New World Money
For the Next Couple of months I want tos share some article that provide some background and important information on our Monetary Structure and the effects of massive Debt.
New World Money
By Teeka Tiwari, editor, The Palm Beach Letter
Chapter 1: Bitcoin Rises From the Ashes
You are looking at a live picture of Lehman Brothers’ 158-year-old firm—born pre-industrial revolution and surviving the Great Depression…
Lehman Brothers will file for bankruptcy this evening under circumstances that, without the government’s assistance, sources tell us would almost certainly result in significant market disruption.
— CNBC special report, September 14, 2008
I trust you remember what happened next.
The credit market’s liquidity evaporated. The S&P was cut in half. 30 million jobs were shed. U.S. households lost $16 trillion worth of financial wealth. More than one million homes were lost in foreclosure.
Fear and panic spread. Some said the stock market was going to zero. Some said this was the end of capitalism. Others said it was the end of human civilization.
The U.S. government rushed in with a $700 billion bail-out package for banks it deemed “too big to fail”. With the stroke of a pen, taxpayers were on the hook for Wall Street’s reckless behavior.
But it didn’t stop at $700 billion.
The Federal Reserve (the Fed) went on to inject $3.7 trillion into the financial system over the next several years.
The Fed used this new money to do two things.
First, it purchased U.S. Treasury bonds in bulk to artificially suppress interest rates.
Second, it purchased the toxic mortgage debt from Wall Street, thus transferring bad debt from the banking sector to the public sector… to the taxpayer.
This was sold as heroic. Fed Chairman Ben Bernanke called it “The Courage to Act” in his memoir.
But a few people out there weren’t so sure. They had to ask: Where did that $3.7 trillion come from?
And the answer they found was rather simple. It came from nowhere. Well, to be more specific, it came from a journal entry on the books of the Federal Reserve.
The Fed is very honest about how this works. They tell you right on their website. The Fed basically writes a check “against itself” to create money for whatever purpose it deems necessary
Now most people don’t question this. It’s not even on their radar. But those who understand basic economics realize something very important: Value is driven by supply and demand. As supply goes up, value tends to go down.
In other words, an item needs to be relatively scarce and relatively useful for it to have value. This is true of anything… especially money.
The median household income in the United States is about $53,000 per year, according to the U.S. Census Bureau. You need at least six decimal points before your Excel spreadsheet can compare this $53,000 figure to the $3.7 trillion that the Fed created from nothing.
What does that say about your monetary system?
This caused a few people to protest the Wall Street banks. And a few others protested the government. They learned pretty quickly that their protests were doomed from the beginning. Brute force and opposition is not what changes institutional systems. Systems theorist Buckminster Fuller observed this dynamic early in the 20th century.
You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.
But this was not a new discovery.
Famed artist Michelangelo understood this way back in Europe’s High Renaissance period. “Criticize by creating” is how Michelangelo put it.
Let’s turn our attention back to 2008.
Lehman Brothers has collapsed. Wall Street is in shambles. Fear and panic is spreading across the country… and across the globe. In this environment, a curious message appeared on an obscure mailing list dedicated to the study of cryptography.
The date was November 1, 2008. The author was Satoshi Nakamoto. I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party… The main properties:
Double-spending is prevented with a peer-to-peer network.
No mint or other trusted parties.
Participants can be anonymous.
New coins are made from Hash cash style proof-of-work.
The proof-of-work for new coin generation also powers the network to prevent double-spending…
Bitcoin was born. It rose from the ashes of the worst financial crisis since the Great Depression.
But to truly understand bitcoin, the world’s first digital currency (or cryptocurrency), you must also understand money. What is it? Where does it come from? Where has it been?
Think about it. What is money?
We know what money does—it buys things. But can we define it?
Is it a green piece of paper with numbers, words, and symbols printed on it? Is it a card with your name, a string of numbers, and a bank logo on it?
Or is that just a piece of paper and a piece of plastic?
The short answer is that money is a unit of account that serves as a medium of exchange. But this is an incomplete view. To be sustainable, money must have several definitive characteristics.
Money must be durable. It must serve as a store of value over long periods of time.
Money must be portable. It must be easy to move money around—either in person or electronically.
Money must be divisible. You must be able to break money down into consistent smaller units that add up to consistent larger units. In other words, you must be able to make “change” out of your money.
Money must be fungible. It must be interchangeable. Each monetary unit must be consistently the same.
Any item that has these properties can serve as money.
Now that we know what money is, we need to figure out where it comes from… and where it has been.
As it turns out, this story is far more interesting than you would think.
A Brief Monetary History
Prior to the 20th century, most of the world operated on the gold standard through which international trades were settled in gold.
While not perfect, the classical gold standard kept nations mostly honest in their financial dealings with each other. It also forced nations to live within their means. Large trade deficits had to be settled in gold, which drained gold from the nation’s reserves. Conversely, a trade surplus added gold to the nation’s reserves. This system placed limits on national debt.
World War I effectively put an end to the classical gold standard in 1914. To finance the war effort, the countries involved “printed” new money that was not convertible to gold. Trade settlement in gold was suspended indefinitely.
Most nations attempted to go back to the gold standard once the war was over. But the excessive money-printing caused their national currencies to diminish in value significantly. That meant nations would have to peg their currency to gold at a higher ratio than before, thus admitting the currency had lost value. Instead, the war combatants scrapped the gold standard.
During the same period, the shift towards central planning in America led to the creation of the Federal Reserve System in 1913.
The Federal Reserve is not a government agency. It is actually a group of private central banks that act as one unit. The U.S. government granted the Fed a legal monopoly on the issuance of currency.
In other words, the Fed is permitted to create U.S. dollars as it sees fit. Anyone else who attempts this will go to jail for counterfeiting
The Federal Reserve was also tasked with being a “banker’s bank”, which meant the Fed would loan newly created money to commercial banks that got in trouble. They thought this would make the system stronger.
Instead, it created “moral hazard” within the banking system. Commercial banks knew that the Fed would bail them out if needed… so lending standards diminished over time. It became easier and easier for risky borrowers to get a loan.
This is the dynamic that ultimately caused the financial crisis of 2008. Wall Street, backed by the Fed—and the government—made too many loans to too many risky borrowers. Then it chopped up those risky loans and packaged them into complex derivatives.