“Mexico City policy” reversed

Today, President Obama reversed what is known as the “Mexico City policy,” which prohibits U.S. money from funding international family-planning clinics that promote abortion. President Reagan had originally put the policy into place, only to have it reversed by President Clinton, then restored by President Bush, and now again reversed by President Obama. I understand that these decisions were made based on where these presidents stood on the abortion issue, but have we forgotten the other aspect of it?

Whether you are pro-life or pro-choice, this is U.S. taxpayer money, so don’t you think that we should spend that for doing good in our own nation instead of funding abortions internationally? We are currently in trillions of dollars of debt and this only allows for more U.S. money to go abroad for a cause that isn’t nearly as important for the United States government as is solving the nation’s domestic problems. I understand that by revoking this policy, the U.S. won’t necessarily spend more money on international clinics, but it does mean that some of the current money going over can now be used for abortions. It is not like there will be an epidemic or something else horrible if someone can’t get an abortion, so is it really necessary to spend even part of the money on that? It is not the job of the United States government to fund abortions internationally. This is U.S. taxpayer money. Then why is it being sent abroad for a procedure that isn’t really necessary for America or its people and one which doesn’t even help solve any major health problems?

A more transparent government

Well, I didn’t expect this, but I am actually happy with President Barack Obama’s first day in office. For those of you who have read my earlier posts, you probably know that I am pretty conservative fiscally and hence, many of my viewpoints differ with the new president’s. I doubt he will cut back on spending (even though he has said it) and I probably won’t be happy with him everyday, but today I am due to the new executive orders concerning a more open government.

In a press conference, the President spoke about how the government should be more transparent and open to the people. Although he obviously can’t talk about everything within government, it is a good move to be more open with the people that he and the government represent. He has also taken a quick stance against lobbyists, by cutting down on their rights and influence on government officials by banning gifts to his administration and setting firmer restrictions on what lobbyists can and cannot do. It is certainly a good move, as lobbyists have grown to have way too much power in government. The government represents the people, not the lobbyists. Thanks to President Obama on a good first move.

A new chapter for America

It is a historic day for our nation as the 44th President of the United States of America, Barack Obama, was just inaugurated. It is a happy day for our nation and it is a day to put aside politics and come together as a nation as we witness yet another remarkable, peaceful transition of power. I love this country and I have all the respect for President Obama, even though I may not always agree with all of his stances on the issues. It is a wonderful day for our nation.

Why the market should set the interest rate

Currently the Federal Reserve sets the interest rate for the United States. This is one of the most inefficient things that the government does for this country. Why? Because the market is simply too large and too vast for any one group of people to gauge it. Everything including emotions, news, government actions, and even estimates effects the market and no one has the knowledge to analyze all that information. This is why the market should compete to set the rate and hence provide the best rate for borrowers that is still sustainable for the economy in the long run.

The central bank setting the interest rate has only created recessions, led to bubbles, and stunted growth. When the Fed makes the rate too low it leads to more loans (for the obvious reason,) which often end up creating artificial growth that is unsustainable. This can clearly be seen with the bubbles in recent history, especially with the housing bubble that just burst. Alan Greenspan’s dangerously low rates ended up created a large influx of growth in the housing market, only for it to all come crashing down because it was artificial growth pushed by the low rates. When the Fed pushes rates too high, people take out less loans and hence sustainable growth could be stunted.

If the Federal Reserve didn’t set the rate, supply and demand would set it naturally through the market. If there was a shortage of borrowers, rates would go down to encourage growth and if there were too many borrowers, rates would go up in order to stunt artificial growth. It is a system that works itself out.

The Fed setting the rate has only led to trouble and it will continue to do so unless we let the market set the rate. Why not allow the banks and the people actually giving the loans to compete with each other? Why not allow the market to set the rate?

The fractional reserve banking system

As I have said before, understanding monetary policy and how money works is important in order to get a firm grasp of how the economy of any nation works. In my post, “What is money?,” I briefly explained how the government printing large supplies of money can be disastrous. Believe it or not, it is not only the government that creates the money we use.

The United States currently uses the fractional reserve banking system, which means that banks are allowed to lend more money than they actually have. This too leads to the creation of money (it is estimated that 95% of the current money supply was created through fractional reserve banking.) This system is contrary to the popular belief that the bank keeps all of one’s money with them in their safes. In fact, if every single person went to the bank to withdraw their money, there would be what is called a “bank run”, and the bank would not have enough cash to pay out to everyone. Such an occurrence would lead to the collapse of the bank. This is exactly what happened recently with the now failed IndyMac bank. A similar thing also happened to failed Washington Mutual, the largest bank failure in history, when too many depositors withdrew funds electronically, in what is known as a “silent run.”

So how does the system allow banks to do this?  When a bank receives central bank money (money that is created by the Federal Reserve,) it is required to keep a certain amount of it in reserves, but is free to loan the rest out. The loaned out money can then of course be deposited somewhere else, where the next bank (or the same bank if it was deposited there again) will keep what is needed for the reserve requirement and then loan out the rest. Remember, that when these loans are being made, the accounts of the original depositors still stay the same, which means that virtual money, in the form of loans, is being created. How much money can be lent and hence created out of thin air depends on what is known as the money multiplier, a ratio of 1/r, where r is the reserve requirement. The reserve requirement changes from time to time, but at current levels it is far from 1:1 (which would be full reserve banking- when banks can only lend the money that they actually have.) This is why the banks don’t have all of the money that its depositors have put in it.

The money that is created by fractional reserve banking is in the form of debt, since it is made when loans are created. That money that is loaned out is completely new money, as the account of the depositors still stays the same. Loans play an important role in the growth of modern economies as they spur growth, but the current system is too inflation prone. This is because if the amount of money created through this system (along with what the government prints) surpasses the amount of economic growth experienced, we experience inflation and again, we, the people suffer because of it.

Because fractional reserve banking requires exponential economic growth to avoid inflation (since the monetary supply grows exponentially under it,) inflation is very likely because as soon as the economy stops growing exponentially, we will see the currency inflate. It is a sad reality and something that we really need to look at again. Our monetary system is broken and we need to rethink fractional reserve banking and printing money above the level of economic growth. The loss in the strength of a dollar in recent decades is not something that simply happened, a large part was (and still is) caused by the current system and it can really be avoided.