Dear Mr. President,
I am a concerned American citizen who has a few honest questions for you regarding your policy and rhetoric.
Throughout your campaign you embraced the idea of a government that is not entangled in special interests and lobbying. The day after your inauguration, you addressed this issue once more by placing barriers between your administration and lobbyists. Despite your words, you have granted waivers to several lobbyists over the past few months to work with your administration and the presence of special interests has not changed in a significant way compared to past administrations. Why the difference in rhetoric and policy?
You later also said that bills would be released 5 days in advance so that the American public and Congress could get a fair chance to see them before they were voted on. Yet, there have been no significant changes on this front either. Several bills, including the CARD Act, were not released within the promised time frame. Why the difference in rhetoric and policy?
You heavily criticized the Bush administration and their handling of the Guantanamo Bay prison. You assured us that it would be closed by January and the torture stopped. Yet, you recently backed out of that time frame and have not given us any estimate as to when it will actually happen- if you still plan on doing it. Why the difference in rhetoric and policy?
Over the course of the last year you have often said that you believe in capitalism and free markets. Yet, virtually every step you have taken, from pushing the stimulus to supporting the bailouts to supporting Cash for Clunkers, has been against the very system you say you still hold in high regard. Why the difference in rhetoric and policy?
Your administration has called for a stronger dollar several times over the past few months, especially recently as the dollar has weakened dramatically. Yet, you have supported policies that increase spending, increase the deficits, and weaken the dollar as the Fed is forced to devalue the currency to help fund these programs. Why the difference in rhetoric and policy?
You often blasted the previous administration for their absurd spending habits and told us that any spending increases you make would be counteracted by spending cuts, making net spending equal or lower. Despite the hopeful words, your spending this year has created a deficit of over $1.4 trillion, more than three times Bush’s biggest spending year. Why the difference in rhetoric and policy?
During your campaign you told us that the health care reform debate would be televised on CSPAN where viewers would be able to see Congressman and doctors negotiating with one another. You said this would show who really cares about the people and who adheres to the special interest groups. Despite the good idea, most of the dealing has been done in private and the American public has had the same amount of insight into the Congressional proceedings as with any other bill. Why the difference in rhetoric and policy?
In one of your debates you also said that there would be no insurance mandate. Yet, in HR3962, the plan that you are currently backing, there is such a mandate. Why the difference in rhetoric and policy?
You came to the White House offering a change from the heavy politics, special interest manipulation, and opacity between the people and government. You offered us transparency, fairness, and government accountability. Yet, this has not happened. So, with that I would like to ask you Mr. President, why the difference in rhetoric and policy?
A concerned citizen,
Miraj Patel
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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.
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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.
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Money is an integral part of our lives and every economy in the modern world. For this reason it is vital to understand the history of money and how the monetary system works. Upon scrutiny it is clear that our current monetary policy is only hurting the people and the government.
Before the creation of currency, people bartered, or traded things. For example, a corn farmer may trade his excess corn to a wheat farmer for some of his excess wheat. This way both farmers would have wheat and corn. It was simple enough, but the system posed problems for several reasons. First of all, it was very difficult to trade large quantities of product because everything would have to be physically moved. Also, if someone wanted something that they didn’t own, they would have to find someone else that did have that product. If the corn farmer wanted soy, but knew no soy farmers, he probably wouldn’t be able to get soy.
The solution to this problem was using a commodity that everyone wanted and would trade for their products. Different civilizations used different things from conch shells to precious metals (such as gold, which eventually became the most popular form of money), as long as it was something that everyone wanted. Since everyone wanted it, everyone accepted it as payment for whatever products they wanted to trade. This was the invention of money.
Pretty soon the banks started issuing receipts to depositors, so that they could claim their gold when they needed it. People soon realized that the receipts were “as good as gold” because they could be turned in for the gold any day. Since it was easier exchanging the paper receipts than the heavier gold coins, the system stuck and paved the way for paper money. Eventually, governments would just print official paper currency that was backed by gold. Each bill of paper money had a set amount of gold behind it, that the government held in reserves. Originally, most countries (including the United States) allowed its citizens to turn in the paper money in exchange for gold (since it was the same thing in theory.)
As money evolved, a new type of currency was created: the fiat currency. A fiat currency is not backed by any commodity (and hence can’t be turned in for anything,) but is accepted around a nation because of the government’s order. The United States currently uses a fiat currency, as do most major world currencies. This wasn’t always the case though.
The United States has flipped between commodity-backed and fiat currencies a few times in its history. Governments have historically changed to fiat currencies in times when more money is needed such as wartime because fiat currencies have no backing, so there is no restraint to how much can be printed. The United States did this during the Civil War, but changed back to a commodity-backed currency after the war. In 1971, President Nixon signed a bill that made the USD a fiat currency (theoretically it was to stay that way forever.) At that time, many world currencies were pegged to the USD (essentially they were backed by the USD, which was backed by gold,) so when the USD became a fiat currency, so did the currencies that were pegged to it. This is why most of the major currencies today are fiat.
Fiat currency is fine as long as the people accept it and as long as it isn’t printed at a rate higher than the economic growth of the area it serves. When the rate of printing does exceed the economic growth of the area, the value of each existing bill decreases and we see inflation. This is exactly what our government is currently doing.
We don’t have money, but big government insists on spending more, so a lot of what is needed is simply printed. Every time a new bill is printed after the rate of printing exceeds the rate of economic growth, we experience inflation. This is because when that bill is printed, all existing bills take a hit in value. One dollar printed above this balance may not be so detrimental to an economy as big as ours, but when the government starts printing billions (as it currently is,) the buying power of the dollar goes down and everything seems more expensive.
When this overprinting of money gets to a certain point, it gets ugly, and fast. We start to see hyperinflation, which is exactly what it suggests: massive inflation. The currency has lost a lot of its value and if the government doesn’t stop printing it, it risks becoming worthless; even to the point where the bill is worth less than the paper on which it is printed. This is not a theoretical situation because it actually has happened. There are several historical examples of such collapses, most notably the Weimar Republic (in more recent news, Zimbabwe is headed down a similar path as the government just announced the issuance of the $10 billion note- which is worth less than $20 USD.) In situations such as these, the part that hurts the most is hearing about those who had savings.
Say you saved $100,000 over your lifetime. If we experience hyperinflation and everything costs huge numbers of dollars, that 100,000 will be worth almost nothing. When you saved it the dollar would’ve been worth a lot more and it certainly would’ve taken a long time to save all that money up, but in a state of hyperinflation all the hard work turns into a waste. That money is worthless. People can lose their life savings because of this.
This is why it is no joke when the government prints money at a rate higher than economic growth. Even though it hasn’t been done enough to cause hyperinflation in the United States yet, it certainly has caused inflation. The government essentially steals the money from you in order to give value to its newly printed bills, which it needs to support big government. Many like to call this the inflation tax because the government is essentially taxing all the dollars you have by reducing the value of them.
So next time you see a new proposal to increase spending think twice before supporting it because if we continue to support and spend as much as we currently are, our money will quickly become worthless.
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In today’s America of bailouts and a left-wing that is calling for bigger government, we must remember that money can not solve everything. It is IMPOSSIBLE for the government to solve everything with money because they don’t have an unlimited supply. Sadly, many politicians nowadays act like they do, with new proposals each and everyday that call for billions of dollars in spending increases despite a debt that is over $10,000,000,000,000 (ten trillion dollars.) The country has been spending with a huge debt for quite a while now, but there will be a point when all of that debt will catch up to us. Deficit spending is alright when necessary, but it should be used as a means to get out of debt, not to fund socialist programs which will only lead to more debt. We are currently in a downward spiral of spending and unless we stop we (or future generations) are bound to suffer.
So why exactly will massive deficit spending cause suffering? In order to understand the answer to that question it is important to look at the way the government prints and spends money. The government has a few ways in which it spends dollars that it does not actually have at the moment. It could be through the sale of bonds and other such securities, which is totally fine since eventually the government will cover those securities by buying them back with actual, existing money. Raising taxes is another option, but it is one that should not be used due to the huge economic implications that come along with it (the government continues to use this method, but it really isn’t efficient- look for a future post for more info on this topic.) At the rates that we are spending money, bonds, security sales and even the occasional tax hike simply can not make up what we need. This is when we simply print bills out of thin air to pay for expenses.
The problem with this is that printing a dollar does not make the government a dollar richer. Maybe in terms of how many bills they have it does, but in reality every single existing dollar takes a hit in value in order to support that one dollar that was simply printed, with no backing. If enough of these bills are printed out of thin air, we will start to see noticeable drops in the value of the currency. This generally leads to inflation and the American people (and those who invest in American bonds and currency) suffer.
This trend can easily be seen in modern American history with the prices of a plethora of goods rising in the past few years. From milk to eggs to gasoline, things are just more expensive for Americans. A lot of the blame falls on the government for printing this money out of no where and hence reducing the value of the dollar for everyone. The value of a dollar is really just a product of supply and demand. As the supply increases, the demand (and with it the value) decreases. It may sound odd saying that the demand for a dollar decreases because everyone still wants money, but in terms of the market it essentially does since there are more available dollars.
A weak dollar means that imports from other nations will be more expensive for us Americans since the conversion rate between the USD and the foreign currency is higher. This leads to less imports (since less can be afforded) and if the dollar is weak enough it could mean big trouble. Currently we are so reliant on foreign nations for commodities and other goods that a weak dollar would mean huge increases in prices for the importer and hence, huge increases in price for us citizens. Deficit spending ties into all of this because as the government expands the monetary supply in order to pay for programs, the value of the dollar decreases and it becomes weaker.
Critics of a strong dollar would argue that a weak dollar helps America make money because manufacturers are able to sell more abroad since goods are cheaper for the buyer. While this is true, we simply aren’t anywhere near resource independent and our need for imports will continue, so a weak dollar would mean more money coming in, but also more money going out in order to purchase the foreign goods we rely on so much. There can be a happy medium where the dollar is weak enough that we can sell a good amount and also still be strong enough for us to afford foreign goods, but at the rate of spending and printing the government is doing, we face a severe possibility of passing the tipping point when imports are so expensive that the shelf price of goods is rocketed to a point where Americans will no longer be able to afford them. The manufacturing companies may make the money through exports, but at the end of the day we still import a lot more than we export and we will be facing a trade deficit that we will no longer be able to sustain. That is the day when we face crisis dead in the eye.
Americans will not have as much money and poverty levels will rise. This could lead to a lower GDP and more unemployment and would probably lead to a depression. We all know the horrors of economic depression, as they were made infamous during the Great Depression of the 1930s. So before supporting the next promise of free healthcare or bailouts, please lets think twice about it before passing the legislation. These programs may seem beneficial to us in the short term, but we must think about the future or we risk having our grandchildren suffer the consequences of our bad judgment.
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