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Economics 101

Part 1

2011.02.20

Money. Economics.

How many of us really understand these topics? And yet, even though our lives are so dependent on money, we don’t learn any of this in school.

Gross domestic product, national debt, interest rates, inflation, unemployment, poverty, trade deficits, currency exchange, stock markets, bonds, commodity markets, etc. These are all items that overwhelm us in daily economic news that make economics seem so complicated.

Everyone over 18 years of age should try to learn and understand this. Why is this so important to us? This is most important because we live and die with money ruling and ruining our lives on a continual basis.

So, sit back and relax. Have a drink and I will take you through a simple explanation on money that will open your eyes.

Not too long ago I was in a Superstore that was absolutely awesome. There must have been over 50,000 square feet of shelves upon shelves stocked with every imaginable food item as well as clothing and housewares. Shoppers were bustling up and down the isles, weaving in and out like an army of ants on a mission. Isle rage is the shoppers’ version of road rage.

I had to stop and take in it all. This I do every time I am in a big mall or store. I look at all the plastic wrapped perishable foods. I check to see where the produce originates. I try to imagine how all of this is so possible. Let us take a closer look at the production chain, from the producer to the consumer.

A farmer grows a crop. He provides his time and labor and along with other helping hands he tills the land, plants the seeds and reaps the crop. He has many input expenses, seeds, fertilizer, tractor, fuel, hired hands etc. The crop may go to a processing plant, a distribution center or may be transported directly to market. Think of all the packing and advertising that goes into marketing the product. Produce gets stacked on store shelves by store clerks. Then we put the produce into our shopping carts and head to the checkouts.

Who pays for all of this? Who pays the farmer, workers, and clerks? Where do we get the money to make all of this happen?

This simple scenario plays out in every form of manufacturing bringing goods from the producer to the consumer, whether it be automobiles, clothing, housewares, electronics, building supplies, houses etc.

We may say that the consumer pays for it all. The farmer, worker, clerk, truck driver - we are all the consumers.

You could very well be the clerk at the checkout counter. You do your job, get paid and then spend it on the very same produce for your own consumption. We pay taxes to the government which in turn pays the salaries for public employees, teachers, firefighters, health-care workers, etc. We are all producers and consumers at the same time.

This picture illustrates that money and economics is a closed system, a continuous loop.

Money is what makes all of this happen. Money is the life-blood of our economic system.

Where does money come from, you may ask? You may think that the government prints money. This is so far from the truth. The paper money the government prints is only a small fraction of the total amount of money in circulation.

If you had said, “Money grows on trees”, you would be much closer to the truth than you may realize.

Let us go back to the trip in the Superstore. At every step along the way each one of us would like to make a little savings or profit. The farmer wants to make a profit to give her kids a decent education. The trucker wants to save for his retirement years. The clerk wants to save in order to own a home.

But if this is a closed system, from where does the money come? How can each one of us make a profit along the way?

Money is created by the banks and lending institutions every time we take out a loan. Money is created as an accounting record on a computer system. Money is credit and debt at the same time. Money is created out of thin air, which is even better than growing it on trees. The banking system controls the money supply by issuing loans.

Money is not sacred. Money is an invention of society. Money is an accounting tool, an instrument to facilitate exchange and trade.

Every time we strive to make a profit, charge rent or interest or put away savings, we are “taking from Peter to pay Paul”. The only way this is sustainable is for the money supply to keep on growing. Thus, it is imperative that the economy keep on growing. Without growth the system collapses. Our national trading system of striving for international competitiveness is a “beggar thy neighbor” strategy. The only way every nation can maintain a trade surplus is for national currency supply to keep on growing.

So the system is based on a continuously growing money supply. With such a system along with free market enterprise, it is every man for himself. And this breeds avarice, an immoral greed for more money that brings power over those who lack money.

It is in the government’s and society’s interest to ensure that the money supply keeps up with demand. That is, as the economy expands, money is needed to conduct exchange and trade. When money is tight, it becomes difficult for business to do business and for corporations and communities to expand.

On the other hand, when the money supply is abundant, as has been the case for most of history, inflation results and prices rise. Let us understand inflation as it presents itself. Food prices are rising not because of a shortage of food but because of an oversupply of money. When money is in oversupply its value falls. Hence your dollar is going to buy you less than what it would have bought a year ago. This presents a dire predicament for all those with cash savings, particularly pensioners who had hoped to put away some savings in a bank account for their retirement years. The value of your cash savings is diminishing daily.

America is exporting its inflationary policy. The US dollar is reserve currency. All international trade and currencies are pegged to the US dollar. As the value of the dollar falls, the price of food and commodities around the world will rise. What we are witnessing in Tunisia, Egypt and the Middle East will spread to every corner of the globe.

Let us go back to the Superstore and think about every form of product, merchandising and marketing strategy. There is only one objective. It is not about bringing you a product of value. It is about sucking the money out of your pocket into the bank account of those in control of the system. And they are winning every time. The workers are the losers.

When the bankers hijacked the power to create money at will, they created an open system, one that has to grow in order to be sustained. The system has become a Ponzi scheme. The rich, the bankers, the powerful and the elite are in control of the economic, corporate and political system. The workers are indentured slaves who are indebted to the money masters.

We work to earn a living. We all need to put food on the table, a roof over our heads, clothing for our bodies, education and decent health care for our families. Do the rich elite have to worry about these things? Absolutely not. They already have the necessities. They want more, the fancy clothing, cars, expensive toys, mansions, resorts, luxuries, exotic holidays. How do they get these? By putting you and I, the working class, to work for their benefit. Think about it!

Why do corporations want a privatized health care system? To bring better health care service to the population? Absolutely not. They do it because it makes them richer. Why do insurance companies sell you insurance? To protect your life, health or property? Absolutely not. They sell insurance because it makes them richer.

To add to the social injustice, consider this. In the process of manufacturing, making goods from resources, the economic process puts no price on the raw materials. The resources of the earth are free. There is no inherent value of any natural resource until it is put into the service of humans. We only pay for the cost of bringing it to market, the price being dictated by supply and demand, speculators and manipulators.

At the end of the product cycle, again no or little cost is placed on the disposal of the discarded product. We continue to damage and destroy the environment and put a hidden cost and burden on future generations.

To summarize, our monetary system is a Ponzi scheme based on continuously growing the money supply out of nothing by creating debt. Economic expansion is the power scheme of those in control of exploiting the planet and workers for their own avarice. We have become slaves to corporate interests. We have been blinded into believing that there is no better alternative. It is business as usual.

Or is it?

I will propose solutions in a follow up article.

 


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