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Sunday, August 10, 2014

How The Fed Creates Money


As a follow-on to the two previous chapters -- one explaining thenature of fiat money, the other showing how money is loaned into existence through our fractional reserve banking system -- this week's video details the Fed's near-magical ability to create money out of thin air (literally!).
We've devoted these past three chapters of the Crash Course to the process of money creation in order to understand this key question:What does the future look like for fiat currencies? (e.g. the dollar, the euro, the yen, the pound...)
In the case of the dollar (which operates similarly to the other major world currencies), we've learned that -- since all are "loaned into existence" -- all dollars are backed by an equivalent amount of debt. Debt upon which interest must be paid. As all outstanding debt must compound over time at the rate of its interest (at least), we come to this important conclusion: Our money system is designed to grow exponentially. And it requires ever more debt in order to do so.
Is this good? Is this bad? At this point, we're not here to cast judgment (yet). But, it does raise some important questions:
  • If the money supply must always increase over time, isn't the purchasing power of each unit of currency (e.g., each dollar) destined to speed its way towards zero?
  • What happens when hard limits prevent the system from expanding at the rate it needs to? (see: 2008 liquidity crisis)
  • Are those responsible for the rate of increase in the money supply doing a responsible job? (see: central bank quantitative easing programs since 2008)
Most of the people holding the majority of their wealth in fiat currency have little clue how it is created or managed. This leaves them very vulnerable to what happens to it over their lifetime.
How vulnerable are you?



Coming next Friday: Chapter 9: A Brief History of US Money
For those who simply don't want to wait until the end of the year to view the entire new series, you can indulge your binge-watching craving by enrolling to PeakProsperity.com. The entire full new series, all 27 chapters of it, is available -- now-- to our enrolled users.
The full suite of chapters in this new Crash Course series can be found at www.peakprosperity.com/crashcourse

And for those who have yet to view it, be sure to watch the'Accelerated' Crash Course -- the under-1-hour condensation of the new 4.5-hour series. It's a great vehicle for introducing new eyes to this material.
Credit to Zero hedge

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