In Part One, I detailed what I researched in order to (try to) understand the current economic system in the United States. What I’ve come to realize is that the current system makes no sense – and can only be explained by either gross incompetence, a grand conspiracy – or some combination of both.
Beginning with the “recovery” after the 2008 financial collapse, and going into overdrive during the pandemic, the Fed has poured trillions (with ‘T’) of dollars – created out of thin air – into the economy by the use of low interest rates. That policy has potentially disastrous long-term results, that are only now beginning to appear – such as higher prices at the grocery store.
The consequences of pinning the entire economy to reliance on low Fed interest rates was explained in the 2016 book, The Only Game in Town by investment banker Mohammed El-Erian. He described the risk of reliance on artificially low Fed interest rates, writing “… the longer such a policy was in play, the greater the possibility that the costs and risks would start outweighing the benefits.”
Remember that whenever you hear a politician, or media talking head, blathering about the advantage to us all if the Fed will just lower interest rates to where they were. Especially now because, as Christopher Leonard explains, government imposed business shut-downs and flooding the economy with so-called ‘Covid relief payments’ during the pandemic aggravated those risks. Possibly irreversibly.
Right about now, some of you are no doubt asking what exactly is my point? Why should you bother to read any further? That’s a fair question, so I’ll try to explain with examples of what I’ve learned about how our current broken economy relates to all of us. I’ll begin with bank savings accounts.
If you feel like you can’t seem to save any money it’s because the system has been designed that way. The financial elites don’t get rich off of your savings – they get rich from you being in debt to them.
The whole point of fractional reserve banking, is that the more banks lend, the more they make exponentially compared to how much they hold “in reserve” to supposedly cover your savings deposit. They only need a little of your money in order to lend a LOT to others.
The money you put into a savings account is a bank ‘asset’ on their books, for which they pay you minimal interest, and then essentially lend that same asset out nine times – all simultaneously – at higher interest (it can actually be lent out 28 times if you understand the fractional reserve math).
The banks need you to borrow from them, rather than save, because you pay them interest for money you borrow – even if you have your money in their bank. They, in effect, loan you your own money, and charge you interest. So the banks are delighted if the only money you have is what you borrow from them, rather than what you deposit in savings.
The financial industry is designed to keep you in debt — and to get you to put whatever extra money you manage to save not into a savings account, but rather into a form from which the industry can make a profit. If you have a current savings account you know the interest you receive is laughably small – by design.
A typical bank savings account now pays 2% APR. Based on an account I’m familiar with that will pay 5 (five) cents interest on a $2500 (twenty-five hundred) dollar balance in a thirty-day period — which doesn’t even keep up with the rising prices of gas.
That pathetic rate of return on your savings encourages you not to save, but to seek a higher rate of return by “investing”. Instead of putting your hard-earned money into a savings account where it is safe (theoretically) and where you can get it on short notice (theoretically), you can invest in the stock market where (theoretically) you can earn more – and pay a brokerage fee to the financial industry for the privilege of investing your money with them.
It’s even better (for them) if you borrow money from them to invest. The low interest rates spawned by the Fed have encouraged people not only to invest their savings, but also to go into debt by taking equity loans on their homes – or using credit cards — to invest in the stock market with borrowed money.
So what’s wrong with that — you may be asking? Shouldn’t us commoners be able to cash in on the stock market just like the elites? Sure, we should, but that’s not what usually happens.
If you only invest your money, all the profits are yours. But if you borrow to invest, a big chunk of any profit will go to paying back what you borrowed with interest.
That’s if you make a profit. But you can also lose your investment in the stock market – as history has repeatedly demonstrated. If your stocks don’t succeed you’ve not only lost what you invested – but you still have to pay back (with interest) the money you borrowed to invest.
The financial industry loaned you the money to invest with them, that investment didn’t pan out, and now you have to pay the loan back to them. Explain to me the difference between that system, and a Mafia loan shark loaning you money to place a bet on a sports team with a bookie from the same Mafia family, and the team loses. You still gotta pay back the loan shark — with interest!
And how is betting in the stock market any better for you than applying your extra savings to pay down an existing debt (like, say, your mortgage or credit cards) and saving the interest you would owe on those debts? But that doesn’t benefit the lenders – which is why that industry, and their media mouthpieces, tell you to invest … INvest … INVEST!
But… wait…. there’s more ! The more you invest in the stock market, the more money there is floating around in the market to be scooped up by the big institutional investors. And, whereas you can lose your money in the market, the big financial institutions won’t suffer the same fate.
With their big money they can manipulate the market, putting your money at risk, by gambling on high-risk investments without any real potential downside for them. Even though they have much more money than you in the market, they don’t share the risk like you do. How can that be, you ask?
Because if the big boys look like they will lose their assess in the market, we the taxpayers will bail them out. They are ‘too big to fail’!
That lack of actual risk encourages market manipulation by big institutional traders which inevitably screws small investors.
Supposedly, the Dodd-Frank Act passed by Congress after the 2008 financial crash, and subsequent taxpayer bail outs of big investment firms (which so offended the public), prevents future bail-outs. At least that was a political selling point to get public support for the Act. But… au contraire!
Dodd-Frank was never designed to actually instill an responsibility, or discipline, into the financial industry. It merely misdirected how it got us taxpayers to foot the bill for their irresponsibility. The pandemic proved that.
Of the trillions (with a ‘T’) of dollars handed out by the federal government in ‘COVID relief’, comparatively little actually went to us commoners. The majority went to large corporations, including banks and other financial institutions, to help them weather the pandemic shutdown of the economy – and much of what went to corporations was used to pay interest on pre- pandemic loans.
And how did those loans come about? They had been encouraged under low interest rate policies adopted by … wait for it …. the Fed! So the Fed encouraged banks to lend money to businesses, putting the businesses in debt to the banks. Then when the economy went south, the federal government gave our tax dollars to the businesses so they could pay the interest on the loans to the banks.
According to Edward Griffin, that was exactly why the Fed was created.