The Banking Establishment: Crooks or Geniouses?

The stock markets took a real beating last week. As my predictive power has been proven to be 0, I will not be trying to make any guesses as to the direction the markets will take this week.

Suffice to say, things are not looking good. Even after all of the cash injections world governments have committed to, investors are still weary of putting their money into investments which they are not sure about. And rightly so. After all, the past few weeks have shown how over-leveraged (i.e. debt straddled) our corporations and banking institutions really are.

I think its about high time we got a bit more into the technical aspects of the financial meltdown. First, I think we are all aware of the fact that the US and 'industrialized' world economies are based on debt. Through fractional reserve banking, the US and its allies have run up tremendous amounts of debt growing their economies since the establishment of banking.

In order to understand how the process of making money works, i suggest that you view one of the two recommended documentaries at the end of this post. In a nutshell, the government gives the Federal Reserve bonds in exchange for the paper currency. The Fed then controls the money supply (and inflation) through the buying and selling of bonds on the open market. But all new money starts off as an exchange for bonds, so money itself is always 'owed' with interest. Therefore the debt is always increasing regardless of the governments budgetary surpluses or deficits.

However, that's not the end of the story. The paper money in use today is what is referred to as fiat money. For a period between Bretton Woods and 1971, the worlds currencies were pegged to gold (the gold standard), meaning, the paper money at least had some sort of intrinsic value. At that time, each currency was pegged to the dollar, and the dollar was re-deemable for gold. Please click on the pre-1971 $100 dollar image below and note that in the top left corner, it is written 'redeemable in gold'. As of 1971, Nixon unilaterally cancelled the Bretton Woods system and US dollars were no longer convertible to gold. The US dollar then became the defacto 'safe' currency. The IMF and World Bank function in US dollars and base their loans on fractional reserve banking.

So from 1971 forward, the US dollars value was based on the amount of money in circulation. Put in another way, the 'legal tender' value was determined by the physical amount of paper currency that was available. In essence, when more of the money was printed, the money already in circulation by definition had to decrease in value. An alternate way to look at this is that the price of goods HAD to increase due to the increased amount of money. So instead of looking at inflation as an increase in the price of goods, you should look at it instead as a decrease in the value of the dollar.

In simple economic terms, the law of supply and demand states that as supply increases (and demand remains steady), the price must inevitably decrease. Alternately, if supply is steady and demand increases, the price inevitably increases. Pick which way you choose to look at it, but either way, inflation is a tax that has been worked into the monetary system. It is inflation which lowers the value of our money. And if there was some sort of peg on which to base the value of the currency, inflation would be almost if not completely eliminated.

Given that the current market situation is the result of huge amounts of debt, it is extremely unlikely that the powers that be would decide at this point to peg the currency to gold again. I think they simply don't have the gold reserves necessary to accomplish something of this magnitude. However, the proposed solution is to fix the debt problem by issuing more debt. Well, I think that anyone can understand that this simply will not work. Giving a drug addict more drugs to get rid of the 'fix' is not really solving the problem, it is only delaying the solution. I think that it is inevitable that this house of cards will crumble at some point if a serious solution is not proposed.

Now, I know I am not the smartest guy in the world. In fact I only have a bachelors degree in finance, no masters and no doctorate. Therefore, I know that the establishment knows all of this as well as I do, and probably a lot more. So the question that arises is: why sustain this system which will surely result in economic catastrophe? Ultimately, this will end up costing those who have money the most, as their money will be worthless. So why?

Great video about the banking industry and the Federal Reserve: Money, Banking and the Federal Reserve.

Another great video: Money as Debt


Other interesting readings:

Global Research - Financial Meltdown: The Greatest Transfer of Wealth in History
(Amazing article which discusses several of the aspects I mention in this post)

Wall Street Journal - Moody's CEO Warned Profit Push Posed a Risk to Quality of Ratings

Reuters - U.S. Has Plundered World Wealth With Dollar: China Paper

International Herald Tribune - G-7 Warns Against Strengthening Yen as Financial Turmoil Deepens