Money is created at the local level. You want to buy a house, the banker electronically creates a debt for you and the title of the house passes from one person to another. The seller gets electronic credits in his account and those credits are moved around within the banking system as he buys things. No money really changes hands.
The fictional electronic money created is backed by the house or other asset mortgaged… so it is actually backed by something more valuable then gold or silver.The money that needs to be paid back exceeds the money borrowed… that total sum does not exist yet… it has to be created by other people borrowing… hence the control on inflation.
In this system you can exchange paper money for shit and it will still work. You borrow 10 lbs of shit today to fertilize your garden… but you have to pay me back tomorrow with 50 lbs of shit. You might be able to manufacture 10 lbs of shit on your own over night to pay me back… but you will have to scramble to get 50 lbs of shit. Hence, shit now becomes valuable because you need it to pay me back tomorrow and can not easily acquire it. That is how money works in the Federal Reserve System.
The system is ingenious…. The only problem here is that the government can borrow any amount of money it wants with no real collateral. They just print up a Treasury Bill and sell it to the Federal Reserve for cash. Then they have to pay that back plus interests… of course same rule applies… the principal plus interest does not exists yet… so they have to borrow more in order to pay it back. It is a national Ponzi Scheme.
The key difference between the US government an the rest of us is… we have to put up collateral for money we borrow. How much we can borrow is limited by real assets that we own. The Federal Government does not have to put up assets. They can borrow without limit and run the deficit up to infinity. The value of our cash is devalued in proportion, a concept we call inflation.
The system can work if the government borrowed slowly. A reasonable rate of borrowing would be one where they increased the debt at a rate more or less equal to the rate of the population growth or the rate of economic growth. When they double the debt in a matter of two years it does nothing except dilute the currency in a manor that is extremely obvious to everyone who is in business.
My goal as an individual businessman is to increase my prices faster then the government is increasing debt/printing money. The error of the government is that when they increase the debt/money supply so fast… people catch on and respond accordingly by raising prices as fast as they can.
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment