Economies, inflation, and banking.

I've been watching for a while, with great interest, the fervor of the Congress to pass out the money earned by our putative future generations. This is not in the interest of our nation, nor the interest of the future, however. When credit becomes available, we as a people become dependent upon it.

Those that choose not to indulge in the use of credit are disadvantaged economically compared to those that do, at least in the short term. But what happens in the long term? Depending on the nature of the lease, interest rates determine the repayment amount. An interest rate of ten percent, for instance, will double the total repayment in ten years. Twenty five percent, such as with some credit cards, increases two and a half times as fast. If the interest rate is compounded, i.e. interest is charged upon the total after interest is placed, it can increase substantially faster.

In the short term view, credit can be a good thing, it allows for flexibility in emergencies, and more consumer purchasing power. But what is the price of credit?

Credit's price is the future repayment, and any other terms and conditions tacked upon your contract. Governments have engaged in the credit game for centuries, from the banks in England (including the Bank of England and the World Bank) to today. The International Monetary Fund provides loans, and exchanges currencies, among other things.

The banks use a fractional reserve system, and fiat currency printed upon that putative reserve. They provide loans to outside sources, repaid at a suitable rate of interest determined by the bank, then use the interest generated (on paper or in reality) to determine their reserve component.

But what happens if the bank sets up credit? Where does the money come from? For a bank to receive a loan from the Federal reserve, the fractional reserve rate usually hovers around 10% actual assets to paper money. These assets used to be viewable on the Federal Reserve site, but have not been updated for several years. To increase the monetary pool, the Federal reserve 'sells' loans to outside agencies. I.e. they create a loan to Unidistopia (fictional) for x amount. We'll call this six hundred million dollars. The government of Unidistopia agrees to pay back that loan at a specific rate in the future. Should the government fail to pay back said loan, what is the result? That six hundred million dollar loan goes defunct, thus collapsing any currency that it backs by the total value of the loan. At the end of the loan period, the Reserve, in theory, is paid back in full.

Foreign nations, however, are not subject to U.S. laws. There is no way to force them to repay anything, and Unidistopia discovers this. They refuse to repay the loan, after garnering the benefits of it. What can the Federal Reserve do? Not much, they either have to write the loan off, or find someone to pay it. Unfortunately, in some cases, they've chosen to 'pay' the loan on paper to back their currency, by giving Unidistopia a certain amount of money that is immediately on paper paid back into the system, thus 'floating' the loan to allow continuation of the value of the backed currency.

The payment, however is not really there. The payment in fact is made up out of whole cloth with printed dollars. When sufficient amounts of this type of loan (originally made in gold) occur, the currency is debased and devalued. While there is an apparent 'growth' of wealth, the real growth is in the debt owed.

There is only one way to expand an economy in the long term, and that is to expand the available workforce. As more man-hours are available, more goods and services can be produced. The core of the economy must be raw goods and materials, however, or those that produce raw goods and materials have a 'seller's market'. I.e. they can set the price on the raw goods and manufactured goods according to their needs, rather than according to the demand, as demand is guaranteed under this scenario.

In a free market system, supply and demand ideally determine what is made, stockpiled, or sold. A manufacturer flooding the market with a device x can't get the overhead back with the market flooded with his product, due to the reduction of scarcity. I.e. when volume exceeds demand, prices drop, so manufacturers must drop their manufacturing volume. This is basic economics, as warehouses, inventory control, and transportation and manufacturing expenses eat portions of profit.

There is another aspect to the free market system however, the producers are also consumers. The manufacturing work force uses their monies to purchase raw goods and materials of their own, as well as completed manufactured items, food, etc.

Monetary supply alters this cycle. Gold is counted as a hedge against inflation, due to its intrinsic value due to scarcity. There is little gold mined at any point on the planet, and it cannot be easily or safely produced, which effectively fixes its value. It had an exchange rate with silver, as well as a value declared to be a 'talar' or Dollar, in troy silver ounces. Fiat currency, however, is not a fixed-value currency. Ostensibly, fiat currency has backing in that very gold, however, with the fractional reserve system, the true value of that certificate can be far less than the face value.

The problem comes in with monetary supply versus man-hours available to the economy. If any economy has more money per man-hour, the value of that money, however it is comprised, reduces. More 'money' reduces the scarcity of that very money, which also reduces its buying power. As more money comes into existence per man-hour available to the economy, prices of goods and services rise, as does the price of all foods, materials, and labor. As money is reduced per man-hour, the prices of food, materials, and labor drops, as the purchasing power of the existing money is higher.

By creating money to inject into the system, the banking system can affect that ratio of money to man-hours. If the money ratio is 1:1, or 1.00, the equivalent amount of 'money' at a ratio of 10:1 would be ten times (10x), or ten dollars per dollar at the 1:1 rate. If the money ratio is 1:10, a dime would buy the same as a dollar at the 1:1 rate, assuming all other influences being fixed.

All other influences, however, are not fixed. Innovation affects costs of manufacture, scarcity of raw materials, financial panics, and many other things affect the actual buying power of fiat currency. By basing that currency in the debt and loans to outside nations, it in effect attempts to reduce the influence of those fluctuations.

Credit operates in this market, as well, as a barrier against inflation. Inflationary cycles themselves assist credit, so long as the rates are fixed, but banks take a loss in inflationary credit cycles, due to the higher-valued dollar being repaid with devalued dollars. Conversely, in a deflationary cycle, credit amounts are repaid with a higher-value dollar but purchased with lower-value dollars.

For example, if you have a $10,000 loan that is purchased at the 1:1 rate, and the rate remains the same, you have no real change. If the ratio goes to 10:1, you can repay the note literally with dollars worth a dime at the earlier rate. If the ratio goes to 1:10, however (an extreme fluctuation) you are paying a dollar for every dime that you purchased.

What has occurred is we've given the ability to determine when the dollar inflation and deflation cycles will occur... to the federal reserve, a private banking practice that has only the trappings of federalism. It can determine the monetary redistribution rate (the 'prime rate' for loans) and thereby determine when economies are going to boom, and bust.

The reserve can make a profit, on paper or in hard currency, in either of these times as it is uniquely capable of both determining when a shift will occur, or hastening or delaying it.

It is in their interests, prior to purchasing in the deflationary cycle, to convert all loans into paper money, then waiting for the deflation to end. In an inflationary cycle, it is in their interest to take out interbank loans, and pay them off at the inflated currency. At this point, they are poised to use the newly 'created' currency due to the inflationary cycle or deflationary to exceed the purchasing power of other organizations, due to 'insider' knowledge of the changes in the prime rate and other motivators.

For instance, in the Bank of England, a small change was placed on the ratio of silver to gold. Say the world price of gold, in silver, was six ounces per ounce. The bank of England chose to gather a great deal of silver, then converted their price to 6.5 ounces of silver per ounce of gold. Engineering and profiteering individuals noticed this, and purchased silver, took it to France and other nations, and brought back gold, making a small profit (or a large one) with each transaction. Eventually, gold accrued to the Bank of England in larger and larger amounts, cornering effectively the world market on gold.

A scarcity of gold was produced, and plenty of silver in countries outside England. This created inflation in the silver market, and deflation in the gold market. By being poised to take advantage of this, the Bank of England could purchase the inflated silver back at literally pennies on the dollar, at the deflated (more buying power per ounce) gold price.

The fluctuations between boom time and panic are closely tied with prime rates, exchange rates between banks and interest rates tied to credit. In the 1770s, this was a prime weapon used against the colonists to keep them under control. Most people today forget that those colonists were often exported from Britain as penal colonies, in the beginning. They were considered felons, and riff-raff. To control them, specific goods and services were introduced (including tea, and other trade via the British East India corporation, rum, sugar, and molasses) to keep fueling the finances of the British empire and the Bank of England.

The British colonists began to recognize and resent the taxes placed upon their goods, but then the most insufferable taxes began... taxes not only upon the goods and services they purchased, but upon that which they owned, that which they made, and their own labor. Even this, however, was not enough to spark full rebellion, in spite of the Boston Tea Party.

The massacre at Rowes Wharf was not enough either. The introduction of the Hessians and the British Colonial guard wasn't enough. The British Colonial guard could write a warrant on the spot, and search and seize any item, household, property, or person, and retain them without a trial. It wasn't enough even that people were being taken overseas.

It was enough when the British Guard marched upon the armories of Lexington and Concorde. Those armories were not only for their defense against the Indians of the area, and criminals and vagabonds, but their only effective means of defense against the Crown itself.

On April 18, 1775, the British Army, under the control of General Gage, marched out of Boston toward Lexington and Concorde, to seize the armory of those rebelling against the taxation and false writs of warrant and attainder. Three men were dispatched from Boston, taking different routes under cover of night to attempt to warn the towns of the army that was coming.

Those men were: Paul Revere, William Dawes, and Samuel Prescott. There were countless other riders that night, but these are the names remembered by history.

Many of the men at the battle of Lexington turned and ran on the first volley, fired high by the British. One stood and reloaded his musket, one Jonas Parker. Before he could fire, he was shot dead.

Seventy men stood against the British on that field of battle. 52 fled, 10 were wounded, and eight died as heroes... to prevent the very things we see today. The British Army, flushed with the victory and determined that the American people were no match for their might, chose to march on Concorde.

At 2 am, Samuel Prescott rode into Concorde, having evaded the patrol that took Paul Revere captive. After numerous strategic withdrawals, the American Minutemen had brought the British to a bridge. They'd seen smoke coming from the nearby town, and they'd had enough. The british soldiers were backed across a bridge with a numerically superior American force, and started to take up the boards on the bridge to prevent following. After orders from the American Captain (John Buttrick) to leave the bridge intact, the British panicked and opened fire. Two more Americans fell dead, and the fire as per orders was returned, effectively.

The enemy were repeatedly re-engaged at Tewksbury, At Meriam's Corner, all over the map. The rebels had used surprise and cover to their advantage, in contrast to the British Military tradition of standing in the field of battle exposed in ranks.

I digress.. this is a history of banks and economics... but the very forces at work those days are at work today again. Banks and money funds, disarmament proposals, taxes, and other instruments of subjugation are once again in the fore.

To repeat the words of Patrick Henry on March 23, 1775:

It is in vain, sir, to extentuate the matter. Gentlemen may cry, Peace, Peace--but there is no peace. The war is actually begun! The next gale that sweeps from the north will bring to our ears the clash of resounding arms! Our brethren are already in the field! Why stand we here idle? What is it that gentlemen wish? What would they have? Is life so dear, or peace so sweet, as to be purchased at the price of chains and slavery? Forbid it, Almighty God! I know not what course others may take; but as for me, give me liberty or give me death!