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It’s “Money in Circulation” Stupid

Economics / Money Supply Dec 14, 2009 - 01:52 AM GMT

By: Joseph_Toronto

Economics

During the 1991 recession (if you can call it that) Bill Clinton made a campaign issue of “It’s the economy stupid.” It’s true, it is all about the economy. But it’s also a little more fundamental than that. It’s something that people have known intuitively for centuries. In a good economy, there was always “plenty of money” and in hard times it was “money is scarce”. Things haven’t changed, except that now those responsible for money creation are intentionally clouding the picture with all kinds of economic jawboning (dutifully reported daily by the media) to create a paranoia of both hyperinflation and deflation.


In our system of money, the private banking system is solely responsible for money creation. Their only means of getting money in circulation is by creating a debt or a loan and lending new money to a borrower. There is no other way. Consequently and conversely, money is destroyed when loans are defaulted, foreclosed or bankrupted. Virtually all of our money in circulation today is “owed” back to the banking system in the form of a loan from a bank.

Imagine what would happen to money in circulation and to our economy and our standard of living if people and companies simply didn’t want to be in debt at all anymore.

Recently, money in circulation boomed during the dot com craze of the late 1990’s when people borrowed massively to “leverage” and “margin” financial assets. They borrowed more money to buy more stuff. Conversely, Money in circulation collapsed when the value of the “stuff” became unsustainable. Values then fell. People then had margin calls on their debt and had to sell their stuff and payoff their margin loans. Others went bankrupt when unable to sell their assets or collateral for sufficient money to repay their loans. So why didn’t the economy fall off a cliff? In order to sustain our standard of living, people went in search of another asset class to “leverage” and they found it, real estate. Once again they began to borrow money to buy more. The economy survived, but only barely, we were able to keep sufficient money in circulation to sustain a moderate economy. But our money in circulation remained hostage to indebtedness. Only this time with real estate as the collateral, there was more debt than ever.

People used to know the hazards and dangers of a “too powerful” banking system. Call them the Jacksonians, disciples of Andrew Jackson. In the nineteenth century, banks were kept largely in check after Andrew Jackson singlehandedly closed our central bank because he viewed it as a threat to our sovereignty and economic freedom. For eighty years, from 1833 to 1913, we had no central bank and our economy boomed. We surged from a colonial outback to a world trading and military power. But the banks didn’t quit. They never do and never will. In the early part of the twentieth century J. P. Morgan and friends were largely responsible for the creation of our latest and greatest central bank, our beloved (and privately owned) Federal Reserve Bank.

One of the great misconceptions of our age is that the Federal Reserve controls the money supply. The truth is far from it. The Fed can only attempt at best, to induce people to borrow more by reducing interest rates on loans, or to deter people from borrowing by raising the amount of interest they will have to pay. In a weak economy, when “money is scarce”, the Fed is utterly powerless when people, fearing economic uncertainty, simply don’t want to be in debt, or when bankers and lenders, fearing economic uncertainty, don’t want to lend their precious capital. Economists call this a “liquidity trap”, “pushing on a string”, or what have you. It all means the same thing. Our money in circulation, our economy, our standard of living is held hostage to debt. We are forever doomed to booms and busts, growth and recession, and an exacerbated  business cycle as long as we cede control of the single most important public utility, money supply, to private banks. However, it need not necessarily be so. (To be continued.)

Very Best Regards,

Joseph Toronto
Affiliated Investment Advisors, Inc.
http://joesinvestoblog.com
joe@aiadvisors.com

Joseph Toronto has been a portfolio manager for 26 years for some of the largest institutions in the western U.S. In 1993, Joe founded Affiliated Investment Advisors, Inc., as a registered investment advisor for serious investors seeking professional management for superior safety and returns. Mr. Toronto is a Chartered Financial Analyst and is a member of the Salt Lake City Chapter of the Financial Analysts Society and the Association for Investment Management and Research. He has a Master's degree in investment securities and a B.A. degree with a dual major in finance and management.

Affiliated Investment Advisors, Inc. is a "traditional" portfolio manager for retirement plans, profit sharing plans, individuals, IRA's and other trusts. Affiliated’s portfolio management services are NOT alternative "hedge" fund style and are “fee only” taking no commissions or performance incentives. Affiliated is not a stock broker or financial planner and does not sell any investment or insurance fund or product.


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