Business/Finance

In the Fed We Trust

Here is a question I propose to all of the non-economic historians out there. Why does the monetary unit of the dollar have value? Is it because there is the “In God We Trust” scripted on our currency? Will God make sure the dollar(s) we have in our pockets always hold their value – no matter what? Or is it something else? Is it something completely different?

God has nothing to do with the value of our currency. In fact, God is dead, God doesn’t exist. The intrinsic value of money is worth only what someone else is willing to give you for it – nothing more, nothing less. If you can trade five dollars for five haircuts, the value of a dollar is worth one haircut. Likewise, if you can buy a boat with $100,000 bucks, $100,000 bucks is worth a boat. Complex thinking – I know. Nevertheless, the dollar has an intrinsic value – allowing users to store their wealth and trade goods back and forth.

But what allows others to barter and trade goods for the currency of the US dollar – thinking that it will hold its intrinsic value? The dollar is not backed by the gold standard or any other metallic mineral. The dollar also is not the function of the word scarce. No, the intrinsic value of the dollar is based on purely the word of government institutions. If a powerful entity such as a government says the dollar can be used as a medium of exchange – then boom – the dollar has an intrinsic value.

More or less, the dollar holds its value solely due to the fact that the words, this note is legal tender for all debts, public and privateprinted on the back of the unit. These words – the implied trust of the government – are the sole reason why the dollar can be used as a medium of exchange. They are the sole reason why the unit has an intrinsic value. These words are why people have their money and wealth tied into a fiat currency. They have their full faith and trust in the US government that the dollar will continue to hold its intrinsic value for centuries to come.

It’s not “In God We Trust”. It’s in the Fed We Trust – to trust they will not print off so much of this paper that it will still hold its value and not become what it’s really worth – paper, nothingness. The dollar is nothing more nothing less – paper. Outside of the words of the government, the dollar has no intrinsic value. If people decide to stop using the dollar as a medium of exchange – it’s almost certain that individuals who hold their net worth in the dollar will see their wealth disappear into thin air.

Having your wealth tied up into a fiat currency like a dollar bill – that has historically been diluted many times over – is ill-mannered. It’s like dumping your wealth into a Canadian micro-cap that has a history of dilution – it may turn out well in the short-run – but in the long-run, you will get the short-end of the stick. Thus, the wealth you hold in financial institutions – earning a paltry rate of return – is slowing losing its purchasing power due to a known practice (not taught secondary educational institutions) called monetary policy.

The Fed’s use monetary policy to target interest rates – through the buying and selling of government bonds, changing the amount of money banks are required to keep in bank reserves or vaults. To stimulate the economy the Fed’s will buy bonds, sending the interest rate lower – giving borrowers the incentive to take out loans, thus putting new capital into the economy. The opposite is true as well; to taper the economy, the Fed’s will sell bonds, influencing the interest rate in an upwards fashion – giving borrowers less of an incentive to take out loans due to a higher rate of interest. That sounds practical on the surface.

It is a highly dangerous practice. Having “smart” people like professional economists control the economy is hazardous to the long-term health of the economy. Giving this control to influence – or as they would say “stimulate” creates more than just moral hazard. Effectively, when an institution like central banks have the power to – more or less – control the direction of the economy – regular business cycles become no more.

Not having normal business cycles isn’t the only thing. The criminals at the Federal Reserve are responsible for all of the inflation we have experienced since the Fed’s creation in 1913. There are three key ways the Federal Reserve has created inflation: Monetizing Government Debt, Making Loans to Member Banks and Setting Reserve Requirements.

The first point – Monetizing Government Debt – is a simple concept. When the government’s expenses exceed its income – which it always does due to the overconsumption habit of the Federal Government – the Treasury Department will issue bonds. Anyone can buy these bonds – even the Federal Reserve. When the Fed buys these bonds they buy them with a check – that is not backed by money they have. Thus, in a hypothetical example if the Fed wants to buy a billion dollars worth of bonds, they will first create a billion dollars out of thin air – through issuing more money – then buy the bonds. It’s pure highway robbery. But how else would the US government get money to spend and spend and spend?

Secondly, the Fed creates inflation by; Making Loans to Member Banks. The good majority of banks in the US are members of the Federal Reserve System. This means they own stock in one of the twelve Federal Reserve Banks out there. Further, it means they can borrow from the discount window that the Fed offers its members. Typically when a bank has no money left to pay its debtors (depositors) or it has made risky loans and lost a shit load of cash – the Federal Reserve discount window becomes a last resort for the banks. Thus, money lent to the member banks is created out of thin air – causing inflation – bailing these over-levered bankers out. This tool was actually one of the key reasons why the Federal Reserve was created in the first place.

Finally, the third way inflation is created by the Fed is through a common practice known as; Setting Reserve Requirements for Banks. All banks – not just member banks – are pulled under this scrutinizing regulation. This regulation allows banks to loan money out to individuals – which they don’t have under their current reserves. For an example, if a bank has $100,000 in assets, but loans $900,000 out to individuals – this is a 10% reserve requirement. This $900,000 is created out of thin air – called fractional reserve banking – and is one of the biggest inflation drivers in the modern economy.

All fiat monetary systems throughout the history of the world have failed. Thinking the current system won’t fail is completely stupid – a lack of an historical educational background. Keeping your money and wealth tied up in the fiat currency of the dollar is an extremely risky proposition. Overtime, the purchasing power of your dollar will continue to lose its power – making you and I, both more poor; rather than rich. I have begun to allocate my savings toward hard assets that will appreciate in value overtime – not depreciate. Hard assets such as land, timber, minerals and gold/silver are great inflation hedges. Hyperinflation is coming. It’s not a matter of if. It’s a matter of when.

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