America's History of Empowering Wealth

by Jarl Jensen

  Nixon’s Devastating Legacy

  In 1971, President Nixon permanently dislodged the USD from the gold standard, ending nearly forty years of global monetary policy in which the USD was equal to a fixed price for gold. In its place, Nixon decided to introduce a floating currency exchange system called Fiat which remains in place today.

  The impact was disastrous any which way you look at it. The real estate market ballooned to obscene levels and the cost of living induced the consumer market to shrink. The 'Great Inflation' had set in.

  What is Fiat money?

  Fiat money refers to the government bonds, securities, and banknotes sold by central banks to prop up the value of their currency. Every currency in the world is now a Fiat currency, which means it's currency does not have any intrinsic value – it only gains value because governments buy and sell each other’s money on the open exchange market.

  In this system, central banks can influence the value of their currency by printing more money or pegging their currency lower than others.

  Why did Nixon end the gold standard?

  The gold standard was ended by Nixon as he did not want foreign nations trading in their currency for American gold. Under the Bretton Woods system, the USD was chosen to be a stand-in for gold; a currency that foreign governments could peg their currency to and trade with. Thirty-five American dollars was worth one troy ounce of gold, the idea being that countries would only want to swap their USD reserves for gold if the dollar depreciated below the price of gold.

  And that’s exactly what happened. The purchasing power of the USD dropped from $40 in 1950 to $20 by 1970 as the Federal Reserve printed more paper money. As the USD began losing value, foreign countries like France asked to redeem their USD reserves in gold instead. Nixon was not having this, so he took the USD off a fixed conversion rate.

  The Domestic Impact of a Weak USD

  Before too long, it was clear that the Fiat system would do no favors for the American economy.

  Nowhere is the contrast more vivid than in the real estate market. The average cost of a home in 1969 was $24,600. Only ten years later, the average had ballooned to $60,300. The primary cause was due to inflation derived from an oversupply of credit in the form of morgages in the markets and a devalued USD. But not only was the cost of land going up - Interest rates on a thirty-year mortgage hit 15% by the end of the decade, making property unaffordable for most families.

  The spike in real estate prices was reflected across the board in the cost of living. The essentials in life became incredibly pricey. Gas, insurance, energy, and even food became more expensive than ever before – without a complimentary rise in average income for the majority.

  Worried that the economy would sputter to a halt, the Fed allowed inflation to continue so that the economy could grow. But instead of stimulating real growth, the unemployment rate increased, and people stopped spending money on consumer goods. The vicious cycle of inflation and deficit spending was afoot, and millions of Americans felt the pinch.

  Five Devastating Consequences of Fiat money

  The cost of housing dramatically increased and continues to take up a greater and greater portion of people’s income. Fiat money gave banks access to unlimited credit. This may seem like good news as commercial banks are able to give more people bigger loans with better terms. However, house prices keep going up, not because people are making more money but because banks are making it possible to pay more for a house with lower interest rates. They have labelled this increase in the value of your home ‘the American dream’ but let’s face it, it’s not a dream it’s a nightmare. As the price of your house goes up so does your neighbors the net gain is negligible. If your mortgage had been smaller or non-existent your money could have gone into savings or investments which have a positive return and would be worth a lot more than your house after 30 years.

  Credit Cards are a direct consequence of Fiat money. Credit Cards have expanded the purchasing power of consumers. While wealthy people use credit cards as a convenience and service, poorer people use credit cards as a means to get by paying more in interest the poorer they are. This of course sets many people on the course to bankruptcy as the bills come due while their earnings don’t materialize. The real problem however is that poor people are forced into working multiple jobs to pay off their bills. This means that employers can hire people part time instead of full time since everybody is working multiple jobs to get buy. If there were no credit cards, people could simply get by on what they earn with one job. If everyone worked less, then employers would need their employees to work longer making it a full-time job and easier to make ends meet.

  Student Loans are a consequence of Fiat money. Student loans have become a big business in America. If commercial banks didn’t have access to unlimited capital, then they could not make so many student loans. If student loans were not available, then college tuition would not be getting more expensive because there would be no way of paying for it.

  Cars are being purchased using credit as well. This subprime market has a very high default rate. However, the banks make money by charging high rates to people with poor credit scores. This way on average they make money anyway, even though many customers wind up not being able to pay off the loan they used to buy the car. If Fiat money was not available, then there would not be a subprime auto market either. People would have to buy cars they could pay cash for or use mass transportation. One could argue that the reason mass transportation is in such poor shape in America is because of Fiat money and the subprime car market making less people use public transportation.

  One over looked problem Fiat money has created is that almost the entire economy runs on debt. Debt has taken center stage on all spending. The problem with debt is that it has to be paid back. Look at it this way, taking out a loan is like digging a hole in the ground and walking away with the dirt. If everyone, every company and every government have all dug holes then everyone is busy filling up those holes again. This leaves very little room for anything else. In essence, the debt driven economy is busy refilling holes instead of making life better for all of us. Most people are too busy trying to figure out how to get some of your dirt to refill their hole. “Personal Responsibility” for repaying your debts is the common slogan but people need to recognize the economy is structured to make it almost impossible to get by without using debt.

  Conclusion

  The Nixon shocks were supposed to be a piece of enlightened economic maneuvering to keep the American consumer market afloat. Instead, it caused an expansion in USD credit market that impacted average hard-working citizens the most. It is high time for a new economic approach that does away with the negative consequences of the out of control expansion of debt and puts debtless money where it belongs – in the hands of consumers!

  Why the Government Keeps Bailing Out the Banks

  The Great Recession was a prolonged period of economic decline in world markets between 2007 and 2011. The severity of the recession varied across the globe, with even some developing countries like China and India experiencing modest growth throughout. For most of the world, the recession meant years of economic uncertainty as politicians and bankers scrambled to cover up issues they in fact created.

  The consensus is that the Great Recession originated in the United States. Inadequate regulation of the banking and real estate sector lead to risky lending practices that left millions out of a job, and out of a home.

  The Financial Crisis and Subprime Mortgages

  A financial crisis hit Wall Street in 2007-08, as investment bankers finally got caught peddling subprime mortgage-backed securities on a ‘shadow market.’ Excessive trading was being done through 2004-07 despite the increasing credit risk of assets in the market.

  What were the bankers trading to cause a crisis?

  The financial crisis is often referred to a subprime mortgage crisis because it has to do with the investment of subprime mortgage-backed securitie
s. A subprime mortgage means a loan arrangement with someone carrying poor credit history – someone who has not been consistent in paying off their debts at the bank. The percentage of subprime mortgages kept rising as real estate brokers jumped at the chance to sell homes even if the mortgage rates were adjustable (subject to change over time).

  Subprime mortgages already carried a low credit rating on the investment market, but that did not stop eager investors from bundling mortgages into security packages and trading them for profit. Bankers were making money from the expectation that homeowners with poor credit would pay off their mortgages in time.

  When home prices declined in 2006, and the buyer’s market dried up, homeowners were left with mortgages that cost more than the value of the property. With nowhere else to turn, homeowners across the country began defaulting on mortgages and declaring bankruptcy. The average net worth of an American household declined dramatically, and entire families faced the harsh reality of homelessness despite doing nothing wrong.

  Mass defaulting on mortgages had a domino effect across the financial markets. Mortgage-backed security packages became worthless almost overnight, and investment banks lost billions of dollars. In dealing with the crisis, politicians came to the rescue of the banks and left citizens to go hungry in the streets.

  The bailout and its aftermath

  Politicians and financial regulators bailed out the primary instigators of the crisis in the first place. But it’s hardly surprising, given how often the Federal Reserve increases the money supply when times are tough. From 2007-08, the Fed did nearly everything in its power to revitalize the lending markets, including:

  • Lowering the fund’s rate from 5% to zero, literally the lowest possible rate it could give.

  • Buying up over $300 trillion in agency debt from mortgage-backed securities that were precariously invested.

  The government got in on the savings act too. Barack Obama passed a $787 billion stimulus package in 2009 aimed at the financial markets, contributing to a $1.26 trillion government debt by 2012.

  Let’s put the blame where it belongs, on the bankers. The Federal Reserve is responsible for keeping the credit markets working properly. And since the commercial banks own the Federal Reserve, it should be no surprise that they bailed out their owners first. The politicians in their naiveté got their action steps from the very people who caused the problem in the first place. And the only institution that could readily remedy the situation was the Federal Reserve.

  Why save the banks, not the citizens?

  When looking at the causes and outcomes of the Great Recession, one theme stands out: the American citizen forced to soak up the consequences of an irresponsibility greedy investment market.

  The banks were responsible for trying to monetize subprime mortgages – but the taxpayer bailed them out. The real estate market tanks and people have to sell their homes and hit the streets. The government provides a nominal tax subsidy that did little to lighten the financial load. Why? Because the government is beholden to the moneyed interests on Wall Street that use twisted economic logic to demand a strong lending market. Of course, little consideration is given to the realities of the individual receiving the credit – what matters is lots of credit passing through the system.

  Conclusion

  As the Great Recession shows, the current system is designed to flow from one crisis to the next, as the government goes farther into debt. The Federal Reserve is a poor guardian of America’s economy as long as the commercial banks are calling the shots. Let’s face it America’s representational government is what allowed the banks to take over the Federal Reserve. Without optimizing the inputs into the economy, the cyclical process will continue and America’s people will continue to bear the burden of the wealthy calling the shots in Washington.

  The Misplaced Economic Policies in a Representative Democracy

  The American political system is far from cohesive. There are three branches of governance – executive, legislative, and judicial – and each operates with a unique set of policies and mandates. Citizens elect representatives to the legislature, who are supposed to push for bills that serve the interest of their constituents. The executive branch is the domain of the President and full of civil servants working for various departments, while the judicial branch keeps the legislature and executive branches in line with the law.

  It is how the founding fathers wanted it, of course, and little has changed from their vision as far as the government functions. However, the founding fathers also wanted the citizens to have a limited role, a limited democracy. They wealthy founders wanted their private property to be protected. They accomplished this by limiting a citizen to only be able to vote every few years on a representative which leaves all the time in between the votes for writing the legislation. Only a wealthy person would be able to influence legislation in between votes. It takes money to influence, let alone have the influence to heard by the elected officials.

  The founding fathers wanted people of wealth to have an overriding influence on the laws written by Congress. Today we call these influencers, lobbyists. Lobbyists work for their wealthy employers. It’s time we recognize the constitution for what it is, a trade-off between personal freedoms and the delegation of powers to the elite minority. Any expansion of freedoms for the people has never encroached on the elites strong hold on power.

  The most influential change in our representative system has come in the area of monetary policy loosely related to the executive and legislative branches in theory. In reality, economic policy is handed down from the Federal Reserve, an institution that was created to provide stable monetary policy for the nation. Over a century of instability indicates how weak the Fed has been in delivering on its mandate – and yet citizens have little say in whether it continues to exist.

  The Fed as an Enlightened Institution

  The creation of the Fed was a landmark decision because it marked a departure away from the representative system. The Chairmen of the Board, including the Board of Directors at the twelve district banks, are all appointed by authorities within the Executive branch of government. They are not elected, and as such, are not beholden to any specific entity within the representative system. The Fed was created as a buffer for the economy as a whole, meant only to intervene when times get tough. And yet they continue to own a significant portion of mortgage-backed securities some ten years after the housing crisis.

  As bankers themselves, Fed chairs over the years have shown a distinct bias for the interests of the financial sector over and above the needs of the population. Wall Street investment bankers are appointed to lead branches all the time, making it easy to pass policy that allows for robust lending markets – especially stocks and bonds – despite a lack of competition.

  Everyone may not have loved Volker’s implementation of a 20% interest rate in the early 80’s, but at least it quelled inflation and forced the economy to be based on higher value business. However, the burden of this massive sea change in the economy was fully bared by the working class who had no way of competing against third world economies. Fed policy today embraces inflation because it keeps liquidity flowing through the market. A system has been enacted into law that assumes the bankers are working to meet the needs of the people. At least that’s what the bankers say. But the increasing sale of national debt to foreign governments, and wave after wave of economic crisis reveal the assumption to be flawed.

  Volker’s high interest rates addressed a symptom not the cause of the inflation. The cause of inflation was the government being funded by foreign loans through the sale of treasury bonds. Instead of the US currency being devalued to allow American made goods to be attractively priced which is what would have happened if the dollars used to buy foreign goods were used to buy American goods in return. Volker’s fix made US treasury bonds even more attractive and forced the value of the dollar so high that the American worker had to figure out a new way of making a l
iving. This set the stage for the American worker to be undermined by national debt, an overvalued dollar and a federal reserve pitted directly against the interest of American productivity.

  Let’s recognize that Volker had little choice. He did not control who was buying the national debt and he did not control the tax laws that created the national debt. And the monetary policy which he was following gave him very few tools to choose from. His only option was to force the economy to use the benefit of the higher valued dollar as a means to create higher value work. Inflation was indeed squashed but only because the dollar became so valuable that imports greatly reduced the cost of importing products. This locked in America’s dependence on low cost imported products and other countries became dependent on exporting products to America. And a virtuous cycle began of America selling its national debt to other countries while importing low cost products from around the world to keep inflation in check. This allowed the Federal Reserve to eventually start lowering interest rates again as long as imported products kept prices low. All the while the average American worker was left in the dark and out of luck.