Today I am republishing part of a series of articles I wrote back in May, 2008. Since then Wordout has added hundreds of new readers, and I hope they find this further insight helpful.
This was before Fannie and Freddie, before Lehman and the whole October surprise. But the general gist of it still applies.
Image by cobalt123 via FlickrThe Setup
Welcome to Crunch Week, Day 1. This week I’m going to try to explain the current financial crunch we all find ourselves in. If you haven’t found yourself in it yet, don’t worry. You will soon, probably sometime this year. What’s going on affects everyone on the planet, and it’s intentional.
To understand it, we have to understand money. How much money are we talking about here? This is just the mortgage industry right? Bear Stearns, Nationwide, Citicorp and the rest, they’re all having trouble because of those pesky loans, right? So how much could that be, as a percentage of how much money there is totally in the world?
Honestly, that’s a tricky question. In my mind, the answer is either 100% or zero, depending on how you look at it. I know that there’s about 70 trillion dollars involved in this mess. Yes, that’s correct. No, it’s not a typo. We’ll go deeper into that tomorrow, but for now rest assured that that figure is pretty close to accurate.
So am I saying that there’s 70 trillion dollars in existence? Not exactly. The truth is, there’s no money in existence. At least, not like you think of money. The truth is, in every developed or developing society on earth where banking exists, there’s no real money at all. There are “notes”, essentially IOUs, promises to pay a stated value in what else; more notes.
Love Me, Legal Tender
Although these notes are backed by the good faith of a government, they are not created by that government. They are created by the banks, who issue loans in order to create more notes, each of which is backed by debt, a promise to pay, essentially an IOU. There are usually rules in place to control how much debt, and therefore how many notes, any bank may create. When you consider that all those deposits represent nothing more than debt themselves, you start to realize that there is indeed no real “money” there.
Look at a dollar and read, in the upper left, where it says “This note is legal tender for all debts public and private”. Think about that sentence, printed on every Federal Reserve Note you have ever seen (unless you’re older). It’s plain as the sun in your eyes, and just as blinding. The Federal Reserve is a private bank, which issues Federal Reserve Notes based on the repayment of all debts public and private. It’s right there on the paper. Read it.
This is a rather long video, but it’s informative and entertaining. If you’ll watch it, you’ll get a very clear understanding of exactly how the financial world got to be the way it is. You’ll understand why you can never catch up on your bills for more than just awhile. You’ll see the words of some of America’s most respected presidents warning us of the problems we have now, and the words of the one who is mostly responsible for allowing it to happen, by signing it into law, in what appears to be a belated sort of apology for his actions.
Time Is All You Have, Spend Some On Yourself
I know you don’t have time to watch this. I’m asking you to make time. This is stuff you need to know, anyway. It will help you and all it costs is 47 minutes.
We’ll continue Crunch Week next with a piece on the fall of Bear Stearns. Just how did it all go down, from start to finish? If the banks can print whatever fiat money they need, how did they get so far into debt? Where did all that debt come from anyway?
I am Jon, thankfully not buried in debt.