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A quick lesson about economics in America and the role of the Federal Reserve
Today’s world is plagued by economic difficulties. The economic growth erected in countries around the world has finally become stagnant. The rich are getting richer and the poor are getting poorer. In this time of difficulty, many have turned to politicians to help fix their problems. For this to work, everyone has to have a basic grasp of economics, including “Dummies”.
A recent economic trend that is still fresh in the minds of people across the world is the extremely high gas prices, nearing $4 a gallon in Colorado Springs, Colorado (my home town). Many people wished that the government would step in and set the price at a certain level. What many forgot is that governmental intervention has consequences. The bigger the intervention, then the consequence is bigger.
For the government to be able to set this price, oil companies would be operating at a loss. That means that they would be losing money. With this loss in money, the oil companies would either go bankrupt or turn to the government for compensation because the government directly caused this loss. The government would then have two choices: let the oil companies go bankrupt, destroying thousands of American jobs or give money to the oil companies so that thousands of jobs aren’t lost.
Money in the United States is completely controlled by the Federal Reserve. The Federal Reserve Act established the Federal Reserve in 1913. This agency used to collect gold and silver and then prints Federal Reserve Notes (United States Dollars) to represent the worth of the gold and silver.
When you receive a dollar bill you have received a piece of credit. Before 1933, you could trade this credit in for legal gold and silver tender, but President Franklin D. Roosevelt made it illegal for a citizen to possess gold and silver by executive order. The only gold and silver that citizens are allowed to possess are jewelry and fillings.
When you work in the United States, the government gives you a loan in the form of United States Dollars. This loan is what gives the government the right to tax. Taxes are one of the three methods governments use to fund projects. The other two are the printing of money and the borrowing of money.
As of 1971, the US has been off of the gold standard. This means that our dollars do not represent the amount of gold that the United States has. Instead, our dollar represents our ability to pay debts and our productivity. If American debts increase, then our dollar decreases. If American productivity decreases, then our dollar decreases.
Recently, through the Federal Reserve, America has been borrowing money from China. China has been buying something from the Federal Reserve called Treasury Bonds. This is basically a loan from China that they get massive interest on. If we can’t pay back the interest, it just adds to our debt. The debt is then shifted to become a burden on the taxpayers. If you think about it, a doomsday scenario could be when several countries work together to buy so many Treasury Bonds that they effectively control the US economy.
If you paid attention in your history classes throughout the years, you’ve no doubt learned about what happened to the Confederate economy during the Civil War. They had no gold or silver standard, and all they did was print money, and print money, and print money, and print money.
America’s current spending trends are leading ever closer to hyperinflation. A bank bailout estimated to reach $739 billion, $180 billion for an auto industry bailout, $819 billion for an economic stimulus package, when you add all of them up the price is vast. Instead of increasing taxes to pay for this, the government has been following the trend of printing more money to pay for this.
During the Bush presidency, he coupled tax breaks with increased spending. Spending in every aspect increased, not to mention the tremendous cost of an expensive war. Funding for this war obviously came from the printing of more money.
Printing more money lowers the worth of money. That makes it so that even with these bailouts, the money needed to keep the industry afloat won’t be enough. Eventually, people won’t be able to purchase anything without thousands of dollars.
The current trends show that inflation is growing worse and the worth of the dollar is decreasing. With this trend, you would think that people would conserve their money.
Wrong. More and more people are buying $100 pairs of jeans because of a label they have, despite the fact that they may be lower quality than a generic pair of jeans.
The housing bubble is a great example of over speculation that’s rampant in the United States. People with not enough money bought houses they couldn’t afford for prices that were hundreds of thousands above what they were worth. The credit ran out and the banks could no longer loan out more money to people who demanded money and had to demand its money back. A mass of foreclosures followed.
This isn’t as much of a problem if just one or two people do it. The problem is, millions of people are doing it. They are buying sub par products at premium prices because of a label. That isn’t the only type of conspicuous consumerism we see today.
The acquisition of jewelry is a lavish purchase meant to show income or wealth. It serves no useful purpose and only wastes money that could be better invested into capital for future profits or spent on products that get used. The fact that money is becoming worth less and can buy less food only makes the fact that people are wasting their money on jewelry even worse.
I bet you wonder what to do in your situation: spend or save. The truth is that both are necessary. When you save too much there’s no money going out to stablize the economy. When you spend too much situations similar to the housing bubble happen. The answer is to do both, but in moderation. Most things in life are perfect with moderation.