America’s Federal Reserve – The Politics of Loans and Inflation

By admin ~ August 17th, 2011 @ 10:48 am

The American economy is slowing down – perhaps even beginning to contract. As prices also rise and employment prospects weaken, the financial pressure on American consumers is driving down product demand and increasing the number of loans entering default. While the first quarter 2008 GDP number registers a weak positive growth rate, this definition of growth is dependent on an assumption about price inflation that does not necessarily match the increases at the gas station or grocery store. A number of analysts and economists are starting to come clean about the growing disconnect between the cost of living and the Consumer Price Index (CPI).

Inflation can mean a general increase in the cost of products and resources, but it can also refer to a specific case of price increases brought about by a proportionate increase in the total supply of money available. Since the value of money is pegged only to a supply and demand system, an increase in the money supply that isn’t backed by growth in productive capacity will always cause prices to rise. In America today, the money supply is mostly digital and in the form of credit created by banks through a fractional reserve system. Since mortgages, car purchases, and even education is provided with credit, the origination of any new loans causes an inflationary trend in the money supply. While the Federal Reserve could limit inflation by raising interest rates or increasing the amount of cash it takes out of the financial system, these would not be publicly popular moves as debt-based industries like real-estate, auto, and higher education would be forced to cut costs sharply.

Politicians are some of the biggest winners in the inflationary economic system. A constant devaluation of the currency leads to asset inflation, the illusion that assets such as stocks and real estate have gained in value. Inflation can also result from public deficit spending, thus giving politicians a way to pay for government projects without directly taxing anyone who might otherwise vote against being taxed. History suggests that the politically popular solution to rising prices is often a declaration of price controls, but price controls typically lead to shortages or huge government subsidy.

The ultimate enabler of the inflationary financial system and the seemingly endless supply of loans and credit is the Federal Reserve. It accomplishes this in several ways: Authorizing banks to create money through loans; Providing funds for politicians intent on deficit spending; and maintaining liquidity with cheap, direct loans to the failing banks when their own loans go bad. Without these specific political interventions carried out by the Federal Reserve, gasoline certainly wouldn’t cost four dollars a gallon.
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