a veil of secrecy.

Let's examine how our monetary system works and review its inevitable outcome to be better informed of ways we can reverse the direction we're headed, since the current structure is hell bent on sowing the seeds of its own destruction..

Stage 1 - Ever Increasing Indebtedness

We know that when lenders make loans, money gets created, and this amount is equal to the value of goods and services sought, but short of the funds needed to pay back the loan at interest. This means that someone else will have to borrow funds enabling enough circulating money in the economy to pay interest on the loan. This interest represents the investor's profit as a result of lending his wealth. Thus when the loan is repaid, both principal and interest is taken out of circulation. If all debtors in the economy wished to repay their loans, there would not be enough money because the system requires ever increasing indebtedness to keep money circulating in the economy. In other words, without increasing indebtedness, all economic activity ceases. If that ever occurred it would expose the folly and negate the current concentration of money and power to the few.

Stage 2 - Inflation

As more and more debtors are created, more money is created which increases the cost of goods and services because prices are heightened by the amount of new debt money created, enabling the payment of interest on older debt. In other words, with more and more debtors in the system we have created more and more money with which to buy goods and services. This happens due to the time delay of debt service repayment. The total amount of debt is to be repaid in the future, as such there is excess liquidity sloshing throughout the economy in the interim, only to be soaked up by higher current prices.

How does the level of interest rates affect inflation? We know that the US Fed will lower short-term rates to spur economic 'growth', but how exactly does it work? When old debt is being repaid at higher rates and new debt is issued at lower rates, excess money creation to cover interest is reduced both by the repayment of debt, and the decreased need for new debt to pay interest at lower rates. Theoretically, this should reduce economic activity due to the contraction in the monetary base. However, just the opposite happens because lower rates cause that many more people to borrow, leading to massive increases in money, leading to an increase in inflation. So now we not only have massive increases in indebtedness, but massive increases in inflation further reducing our ability to buy adequate levels of needed goods and services, and find ourselves borrowing further to compensate until our finances become totally out of control.

Stage 3 - Effects on Global Trade

Enter Cheap Foreign Labor - Ahaa! a Solution to this inflation mess emerges with the importation of cheap goods from developing countries, and we are suddenly bombarded with a multitude of new multi-national trade agreements. This offers a temporary fix to indebted consumers, but what happens to their employers who are no longer able to compete against cheap labor? Yup, you guessed it.. thanks to our government's free trade alliances, we have managed to dig ourselves even deeper into the quagmire with lowered wages and fewer benefits. And now US industries now have to compete for even less of the pie from under-paid and over-indebted consumers.

And to add insult to injury, all the while these export-driven economies end up collecting our money free of debt - Talk about an imbalance!

Stage 4 - Government Debt to the Rescue

Governments go into debt much the same as we all do by issuing notes to a lender at interest. But government debt is called Treasury Bonds. These bonds are nothing more than a government IOU to the Fed, to be paid from public funds sometime in the future, while servicing the bonds with interest during the interim. The funds to pay government interest and principal historically has been provided by government revenues via public tax collection.

But governments can also create money by taking on more debt enabling them to service their bonds when public taxes are insufficient. And the more governments borrow, the further down the hole we all go.

So what do we have here at this stage? An indebted consumer, indebted US corporations having to compete with higher prices and lower wages, and a government indebted to those same developing countries who are getting rich importing stuff to us debt-free because they're now the ones creating the wealth. What a bargain!

Furthermore, these export-driven economies cause massive increases in the price of raw materials used in production and other basic commodities. Things like oil, metals, building materials, even food prices rise as these thriving populations cause increasing demand - and they go up for everyone.

This brings us to the next logical stage..

Stage 5 - War

Suddenly global governments are competing for vital resources. Our US government goes into even more debt by going to war to fight for what they cannot compete for in purchasing power. This ever increasing debt then eventually brings on the inevitable..

Stage 6 - Bankruptcy

The economic implications of more and more government debt are similar to increasing amounts of private debt in that it leads to impoverishment, but the impoverishment of a debtor nation has worse social implications. Our national corporations begin selling off to foreign countries their only means of wealth production, likewise governments sell off federal and state owned assets for needed funds. The end result is then selling the cows just to be able to buy the milk!

Once this stage is reached, the Federal government performs its silent declaration of bankruptcy. They are forced to devalue the currency, enabling them to be able to repay foreign creditors with vastly depreciated funds. But how can our government keep face with such disgrace? Basically, they don't. Since over time, our country will sink from its former position of global super-power much the same way Britain did towards the end of WW2.

Conclusion

We can now see how close the US is to collapse and End-Game. How low will the US Dollar have to sink into oblivion before we get the needed fresh start afforded by bankruptcy? I suppose we'll see.

In any event, it should be obvious by now that the path we find ourselves on is caused by the faulty logic inherent within a debt-based monetary system - and that the payment of interest will always create a shortage of money leading to increasing levels of debt - a predicament which leads to massive impoverishment and failure. The system simply does not work.

A possible solution to this outcome would be our cessation of the Federal Reserve and all other private banks who loan at interest. If there is a need for money, it should be our government who creates it (as mandated by our Constitution). The government would then spend into the economy on public projects and services, while creating jobs and stimulating economic growth. This would then enable us all to finally trade on par for wealth earned, rather than incurring debt at interest. This would also finally put an end to the ruling Elitists whose agenda is self-serving at best.

Link to the Elitists (Root of our Evils)

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