My Two Cents - "2011 To-Do List"

12/31/2010

Many people I’ve spoken with over the past 6 months or so have expressed extreme dissatisfaction with their individual and/or collective ability to affect change in government. Sure, there have been some small victories here and there, but by and large our biggest problems continue to rage on unabated. For quite some time I shared in their frustration, and still do, but have realized that sometimes the actions of the masses need to take place on a different level to change the bigger paradigms. To use some old adages, we shouldn’t throw stones from a glass house, and we should certainly tend to our own backyard before criticizing that of our neighbor. On this last day of 2010, let’s take a look at what we can do in our own financial lives to improve our situations. Let’s call it trickle-up responsibility.

Stop Accumulating Additional Debt

Obviously, this one seems like a no-brainer, but let’s hit it from a few unconventional angles. First of all, it is important to understand that debt is one of the biggest ways the banking system creates inflation. The money multiplier, aka fractional reserve ratio, determines how much banks actually need to keep in their coffers to meet withdrawal requests by depositors. The rest can be out in the system in the form of loans, speculative investments, and the like. Let’s use an example. You to go the bank and deposit $100. The bank can create roughly $1000 in loans off that $100. In that sense, the bank has created inflation by inventing money from your deposit. Perhaps one of the biggest misconceptions in this dawning age of awareness of the Federal Reserve and what it does is that the Fed is solely responsible for inflation. While the Fed does set the multiplier, the Fed itself does not create much of the inflation we experience. That is done in the banking system by creation of ~10X loans from deposits.

With this in mind, each time you take on additional debt, you are helping the banking system to create inflation, which erodes the purchasing power of the money you just borrowed plus all your other funds. This is why there has been such a big problem over the past two years and Bernanke et al are trying to scare the public about deflation. People weren’t borrowing enough to allow inflation to occur. Wonder of all wonders, we have actually undergone a period of deflation (contraction in M3), and the Fed, banks, and government just can’t have that. Why? Because they know that a fiat monetary system needs inflation like human beings need oxygen.

Who caused that period of deflation? The government and banking elite would have you believe that it was bad loans and falling home prices. WRONG. If you’d like proof of that, take a minute and read the My Two Cents from 10/10/2008. It was you – the American people - that did it by living responsibly for a time. You did it by foregoing on consumption and additional borrowing. You didn’t do it by having rallies, you didn’t do it by demonstrating, you didn’t do it by waving signs. You did it by making smart financial decisions at kitchen tables from sea to shining sea. That is the dirty secret those in charge of the banking system and the upper levels of government don’t want known.

This is another reason why the government has undertaken so much borrowing. It is not to stimulate the economy as we’ve already seen. Many of you have expressed frustration about the trillions spent on ‘stimulus’ with nearly nothing to show for it. The above facts are precisely the reason why this is the case. The government stepped in to save first the banking system, then the fiat money system itself by borrowing on your behalf. Many people have already caught on to this reality. Those are the priorities of the government. The financial system and the money system must be preserved because that is where actual political power is derived in the current paradigm. This is another reason why governments promote entitlement societies. They assist in preserving the fiat paradigm and at the same time gathering control over the citizenry.

The past two years of credit contraction and lack of additional accumulated debt by the American people have been a major thorn in the side of those who benefit from the fiat paradigm. This is why there has been a massive media and propaganda campaign to convince people that the economy is on the mend and that we should get out and spend money. It is why George Bush told the American people to go to Disney World, and it is why we continue to dump billions into continuing unemployment benefits rather than bringing jobs back home and finding ways to create sustainable employment for the unemployed. It is why banks continue to send pre-approved credit card applications to people who haven’t had jobs in 2 years. I personally know of at least two dozen situations where this is the case and I’m sure there are millions more out there.

Simply put, we’re analyzing the actions of the banks and government from a ‘good of the people’ perspective where they are acting from a ‘good of the fiat paradigm’ perspective. That is why nothing makes sense. Keep up the good work on eliminating debt accumulation; you’re doing a fantastic job!

Make Others Aware and Encourage Similar Action

On its face, the above heading may seem like the tripe that often comes out of futile movements, but as we’ve seen above, in the case of debt, what has happened has actually been working. People need to use every opportunity to make others around them aware of this reality. I understand that much of the contraction of debt accumulation has been forced on people by job loss and/or reduction in earnings. Economic realities often precipitate necessary actions and this is no exception. The key now is to continue the trend. And that will only happen if more individuals and families are recruited and encouraged to join the effort. And it costs nothing to join.

It is sad to think of the millions of Americans that have lived their entire adult lives with the burden of debt hanging like a millstone around their necks. It is even sadder when you begin to realize that much of it wasn’t necessary. I have a saying that I am quite sure someone else came up with, but it is very appropriate. It isn’t what you make, it is what you spend, and in this case what you borrow to spend. It has gotten us in trouble as individuals, as families, as counties, as states, and as a nation. While we might not be able to order Washington and Wall Street to represent us and dispense with this phony monetary paradigm, we can make it difficult if not impossible for them to continue it.

Obviously there are consequences for any course of action. Good ones and bad ones. In the case of debt, the positive consequences are freedom and peace of mind, not to mention saving all that money on interest payments. The negative consequences are that the Fed and USGovt will do their level best to pick up where you left off. Our government will borrow like it has never borrowed before and the Fed will buy more bonds. It might have to buy them all eventually. And so it will proceed until the fiat paradigm ends. It will end. It always has and always will. It is one of the immutable laws of economics given to us by God. As in all prior historical examples, it will not end well. There will be turbulence and dark times. That also is the way of things. Radical change in societies and paradigms never happens quietly. These transitions tend to follow another famous adage that those who play with fire tend to eventually get burned.

There is good news though. While all of this flux continues to transpire, you can do whatever is within your means to positively impact your situation in this regard. This much I will tell you: not only will it feel good and put more money in your pocket, you’ll sleep better at night as a result of it. Please accept my best wishes for a Happy New Year and may you be blessed in your efforts to become debt-free.

Graham Mehl is a pseudonym. He is not an ‘insider’. He is required to use a pseudonym by the policies of his firm when releasing written work for public consumption. Although not an insider, he is astonishingly bright, having received an MBA with highest honors from the Wharton Business School at the University of Pennsylvania. He has also worked as an analyst for hedge funds and one G7 level central bank.

Andy Sutton is a research and freelance Economist. He received international honors for his work in economics at the graduate level and currently teaches high school business. Among his current research work is identifying the line in the sand where economies crumble due to extraneous debt through the use of economic modelling. His focus is also educating young people about the science of Economics using an evidence-based approach.