The global economy continues to shudder under the impact of the U.S. financial crisis. Reuters reports that “From Iceland to Italy, officials scrambled to contain the fallout from the deepest financial crisis since the 1930s…. European banks have been hit hard by the fallout from a crisis which began in the United States when the housing market collapsed and bad mortgage debts multiplied.” Germany offered a blanket deposit guarantee to boost consumer confidence and help prevent a run on the banks. Italy revived talk of a bank bailout similar to what has been done in the U.S. As the market dropped this week in Europe, banks pumped more money and credit into the system.
Meanwhile, the New York Times reports that “American consumers are pulling back on their spending, all but guaranteeing that the economic situation will get worse before it gets better.”
One might think that saving and refraining from spending money one does not have would be only wise policy for individuals, and thus, for the overall economy. But a “strong” economy, under the Federal Reserve system, is measured by how much people are spending money they don’t have.
To produce “money”, central banks under the fractional reserve system simply conjur paper bills into existence and loan them out to banks. Those banks then are only required to have ten percent of depositor’s money on hand (or “in reserve”) at any given time. So with ten thousand dollars in reserves, a bank may loan out $100,000, including to other banks. Those banks may then repeat the cycle, creating more money, usually in the form of credit, out of nothing.
What’s more, private central banks like the Federal Reserve charge interest on loans made. When more U.S. currency is printed, it’s not usually thought of as a “loan”, but that’s essentially what it is. The U.S. government prints government bonds, which are “traded” for Federal Reserve Notes of the same total value. But this money is loaned out to the banks and then to consumers, an interest requirement is attached, payable not to the government, but to the central bank.
The principal of the loan equals the total amount of currency in circulation. What this means is that to pay off the total federal debt would require every dollar to be removed from circulation. Ergo, there would be no monetary notes left to pay the interest. The interest is paid in the form of borrowers paying back to the banks for something of real value for foreclosures on loans made by creating paper money out of thin air.
When people conserve by consuming less and saving more money, it removes those dollars from circulation. This means banks don’t have that money on deposit to to create even more money out of nothing, which is deemed bad for the economy. When consumer confidence is down (meaning people aren’t spending as much), banks lower interest rates to encourage more people to borrow. By loaning more, inflation occurs as more money is invented into circulation. This in turn results in a raise in the cost of consumer goods, translating into less buying power per dollar. The health economy is measured under the present financial system by the continuation of this cycle.
Naturally, this completely absurd system is totally unsustainable. The U.S. economy is beginning to see the early tremors of the Federal Reserve system nearing its theoretical limit.
No doubt, this is well recognized amongst the political and financial elite. The only question is how to replace the Federal Reserve system once it becomes clear that the illusory bubble of an economy it results in with another similar system designed to transfer real wealth from the masses to the relatively small number of financial elites.
One possible solution there have been some indications may be being considered would be the creation of a single new currency under a North American Union trade zone developed as an extension of NAFTA. The latest bailout bill was proposed by the banks themselves and are designed merely to keep the bubble afloat for a while longer rather than addressing the real root issues and causes of the present financial crisis.