Savers are Penalized; Debtors are Subsidized

The Federal Reserve is the most abhorrent organization I’ve come to know. If I told you that there exists an organization which can redistribute your wealth on a whim, wouldn’t you be angry? Guess what – there is.

To put it simply, if you, for example, work and save your money as all hard working Americans should do – your dollars will earn hypothetically speaking 5% in the bank. Every year, on all interest you earn, the government will stick its hands in your pocket and take its share on all “taxable income” including interest income. So if you’re in a 33% tax bracket, the government will collect 1.65% of that 5% interest. This leaves you with 3.35%. This 3.35% at least must equal the rate of inflation to maintain its relative value. Otherwise, the dollars you saved in the past will be worth less and less as time goes by. The Government reported the inflation rate last year to be 4.1% - which many claim is a bit on the conservative side. Energy prices alone have gone up 35% and that drives all underlying costs since transportation is a key component. Regardless, lets say for argument sake that this 4.1% inflation rate is correct. That means the dollars in your bank account will have lost value by -0.765% of their initial value. So if you save, you’ll lose money.

The Government essentially incentivizes people to continually spend the money they earn. If you take out loans, most of the time the interest can be deducted off your taxes (ex. Mortagages). So, debt is therefore subsidized by the Government. As an example, and this is a ROUGH calculation (actual calculations are based upon qualifying interest), if the interest rate on a loan is 5.5%, and your tax bracket is 33%, you can deduct 1.8% off that 5.5%, making your loans “actual” interest rate somewhere around 3.7%, which is incidentally below the rate of inflation. This means, essentially, its better to take out debt to pay for things cause it isn’t your money - your paying 3.7% interest on borrowed money whose present value is being deflated by 4.1% a year giving you a net gain of 0.4% in the value of your assets.

If the Government lowers the target rate, essentially you will earn less interest you have in the bank (it lags, but it will eventually catch up). Lower rates lower the cost of borrowing, which in turn increases the demand for loans. What you don’t know is that every time a loan is given, new money is created. The Federal Reserve requires that banks hold, 10% of total deposits in cash (called the “reserve requirement”). Therefore, banks collectively can issue up to 10x their deposit. When someone writes a check based on a loan (For ex, $100) to someone else, that someone else then deposits the money in a bank. The bank then takes the money can loan out 90% of it. Bank B loans $90 out. Bank C can loan $81, Bank D can loan $72.7, etc. Your head is probably spinning by now, but this is how it works. Up to $1000 can be created based on a $100 deposit. Therefore, in the “Stimulus” plan that’s being offered, if the Government issues $600 to every person, the effect on the nation’s money supply is cataclysmic. It begins with the Federal Reserve creating the money out of thin air – almost $150 Billion of new money in exchange for a Government Bond. From that $600 that goes to every taxpayer and whoever else they authorize it to, almost $6000 of new money is created to flood the system. As more money “sloshes” through the system prices rise. Therefore, $150 Billion equals almost $1.5 Trillion Dollars of new money sloshing through the system causing inflation and other price rises. THAT’S WHY THIS ECONOMIC STIMULUS PACKAGE IS A CURSE MORE THAN IT IS A BLESSING. The idea is that as money is loaned out, people buy more and more things. But what it does, essentially, is redistribute additional wealth to banks and financial institutions in the form of additional interest income. Generally, businesses take out these loans for additional investment and continually leveraging debt for profit. Poorer people who spent the money now find themselves in the same predicament they were in before. They can now either take out money to pay for basic things such as food, clothing etc. or have to cut back. Their salaries are for the most part the same or slightly higher. The temptation is that government continues to perpetuate the system giving people handouts and continuing the viscous cycle. It doesn’t work and it will eventually crash and that’s why we need a currency system that’s backed in Gold or Silver or some other tangible asset – it protects the value of your money that you worked hard for. Democrats are not the Poor people’s friend many people make them out to be. They love Government spending and handouts which causes this to occur. The Bush administration has done the same thing at the expense of the American people. People think handouts are good for them, No! It keeps you poor and further redistributes the wealth to upper echelons and financial institutions. That’s why I am against national healthcare plans – it will inject more money into the system causing skyrocketing costs. And Social Security payments won’t keep pace with the rates of inflation either.

I’d rather see lower tax rates that encourage additional business activity beyond banking institutions, lower government spending which brings stability to the money supply, and a sound money system which ensures a solid foundation for an economy to stand on.

Back to the Value of the Dollar

There’s two ways you can tell whether the Dollar is losing value – on a comparative basis when you compare it to the equivalent value of foreign currencies (the exchange rate), and to the cost of goods and services as measured by the Government’s reported Consumer Price Index (available at www.bls.gov).

This is a chart of the US-Euro Exchange Rate. The y-axis represents how many Euro cents is equivalent to a dollar. Where 0.83 Eurocents equaled a dollar 2 years ago, its now worth 0.68 Euro cents – a 20 percent drop. Keep in mind at one point 1.2 Euros equaled a Dollar in 2001. So we’re talking a significant year over year drop. If the trend continues, we’re really headed into serious turmoil.

And as the Federal Reserve cuts interest rates, it increases the supply of US Dollars on the market. The value of the dollar relative to foreign currencies fluctuates based primarily on two factors – supply and demand, and political uncertainty. Therefore, as the Federal Reserve essentially prints more and more money, the supply is increasing relative to world demand. In addition, as the US continues to wage war for whatever reason, the value will continue to decline as that represents political uncertainty. In addition, since the dollar is backed by the US Government, as the US Government continues to take out debt to finance the war and other entitlement expenditures, the value of the Dollar will continue to decline. Similar to the Stock Market, the stock of a company will decline as that company continues to take out debt with no way to pay it off in the future other than to take out additional debt.

Should I reiterate why I support Ron Paul? Its for the reasons above.