The Great Fed Fail Of 2008

I have been facing the magnitude of our current economic crisis for some time now.  I expected it long before we ever got here…it’s just logical progression for those that are aware of the facts.  I have struggled, however, in the ways I can use to communicate the severity of the crisis.

The puppet heads in the media really aren’t saying what this crisis is.  They want to look at the housing market or the stock market…the companies and the malinvestments.  They just simply aren’t looking at the facts.  The problem has been and will be inflation – the creation of money out of thin air, by the Federal Reserve, without anything of substance to give it value.  This crisis is essentially the systematic destruction of the US dollar by central bankers, fueled by an ignorant and fearful Congress.

I found a video that pretty much sums it up.  The sheer numbers on a graph, when compared against historical records, illustrate quite well the maginitude of what we face.

For those who may not get what these numbers mean, essentially this is the balance sheet of the Federal Reserve.  Imagine that I have $1,000 worth of something valuable (say, gold for example) and that is used as collateral to give value to something that has no inherent value, such as a printed dollar.  Then, say, you come to me and borrow a thousand printed dollars.  I’m now at a one-t0-one ratio, right?  I have $1,000 worth of value and $1,000 worth of debt…not a bad place to be.

But then imagine, I all of a sudden say that I’ll now borrow out $5,000 of intrinsically worthless paper…but I don’t increase my reserves.  You borrow the $5,000 paper dollars…I’m now at a 5 to 1 ratio, right?  The value of those dollars has not increased, but rather decreased because I still only have $1,000 in reserves.  If you wanted to buy that $1,000 worth of gold, it would cost you the whole $5,000 because that’s what the gold now represents.

Take that to where we are today.  The graphs in the above video illustrate what would happen if I all of a sudden said I now have tens of thousands of dollars that I can borrow out…but still, refuse to increase that which gives those dollars value.  Again, the perceived value of all those tens of thousands of dollars are decreased by the ratio of reserves to loans.

The danger of this situation is significant…both to me, the originator of such loans and to you, the borrower.  Why?  As we increase this ratio, the perceived value of those paper dollars becomes less and less attractive.  The risk comes when you, the borrower, starts to see the impacts of this devaluation and consider other options that may be less risky.  That’s where the danger comes in – if the significant borrowers of my paper money become disinterested in borrowing from me….all of sudden the system fails and both you and I are hung out to dry.

This is the rapidly approaching situation that we face, aleit simplified by magnitudes.  We cannot turn a blind eye to what is really going on with our economy these days, as scary as it is to face it.  The sooner we accept what the problem  really is, the sooner we can come to terms on how we can fix it.

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