The Real Reason Why America is Broke
Every night and day on the 24 hour news channels, the “talking heads” argue vigorously over who is at fault for the economic crisis. The Democratic heads blame the Republican heads for their refusal to increase taxes. They say we have a “revenue problem.” The Republican heads blame the Democratic heads for their refusal to reduce the deficit. They say we have a “spending problem.” Whose right? Sadly, neither one.
What we hear out of Washington and in the media is little more than a diversion that keeps Americans from discovering the real reason for our financial woes. The real reason? The lack of an honest currency.
The year was 1913. The Federal Reserve was created to be America’s central bank, to control the inflationary / deflationary cycle and to promote economic growth. Instead it has created longer and more severe economic cycles and has promoted economic decline. It has done these things by a continual destruction of the dollar’s value to the point where the once vaunted standard currency the world had ever known is now next to worthless.
To begin with, the Federal Reserve is not federal! It is not an agency of the federal government. It is, in fact, a group of private banks given an exclusive contract by the government of the United States to create, circulate and defend our currency. In other words, the Federal Reserve is a third party private contractor. The Constitution gives this obligation to the House of Representatives but in 1913, and every year since, they have “punted the ball” and allowed a third party to be responsible for these most serious of matters. Since it’s inception, the Federal Reserve has gradually taken us from an asset based economic system to a debt based one. Any currency must be backed up by something. At one time it was backed up by gold and silver. You may have seen a “green back” called a “silver certificate.” The idea? Each paper dollar had to be backed by a dollars worth of silver held by the government. Today, however, we have a different description on our paper money; “Federal Reserve Note.” What is a “note?” A note is a debt, not an asset.
What backs up our Federal Reserve currency today? Pretty much nothing other than what is called “the good faith and credit of the United States.” In truth, since the inception of the Monetary Decontrol Act of 1980, the government can call literally anything it wants an “asset” and use that “asset” to back the currency. In a bizarre twist of fate, the currency of the United States is backed up by it’s debt! The fact that third parties, such as the Chinese, buy up our debt is a defacto way of saying our currency is good because third parties continue to buy up our debt. In other words, whenever someone, for example, buys U. S. debt, that gives a green light to the Fed to “print” more “money.” The Federal Reserve “creates” money, therefore, by a few computer strokes thus adding “value” to it’s books. Books that have never been audited by the actual government of “we the people.” The more “dollars” circulated by nothing more than the Fed’s grand imagination has a serious side effect; each dollar is made less valuable whenever new and worthless dollars are injected into the economy. So many worthless dollars have been injected into our economy since 1913, the dollar is literally “next to worthless.”
The dollar of 1913 was, at it’s inception, was worth $1.00. In contrast, one would have to come up with nearly $23.00 to by a $1.00’s worth of 1913 goods and services. The dollar has lost right at 98% of it’s 1913 value. To put it another way, $100,000.00 in 1913 would be only worth a little less than $5,000.00 in 2011 dollars. On the other hand, $100,000.00 in gold in 1913 would be worth a staggering $4,000,000.00 today in 2011 dollars! The real reason America is broke is that we have a worthless currency.
To bring this matter home, in the last 11 years, the dollar’s value has slipped nearly 40%! What cost a $1.00 in 2000, now costs nearly $1.40. Here’s the real rub, A family making $70,000.00 in 2000 must make nearly $93,000.00 today to just keep the same standard of living they enjoyed just 11 years ago! I don’t know about you but my families income and those of everyone I know has not gone up by $23,000.00 since 2000, it’s gone the opposite direction. While the dollar has dropped like a rock in water, real income has been static. The median family dual income in 2000 was $64,694.00. Just last year, in 2010, that number was just $67,348.00.
The real reason America is broke? A worthless currency that continuously drives up the cost of nearly everything while, at the same time, continuously drives down incomes. Americans are working twice as hard for 1/2 as much. There are only two ways to fix our economy; eliminate the Federal Reserve and replace it with an honest currency or to re-charter the Fed mandating a return to an asset based model, again, producing an honest currency. On the one hand, neither the Democrats nor the Republicans are to blame because our problem is a dishonest currency. On the other hand, BOTH Democrats and Republicans are to blame for they both continue to support the dishonest Federal Reserve System, a system that is neither “Federal” or has any “reserve.”
Good stuff here, great article.
I never studied Economics, so the whole thing is beyond me, but I'm just a little curious about something - Is China in a position to bankrupt the USA?
If your talking about the debt that China buys (bonds) no they are not. Currently they own around 1.2 trillion in US Treasury bonds. That is a little over 5% of the total debt owned by the US government. It helps that they buy the treasury bonds to service our debt but there are others that would buy the bonds if China stopped. Also they cannot ''cash them in'' all at one time since all the bonds have different maturity dates.
China is the biggest foreign holder of our debt with Japan second.
Thanks, K.
Dear Brother Kavika: Jay's Diner is the third largest Treasury holder.
Their use of very low cost recycled plastics, industrial waste, and dehydrated beverages instead of edible foodstuffs in their entrees, side dishes and drinks allows them to use the difference to buy bonds, bills, notes and Federal Funds.
I keep my disposable and discretionary income in Rez Reserves and Kosher coins.
Enoch, Sleeping Better Nights for Having Gone Green.
I'm not sure if you can lay ALL the blame on the Fed, I think Congress and a couple of Presidents have had more then a little input on those issues. I also believe that our dollars are backed by the gross national product or something along the line on how much goods we can produce.
But lets skip up to the fun stuff, where your options are to find enough precious metals to back our current economy or make gold $27,000 a ounce?) or reduce the value of or currency by 90% (what do we do about coins?) print new money and exchange with a 90% reduction, or just do without money at all, do like businesses even international ones do business. They don't pass around bales of cash its all done electronically.
We could all get bank cards, EVERYBODY, and all debts and all payments would be a matter of record available to other banks and the Gov and if conservatives are in charge, available to police departments and to you boss if your boss wants it. I can feel big brother breathing down my neck already. Brave new world, where the banks and gov. can make you pennyless in seconds, and there would also be the occasional accident.
Of course, the banks would have to put in a little charge for transactions.
All of that sounds like a lot of work and wildly expensive, as well as you'd have to almost use force to get people to go along with changes that big.
I think the problem with our economy doesn't have much to do with the Fed, and more to do with the way money flows uphill and just pools there. I guess the game is to see how many zeros the banks and the wealthy can add to their accounts.
Also, banks have been trying to get rid of the Fed since 1914 or around then, and I'm for anything that the banks see as a restriction on themselves and are against.
The dates in your post make me wonder if this is a recycled op/ed, and how many other sites over the years I'd find this post on.
The Real Reason Why America is Broke
Same reason many individuals find themselves in the same place, outspending income on a continual basis and not paying down incurred debt.
Now there are a multitude of reasons for this, some of what is outlined that have led to this point but overall it is the net result of poor fiscal policies for quite some time.
America is not 'broke' financially. Vast wealth is everywhere, just not here at home.
Supply Side Economics segregates America's prosperity, promise and wealth as a matter of convenience.
As far as America's broken spirit...….America allowed Birtherism to breathe, subjecting itself to a philosophical immoral turpitude.
Great work Emily!
No backing also allows the government to just print up money. Aside from helping to debase our money the FED had a lot to do with the Great Depression.
The value of any currency is determined by what is purchased with the currency. Fractional lending does, indeed, create (or print) money and increase the supply of money. But the value of that printed money depends upon what is purchased.
The Federal Reserve regulates lending (printing money) by setting interest rates to make borrowing more or less attractive. (And to make saving more or less attractive, discussed further on.) But it is the number of borrowers and the amount they borrow that actually prints the money. And the value of the printed money is determined by what the borrower buys with that printed money. So borrowers play a large role (if not the largest role) in printing money and determining the value of that printed money.
Buyers devalue or debase money by paying more for the same goods and services today than they paid yesterday. If buyers are willing to pay $3 today for a hamburger that they bought for $1 yesterday; today's money only has a third of the value (or worth) of yesterday's money. That is the buyer's choice and is influenced by the amount of money available to the buyer. Credit increases the amount of money available to a buyer and allows the buyer to pay more money today than they paid yesterday.
Savings is the counterbalance to borrowing. Money that is withdrawn from circulation and placed in savings means less money is available to buyers. As long as the money remains in savings, it will not be used to buy anything. By removing existing money from circulation, a buyer is less willing to pay more today than they paid yesterday. Lending money from savings does not print money; the money already exists (it has already been printed).
Interest (or rent) on borrowed money also influences the value of money. Interest on borrowed money is paid using income derived from some sort of productive economic activity. Higher interest requires more income from a productive economic activity and lower interest requires less income. Borrowing at high interest requires the borrower to be more productive in order to borrow. Higher interest makes fractional lending (printing money) more expensive because it reduces the amount of money that can be spent; buyers are not as willing to pay more today than they paid yesterday. Higher interest on savings (money that has already been printed) also makes saving more attractive than spending and removes more money from circulation.
One of the major problems I see is that the Federal Reserve has separated borrowing and saving. The large disparity in interest on fractional lending and interest on savings has favored borrowers printing money and discouraged savers removing money from circulation. A continuously increasing amount of money in circulation encourages buyers to pay more today than the did yesterday. IMO that is the most important factor that is debasing our currency.
There are a lot of claims floating around that the United States should return to the gold standard. But a lot of those claims are based on fictions.
The value of the dollar under the gold standard didn't have anything to do with the gold or the value of gold. Lenders still engaged in fractional lending under the gold standard (essentially minting gold). What the gold standard required was larger reserves. A bank's reserves are the savings held by the bank. That meant money available to borrowers already existed and had been removed from circulation to be placed in savings. Increasing savings meant there was less money in circulation. Borrowing from savings doesn't print money. The need for a higher reserve also meant that increasing borrower demand for money increased interest rates and made printing money more expensive. Buyers were less willing to pay more today than they paid yesterday which avoided debasing the value of money.
Returning to a gold standard doesn't require gold. What is required is to increase the amount of bank reserves needed for lending.
I haven't tried to look up the real numbers for reserve requirements, so the numbers I'm using are just to illustrate the point. If a bank is required to hold a 10 pct reserve, then the bank could lend $10 for every $1 in reserve. If the requirement is a 50 pct reserve, the bank could lend $2 for every $1 in reserve.
Good work Emily. The Federal Reserve is not a friendto our government