Ladies and gentlemen, despite rep.ing the End the Fed movement strongly; one lesson in battle is to analyze your adversaries. One thing I learned while analyzing the Fed is that they actually can pull us out of this recession. Realize though that this will never happen, unless they restructure themselves in a new banking system, simply because Fractional Reserve Banking will not allow the following.
What is inflation? Investopedia defines it as:
The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.
You notice it all around you when you find the price of something is higher than you remember. It really is bad news, because you have to work longer to attain the same good(s). Working longer will put you in higher income brackets which will raise your income taxes (unless the government adjusts for inflation). Just how do central banks try to curb inflation? Right now, it’s insanely low interest rates. This will entice people to take out credit. This reporter says that is the wrong way to fix it. For one, credit shackles people. The person getting the money will have to pay it back. The issue is, people don’t always pay stuff back. Ergo, credit company “persuasion”, repossession, garnished wages, foreclosed homes, etc. Not to mention, it still leads to inflation. Maybe that’s their plan? However, on a positive note, precious metal prices continue to go up; so those that did invest in metals early on are reaping some serious benefits (as stated).
However, you will not like this method if you bought precious metals; as the price would plummet. So what’s the opposite of inflation? Deflation. Specifically defined by Investopedia:
A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Central banks attempt to stop severe deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum. The decline in prices of assets, is often known as Asset Deflation.
People often say deflation is a sign of weakness and a sign of a depression. I can easily see that. I’m not saying we need a depression (although for people that never had bad times; it would be a great growing experience for them), I’m saying the buying power of the dollar needs to increase. Look up stagflation for my reasons as to why I feel this. A period of deflation benefits savers. If you have $5000 and don’t spend a dime, that $5000 will be worth more after a period of deflation, since it will take a lower number of dollars to purchase the same thing. Ergo, the buying power of the dollar increases. A more powerful dollar will also work better for people travelling overseas. A slight deflationary period coupled with policy that helps small businesses would help jump-start this economy to its former greatness. Unfortunately, this will never happen.
Fractional Reserve Banking (pdf link) is a system that prohibits deflation by design. It works by monetary institutions lending more than they actually have (see why I hate Fractional Reserve Banking here). Some gurus actually figured out the fact that a monetary institution can lend out up to 90% more than they actually have. It was designed to prevent contraction of the money supply, which leads to perpetual inflation. Ever noticed how measuring an economy changed from deflation/inflation cycles to measuring the rate of inflation right around the creation of the Fed? Does that scare you much? It sent off a warning in my head. Good cycles are considered when the rate of inflation does not grow as fast as projected and bad cycles are considered as the rate of inflation growing faster than projected, especially when unemployment becomes a factor.
I never thought I could, let alone would, put deflation in a positive light; but it’s seriously what we need right now. Until then, the standard monetary measures apply; invest in precious metals, not in money markets, and get prepared for the worst, because it looks like it’s coming soon.