Clearing It Up!
To demonstrate this idea of how currency is created, let's first take the example of how it is done in The United States. Some of us quite flippantly use the term 'currency printing' yet what I aim to explain is how this seemingly simply process actually happens! It all starts with the Government. They create a glorified IOU. IOU is an acronym for 'I owe you' (for sake of clarity I thought I'd add that). This is the government essentially saying, 'I will promise to pay you back the currency you lend me plus some interest on top!' The Treasury, the department in charge of managing all federal finances, facilitates the formal creation of this IOU. This is called a bond.
The Profitable Middle Men: The Banks
Well recognised banks, such as JP Morgan and Bank of America, will purchase these bonds from the treasury. At this moment in time, the government now owe the banks the interest and principle on the bond, the government have essentially taken a loan out from the bank. The banks will then sell these bonds again onto the Federal Reserve, ofcourse including a premium on those bonds and thus creating a profit. However, this is the vitally important piece of the puzzle that not many people understand.
The Federal Reserve writes a cheque to purchase these bonds from the banks. When the Federal Reserve writes this cheque, they do not have the funds to support this cheque. When you or I write a check, we have to have the funds in our bank otherwise when the other party comes to claim the cheque it will bounce. However, the Federal Reserve gets to write a cheque with a checking accound of zero balance and the cheques are fulfilled on the other side. The aftermath of this essentially fraudulent activity is that the Federal Reserve owns the bond and both the banks and the government have huge sums of currency in their pockets. All of this currency was created from thin air. This currency by the way is the US Dollar. The one that 300 million people have to go out and earn, whilst the Federal Reserve can essentially just type the numbers into the computer and voila! The government now have the currency to spend as they see fit. Simply once again, they have taken a loan from the Federal Reserve and have to pay the loan back plus interest to the Fed. The banks essentially facilitated this trade and took their fee.
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Picking Up The Tab
So, the clear question that is left is 'How does the government pay back the Federal Reserve for the loan that it took out?' The answer is that they don't. You pay it for them. When you go and out and work hard for the dollars that you earn, to feed yourself and your family, there is a time when you have to pay tax. The taxes that you pay pass through the IRS and onto the Treasury so that they can pay the debt that they owe to the Fed. You are picking up the tab for someone else's loan. If you lived in a world where you knew someone who was constantly taking out loans to fund their wild, extravagant and somewhat foolish lifestyle you probably would sit them down and have a heart to heart chat with them. Well, the reality in this situation is that you are the one actually funding this for them. You will be the one who has to pay back the loan that they took out to fund their life. Well, that someone is all governments throughout the world. They get to spend currency on whatever they want like it's going out of fashion and you and I are paying for them to do that through taxation. This is the reality.
Debt Ceiling Illusion
As much as you may try to get your friend to change their spending habits, history has shown that they will not. All of the government spending is done through the politicians that are elected into power. Their claim is 'Vote for me and i'll give you more free stuff than my opponent'. However, we now know that there is no such thing as a free lunch. The money has to come from somewhere as they are not using money that they have in their pockets. They are using the currency that they have been loaned in the example that I have just explained. This is called deficit spending. Politicians do not care about the financial implications of this deficit spending. They just want to look good and they don't care how much is costs. The economic collapse will never happen on their watch, as long as they keep taking out these loan to fund their programmes.
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Robbing the Wealth of Savers
All of this deficit spending increases the currency supply of the US Dollar. This devalues people's purchasing power over time. The most productive people in society are the ones that get screwed the most. The ones who are diligent with their spending habits and the ones who work to earn their income are the ones who get shafted. This is due to the resulting inflation that happens, robbing the wealth of the people and funneling it to the elites. This system is only possible because we use currency not money.
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Financial education is really important, especially right now. COVID is happening and there are significant health and social reciprocations. Yet it is important to understand the financial implications too and what is going on behind the scenes. Please continue to read my blogs about financial education and crypto as they come out. This is aimed to educate people who know nothing about these topics with the aim of having some protection when an inevitable financial collapse happens.
Currently, if you are new to this, you are not too late. The talk in crpyto is that if you aren't already in you are too late. This is not true. This is not true for gold or silver either. There is still an opportunity to educate yourself and make appropriate decisions for yourself!
Please upvote, reblog, and comment! I look forward to your thoughts on these topics too as I want to get this discussion going! Thank you.