Whenever a central bank writes a check it creates a type of currency they call “base money” (paper currency). The reason currency is created every time a central bank writes a check is because the check was drawn on an account that always has a zero balance. Basically they are committing a fraud and counterfeiting. These brand new units of currency inflate and dilute the currency supply when they enter circulation causing the purchasing power of that currency to fall. With each new unit of currency created, each existing unit of currency has less purchasing power. The symptom of this inflation and dilution of the currency supply is rising prices.
Usually, the reason a central bank writes a check is to artificially stimulate the economy through something called “open market operations.”
But all bank loans are pyramided on top of base money through something called “fractional reserve lending.” Reserve ratios vary wildly, but for simplicity I will use a 10% reserve for this example. Let’s say you are going to buy a house, so you apply for a one million dollar loan. Under a 10% reserve ratio, the bank is allowed to create $10 of bank credit for every $1 of base money the bank has on hand. So if the bank has $100,000 on hand it can legally create $1,000,000 and loan it to you. The bank then credits your checking account with the newly created currency. The new units of currency created via your $1 million loan also inflate and dilute the currency supply and cause prices to rise.
Another way that central banks can influence interest rates is by lowering the interest rate on currency they lend to commercial banks. In the United States this is called the “Fed funds rate.”
For savers, even though the quantity of currency in their savings accounts may have increased, they have been punished because the purchasing power of the currency has fallen faster than the growth of their accounts. For borrowers, getting as deep into debt as possible has been rewarded because they can pay off their debts with a cheaper, lower value currency in the future.
Now governments around the world & the middle class are deeper in debt than at any time in history. It’s like they’re standing in water so deep it’s up to their eyeballs. They can still tilt their heads back, poke their mouths above the water, and take a breath every once in a while. But if the water gets any deeper they’ll drown.
Interest rates have been falling since 1980, but that can’t continue forever. One day soon interest rates, like the water, will rise again. When they do the spoiled kids are going to be in trouble… it’s all just part of a cycle.
The global economy has been skidding out of control since the crash of 2008 and the emergency maneuvers are not working. Central banks have been writing checks like crazy. In the United States the Federal Reserve has tripled base money (that means that they have created two times more base money in the past four years than the previous 200 years.) First there were the bailouts. Then there was “QE” (quantitative easing). Then there was QE2, and now it looks like we’re about to begin QE3.
So far none of the emergency maneuvers to avoid the crash ahead have worked. In fact, they’ve pretty much proven it doesn’t work… so now they’re going to try a whole lot more of it. I believe what they’ve done is just added to the stored-up economic energy and, just like stepping on the accelerator to beat a red light, the impending crash is going to be a whole lot worse.
The recent crash of my Tesla Roadster and the global economic crash that lies ahead of us have some similarities. Surviving the impact of a collision is all about the dissipation of energy. The biggest crash the world has ever seen is happening right now. The financial vehicle I have chosen to carry me safely through it is gold and silver.]
There can be no understanding of just how perilous this current economic crisis, nor the one just around the corner, truly is without a solid understanding of just how exactly our monetary system really works. Once you understand the unstable concept of fractional reserve banking when it reaches the end of a 100 year endlessly expansionary period complete with a credit bubble that has collapsed then you can begin to understand the thin ice that the system really resides upon. The realization that we are truly in an inflationary bubble of fiat paper money that is created out of thin air & the very act of creating that money reduces the value of the very dollars you are fighting desperately to hold onto is the first step to realizing that you need an uninflatable money to truly preserve your wealth. These wealth preservation tools, such as gold & silver bullion, are some of the only options that stand between you & the continuous devaluation of your life savings as our fearless leaders attempt to apply more of the same solutions to a problem that only continues to grow out of control.
The ‘Oracle of Omaha’ loves to call gold a stupid investment because it offers no dividends to the investor, but this only highlights the lack of understanding of what gold really is and what it offers those wise enough to hold it. At the end of the day, even though the markets love to intentionally mischaracterize gold & silver as commodities, gold & silver bullion are actually money and nothing more. To that point, gold & silver have been money for over 6,000 years so this is not a new concept but the mischaracterization of the metals is a new psychological warfare tactic that will be responsible for the devastation of millions of American’s life savings when the dollar crisis begins. If you hold Euros, or British Pounds do they pay the holder a dividend? NO they don’t because currencies doesn’t offer dividends so this makes the whole argument ridiculous.
What we need is a serious conversation that covers the fact that the govt. can not save us, only we can. We need to accept that we are the masters of our own destinies & that we need to be responsible the preservation of our own net worth’s. We need to accept that holding physical gold & silver bullion will permit the transfer of our savings into the ONLY CURRENCY that can’t be inflated by desperate money managers at central banks to artificially create economic momentum in order to stave off collapse. Worth mentioning is the fact that gold & silver have continuously risen as the FED has bailed out the banks & entire sectors of the economy and will continue to do so as long as they continue down the same path. The only option at this point is to do just that, PRINT MORE MONEY AN HOPE FOR THE BEST! Remember that it is a far better strategy to PREPARE your portfolio rather than attempting to REPAIR your portfolio once the damage has begun. Tick, tock.