Sunday, November 22, 2009

Dispelling Myths – How the Real World of Money Works…

Yesterday a person on another forum kept hounding me to accept his beliefs about the way money works. He is backing a person who is running for President(!) because he thinks he has all the answers as to how money works. According to him, government rules are different than other people’s rules when it comes to money and he explains how the Treasury moves deficits around in various accounts and that the net effect is that deficits don’t matter and that we can simply print our way to prosperity, and that the people who are harping about the deficits are the ones who do not understand how money works. This is very reminiscent of the video where Jan questions the politician about interest and deficits and the Haaarvard trained politician tells Jan that he’s full of it and then threatens to throw him out the window! Remember that?

Okay, here is the paper that backs this latest person’s assertions. Just see how many fallacies you can find in the assumptions that are made in it:



This entire paper and way of thinking is just plain old flawed and does NOT represent how the real world works. This is my response to the poster and my attempt to explain how the real world of money works. I hope that it helps to clear up some misunderstandings…

Reply to the poster:

Sorry, not meant as anything personal because MYTHS about money abound. You are incorrect in saying that the government pays you (or anyone) with real money. In fact almost NO REAL MONEY is issued today America or in the entire world.

The government takes in revenue from taxes, that's called income. Then they spend money, that's called outflow. When the outflow exceeds the income, that's called a deficit. When the deficit portion is paid out, the money has to come from somewhere, or alternatively it could just be paid and the deficit not increased, THAT is called printing. In fact, printing in that method would be a REAL dollar, one that came into existence without debt. But that's NOT how our system works and there's a reason for that. To cover the deficit, the Treasury issues bonds, i.e. DEBT. Who generally buys the debt? The BANKS. Thus, the deficits are borrowed from the BANKS, the money is NOT simply printed, or I should say that under the current system, is not supposed to be.

This is not altruistic! The banks charge and receive interest. The interest payments must come from somewhere, and if the money is not there in the form of income, then it is added to the national debt. Thus, all money is supposed to be debt under the current system. And actually the debt COULD work as a money quantity limiting device, but it doesn't work that way... why? Because, debt backs all money, the interest quickly erodes it over time. To cover the interest, more debt must be issued. This is why never ending growth is a must under a debt backed system. More money equals more debt. That's why you are seeing politicians and bankers clamor for ever increasing amount of "CREDIT" i.e. DEBT. Without more and more, the system will deflate and that, in their delusional minds, is bad. This is WHY you see the delusional game of fighting a DEBT PROBLEM WITH MORE DEBT. So, the debts grow and grow and grow until they go parabolic. All exponential growth curves eventually fail, our debts are no exception. Why?

Because our system is OPEN, capital and manufacturing is free to leave... and leave it has. This is terrific at arbitraging wages and keeping inflation temporarily at bay. The problem with that theory is that without wages rising at the same rate as DEBT, the debt can no longer be serviced once saturation occurs. That is where we are today.

And that leads us back to printing without debt. That is essentially what quantitative easing is. Outright printing YES is possible and yes, you could call those dollars REAL, not credit dollars. The problem is then, that you no longer have any method of CONTROL over the quantity of money.

As the quantity of money goes out of control - and it has - some bad things begin to happen. People begin to expect that more printing will occur. The people who hold our debts begin to realize that they are being paid back with diluted money that is worth less. The value of our currency begins to sink in relation to other currencies as we begin to be PUNISHED by free market forces. That may not seem like it's happening, but it is and it's gathering momentum.

The politicians and the economic mass psychosis crowd who believe that deficits on the national level just don't matter are delusional, and they will be proven so in the fullness of time. ALL DEBTS GET REPAID WITH INTEREST IN ONE WAY OR ANOTHER. I would go so far as to call that a law of nature. There are two ways to pay back debt, default or pay it back. When a nation that has debts prints money, it is in fact defaulting to those it owes. Any nation that does too much of this will begin to be squeezed off by the rest of the world. Is there any truth to what I'm saying here? Can you see it?

Another part of the delusion is the fact that the U.S. is "the reserve currency." BULL. There is no law anointing us as such, that status is a PRIVILEGE, one that can and is being lost because of bad stewardship.

If you work for the government and think that your paycheck is just printed out of thin air, you are most certainly incorrect. If everything were that easy, then the markets would not have collapsed last year. Imports would not have crashed more than 20%, etc. MONEY IS AN INTERNATIONAL GAME OF CONFIDENCE.

And we haven't even addressed debt saturation on the individual level, the state and local government level, and the debt saturation that now has the world's banks hobbled. HOW DO YOU GET FROM DEBT SATURATION BACK TO SOUND MONEY WITHOUT LOSING THE CONFIDENCE OF THE REST OF THE WORLD AND WITHOUT CRASHING THE ENTIRE PLANET'S ECONOMY?

There are four major markets and all four markets are intertwined. EQUITIES, BONDS (DEBT), CURRENCIES, AND COMMODITIES. You will see stress seep out from one and bleed into the other. When I say that all debts get repaid with interest in one way or the other... The LEAST painful way to pay back debt is to work and to receive money from your PRODUCTIVE EFFORTS and to pay it back per contract and the rule of law. Another way to pay back debt is to monetize it (this is currently outside of the rule of law). But then when we do monetize, what effect does that have on currencies and commodities? That's where you get to really pay it back, see? The currency goes down, commodities go up and THINGS cost you more. The cost you more is actually you, once again, having to go to work and use your PRODUCTIVE EFFORTS to pay back the debt. THIS IS A LAW, LIKE GRAVITY, YOU CANNOT GET AROUND IT. Oh, you may think you can for awhile, but that is not real, that is delusion.

You can default on your national debt, but again, what effect does that have on your currency? Thus, again, you eventually wind up paying it back, with interest as your money will no longer be taken overseas when you do so, or if they even believe you are going to do so. That’s a loss of confidence, that IS occurring right now.

Thus, our system has set us up for never ending growth, it must happen because of the way the system works. The bankers are the ones who profit from such a system and as the debts build, the people are the ones who pay it back. It's a perfect system for the ones who started it.

Let me ask you a few questions to get you thinking... Why do you think the Primary Dealers MUST buy the Treasury's debts if no one else will? Who made that rule?

How did the IMF become the world's third largest holder of gold?

PEOPLE, please take the time to understand how money works and do not be fooled by politicians or central bankers – they have become ONE IN THE SAME.

So, to get back to the poster’s comments and his backing of the candidate who says it's all a game that can simply be bypassed, I say again, that's NOT the way the real world works.

Now, I know that people are going to attack me and say that it is I who does not understand how money works. I say that over time the markets are going to dispel all such bull____. Thus a window of opportunity is opening. The central bankers think that it is their window of opportunity and they are going to fiercely attack and spread more of their psychopathic and controlling myths in order to get their objective... What's their objective? World wide never ending debt backed growth. Believe it or don't believe it, I don't care, but that's where it's all headed.

You need only look at what happened in Iceland. Debt and derivative saturation to the MAX. The IMF (the world’s central bankers) came in and offered loans (DEBT) under condition. Those conditions would effectively turn over CONTROL of the nation and how it’s money system work to the IMF (central bankers). Where does the IMF get the money to lend in the first place? Where are their productive efforts to create the money they lend?

The President of Iceland said NO, pound sand! The next day the people were rioting in the streets protesting the fact that the President would not take the loans! The IMF (central bankers) has the world by the balls. If you don’t play their debt backed games, they will isolate your country and cut you off from the rest of the world. But the truth is that Iceland deserved to be cut off from the rest of the world and they were rightly being punished because they allowed themselves to run up an impossible level of debt, thus they gave up control of their own destiny a long time ago. That’s what we are doing today as well… we are doing it as a nation, in our states, in our local governments, and as individuals.

FREEDOM only comes when one is free from debt! Like all things in life, there is a balance. We have gotten very obviously out of balance, something that was UNAVOIDABLE because of the interest bearing debt backed feature of our current money system that is only 38 years old. On the national level, it is possible to have a non debt backed money system whereby money is spent into being in the form of real money, not credit money. The problem then, is one of quantity and control.

Thus, I look at coming events (and EVENTS ARE COMING) not with fearful eyes, but with OPTIMISTIC eyes, as I view coming events as a window of OPPORTUNITY to change the way our monetary systems work... WE DO NOT NEED CENTRAL BANKERS IN ORDER TO HAVE A MONETARY SYSTEM THAT WORKS! Indeed, our money does NOT have to be backed by debt, but for that to happen, you MUST control the quantity or the forces of nature will eventually control it for you. That is, trade is a game of CONFIDENCE. The way that capital forms is by having confidence. The way that confidence is held over time is by having and following the rule of law and by controlling the QUANTITY OF MONEY.

“It’s not WHAT backs your money, it’s WHO controls its QUANTITY.”