14 Page Essay Accurately Depicting and Summarizing Economic Collapse

[Irving]

I wrote this in the past few days to give to family, friends and anyone who wants a precise summary of what is happening to the economy, what the fundamental flaws of it are and where it is heading. I thought I would post it here as well. Feel free to share and spread wide if you think that it is good.


The Reality Of America's Economy And What It Means For The Near Future.
James I Greene


We live a mysterious existence together on the 3rd rock from the most local fiery ball of light and energy. Our solar system, within our galaxy, hurdles through seemingly infinite space as it revolves around an unknown possible center point of our universe. How incredible. What is going on here?

It is a mistake to think that those who came before you have everything about our reality figured out. It is an even bigger mistake to assume that what has been figured out and agreed upon by a majority is accurate and unquestionable. Conventional knowledge is oftentimes the pure result of group think based upon previous error. A sane person grounded in truth is therefore often regarded as the insane in a world largely guided in error.

The cutting edge is always ahead of the mainstream. The cutting edge is also always ridiculed by the mainstream for many years before finally receiving acceptance and recognition. This is typically because an entire paradigm of jobs, books, school curriculum, reputations and ways of life are entirely dependent upon the current mainstream paradigm which has been many years in the making. So it becomes clear why a system based upon fallacy can remain intact for such a long time even after a more accurate, truthful and efficient way has been devised.

One of such areas is economics.

The United States represents less than five percent of the world's population and consumes more than 25 percent of the world's resources while running a national debt of almost 11 trillion dollars. At the same time about half of the world's population lives on less than two dollars a day. Why is this so? Can the lifestyle that Americans have become accustomed to during the past 25 or so years carry on indefinitely in the globalizing world? The answer is no, it can't, and because of poor governmental intervention as well as a host of other factors, the falling out of the American economy will be much sooner and much more drastic than most currently believe. If it wasn't for governmental interference in the free-market, the unwise Federal Reserve manipulation of interest rates on loans, rampant printing of money out of thin air, and attempted control over what the Fed's chairmen see as an inevitable "business cycle", the changes to America's way of life would be much more gradual. However, since there has been much manipulation over the years to prop the dying system up, the crash is going to be very sudden and drastic. The trend as of lately has been to resist recession at the cost of creating an even worse recession further down the road.

The American economy is currently so far down the path of recession resistance that a very long and hard recession is completely inevitable and our leaders are currently determined to try and solve the problem of having too much credit in the system by creating more credit. This is evident by the passing of the bailouts (more money created out of thin air) and lowering of Federal Reserve interest rates (trying to get more people to want to take more loans). These choices are very unwise because they are debasing our currency (making all individual dollars worth less) and it is propping up the dying system in order to continue letting people overconsume and live beyond their means with credit while our country goes farther and farther into debt. The incredibly poor central planning and choices of our mis-leaders is currently insuring the demise of America. I will briefly explain why and how this is all happening in this article.

The changes that will take place in our society and economy will be akin to the sudden breaking off of a tree branch once a certain amount of heavy snow has accumulated on its surface. The government's solution has been to foolishly try to keep coasting on the high of an economic boom and has essentially entailed adding more and more snow onto the weakened branch of the tree. The snow on the tree branch represents consumer goods, houses, cars, plasma TVs, ect, and easy credit printed out of thin air that is based upon foreign debt while the tree branch is the foundation of the countries' economy. The Federal Reserve and unlearned politicians are going to do what no foreign power ever could have done. They will bring the U.S. economy to its knees, as sacrifice and underconsumption will ultimately have to define the U.S. economy for generations to come because current generations have squandered their wealth and utterly wrecked their economy through overconsumption and extreme overuse of loaned money while not generating enough wealth or produced goods to offset such conspicuous consumption.

To most modern economists, we are now living in a new era where Americans can consume and borrow indefinitely while the rest of the world saves and produces in their stead. The truth is that this current era will fade as quickly as it appeared. It is unfortunate to have to say that past glory tends to get in the way of accepting present realities as most economists still hold notions of America's economic strength. It is simply foolish to think that the present economic situation can continue without profound change and it is amazing that it has gone on for as long as it has without breaking. But this has not come out of the blue, Austrian economists are a group of thinkers who have been predicting and warning about everything that the American economy is going through for years and years and yet Americans have not listened to them.

The reason for the coming economic collapse is that the fundamental foundation of the American economy is unsound in a shockingly simple way. America has been slowly transformed from a society that saved, produced and exported goods around the world, into a society that has run up record national and person debt, borrows money from abroad and excessively consumes imported goods from the same countries that we borrow money from to buy those goods. Saving and producing have largely ceased while borrowing and consuming have largely increased. To consume, you have to either be productive or borrow, and you can only borrow so much and for so long.

An enormous part of the problem that has kept the blinders over the eyes of most economists is that conspicuous consumption has been confused with legitimate wealth creation. Figures, such as the impressive Gross Domestic Product (GDP), are pointed to as a sign of our prosperous economy but yet our GDP is dominated by over 70 percent consumption. GDP is defined as the total market value of all final goods and services produced within the country in a years time. Every time someone is diagnosed with cancer the GDP goes up and every time a hurricane destroys a town the GDP goes up. These examples illustrate how using a GDP to measure economic progress is flawed, especially when our GDP is overly dominated by consumption of foreign goods with very little domestic production. The GDP is not a measure of how much wealth we have created but rather an indication of how much we have destroyed and consumed. This erroneous way of calculating the success of an economy is a typical symptom of only being concerned with numbers on paper but never checking out the realities of the real world situation.

America was at one time the worlds largest creditor nation and is now the worlds largest debtor nation. Foreign countries, who produce the majority of goods that Americans buy and who loan Americans money to buy those imported goods, are eventually going to smarten up and cut America off when they fully realize that America does not have the ability to repay the trillions of dollars that are owed. America has no way of repaying this debt because it does not produce its own sustainable wealth to make a large enough domestic profit to even prevent the progress of our getting-bigger-by-the-day national debt; let alone repay its loaners. So, essentially, if foreign countries are exporting their goods to America as well as loaning their money to America so that Americans can purchase those goods: foreign countries are virtually giving these products away as the country has no means to repay.

America has not been living within its means or culling its national debt in large part because because transnational corporations have moved the majority of their production facilities outside of America and overseas where labor is cheaper and with less regulation. In the process, good paying middle class American production jobs have been largely replaced by lower paying jobs in the service sector that sell and deal with the products that outsourced production facilities import into the states. So, as our manufacturing base shrank, a service economy expanded in its place. This new service economy has become a gigantic monster because it is based almost solely on consumption and the majority of the workers who were previously working in production are now working in consumption related service jobs. So, there is a great lack of balance and consuming is greatly encouraged to keep our bubble intact. Since America no longer produces a significant amount of wealth, it goes further into debt every year in order to be a land of importers and consumers rather than of exporters and producers. A balance somewhere in between the two would be a healthy range for a country to be. It is really quite common sense to realize that America's superior standard of living is something that simply will not last for very much longer because it has been based upon debt and borrowing rather than saving and production. Consumption related jobs extremely outweigh production while consumers have more or less been conditioned to shop until they drop. Governmental policy has been preventing the natural changes that should be taking place in a naturally globalizing world to counter the unusual setup of America's economy. Their policies are going to ultimately lead to the imminent collapse of the American dollar as our economy and currency become incredibly out of sync with the rest of the world. America sure was the richest and most productive country in the world at one time but has fallen asleep at the wheel and been distracted by shiny things based upon debt. Many are still stuck dreaming about the good old days as they even encourage more of the status quo. There is good reason why the American system is failing.

The mainstream of economic thinking holds that a country like China will continue to finance the U.S.' current deficit indefinitely because American consumption is vital to the survival of the Chinese export-driven economy. I believe that the reality is quite to the contrary as sociological and economic evolution will have it otherwise. As the dollar is losing significant value in comparison to the yuan, China will redirect their vast resources to raising their own standards of living rather than propping up the living standards of Americans. Most of the Chinese ride bicycles and have vastly different lifestyles than Americans. When they fully wake up to the fact that the United States can't pay, they'll stop financing our debt and become their own consumers. Lacking the savings and production capacity for America to support itself, its economy will collapse and take many years of hardship to eventually rebuild. When foreign country creditors finally cut America off, it is going to dramatically increase their standards of living because they will no longer have America leaching off of their wealth and they will be able to focus their resources and wealth inwards rather than export their goods and lend their money so that American's can live like spoiled kings on debt. It will essentially be like voting the weakest link off of the island. America sure looks very impressive on the outside, but it is a house of cards that is just waiting for collapse.

It is this unbalanced trend of borrowing and consumption rather than savings and production that has paved the way for America to have a trade deficit of around $800 billion annually and a national debt of around $11 trillion. This trade deficit simply means that far more goods are being imported into America by foreign countries than are being exported abroad by America. Enormous cargo boats frequently come to American shores full of goods and leave with nothing as they head back to their country of origin. Efficient economies export what they produce and import what they don't produce, so under ideal conditions, trade accounts overall should be close to a balance. Yet we continue to spend like drunken sailors on imports from foreign countries that do save and produce, in the process building massive trade deficits that we finance with money borrowed from our trading partners, money we can't repay because of huge budget deficits, mounting national debt, and no significant production to generate internal wealth. What this all means is that the prosperity of the American consumer lifestyle of the past 25 years or so has been based upon debt and is a vast illusory bubble which will one day, sooner than later, pop. The looming dollar crisis cannot be prevented, only delayed, and only at the cost of exacerbating the collapse. Much of America's apparent wealth is sadly only there because of debt and overconsumption. It is an illusion. There are billions and billions of dollars worth of consumer goods, houses, cars and so forth that foreigners essentially own. Foreigners own about 4 trillion dollars more of America than American's own of them. Think about it, on an individual level, who do you know who is not in debt?

This coming rejection of American dollars from abroad will also likely create hyperinflation within America as billions of accumulated and inflated dollars from overseas are flooded back into the American marketplace as they are used there by foreign countries. Much of our apparent wealth will disappear and an overabundance of dollars will be left in their place. Essentially there will be countries, like China, who will be buying back all of the goods that have accumulated in America which cannot be paid for and the overconsuming lifestyle based on illusion and debt will come to an end. As the American dollar inflates into uselessness, and it certainly will because of incredibly flawed current policy aimed at "saving" the current economy, it will be very cheap for others around the world to engage in the American marketplace and buy the goods that have accumulated there.

Hyperinflation is a situation where a sudden surge of credit is unleashed into a marketplace, debasing the current currency and forcing prices of goods and commodities to skyrocket. However, raising prices are really an illusion because it is actually the value of the dollar which is going down. Adding more currency into a system at a disproportionate rate than the increase in goods and/or services always leads to inflation and means that individual dollars are worth less because they are more abundant in the system without additional places to spend them. Modern economists define inflation as too many dollars pursuing too few goods, which is just a nice way of saying that the purchasing power of the dollar has decreased and prices were forced to go up.

A very important factor in all of this is the Bretton Woods Agreement of 1944. Following World War II, this agreement made the American dollar the world's reserve currency. This status is what has ultimately shielded the United States from the consequences of persistent and growing trade imbalances. The Bretton Woods accords made the U.S. dollar the currency used by other governments and institutions to settle their foreign exchange accounts and to transact trade in certain vital commodities, such as gold and oil. This agreement was originally made because of America's unequaled industrial might, its status as the world's leading exporter of manufactured goods and that at the time it was the greatest creditor as well as the fact that, at the time, its currency was fully backed by, and redeemable in, a fixed amount of gold. None of these factors exist today. This agreement has played a large role in allowing the illusory American bubble economy to exist and it is the breaking of this agreement that will play a large role in popping that bubble.

It is amazing that the American dollar has remained the world's reserve currency for as long as it has. Bureaucratic central bankers around the world have allowed the dollar to remain while America's deficit reaches dangerous levels. There is, however, speculation that reserve currency status could be transferred to the Euro or a combination of foreign currencies. Considering the direction that America is headed in, the dollars status as reserve currency cannot last indefinitely. When it does end, all of those surplus dollars from around the world will come home to roost, creating hyperinflation domestically.

Keep in mind that the gold standard once backed the U.S. dollar as the worlds reserve currency. The flaw of leaving a commodity standard that backs a currency, such as gold, has been inflation. Most of the world now uses what is called a fiat currency. A fiat currency is a currency that has no intrinsic value other than the numerical value that a government prints on its face. The problem with this is that governments (actually the private central banks) always end up printing too much money and lending too much credit and inflation is created. Fiat currencies do not stand the test of time that a commodity such as gold will. Gold and silver have retained their value for thousands of years. If someone has a 25 cent quarter from the 1960's that was made from 90% silver, you could buy a gallon of gasoline with it at that time. Today, if you still have one of those quarters and you melt down the silver and cash it in for federal reserve notes, you would receive about $3.12 and you can still almost buy a gallon of gasoline! The historic vulnerability of oil prices to political tensions in the Middle East makes it easy for the government to blame recent spikes in crude oil on such events, which is unfortunate because recent trends are overwhelmingly the result of inflation.

It is important to understand what the Federal Reserve is and what it is not. The Federal Reserve is not a government agency, despite what many falsely believe. The Federal Reserve was created in 1913 by the Congress of the United States and it is owned by national banks who have come together to form a banking cartel. This is an incredibly large and interesting topic, but is not really the focus of this article. However, a general understanding of the extremely questionable nature of this institution is necessary. I usually point out the two following topics regarding the American Federal Reserve system.

1. What country in its right mind would charge itself interest on its own money when it could create the money itself interest-free? The Constitution clearly states that only congress has the authority to coin money. They have outsourced that job to the private Fed corporation. The fed charges U.S. taxpayers interest on the entire 11 trillion dollar national debt. Does this strike you as strange? Why doesn't congress simply have something very similar to the fed that does not charge interest? (I think you will find that the answer to this question leads you very far down the rabbit hole of that dreaded word "conspiracy".)

2. Where is the money EVER going to come from to pay the interest on our national debt and/or all private loans? There is simply never enough money ever in circulation to repay principle plus interest. The entire Fed created money pool that is in circulation is substantially smaller than the final principle plus interest which must theoretically be paid back to the Fed. This literally means that our national debt can never be repaid. It is not possible. Let's look at a very overly simple example to prove my point: If a central bank loans out 1 dollar at 10% interest - and this is the only loan that it ever makes - how will you ever repay the 1 dollar at 10% interest? Where would the money come from to pay that 10%? It cannot come from anywhere, and you are permanently in debt.

Our country's population, and most other countries around the world as well, are enslaved by the world bank and central banks through debt which can never be fully repaid because of our inherently faulty fractional reserve banking and fiat systems that charge interest for loans made to governments and national banks. Because of inflation, the middle class is always shrinking as their wealth is chiseled away by the banks and because there is never enough money in circulation to repay principle plus interest there is always, be design of the banking system, a shifting poor underclass who are perpetually going broke and have their homes and possessions repossessed. It is an extremely faulty system which, over time, gives rise to a small class of extremely wealthy individuals and a large class of extremely poor individuals.

Fractional Reserve banking in and of itself, in addition to government "bailouts" or "stimulus packages" of money printed out of thin air, also gives rise to inflation. Fractional Reserve banking allows banks to only have to keep a small amount of their deposits on hand while they can loan the rest to customers. Banks typically have to have around 10% of their money on hold while the rest can be loaned. Let's say that a customer makes a bank deposit of $1000. The bank can now loan $900 of the original $1000 to a new customer. That $900 dollar loan will eventually end up in a bank somewhere (it doesn't matter where because its the overall money pool we are concerned with here). Now, if both customers came to get their $1000 and $900 deposits, they would not be able to because only $1000 actually exists. Essentially $900 has been created out of thin air. If this happened on a wide scale it would be called a "run on the bank". The process continues on to create even more money out of thin air as the new $900 will become a loan of $810 and on and on. A chain reaction of inflation is created through fractional reserve banking as money expands far faster than actual goods, services and population.

So, you see, by inflation, it is not prices that are really going up very much, it has been the value of the dollar consistently going down since America left the gold standard. Inflation is a very large problem as it builds through the decades and becomes further and further debased from the original commodity backing. It is largely because of years and years of accumulating amounts of inflation that families have to work longer hours just to make a living.

The fact of the matter is that foreign countries are simply not going to deal with a reserve currency dollar that has been so incredibly far debased through inflation. The Wal-Street bailouts are making this problem incredibly worse. Ben Bernake, announcing today (oct 7th), that interest rates will be lowered to jump start the economy will make this far worse. All fiat currencies around the world are being debased, but not nearly at the rate that the American dollar is. The U.S. simply will not be allowed to use its increasingly worthless paper fiat money around the world for very much longer.

Inflation has always been a problem and has been a very large problem as of lately as the Federal Reserve is injecting more credit into the system to try to counter the failing economy. The recent Wal-Street bank bailouts essentially entail the Federal Reserve injecting more credit, out of thin air, into the bankrupt banks because the bank's loan customers have been unable to pay. This is obviously completely unconstitutional and it steals from individuals because the rampant printing and injecting of money into the system debases citizen's personal savings and wealth because there is now more money in circulation; i.e. inflation. These bailouts are incredibly foolish and the claims that they will help save the failing economy are incredibly short sighted. The bailouts are actually guaranteeing the collapse of the US dollar. It is really bizarre, its almost as if those in charge are following a manual on how to destroy an economy.

American's are addicted to easy credit and consumption and this has been encouraged by our big government and the Federal Reserve's irresponsibly low interest rates in the early 2000s. The dollar lost 24 percent of its value against other currencies between 2002 and 2004 alone as a result of government policy of inflation. The declining value of the American dollar is a direct result of declining production, inadequate savings, reckless consumption, soaring household debt, ballooning federal budget deficits, and an overly accommodating Federal Reserve that works upon the principles of continuously pumping more artificial credit into the system to keep it from crashing which, of course, only makes that inevitable day of crash much worse. And, as I mentioned, this artificial credit also robs individuals of their dollars purchasing power, this is referred to as the "inflation tax". This inflation tax is a largely invisible tax that robs money holders of their wealth while it looks like nothing is happening because the denominations of money have stayed the same while the purchasing power has declined and prices have risen. The Federal Reserve is now trapped between inflation and extreme recession/depression and it's too late to stop the consequences of either. Our leaders have led us out over a cliff and our propulsion is just about out of steam before we begin our long descent back to reality. Essentially the government and Federal Reserve have two choices. 1 - Stop printing money to inject into the system for the purpose of artificially keeping the failing overconsumption society going and face an extreme recession now. 2 - Keep injecting more money into the failing system (thus debasing the currency and likely to eventually create hyperinflation) to keep on partying and overconsuming for a bit longer and then face an even more extreme depression a bit further down the road which will last many many years.

The current bailouts are comparable to another syringe load of heroin for a drug addict: it will help the economy feel better for a short while but the inevitable recession will be much worse in the end. As the two choices above illustrate, up until the point of the acceptance of the $700 billion dollar bailout, the unspoken question was essentially this: do we want a really bad year long recession or do we want to postpone that recession by passing the bailout and then have several years of an economic depression slightly farther down the road. The choice made is now history. However, America is likely to have many more bailouts proposed in the very near future to try to "save our economy" because I guarantee that the first one will fail. These future bailouts must be protested in order to stop the inevitable recession/depression from being far worse. The fatal flaw that is bringing our economy down is that any attempt to save and under consume, which would surely bring about the badly needed recession, is resisted by government policy, the sole purpose of which has ignorantly been to postpone the inevitable day of reckoning. Economic recessions are actually something to be embraced and ridden through by letting the free market act for itself rather than to try to keep the economic high point rolling high.

The single overarching reason that we are in this current financial crisis is because of an excess of artificially created credit at the hands of the Federal Reserve System. The government's proposed solution is to continually inject more artificial credit into the banks through the Federal Reserve system. It is more of the same. More of the artificial credit that got us into this mess. That is all that the government can do, all they have is the printing press to print more money. They are like a child poking and irritating at a wound and making it far worse. They are either liars in their assertions that this will help, or they are completely incompetent to be running anything. Either way, they are going to destroy the dollar and devastate the American country. The governments method is in all seriousness like trying to put out a fire with gasoline. It is literally that stupid.

America's economy has moved in between periods of booms and busts for a very long time. They are often viewed as a part of a natural business cycles, but in reality the "business cycle" is totally a consequence of Federal Reserve central planning. The Federal Reserve sees its role as trying to tame, speed up, sooth, or slow down the economy by adjusting interesting levels and the amount of credit in the system. The Fed and its actions are completely unneeded in a free market and actually make the market incredibly hard to engage in for small business and is what causes malinvestments, such as what happened with the recent "housing bubble". As explained later, it is the Fed's actions which actually create the very business cycle that they are trying to tame and control. It is always too much control that brings us down. Too much tampering with something that should just be left alone and free is a terrible flaw. This "business cycle" involves inflationary periods of economic stimulation that are then followed by a typical equal period of economic recession. These are called booms and busts, or bull markets and bear markets. The subsequent recessions that follow a boom are how the market stabilizes itself and grows after an economic boom. However, and as discussed further below, the booms are actually a cause of the Fed by trying to control the bust and then once they have tried to control the bust they have created a later boom. It is a cycle of free market tampering that started many decades ago. It is, however, this faulty method of trying to sooth and control the market that we must go by here to explore what is happening.

The history of our current economic problem is many years in the making but a good place to pick it up is in the early 2000s after the bursting of the technology "bubble". After this happened America should have had an economic recession. However, Alan Greenspan kept Federal Reserve interest rates very abnormally low during this time that did not allow the recession to take place. Instead, along with socialistic governmental programs that required banks to give loans to riskier customers, consumers were greatly encouraged to engage in the housing market. Essentially, inflation was being created in the guise of a healthy housing market as vast numbers of people bought houses either to live in or to "flip" or whatever. These people felt that they had gotten great deals on houses and felt that their homes could now be their savings and so many of them engaged heavily in consumption elsewhere as well as purchasing a house with a very low interest rate. However, as we have now seen, it was all based on illusion and inflation. This has been called the "housing bubble".

Current Fed Chairman "Helicopter" Ben Bernake has continued the same poor policy choices that has led to the inflation the housing bubble that are currently destroying the American and world economies. The nickname "helicopter" comes from when the newly appointed Bernake used the metaphor of cash dropping from a helicopter to illustrate the ease with which the economy could be invigorated through government monetary actions. This illustrates the insanity of the people in charge of a monetary system who think that injections of more credit can actually properly propel an economy. What they should actually be doing is nothing at all! America should not even have a Federal Reserve and the free market should be left alone. The syringe load of drugs for a drug addict is always a great analogy to show how misguided simply giving more money to failing banks is in order to propel the economy. It feels good for a bit, but the crash is that much worse.

The reason why these banks are failing is because this massive surge of people, who get caught up in the housing bubble, borrowed trillions of dollars which they now cannot repay to the banks from which they borrowed from. Henceforth these banks are now going broke. However, much of that housing related demand was simply a function of centrally planned low interest rates, lax lending standards to risky customers, and speculation. This has happened amongst the misguided and foolish counteractive measures taken by the government along with former Fed Chairman Alan Greenspan and current chairman Ben Bernake to prevent a natural recession from taking place. Think of a recession as a period of sobering up after a long night of drinking, the centrally planned policies have been to simply keep on drinking into the wee hours of the morning as the sun is coming up in order avoid the hangover. And that is all they can do. Again, all they have is the printing press to create more money. All they have is more beer and drugs to continually inject into the failing overconsuming system to keep the entire thing together. Their policies are going to unleash chaos within America when the system finally runs out of steam in the very near future.

One of the reasons why the housing bubble collapse is so destructive (and is going to be much more so in the days to come) to the overall economy is because approximately 43 percent of private sector jobs between 2001 and 2005 were hosing related. Not to mention furniture, landscaping, appliances, municipal governments, and nearly everything else depend in one way or another on real estate. The amount of consumption related to home ownership is almost without limit. So, the popping of this bubble is acting as a domino effect throughout society. The government's policies are akin to trying to reinflate ballon that is full of holes. It is futile.

The paragraph is quoted from Peter Schiff predicting, back in 2006, what would happen with this housing bubble:

"Ironically, the worse-case, and most likely, scenario would not be a bust proportionate to the boom. That would be devastating, but natural and ultimately salutary. The worst case would be politically inspired re-inflation aimed at preventing a crash landing. That would mean winding up Helicopter Ben Bernanke's money printer to keep nominal home prices artificially high." Schiff was right on the money with his prediction, as usually.

Government and Federal Reserve policies have been continuous credit expansion with inflation to desperately try to keep the American economy riding on the high crest of a wave before it drops down into natural recession. Since this recession has already been resisted for about eight years, it is going to be much worse than it would have been had it been allowed to naturally occur within the free market without governmental interference. However, as the quoted section below will explain, the economy should not even have booms and busts in the first place. Now that our government and Federal Reserve have gotten us this far into this mess they insist upon continually expanding credit to avoid the horrible depression that America will now likely have. Their solutions, to a problem of their making, are to continue doing the same old thing which is leading to a spiral effect of economic collapse. Sound too stupid to be true? It really is this simple. There really are hundreds of politicians and economists who think that this is a viable method to try to save the economy. They just do not see the big picture for what it is, they are preoccupied with symptoms of the disease but do not see the disease itself which is the very foundation of our fiat money system, fractional reserve banking, inflation, and misguided Federal Reserve interference in the free market. The government has no business trying to save the economy anyway. In a true free market, government should not be involved. It is not even the disease which will bring down the country. If government and the Fed would stay out of it, the country would slowly recuperate after a hard recession. However, it will be the governments chain reaction of attempts at a cure which will bring the American economy crashing to the ground and prices of everything to go soaring through the roof.

The follow are several paragraphs from Peter Schiff explaining the classical and correct view of the business cycle and how it is actually a product of governmental policy and central planning which leads to a spiral effect of interference which results in booms and busts:

"According to the classical economists, like Ludqig von Mises and Friedrich A. von Hayek of the Austrian school, recessions should not be resisted but embraced. Not that recessions are any fun, but they are necessary to correct conditions caused by the real problem, which is the artificial booms that precede them."

"Such booms, created by inflation, send false signals to the capital markets that there are additional savings in the economy to support higher levels of investment. These higher levels of investment, however, are not authentically funded because there has been no actual increase in savings. Ultimately, when the mistakes are revealed, the malinvestments, as Mises called them, are liquidated, creating the bust. Legitimate economic expansions, financed by actual savings, do not need busts. It is only the inflation-induced varieties that sow the seeds of their own destruction."

"This flies in the face of modern economic thinking that regards the business cycle as the inevitable result of some flaw in the capitalist system and sees the government's role as mitigating or preventing recessions. Nothing could be further from the truth. Boom/bust cycles are not inevitable and would not occur were it not for the inflationary monetary policies that always precede recessions."

"Economists today view the apparent overinvestment occurring during booms as mistakes made by businesses, but they don't examine why those mistakes were made. As Mises saw it, businesses were not recklessly overinvesting, but were simply responding to false economic signals being sent as a result of inflation. For that reason Mises called such mistakes malinvestments rather than overinvestments."

"Absent inflation, it is still possible for individual entrepreneurs to misread economic signals and make bad investments that need subsequently to be liquidated. But it is only with inflation that malinvestments are made on a national scale and result in economy-wide recessions. That is why inflation is such a destructive force in a market economy, even if its effects are not immediately reflected in rising consumer prices."

So, America is currently many years into a phony illusory economy based upon overconsumption, borrowing, a lack or production, and a long history of flawed central banking Federal Reserve inflationary policy that is aimed at trying to correct recessions that are of their own making. The free market and capitalism should not be blamed here, because, in reality, it is interference by big government and central banking which is the problem. Free market capitalism has hardly even had a shot! What we have is poor central planning that undermines republic democracy and capitalism and instead favors monopolist capitalism at the hands of the richest elite who are the most cozy with government.

The 2000s have been, by far, the farthest and most destructive the Fed's policies have ever been as they are doing everything in their power to stop this long overdue recession. The recession just needs the happen, the bailouts should have been rejected and the economy should simply have been allowed to do whatever it is going to naturally do in a free market. It would have been rough for sure and many more people would have lost their jobs and homes, but it will be a lot worse if the American people allow the Federal Reserve to continue printing money to inject into the system to ignorantly try to fix this. The economy is based upon debt and illusion and simply needs to fail. Future bailouts must be rejected if this country stands any sort of a chance in the future.

The fear mongering that is heard from the establishment is that Americans will not be able to get loans to buy homes, or cars, or continue consuming, or send their children to college if this bailout is not passed. That is actually a good thing! College is far too expensive and the prices would be forced to drop if no one could afford to go! At one time very few Americans borrowed to go to college. A couple of generations ago it used to be possible to work your own way through college without even having help from parents. Today, it is virtually impossible to do so. High tuitions, however, are no fluke. They exist as a direct result of government-guaranteed student loans. Without such loans, tuition could not rise beyond students or their families ability to pay. Today, because students have almost unlimited access to credit (that is based upon foreign debt) universities are able to raise tuitions without the limits market discipline would otherwise enforce. It is essentially the undermining of supply and demand and the propping of of high prices that force Americans to go into debt. It is ironic that as a direct result of government0subsidized student loans, students now need those loans to pay tuitions that, in the absence of such programs, they could have afforded to pay in cash. It is a good example of a government "solution" to a problem of its own creation.

If these ridiculous government policies and big bank bailouts would fade away, college tuition, home prices, and consumer good prices would be forced to come down by natural free market forces in order meet with the demand that Americans can afford. That is how supply and demand is really supposed to work. Home prices would have to come down, to meet with the demand that consumers have for shelter. Prices of everything would have to fall dramatically so that consumers could afford these things and live within their means, rather than putting everything on credit. What the policy of injecting more and more unconstitutional taxpayer credit into the failing banks (which should simply be replaced by more competent banks in a true free market system) is doing is propping up prices in a failing system. The days of overconsumption and credit are over, government policy is simply trying to keep the status quo rolling has destroyed our economy and which will lead to a very poor nation of people for many years to come.

Again, it is very important to know that the reason that this crisis has happened is because a recession has been fought off by centrally planned government policy and federal reserve incompetence. It has been done at the expense of your dollars purchasing power and imminently at the expense of the entire US economy unless the coming future bailouts are rejected. It was just announced on October 6th that the federal reserve has already given a several billion dollars to national banks beyond the 700 billion bailout. The big banks at the top of the food chain want to have a form of socialism that helps them remain at the top despite the fact that they have failed. They want to be rewarded with billions of dollars for failing. A typical trait of fascism is socialism for the rich and capitalism also only for the rich. Losses are being socialized while profits are private. In a typical capitalist free market system this would not be allowed to happen, these failed enterprises would be replaced by banks that are more competent. That is how capitalism should work in the true free market. It is important to point out that the capitalistic system that we currently have could more accurately be called monopolist capitalism as opposed to free market capitalism. The differences are enormous.

The coming months and years are going to be incredibly interesting as we will see changes unlike anything seen in many decades. The collapse of the US dollar and soaring prices and the scarcity of goods are completely inevitable and can only be further postponed at the expense of having the crisis be even worse. I recommend transferring as much money into gold and silver as possible. Foreign stocks, bonds, and currencies are also an option that is better than the US dollar, but gold and silver are best. It is important to note that many people who invest in gold believe that they have made money if the price of gold has gone up since their purchase, but this is not true because it is actually the value of the dollar going down. The IRS even wants to tax you on "profits" made on gold, which is completely absurd.

Fiat currencies do not last through the ages while gold and silver have remained of steady worth for thousands of years. Buying gold and silver is never a way to profit, instead it is a way of freezing your assets so that they do not get chiseled away by the forces of inflation which are very likely to be speeding up incredibly in the coming weeks, months, and years. It sounds stereotypically conspiracy minded or fringe to stock up on food, but I also strongly recommend having a couple of months worth of storable food on hand as well because you cannot eat gold and silver. It is much better to be safe than sorry. You should absolutely be fearless and not overly worried about this situation. It has been my intent to have empowered and informed you with these pages rather than instill fear and worry. I am extremely interested and excited to see how this is going to unfold, but you will not be able to enjoy the show if you do not have your own basic needs and assets protected. I wish you all the best.

[vega]

The United States represents less than five percent of the world's population and consumes more than 25 percent of the world's resources while running a national debt of almost 11 trillion dollars. At the same time about half of the world's population lives on less than two dollars a day.

Thats it!

very well thought out article - the only problem though is if the US currency is suddenly made null and void overnight in favour of a new currency against a gold standard and all the creditors are asked to take a walk! They can actually do this and start the war.

Vega

[Irving]

This article has been revised since the first posting and is much better in my opinion. I have written it as a wake up call to family and friends and so I have not taken extreme care with citations and footnotes so forth. There are definitely at least 5 or so Peter Schiff quotations that are not attributed. But this is obviously not for commercial use, just friends and family and any of you and whoever you wish to share it with to wake up your loved ones. I am really proud of this article. Check it out!

[The One]

Very good article!!

One small typo that might confuse some people:

Let's say that a customer makes a bank deposit of $100. The bank can now loan $900 of the original $1000 to a new customer. That $900 dollar loan will eventually end up in a bank somewhere (it doesn't matter where because its the overall money pool we are concerned with here). Now, if both customers came to get their $1000 and $900 deposits, they would not be able to because only $1000 actually exists.

[GregorArturo]

I read Irving's first article, and don't have it in me anytime soon to read the revised but otherwise I highly recommend it, as I personally know Irving, but also the material is well organized. Great to give to a parent or friend.

[Irving]

Originally Posted by The One

Very good article!!

One small typo that might confuse some people:

Let's say that a customer makes a bank deposit of $100. The bank can now loan $900 of the original $1000 to a new customer. That $900 dollar loan will eventually end up in a bank somewhere (it doesn't matter where because its the overall money pool we are concerned with here). Now, if both customers came to get their $1000 and $900 deposits, they would not be able to because only $1000 actually exists.

Thanks for pointing that out!

[cantaloupe]

Thank You Irving,
This is recommended reading for all.
I never thought I'd be begging for a recession.

[lohiaaditya]

The best article I have read that explains the current situation, its causes and the core of American Economics and the flaws of it to an average economic mind.

Great job.