Fact Behind the Fiction
Let’s use me as an example.
Say I am living beyond my means. Spending more money than I am making. The only way to balance my budget is to borrow. Everybody knows that this is a recipe for disaster. Well maybe not everybody knows. Apparently our government doesn’t know. Anyway, back to my example. Short of money, I borrow. Except I am running out of people that will borrow to me, because with all my debt they are becoming concerned I won’t be able to pay them back.
I don’t have the discipline to cut my spending so I have to figure out a way to borrow more.
Let’s say I have a very good friend named Fred Reserve. I have done a lot for Fred in the past so I ask a favor of him. I ask him to pay off some of my debt. Except Fred doesn’t have any money. But Fred is a technological whiz and has an idea.
He comes up with a way to create virtual money in his checking account. He uses this new, virtual money to pay back my creditors. He is happy he could help me, my creditors are happy and life is good.
My creditors ask me why Fred paid off my debt. I tell them he is a good friend. They wonder, could it be a scam? So they check out Fred. Who is he, and where did he get his money? They discover that Fred just made this money out of nothing. He is broke and has nothing in his name. The virtual money he fabricated is not real.
Real money is only real if people believe it is real. It must be backed by faith in the creator of the money. As soon as my creditors realized Fred paid them with fake money and that I am still living beyond my means, they lose faith in Fred. And in me.
We were printing money.
My debtors get scared. My debt is worthless, my name is worthless and my money is worthless. I can’t borrow anymore to live beyond my means. I can’t even live within my means, as nobody accepts any of my money, thinking it might be that fake electronic crap.
Financially I am done.
In real life the Federal Reserve is doing this same thing, whereby they purchase treasury bonds, which the government sold to finance their deficit. Except the Federal Reserve is the government, so our government is lending money to itself. And the Federal Reserve is not using real money. They are using money they technically don’t have. Virtual money. This puts money into our banking system and increases the money supply. In theory this will provide more money for banks to lend and people to spend. Lend and spend. The American Way.
Lately the Federal Reserve has been reducing its debt purchases under a program called tapering, which gradually reduces the amount they are lending to the federal government. Assuming this is true, however, they are still holding this debt that the government owes them.
What happens when other creditors of the United States, like China and Japan, get scared because we have been creating too much of this fake money and pumping it into the economy?
China and Japan fear this fake money is not backed by anything and there is too much of it. This could cause rampant inflation and erode the purchasing power of the dollar. They don’t want the debt they hold to be paid with these same virtual funds. The U.S. debt becomes worthless, the dollar becomes worthless and the U.S. can’t borrow any more money. The U.S. can’t live beyond its means anymore because they can’t borrow money, and can’t even live within its means as the dollar has no value to purchase anything.
Financially the United States is done.
It all started with printing money, or as the Federal Reserve likes to call it: Quantitative Easing.
The fact behind the fiction in: The Reason.
2015 © QUENTIN BRENT