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Aug. 1, 2010

GUEST COMMENTARY: The Coming Currency Crisis

By Pat McGeehan

Freedom lies at its darkest hour not by threat of sword, but by threat of poverty. And our country’s impoverished condition continues. The American Republic is dying. Our nation is bankrupt. This is no longer a Republican or Democrat “issue”—it’s just a “math” issue. Tomorrow, if the entire federal government was eliminated—including the US Military—we could still not afford to pay for Medicare, Medicaid, and Social Security. We would still run a budget deficit. These three bloated programs and we can’t foot the bill. For anyone not yet paying attention, this sobering predicament is your wake up call.

Furthermore, despite what you may hear to the contrary, the economic depression still lingers. It will get worse. To examine what this means to your future, we must examine the cause of our economic downturns and how it is bankrupting our society.

The source does not rest with “Wall Street greed” or a shortage of consumer spending. The real cause of our economic roller coaster ride stems from an opaque institution known as the Federal Reserve. This quasi-government creature not only orchestrates the “booms” and “busts” we are familiar with, but it also makes possible our colossal national debt. While our country’s central bank may not seem very significant to your daily life, it’s crucial Americans begin to pay more attention.

All of our past economic depressions or “busts” are caused because the Federal Reserve increases the nation’s supply of money. Though hidden through complex bureaucratic terminology, the process is really quite simple. To “stimulate” the economy, the Federal Reserve utilizes its money printing tools to artificially lower interest rates. IOU checks are written by the Fed to the nation’s largest and most politically-connected banks, and with a few keystrokes of the computer, money is created out of thin air. These big banks gain more cash on hand, profiting by having the privilege of being the first lender. Remember though, all this newly granted cash is counterfeit. These reserves represent zero new resources produced and saved from economic growth. However, by printing more money, the Federal Reserve gives the appearance that more resources are now available for investment, and so begins the boom. It should be noted, this counterfeiting bank cartel is purely a product of government. There is nothing “free market” about it.

When something is more plentiful or abundant, the price tends to fall. This is also true of the interest rate, which plummets as the supply of paper money increases. After the Fed injects counterfeit reserves into the vaults of its member banks, the price of this diluted capital now appears cheaper. But remember, all of the genuine resources in the economy have now been watered-down by the government counterfeit. The interest rate does not fall because of an increase in voluntary savings; but through government intervention. The Federal Reserve is simply price fixing.

The new counterfeit money now makes its way into our economy from the banking system, typically first appearing through the loan market. The Fed deceives businessmen and entrepreneurs, who because of the lower interest rates, are falsely signaled more resources are available to invest in long term projects. These artificially cheap rates cause banks to make more business loans, and more credit is granted. As a result, more projects are started, and more investments are made. Politicians in office are praised for healthy economic prosperity. But it’s simply an illusion—all of it pure fantasy. The government’s counterfeit merely diluted scarce resources, causing real capital to become misallocated, squandered, and ultimately wasted. The situation just outlined has been the plague of our American economy.

Thus, it is important to note that the boom phase is the unhealthy stage where the economy grows sick. All of these new investment projects cannot be sustained, as consumers never actually demanded any of them. Once the money-printing scheme ceases, the bust phase sets in. All of these businesses or projects are now realized to be, in fact “malinvestments” and they must be liquidated (i.e. an overabundance of houses for which no one demanded be constructed). Businesses close. Mass unemployment is created—all at once. These recessions are painful but necessary for true healthy economic growth to resume in the country. Trying to sustain the boom is equal to trying to keep the economy sick.

Our primary illness now is that we have tried to deny that our economy has been sick. By doing so, we have merely prolonged the recession. Through trillion dollar stimulus plans and even lower interest rates, we have aggravated our economic woes. The Federal Reserve has now maintained 0% interest rates for 21 months straight, a reckless and unprecedented government maneuver. But the denial can only last so long.

Our denial has exchanged short term pain for long term misery. Our spending and money printing has prompted a coming currency crisis. The US dollar is losing its value and the country faces possible hyperinflation, or even the collapse of our paper money system. Prices will rise higher and higher, robbing the poor and driving middle class families into poverty, as they are forced to eat away at their savings to compensate for higher food and energy costs. Interest rates at the national level will begin to rise, and no trick left in the Fed’s playbook will be able to stop this. As our national debt mounts, we will face insurmountable payments on our annual interest alone (likely exceeding 65% of all federal tax receipts within the next 3 years).

If history is a benchmark, we will attempt to “print-up” even more money to pay for it, throwing more and more worthless paper into circulation. Unless we do something soon, this is the end game. Prolonged economic depression, rising unemployment, and 20 dollars for a loaf of bread—15 bucks for a gallon of milk. This is a real possibility—and this is what it could look like for you and your family.

http://www.huntingtonnews.net/columns/100801-mcgeehan-columnscrisis.html

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