21 May 2024 12:49:20 GMT

The Third Rock Forum - Economics

Article Title
The changed world of money
Topic Section(s)
Submitted : 13-02-2011 14:21
Amended : 10-11-2014 13:02
Status : Approved:  
Likes : 1
Dislikes : 0

On the 15th September 2008 a financial storm hit the world as a result of the bankruptcy of Lehman Brothers in the USA.  The world’s financial system had a near fatal shock and had to be rescued by vast sums of money provided by Governments the world over.  Most Governments, in addition to their existing debt, have built up a massive Sovereign Debt as a result. The crisis necessitated that central banks in the most affected
countries, such as the USA, the UK and elsewhere in Europe, besides borrowing massively, printed huge sums of their respective currencies for two reasons; to partially finance the rescue effort and to prevent an economic disaster due to the disappearance of commercial credit. All this and the crisis hitting the world’s reserve currency, the US dollar, will put our own finances into perspective.


At the end of 1913, the US Congress gave up its constitutional right to issue money and control its value.  This right was passed onto a PRIVATE corporation, the Federal Reserve Bank whose members included
some of the richest bankers on the land. The Federal Reserve, as it is now referred to, started issuing dollars and lent them to the US Government who has to pay interest on this loan. Can you believe that?  Every dollar that the Federal Reserve  issues is loaned to the US Government and to US banks for which interest has to be paid. There is more. The Federal Reserve Bank has no budget, files no accounts and it is not
accountable to anyone, not even Congress. Now, add to this momentous occasion the next crucial development in the life of our reserve currency when the value of the US dollar ceased to be guaranteed by gold reserves. The date was 1971 when President Nixon abandoned the Bretton Woods system as far as the US dollar’s value was concerned. 


At that point the dollar has become nothing more than a piece of paper whose value was what the world accepted it to be. Nothing more. Given that the Second World War, the Korean War and the Vietnamese War
were essentially financed by newly printed money, the gradual erosion of the value of the dollar has been set in motion. Even before that 2008 shock to the world economy the USA has built up a huge trade deficit with the rest of the world, meaning that they have a colossal Sovereign Debt to deal with.  China, for example, is awash with US Treasury Bonds. The paper currency, the US dollar, our reserve currency, and the US  overnment, face a dual jeopardy, reflecting on  most currencies in the world.  On one hand, a continual and rising debt to the Federal Reserve Bank, and on the other hand, an ever increasing debt to the rest of the world, particularly China.  There is no way out, effectively, but to print more and more currency.  That is why the purchasing power of the reserve currency, the dollar loses its purchasing power ever faster. Other central banks have been also involved in quantitative easing, an ‘official speak’ for printing currency, allowing their value, their purchasing power, to be diminished in the process. This is reflected in the relative values of currencies in the international currency markets. Each country now is hoping that their currency will be relatively lower in this market to help their export effort. Put in another way; help to give away the country’s wealth cheaply. But, surprise, surprise, their imports become more expensive.  Not many countries export more than they import!  The acceleration of the loss of purchasing power of paper money is assured. 


The financial world has changed forever.  The slow erosion of the purchasing power of the world’s reserve currency, the US dollar, accelerated beyond expectations, taking with it the purchasing power of other  urrencies, such as the pound sterling. As far as most people are concerned, those who exist on average incomes, this development has changed the prospects of financial security. Why? Because  we now have to take into account
a number of new components that impact on our plans to ensure that we make a reasonable living and create  some kind of a financial security for ourselves.  For most people, this is a much more important issue than who gets what bonus in the banking sector or who owns one or another bank despite the apparent media and public obsession with these items.