With the US election results now behind us, the markets are squarely focused on the “fiscal cliff” threatening the country. If Congress and the President don’t come to terms before the end of the year, the economy will be hit with tax increases and spending cuts that could lop 3.6% off the GDP. This would put the US economy into a full-blown recession. Many are hopeful that a compromise will be reached, but one must remember that, even if there is a deal done, the US government still must grapple with the reality of a gaping annual budget deficit that is unsustainable. Up until now, the US economy has been kept above recession levels owing to a trillion-dollar annual increase in government spending. Much of this extra money is being provided by the US banking system and the Federal Reserve. The Fed is printing money, and buying government bonds and mortgages to fund this deficit. It has also cut interest rates to zero so that the financing of this debt hurts as little as possible. Recently, the Fed extended its “Quantitative Easing” program indefinitely, claiming that it was to help the unemployment rate. In reality, it is likely that it is just allowing the government more time to get its house in order: i.e. to kick the can down the road. Ever since Obama’s re-election, the stock market has been going down, partly as a result of the slowing global economy but also of the uncertainty surrounding the future government policy. Even if the “fiscal cliff” is avoided, the US economy won’t he helped much, as it still faces gargantuan deficits and spending cuts to come.
I recently came across a fascinating video created by Paul Grignon, entitled “Money as Debt”. The 47 minute film explains in very simple terms the history of the modern banking system, how it has deteriorated, and how it can possibly be fixed. It is a truism that, in order to succeed in any realm of life, whether it is sports, business, or investing, it is essential to know the rules of the game. This video demonstrates how the banking game is structured and is very thought-provoking. For example, the fact is that we live in a debt based money system, in which money is created through the issuance of debt. Since there is an interest charge on debt, more money must be created year after year to service the debt (or money) that has already been created. Eventually this compounding goes exponential and is unsustainable. We are potentially at that point right now. The fact that a system that functions this way was ever allowed to become the mechanism for how our world creates the money for its economy is mind boggling. I think that many people still find the concept of money’s being printed out of thin air to be surreal. It is an unconscionable privilege bestowed on a few, and its consequences can be devastating. Most of us have to earn our money through work, yet commercial banks and central banks can print it at will. I really encourage clients and others to watch this video and form their own opinion.