Thursday, February 19, 2009

Irritation and Angst

***Cross-posted at What Floats My Boat***

Ask around, you will (nearly) always hear the same answer:

What caused the Great Depression?
The stock market crash of 1929.
No more, and no less. Just, the stock market crashed. Herein lies the failing of the education system in this nation: Providing only a partial (or entirely incorrect) explanation of the reality.

The 1929 crash was not a cause but an effect of sloppy economic, monetary and fiscal policy - leading first to the crash then to the Depression.

Many seem to be under the impression that money just "disappeared" during the Depression. Like all the money that had been so freely flowing throughout the Roaring Twenties.... was mysteriously sucked up into some big black hole. This, of course, is impossible - since most of it never existed in the first place.

Since 1913 with the signing of the Federal Reserve Act, most of our "money" has been an illusion. When our currency was removed from the gold and silver standards, leaving it backed by NOTHING, this became true of ALL "money." A figment of an overactive imagination. Created out of thin air and only "real" insofar as the perceived reality imposed upon it by the Federal Reserve. A "purchase" of US Treasury securities for the intangible future generation of wealth.
The Federal Reserve trades NOW against the wealth that you and I (and our children and grandchildren) are EXPECTED to earn at some point in the future. This wealth does not exist - YET - but is being sold, regardless. This is the miracle of "credit" in a fiat banking system.
In the time leading up to the stock market crash of 1929, investors could make huge profits by buying on margin or short selling stocks - speculation. This involved massive amounts of credit being extended to buyers (both by banks and by brokers, in return for a fee on the resale of that stock). Over time, "bubbles" were created, in which the value of the commodity being traded became overvalued. Eventually, the bubble "popped." Loans were called, borrowers were unable to cover their losses, depositors demanded their holdings be returned, and eventually the entire system collapsed.

A credit crisis.

Credit was extended based on money created out of thin air - unable to be repaid - with the resulting contraction of the money supply to realistic levels (essentially, how much money there actually IS as opposed to how much money the Money Fairy made us believe existed after sprinkling around some Magic Fairy Dust).

We begin to sink deeper into trouble when greed allows manipulation of fractional reserve banking and lending institutions overextending credit to riskier and riskier clients, inflation of the money supply, devaluation of the currency, rounded off by a government (who has allowed a monopoly to be held on the money supply by The Fed - those same private banks glutting themselves at the trough o' plenty) to suspend payment to depositors.

Allowing the bank to NOT return to the depositor that money he placed in the bank (either for safe-keeping or to grow an investment through interest) in good faith.

Is any of this sounding familiar? We again face a credit crisis, but once again it is not the crisis our federal government would have us believe it to be. The crisis lies in the corruption of power at the highest levels of government and in the private banking industry - that same banking industry that holds the reins on the money supply and, in turn, the reins on Congress and ultimately each and every citizen of the United States.

We keep hearing there is no "painless" way out of this crisis. We keep hearing that we must spend more to dig our way out of the hole that we now find ourselves in - the hole our government set us to digging at our own expense (shovels furiously flying during the New Deal era) then pushed us into unceremoniously - while ordering us to pull the dirt in behind us. Since when did that scheme ever work, to borrow MORE money to pay off what you already owe and are unable to pay back?

I have a solution; to be sure, it is not painless but far less devastating than the beeline over a cliff we are now headed over at Mach 5. No one would want to hear it, though, much less implement it, because no one really wants to feel the pain - like going to the dentist to have a tooth pulled without some anesthetic.

Sometimes that tooth just has to come out, though.

1 comment:

Lew Waters said...

As you say, you cannot borrow your way out of debt.

Anita and I were talking once that we really have no money, just numbers that are shifted around. We receive a piece of paper with numbers that we give to a bank and add to our numbers, until we send some numbers to others to increase their numbers.

The only way out of this current mess is to let the chips fall. A lot of people will be hurt, but maybe theywill learn what our parents learned growing up in the 1930's, life isn't easy and there is no free ride.

The current solution of the first porkulus bill isn't even a solution but a move to implement socialist control on many aspects of our economy and lives.

Bad idea because as Margaret Thatcher so famously said, "The problem with socialism is that you eventually run out of other people's money."