It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes. Distinctions in society will always exist under every just government. - President Andrew Jackson (1767 – 1845)
When most people hear the words "Federal Reserve" they automatically think that this bank is a part of the Federal government. In reality, this is not true. The Federal Reserve is a private bank, a corporation. It is no different than Bank of America or Wells Fargo, except for it is a central bank, and it is much more powerful than these two banks. The Fed is responsible for loaning money to the U.S. government, and it is also responsible for controlling interest rates.
Many Americans are not aware of the fact that the Federal Reserve is not Federal. Not only is it not Federal, but it doesn't have any reserves. The U.S. dollar is not backed by gold, and it hasn't been since 1971. I talk to wealthy people all the time who don't know this. Most people don't realize how serious this is. Having a paper currency that is not backed by precious metals is extremely dangerous. This means that the central bank can print as much money as it wants.
Why is this important?
Many Americans are in debt because they don't understand how our economy functions. Let's take a look a this example to understand how the American economy functions. The Mona Lisa is a world famous painting that was produced by Leonardo Da Vinci in the 16th century. There is only one Mona Lisa, and its value is extremely high. The reason for this is simple: There is only one Mona Lisa, and an authentic replica can never be reproduced. Leonardo Da Vinci has been dead for centuries, and he can never produce another one. The low supply and high demand for Da Vinci's work makes this extremely valuable. After all, there is only one in existence. Here is another example. If you are drinking water from a water fountain, and I come up to you, and try to sell you a glass of water, more than likely, you won't buy it.
Why would you buy water from me when you can get it from the fountain? Now, let’s change the scenario. Let’s say you're out in the middle of the Gobi desert, and there isn't any water around. You're dying of thirst, but you have some money, and I come up to you and offer you a container of water. Suddenly, the water that you turned down at the fountain will become extremely valuable. You will pay as much as possible to get it. Both of these analogies are closely related to the situation with the Fed. The Federal Reserve prints a lot of dollars into circulation, and when they do this, the value of the dollar drops.
Inflation and the American Economy
When the value of the dollar drops, the prices on goods and services increase. This is called inflation. While most people think of inflation as simply higher prices, in reality, their currency has been devalued. It has lost its purchasing power. When dollars are pulled out of the economy, this is called deflation. Because dollars become scarce, they are more valuable, and the prices on goods and services will drop to acquire them. A central bank must be able to balance inflation and deflation to keep the economy balanced. If you cause too much deflation, you will have an economic depression, since money will become scarce.
If you cause too much inflation, the currency will become devalued, and prices and services can become hard to afford. When people find it hard to pay for their basic necessities, they tend to stop spending on other things, and this can create a domino effect which can hurt businesses and eventually weaken a society. If inflation is taken to the extreme, it gives rise to a phenomenon that is called hyperinflation. Hyperinflation is extremely dangerous, and I will talk more about it later. Right now, the Federal Reserve is printing too many dollars into circulation. Because the U.S. dollar is no longer backed by precious metals, they are not limited in the number of dollars they can print. Prior to 1971, the Fed could only print dollars that were convertible into gold. This meant that they could only print what they had in reserves. The economy was balanced, because if the Fed attempted to print more money than they had in gold, problems would arise if people attempted to convert their dollars into this precious metal, since the number of dollars printed were not backed by an equal amount of gold. The phenomenon which allowed our currency to be backed by gold is called Bretton Woods.
Once Nixon pulled the United States out of Bretton Woods, the Federal Reserve had a free ticket to print as much money as it wanted, and it has continued to do so today. Not surprisingly, the value of the U.S. dollar has dropped. Goods and services today are much more expensive than they were prior to 1971. Once the Fed started printing out too many dollars, they became what is called a fractional reserve banking system. Today, almost every bank in the United States uses a fractional reserve system. A fractional reserve system is when the bank loans out more money than it has in reserves. When you go to the bank, and you deposit your money, the bank can then make loans against your deposit. Of all the millions or billions of dollars that a bank holds in their customer accounts, they make a large number of loans against it. The bank knows that the mathematical probability of all their customers withdrawing their money at the same time is very low. So they take a portion of this money, and they loan it out to people. The bank then makes profits from the interest they charge on these loans.
If you go to the bank to withdraw your money, the bank will generally give it to you without hassle, since they know it is unlikely that everyone will withdraw their money at the same time. However, if you have a substantial amount of money in your account, you will find that the bank makes it harder for you to withdraw it. The more money you have, the harder it is to withdraw, especially within a short period of time. If the bank is making a lot of interest off your money, it hurts them when you suddenly pull it out of your account. This is why banks always reward people who maintain high balances. They make a great deal of interest off these accounts.
The Federal Reserve Bank is the same. It also uses a fractional reserve system. The Fed is the master bank, and it controls all the other banks in the United States. It loans out money for car loans, mortgage loans, student loans, and every other loan you can think of. Americans then borrow this money and use it to pay for various expenses. Trillions of dollars per year are made in interest payments alone. Here is the thing that is mind boggling: Many Americans don't own the assets they borrow money for. When you get a car loan, you don't own the car until you've paid it off.
When you get a mortgage, you're not the true "homeowner" until you've paid the mortgage off. When you loan money from a bank, they are guaranteed to get back more money than they loaned out due to interest payments. If that loan is secured and you don't make the payments they will repossess your car or foreclose on your house. Therefore you do not own these assets. Americans have been lead to believe that borrowing money at a “low” interest rate for a new car, home or against a credit card is a good thing. No wonder the banks give you a sucker when you go in to deposit your paycheck. When you become heavily in debt by borrowing money, you are a sucker. But this is only the tip of the iceberg. It gets a whole lot worse.
Not only does the Fed loan money to the individual American consumer, they also loan money to the U.S. government. As with any loan, the Fed charges the U.S. Government interest on the money they borrow. Because the American government borrows money, they must also pay that money back plus interest. Who is now in control of this situation? Much like the typical American is enslaved when they owe $12,000 on a credit card. The big difference between the individual consumer and the U.S. government is the amount of money they owe. There is no point in listing the current national debt in this book, because by the time your read it, the amount would have gone up.
It is enough to say that the U.S. government owes trillions of dollars. Now, as with any loan, the U.S. government must pay back the principal, plus interest. Where do they get the money? The answer to this question is simple, but profound: American citizens. When you pay your taxes each year, that money goes to pay back the money that your government borrowed. What is really sad about this is that all the money paid in the form of income taxes can barely pay the interest on the national debt. We don't even touch the principal. So the government uses various forms of taxes to attempt to pay back the money they owe.
When you combine this heavy tax burden with inflation, and the personal debt that many Americans carry, is it any wonder that so many of us have a negative net worth? Is it any wonder that we are strapped for cash? If the U.S. government becomes unable to pay back the money it owes, like any borrower, they would be in default. The Federal Reserve can then "foreclose" on the United States.
The implications of this are scary, to say the least. Some of you may read this and wonder what references I have to back up this information. My references come from established sources such as Paul Craig Roberts, Congressman Ron Paul, and Nobel Prize winning economist Joseph E. Stiglitz. They have all stated what I have essentially said in this book. If Americans don't take back control of their financial situation soon, the future is very dark, to say the least. If this doesn't scare you, you don't understand the full implications of the situation, which brings me to the subject of hyperinflation.
As the name implies, hyperinflation is a form of inflation, but it is much more extreme. Hyperinflation is defined as inflation that is "out of control." The paper currency will lose its value within a short period of time, and prices for everyday goods and services will shoot through the roof. In fact, they will become so expensive that many people won't be able to afford them. Hyperinflation is inflation which escalates rapidly within a short time span. While normal inflation takes place over the course of years, hyperinflation will occur in just a few months. As far as percentages go, the inflation rate during hyperinflation can be as high as 30 percent.
To give a basic example of hyperinflation, imagine if you went to the store to buy food, and you notice that a loaf of bread is $4 instead of the 78 cents that you normally pay. If you see this, your economy will be in a period of hyperinflation. As you can imagine, chaos will consume any country that has fell victim to this disaster. There will likely be street riots, political upheavals, and the economy will enter a massive depression. However, the big question is this: Can it happen in the United States? The answer to this question is an absolute "yes." Because the U.S. dollar is not backed by precious metals, the Fed could print so much money into circulation that the U.S. suddenly enters a stage of hyperinflation. While this is not probable, it is possible. While the average American may not be familiar with hyperinflation, just take a trip to Argentina or Yugoslavia, and talk to the people of these nations. Argentina suffered a massive banking crisis, one that left many middle class Argentines in poverty. Like the United States, the Argentine government borrowed lots of money, putting the country in debt for various projects.
Argentina owed money on an international scale, and like many governments and people who are in a cycle of debt, they had to keep borrowing and the public debt continued to grow through the 1990's. It soon became obvious that the country was not going to be able to pay back the debts. Despite this, the IMF continued loaning money to Argentina. To add fuel to the fire, elements of the Argentine banking industry were involved in money laundering. Both foreign and local investors begin to lose faith in the country by 2001, and they begin moving their money out of the country. Not soon after, many of the citizens begin to realize the threat, and they ran to the banks, attempting to withdraw their money. Since the peso was being devalued, they attempted to transfer it into dollars, and send it out of the country. This caused a domino affect which is called a bank run. Because the government and banks were threatened by this, they placed a freeze on all the bank accounts for one year, and the citizens could only take out small amounts. This left many Argentines in poverty. There were riots in the streets, and a state of emergency had to be declared. There were many families who had tens of thousands in pesos in the bank, but because they didn't convert their money fast enough, it was heavily devalued, and they were limited to the amount they were allowed to use. Argentina, once called one of the richest countries in South America, had become similar to many third world countries. We must learn from the lessons of other countries and governments. This is a cautionary tale meant to further illustrate the dangers of borrowing excessively. It starts at the individual level, extends to the business level and reaches the government level. The people of Argentina know what it means to have a devalued currency, but the average American is completely clueless.
All of this results from a failure to save money, and a tendency to borrow. Whether it is a government or individual citizen, borrowing money places the power in the hands of the banks. If you can control the banking system of a country, you can effectively control the people through debt. You have the power to break this cycle by eliminating bad debt from your life.
Using Debt To Control the Masses
Throughout history, nations and groups have always looked to control each other. In the past, it was very simple. If you didn't give in to the demands of a tribe, group, or nation, your country would be invaded, and you and your family would be slaughtered or physically enslaved. However, this method was not very effective over the long term, because the captives would always rise up against their captors and overthrow them. As thousands of years passed, the methods of control became more refined and sophisticated.
Various organizations begin to realize that religion could be used to control the masses. When religion was used to condition the masses, it was less obvious that they were being controlled and manipulated. Instead of a direct military invasion, a religious movement would be pushed, and the rules of this religion would be used to keep the masses in check. While these groups sometimes needed to use brute force to get their point across, it was not as direct as a full scale military invasion. However, in time, this method also proved inadequate, because the people would eventually point out inconsistencies that they found within the religion, and new religious movements or philosophies could circumvent its power. In addition to this, religious organizations were still quite visible, which further weakened their power as more people questioned them.
The third method which has been used to control populations is debt. While this method takes a long time to implement, in the end, it is the most effective of the three, because it is subtle, and the citizens do not realize that they are being controlled and manipulated. Out of war, religion, and debt, debt is the best way to control populations for a long period of time. It is this method that has been used to undermine the power of the American people. Like an anaconda, debt has slowly wrapped itself around many American people causing us to suffocate. There are a number of things you can do on a personal level to protect yourself.
First, follow the rules in this book. Make saving money a prominent aspect of your financial life. Avoid all forms of debt, no matter how good it seems. Second, once you begin saving your money, you must begin converting a portion into investment possibilities. This book does not deal with the specific types of investment opportunities because you must save money first and eradicate bad debt from your life. You must learn to control your spending and borrowing immediately. This is not a book about investing. It is not a book about making money. This is a book that shows you how to save money, and lots of it. Once you begin saving a large percentage of your income, you need to protect it against inflation through investment opportunities.
The United States has always been considered a beacon of freedom. The Internet, planes, and the atomic bomb were all invented in this nation. For nearly a century, the United States has pushed the limits of innovation, and it has been a world leader in technology and education. Unfortunately, this will not last if we continue going down the path that we're headed today. Our middle class is being destroyed, our jobs are being sent overseas, and illegal immigrants are flooding our borders. We have a government that owes trillions of dollars, and this tax burden is placed on the American people. Banks continue to benefit from this. When America goes to war, the U.S. military needs money, and they get it from the banks. When the CIA decides to overthrow the elected government of a foreign country, they need money and resources, and the banks provide it to them. When government laboratories invest in high end technologies, they need money for research. It is the banks that they turn to. When you think of all the money the banks make in terms of interest payments, it is mind boggling. Billions can be made in the blink of an eye. We must start at the individual level and achieve financial dependence by eliminating our debts and controlling our spending.