In the past economy seemed to be doing OK solely due to credit inflation that FED has fostered. FED made it easy to borrow. America borrowed and spent. When we borrow money, banks create new money and give it to us. They do not lend existing money. Here is how banks create money.
This new money expands the money supply. It makes it easy to earn. But it also increases the interest we have to pay back. Our economy is now addicted to the ever expanding credit supply. For decades, our total debt (not federal debt, but the debt people owe) increased faster than the GDP. For every unit of GDP increase, we had to borrow more and more every year.
Why does it matter? Well, all of our money supply is bank credit. It is borrowed money. It needs to be paid back as principal + interest. The interest portion is not even created yet. Borrowing MUST increase exponentially so that principal+interest amount exists in the economy so that people can earn it and pay back what they owe. What happens when borrowing stops? Deflationary crash occurs. Debt problem:
There is a limit to how much people can borrow. To make it last what did they do? They created the housing bubble. They allowed people to deduct mortgage interest from income while calculating tax. That made mortgage more attractive. So people borrowed more and injected new money into the economy. This new money makes the current administration look good. In fact, they guarantee a future bankruptcy but who cares. As long as they get re-elected…
Government talked about the American Dream and Affordable Housing. When home prices became affordable in 2008-2011, instead of celebrating, they were scared to death, they adopted policies to inflate prices again. Back in the day leading up to the 2008 crash, after prime borrowers were exhausted, they changed the rules to allow sub-prime borrowers get big mortgages. No 20% down, liar loans were all to inflate total credit. Eventually sub-prime borrowers were exhausted, the sea has ended, and the crash arrived. They offered 8K tax credit. Then they offered 10K gift to home buyers. Coupled with 0% interest rate of the FED, this helped expand credit again. But in 2022, it seems we have reached the limits of this new normal too. Here is why FED’s easy money policy does not work beyond some point, explained in this jaguar inflation analogy:
This credit inflation helped inflate home prices and in turn forced people to borrow even more money to make home purchases. This is the web of debt that caught the population in a never ending loop. Why does the FED target 2% inflation but not 0%? Inflation makes sure that savers are punished. If people are allowed the save money to buy their homes, then the cycle will end. Thus it must be blocked at all costs. FED works for the banking industry and makes sure that bankers earn interest at the expense of the rest of the population. The best thing Americans can do to improve their life style is to avoid taking mortgages. This is going to prevent financial industry making a claim on people’s 30 year earnings for simply creating money out of thin air. This is outright robbery of the people. This practice of usury must be declared illegal. This is no different than slavery. But bankers are organized where as the people are not! Individuals and not a powerful lobby faces the bankers. Thus each individual is helpless at the mercy of usurers.
Where did that leave us at the end of 2021? It left us at the top of the greatest bubble ever! What ever you do, make sure you do not take on more debt! Pay off existing debt! If you have existing savings in cash or cash equivalents such as short term US treasuries you should be fine for a few years. At the bottom of depression you may have to jump out of US dollars if FED freaks out and really prints money!
All of the prices, and salaries you see around you were based on inflated credit that happened over 60 years. It is based on a money supply that is almost entirely bank credit. People borrowed and borrowed and spent. The amount of money borrowed reached sky high. You earned in good times! Now, it is reversing course!
Deflation is here! Bible of deflation helps understand the economic environment we are in:
Even though at an individual level borrowing costs may not matter, at macro-economic level, this change is the harbinger of the tidal wave that will wipe us out. Deflationary crash is not over. 2008 was just the warm up. Japan had it for 30 years. Printing money (Abenomics) did not help! Do not think we are immune. Even though FED makes credit available, deflation can happen when:
1. Banks do not want to lend because they are afraid they won’t get their money back.
2. Borrowers do not want to borrow because they are afraid they cannot pay it back.
This fear causes a deflationary crash. FED cannot fix this as if it is a mechanical device.
Negative Interest Rates?
Around the world central bankers have been trying to implement negative interest rates on sovereign debt. But is it working? In a new July 2016 40-minute video presentation called “Crazy”, Williams highlights the extraordinary levels of global debt and unprecedented monetary policy we’ve seen since the 2008 financial crisis. Following the 2008 financial crisis, central bankers unleashed ultra easy monetary policy. One of the efforts involved the Fed making large-scale purchases of bonds, aka quantitative easing.
“The investment landscape today is unlike anything we’ve seen in our lifetime,” Williams says. There’s simply too much debt, he argues. He illustrated this in the chart above, which shows the growth of credit instrument eclipsing the much more modest climb in US GDP.
In the presentation, Williams points to a “fabled wealth effect.” The Fed’s policies were meant to encourage the consumer to spend and thus stimulate the economy. The unintended consequence is that the American consumer suddenly decided enough was enough and that it was time to start saving.
Let’s watch this excellent presentation:
The History of Money as Debt
|Ellen Brown explains the facts that lead to the financial crash. How banks create money, inflate the credit supply and how the debt based monetary system crumbles under it’s own weight.
Online Journal, March 2, 2009:
If there is one book, one newspaper, one blog, one article, that one should read to understand the current economic crisis, to understand the root of the problem, and to understand its solution, it is “The Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free”…. “Web of Debt” is an extremely enlightening and remarkable book, providing an understanding to our world and the current economic crisis and providing monetary and banking solutions that will take us out of this crisis and benefit the people… The book is an absolute must read and relevant to people of all political stripes. The only ideology presented is one of fairness, integrity, and common sense.
National Debt Problem
What’s going on with the world’s economy? Foreclosures are up, unemployment is skyrocketing – and this may only be the beginning. Some think the cause is reckless government spending. Bur even financially conservative countries like Ireland are in trouble. The true cause of the economic problem is debt based monetary system. Could it be that solutions to the world’s economic problems are embedded in the most beloved children’s story of all time, “The Wonderful Wizard of Oz”? The yellow brick, the emerald city of Oz, even Dorothy’s silver slippers were powerful symbols of author L. Frank Baum’s belief that the people (not the big banks) should control the quantity of a nation’s money. The bottom line: No More National Debt. All our money is created out of debt. But nations don’t have to borrow money from banks. Sovereign nations can create their own money (debt free) just as Abraham Lincoln did. But will it not cause inflation if we let the government simply print money? Well, banks are already creating money out of nothing and it is causing inflation as we all know it. We might as well collect the interest ourselves! Debt free monetary system is the fix. Must see documentary:
The Secret of Oz