Topic: Federal Reserve
How Government Money Works

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Using childish humor, vast oversimplification, and a little algebra to put some sense to the "Crisis"

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by The Original Jason
(libertarian)
Thursday, October 9, 2008

When a government borrows money into existence like ours does, it increases the amount of credit on the Federal Reserve's books. Its not money, but a note, like a car loan.

 Ok, no harm so far- The government has a nice new shiny "credit card" to toss on the pile.  The government then uses that credit card to buy stuff.

Stuff like post-its, and cars, and staplers, and GPS guided bombs for whatever projects they have going. Makes sense- lots of people use credit cards, right? Well I can't argue with the practice, but I have a problem with the method I would like to address.

My first issue is the fact that, while the government's spending is a large part of the economy, it allows the Fed to treat the aforementioned credit line as an account receivable, which in turn labels it as an asset, which can be loaned against to someone else after deducting the proper reserve margins- which can be asset-ized and lent against, and, and, and, ad infinitum.

 "HUH?!? A loan gives the Fed all it's lending power?" You ask.

 Yepper. There isn't anything but the say-so of the federal government behind even the pennies under your couch.  When the government passes a bill that screams past the budget (like last week's bailout), the Treasury just gets an extension of their credit line with the Fed. Neat huh?

That is exactly where my problem starts.

The Fed loans this cheesy money to big banks, which in turn make loans to companies that make the products we enjoy every day, and these companies pay people for their hours. By the time this money gets to the employees it has been dipped in, and subdivided, and skimmed so many times, that it maybe pays the bills- but maybe not.? Plus, the money people get paid comes in at a mostly constant rate- hopefully with a raise every year- while inflation (a result of the Reserve lending more money) makes that mostly constant paycheck worth less.

That means if I get $1000 weekly, over the course of a year at 5.37% (Aug '08 rate), that thousand will only pay for $949.04 worth of goods and services- i.e. food and daycare. Figure that over the course of say? five years.

1000 / (1.0537^5) = 769.87

Seven hundred and seventy dollars. That's it. That's what you're left with. Sucks, doesn't it?

"But what about Raises?" you say.

Ok, I'll bite. I personally believe a good raise is around 4% yearly. Not much chance of getting anything higher nowadays, so we stick 4% in the program.

(1000 x 1.04^5) / (1.0537^5) = 936.65

Better, but you're still losing value. Every loan the Fed gives out makes your money worth just a little bit less. The "Big Dudes" who do all the lending and sub-lending don't notice the inflation because they don't buy any real goods or services. They are service providers who rent out money at rates above inflation (My lender charges 11% for a credit line). Bankers always get paid more than they lose, its just good business.

Then to top it all off the government charges you taxes so they can pay the finance charges on their credit line with the Reserve! If that's not a racket I don't know what is.

This all leads one to suggest that you can never make money working for someone else- but that's a whole other rambling for another day.

When someone who "carries the big stick" (like Fannie-Mae and Freddie-Mac) fails to pay on their obligations for some reason, there are huge, gianormous, colossal problems for their creditors, because the lender can no longer use that particular credit line as an asset anymore (and quite frankly that's a pretty big asset! Ooo, horrible pun, I know. I couldn't help myself ;)~ ).

After something Epic like that, the lender has to scramble to pay their bills, which means they raise their prices, leading some borrowers to default, causing the lender to scramble harder, until they've scrambled themselves like breakfast eggs. This just keeps expanding and spreading until only the bankers that practice good policies- such as having more money on hand than they need to cover any failed assets- will survive.

"What if the government goes under?" you can't help but ask.

You might as well pull the bag over your head and kiss your butt bye-bye, 'cause we're all screwed.

Seriously.

No joke.

We're hosed.

If the government were to fail the Reserve would fail, and the big borrowers would fail, and the little borrowers would fail, and the citizens would fail. Without that first loan and promise, the money in your wallet would just be pretty multicolored cotton/silk/polyester/whatever rags, so go get a bunch and make yourself a nice hat. Maybe you can trade it for a loaf of bread? 

That, dear friends, is my big problem with how our money operates. Without all this funny money monkey business, we wouldn't have to worry about inflation, our retirement value, or paying bills, because with a sound, solid money system we can count on the cash value, and the cost of goods being predictable.

An ounce of gold in Ancient Rome would buy you a robe, a laurel, and a decent pair of sandals.

An ounce of gold today will buy you a suit, a hat, and a decent pair of shoes.

References:

http://inflationdata.com/inflation/Inflation_Rate/CurrentInflation.asp

[link edited for length]

©2008 The Original Jason, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Thursday, October 9, 2008
Last modified: Thursday, October 9, 2008

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