We studied in part 1 of the Crash Course the nature of the crisis brought upon us by a humanity in deep confusion between growth and prosperity. In part 2, Chris Martenson, a trained scientist, tells us what precisely money is, how it is created, brought into existence by Central Banks; Emphasis is put on the combined actions of the US FED system and the US Treasury. Chris explains how, by design, insufficient amounts of money are created driving us to a vain competition for survival in a world of artificial scarcity. Lastly, the true nature of inflation is revealed: a purely monetary phenomenon serving the hidden purpose of financing governments and maintaining the status-quo of the powers in place; banks are exposed as the driving force behind the hijacking of prosperity, for growth (think exponential growth) is a necessary condition to their existence.
Crash Course – 6 – What Is Money
Before we begin our tour through the three Es (the Economy, the Environment, and Energy), we need to share a common understanding of this thing called money.
Money is something that we live with so intimately on a daily basis that it probably has escaped our close attention.
Money should possess three characteristics. The first is that it should be a store of value. Historically, gold and silver filled this role perfectly because they were rare, took a lot of human energy to mine, and did not corrode or rust. By contrast, the US dollar pretty much constantly loses value over time – a feature which punishes savers and enforces the need to speculate and/or invest. A second feature is that money needs to be accepted as a medium of exchange, meaning that it is widely accepted within a population as an intermediary within and across all economic transactions. And the third feature is that money needs to be a unit of account, meaning that the money must be divisible and each unit must be equivalent.
It is crucially important that a nation’s money supply is carefully managed, for if it is not, the monetary unit can be destroyed by inflation.
Crash Course – 7 – Money Creation
Here we will explore the process by which money is created. In order to appreciate the implications of our massive levels of debt, you have to understand how the debt came into being.
John Kenneth Galbraith once famously said, “The process by which money is created is so simple that the mind is repelled.” We’re about to discuss that very thing. Money creation is a bizarre thing to ponder. It is actually a very simple process, but it’s really difficult to accept.
Money is loaned into existence. Conversely, when loans are paid back, money ‘disappears.’
There is a federal rule that allows banks to loan out a proportion, a fraction, of the money they have on deposit to others. In theory, banks are allowed to loan out up to 90% of what people have on deposit with them. Because banks retain only a fraction of their deposits in reserve, the term for this process is “fractional reserve banking.”
Crash Course – 8 – The FED – Money Creation
Here’s a quote from a Federal Reserve publication entitled “Putting it Simply”: When you or I write a check, there must be sufficient funds in our account to cover the check, but when the Federal Reserve writes a check there is no bank deposit on which that check is drawn. When the Federal Reserve writes a check, it is creating money.
Wow. That is an extraordinary power. Whereas you or I need to work to obtain money, and place it at risk to have it grow, the Federal Reserve simply prints up as much as it wishes, whenever it wants, and then loans it to us via the US government, with interest.
All dollars are backed by debt. There are two kinds of money out there. At the local bank level, all new money is loaned into existence. At the Federal Reserve level, money is simply manufactured out of thin air and then exchanged for interest-paying government debt. And perpetual expansion is a requirement of modern banking.
Crash Course – 9 – A Brief History Of US Money
The purpose of this section is to show you that the US government has radically shifted the rules during times of emergency and that our monetary system is really a lot younger than you might think.
In 1933, newly-elected President Franklin D. Roosevelt decided to counter the falling money supply in a most drastic manner. To accomplish this he confiscated all privately-held gold and immediately devalued the US dollar. This goes to show how governments, in a period of emergency, can change rules and break their own laws.
Fast forward to 1971, when President Nixon “slammed the gold window,” ending its dollar convertibility. Without a gold backing, there was no hard, physical limit to how many paper dollars could be issued.
What will it be like to live here when our nation is creating a trillion dollars every four weeks? How about every four days?
Crash Course – 10 – Inflation
Most of us think of inflation as rising prices, but that’s not quite right. Inflation is not caused by rising prices. Rising prices are a symptom of inflation. Inflation is caused by the presence of too much money in relation to goods and services. What we experience is things going up in price, but in fact, inflation is really the value of your money going down, simply because there’s too much of it around. Inflation is, everywhere and always, a monetary phenomenon.
From 1665 to 1776 there was absolutely no inflation. For 111 years, a dollar saved was, well, a dollar saved. Can you imagine what it would be like to live in a world where you could earn a thousand dollars, put it in a coffee can in the backyard, and your great- great grandchildren could dig it up and enjoy the same benefits from that thousand dollars as you would have 111 years previously? This was reality in the US at one time.
What does it mean to live in a world where your money loses value exponentially?
The chapters of The Crash Course take over 3 hours to go through and give you an overall understanding; we have broken the learning down into 5 postings. This is the second installment. The first part explained the nature of the crisis, the convergence of an Economic, Energetic and Environmental crisis, and the distinction between growth and prosperity; in part 3, we will move on to energy, peak oil, the role of energy in our society, and the improbable existence of civilization without energy; last, we will measure the impact on the environment, the coming shock, and engage in a discussion about what we can do and who we must be to change this course of events that humanity has unwillingly set for itself.
The other parts of The Crash Course can be accessed following the links below:
Crash course part 2, Money: What is money? How is it created? The Federal Reserve System & a brief history of US money; the true nature of Inflation.
Crash Course Bonus Audio: An Interview with Chris Martenson.
Tags: awareness, Chris Martenson, cosmic cost accounting, crisis, critical path, economic cycle, Economy, energy expenditure, Environment, Future Of Humanity, inflation, integrity, life sustenance, malthusian limit, mind, sense of urgency, the Crash Course, think, truth, universe
Subscribe via email or RSS