Newsletter – January / February 2011 – Keeping the faith

Keeping the faith

My oldest son is in shock. He found out how the American monetary system works by visiting a few websites that “expose” the “corrupt” monetary system and the Federal Reserve Board.

http://video.google.com/videoplay?docid=7065205277695921912# and http://www.youtube.com/watch?v=IieZHLTExws&feature=related are good examples.

These offerings are politically motivated anti-establishment websites. The way these educational economic snippets are presented is as if the presenter were exposing a corrupt and malicious system.

When I first learned how the U.S. monetary system worked, I was a trainee with Merrill Lynch. This stalwart American institution taught me exactly the same thing the conspiracy websites are teaching my son; but Merrill Lynch explained it to me in a matter-of-fact way: “This is how it works.” The anti-establishment websites claim there is a dark conspiracy enslaving the American public. (The underlying pitch is that if you vote for such-and-such Politician, he will save you from this evil conspiracy.)

What intrigued my son was how U.S. money is created “out of thin air,” whenever U.S. banks lend money. He had not realized that the total money supply of the USA is the same as the total debt of the USA. Economic expansion is accompanied by expansion of the money supply AND the expansion of debt. If people stop borrowing or banks stop lending, the economy gets stuck. If bank loans are paid off faster than new loans are made, the money supply and the economy shrink.