This is a long one, but its a complicated subject

Where our money comes from

When Congress needs money we don’t have (This is how we get debt)

They call Treasury, and Treasury create a bond, this means that a bond for X dollars, let’s say for 1000 dollars has now been created. Anyone can buy them, from Grandma to the Chinese government and international banks, this is payable to the holder in full with interest AFTER the maturity date (such as 10 year, 30 year, etc.)

Now the Federal Reserve despite its name IS NOT A FEDERAL AGENCY. They are as Federal as Federal Ammunition or Federal Express; they are a private entity with the word Federal in it.

The Federal reserve is in charge of “increasing the monetary base” this means that if they think that there isn’t enough money in circulation they will “increase” it, by “making” more money.  This is the “Money Supply” and that is ALLLLLL the money that is printed and ALLLLL the money that isn’t printed but is numbers on spreadsheets in financial firms, personal and business accounts and everywhere else that dollars are represented.  Now how is this done?

This is how it is done!  Let’s say that Citigroup bought the thousand dollars of bonds, so the Fed calls them up and says that they will take ownership of these bonds, pay them for the bonds and the interest that they have accrued so far.  So Citigroup sells them the bonds, but the Fed doesn’t use the money with dollars, there isn’t ANY cash exchanged as you or I would understand it.  If you or I buy something we hand the cashier money, they give us the item, everyone is happy.  What the fed does is they go into their Big spreadsheet (this is simplified so don’t berate me with technicalities and “it’s not just one spreadsheet” I know this!).  they go into their mondo spreadsheet that they have and put in column {send Citigroup 1,000 dollars} they push the enter button, and now the 1,000 dollars are in Citigroups accounts and the bonds with interest are in the Federal Reserve’s spreadsheet. Now this is how money is truly “made”, it isn’t printed as they say all the time, only 3% of the US dollars is printed the rest is on spreadsheets! So now the U.S. government owes the Fed the original 1,000 with interest, and now that money is now “in circulation” within the money supply. So now there are 1,000+ more dollars in the money supply.  This sounds a bit crazy right? That the Fed can just punch a few numbers into their system, Citigroup gets their money with a little interest and the Fed gets that money, but WITH NO ACTUAL MONEY to back up their purchase.  This would be the same as you writing IOU’s to your neighbors, but well….without the IOU’S.

Now the banks themselves get in the game! And this is where the money really takes off.  Citigroup takes that money, and they don’t just keep it in their accounts.  This money now goes into their system and creates MORE MONEY!  They can loan up to 90% of the value of the money in their account, so they take that 900 bucks they can loan and loan it out to you to go buy a new crappy car. You take that money and go and spend it.  Now you can see where MORE money is created than actually exists, and this is where it gets crazy.  THEY DON’T ACTUALLY “GIVE” YOU THE 900 DOLLARS. They do the same thing the Fed does.  They don’t give you that 900, they put down in their spreadsheet to transfer you that money, but it doesn’t leave their accounts to you. They take the collateral (the car) and put that on their books since they will take receivership of the item as restitution if you DON’T pay the loan. So with this the bank has taken the 1000 dollars, kept 100 in reserve, made an entry that you took 900 for the car, put the car as collateral against that 900 dollars. So then whoever bought that car, takes that money and puts it in their bank, now if it’s the same bank they have the original 900 or so back in their accounts (Since all our savings are on their balance sheets and can be borrowed against). Even if it’s a different bank, it’s still “fake” money that has been created by that single loan, so it’s available to that bank to borrow and loan against.  So let’s say it’s the same bank, they both bank with citigroup.  The bank then take that 900 and loans out 810 to someone else.  You can see that this goes on and on down the line! So now the 1,000 that the Federal Reserve took out has now ballooned to 2710 dollars and more down the line.  This is ALL DEBT and it’s due back with interest to the various groups and holders! This is how our money is made. For every 1000 bucks it can balloon to 10000 in debt or more!

So here is where the FED really ramps up their craziness, monetizing debt.  So let’s go back to the beginning and let’s say that citigroup only bought 500 bucks and the government needs another 500 bucks to meet their “needs”.  This would seem like a good failsafe for Government spending within this messed up system.  You would think that congress would say “hmmm well no one wants to buy the rest of these bonds, because they are concerned with our spending or whatever reason so maybe we should back off”  NOPE this would be somewhat of a good system to cap our dollars in circulation and decrease the chances of inflation, etc.  But we have the Fed so why be concerned with little things like that!

So the Fed steps in with what we hear a lot in the news these days, “Quantitative Easing” or also “Monetizing Debt”.  The Fed then “buys” (remember earlier they don’t give anything for it; just note it in their big spreadsheet).    They’ve now created another 500 dollars, no real money given.  They “bought” the bonds from the Treasury the same way that they bought it from Citigroup earlier.  This is literally, The Fed buying nothing with nothing, but the underlying issue is the DEBT that is created by this! Because EVERY DOLLAR “CREATED” HAS A DEBT ASSOCIATED WITH IT.

So a lot of people say and after all this you may be saying…well dollars are worthless, they aren’t back by anything, and they are just created.  Well yes they are created, but they are not Worthless, if they were you couldn’t buy something from Europe on EBAY or get a soda at a gas station.  And yes they also are not backed by anything like gold or silver but they are backed by something.

WHAT ARE THEY BACKED BY?

They are backed by the intrinsic value of the U.S.

The land, the natural resources, the labor that you produce and the labor that everyone EVERYONE else produces.

Before we go into that lets talk about Inflation and Deflation. What are they really?

If you have looked at this before you probably think and its partially correct that Inflation is when you have more money (whatever it may be, dollars, Euros, yen, soda caps, whatever you use for currency) in circulation than before and faster than what the economy can produce to back it up.   For example if you had 100 dollars in circulation and you added another hundred than the dollars would be worth half as much.  This is partially true, but not completely how our money works.

If the country expands production and the economy grows and the currency stays the same then the value of that dollar is worth more, and vice versa.  The country does grow and expand production and population so that’s why we don’t consistently feel rapid inflation throughout our lives. Inflation is when there is more money in circulation than the combined population and economic growth.

Deflation is when the monetary supply (amount of currency out there) contracts and there is less of it, then the value of the dollar grows.

Now there is something called monetary velocity and this factors into how the money is valued as well.  So if people stop spending and save, if banks stop loaning out money, less money is created and less money moves around.  So if monetary velocity slows, even if the fed pumps money into the system, nothing is moving so inflation is held back.  It’s a natural check against inflation, at first, if it doesn’t move for long enough deflation occurs.

So now you’re saying well how is this? There’s still all that money around and being created by the fed.  Go back to our example of the bank’s lending that money for your new Honda.  They had taken that money from the fed and then loaned it out fractionally so from that original 1000 they put 2610 into the system.  If people stop buying then you don’t buy that car, you don’t need the loan, the banks don’t loan and that 1000 stays at a thousand, it doesn’t grow to 2610 or more.  They never really gave that person the money in the first place; the entry was actually THE DEBT that was created with the loan that DEBT plus interest created MORE DEBT plus interest after being loaned out again and again. So there truly wasn’t any REAL money being given out ONLY DEBT plus interest. So in truth that 1610 “dollars” weren’t really dollars, and when they stopped being loaned out alllllll that money from the millions and billions of loans like that just disappears.  Crazy huh? That’s how money “disappears”, it’s because we call that debt money, but it’s not, it was the debt and interest being created that disappeared, not money.

Now the monetary base contracts also when people/businesses default, or go bankrupt.  So say you bought a house for 100k and got a loan for it.  The bank “loans” it to you (remember the car) and then puts down in a journal entry that the YOU the asset is worth 100k if paid tomorrow or worth 300k if you took 30 years to pay it off. So now their bases are covered.  Tomorrow the economy tanks you lose your job and you can’t pay it.  The house is now worth 50k, and the bank says you have to pay or you can short sell for 90k and pay us with that.  You then tell them to go to you know where and just walk on the house.  You declare bankruptcy and leave.  The bank now has an asset that is worth 40k that their entry says was worth 100k, this is how (in this circumstance) 60k just disappears. It’s gone, never to return.

Now this is expected for a percentage of loans, banks account for this, that a certain amount of people will just walk away from their house.  But when thousands and thousands do all at once, this is what causes a monetary retraction, and deflation.  This is one of the reasons why the FED and Treasury pumped TRILLIONS OF DOLLARS into the system in 2008 and continue to do so now.

Why

Because the government needs DEBT and they need inflation to continue to operate. Why again. Because they have MASSIVE AMOUNTS OF DEBT. And the more inflation there is the more money there is and less its worth. So they can take the new money that is in more quantity and worth less and pay off the old debt.

Now let’s look at our debt, and what that means

THE TOTAL DEBT WILL ALWAYS BE MORE THAN THE TOTAL SUPPLY OF MONEY

If you can imagine this there is more debt in existence than there is money in circulation. So if we took every last dollar out of every single wallet, off of every balance sheet and put it in a pile, there would still be more debt.  So even if we did that, there would be no money left in circulation, so we would have a massive contraction (to 0) in our money supply, more money would have to be created to put it back in the system to pay off the remaining debt, but debt would be created to do that. That is what is called the DEBT TRAP, that’s the way the system was designed when the Federal Reserve Act was put into effect in 1913.

Alot of this info came from

THE SURVIVAL PODCAST

check out the shows here, they go into more depth, but for ease of reading i decided to type it

A NEW UNDERSTANDING OF MONEY PART 1

A NEW UNDERSTANDING OF MONEY PART 2

GREAT NORTHERN PREPPER OUT!

   Send article as PDF