On the 15th
September 2008 a financial storm hit the world as a result of the bankruptcy of
Lehman Brothers in the USA. The world’s financial system had a near fatal
shock and had to be rescued by vast sums of money provided by Governments the
world over. Most Governments, in
addition to their existing debt, have built up a massive Sovereign Debt as a
result. The crisis necessitated that central banks in the most affected
countries, such as the USA,
the UK and elsewhere in Europe, besides borrowing massively, printed huge sums of
their respective currencies for two reasons; to partially finance the rescue
effort and to prevent an economic disaster due to the disappearance of
commercial credit. All this and the crisis hitting the world’s reserve
currency, the US dollar, will put our own finances into perspective.
At the end
of 1913, the US Congress gave up its constitutional right to issue money and
control its value. This right was passed
onto a PRIVATE corporation, the Federal Reserve Bank whose members included
some of the richest bankers on the land.
The Federal Reserve, as it is now referred to, started issuing dollars
and lent them to the US Government who has to pay interest on this loan. Can
you believe that? Every dollar that the
Federal Reserve issues is loaned to the
US Government and to US banks for which interest has to be paid. There is more.
The Federal Reserve Bank has no budget, files no accounts and it is not
accountable to anyone, not even Congress. Now, add to this momentous occasion
the next crucial development in the life of our reserve currency when the value
of the US dollar ceased to be guaranteed by gold reserves. The date was 1971 when
President Nixon abandoned the Bretton Woods system as far as the US dollar’s value
point the dollar has become nothing more than a piece of paper whose value was
what the world accepted it to be. Nothing more.
Given that the Second World War, the Korean War and the Vietnamese War
were essentially financed by newly printed money, the gradual erosion of the
value of the dollar has been set in motion.
Even before that 2008 shock to the world economy the USA has built up a huge trade
deficit with the rest of the world, meaning that they have a colossal Sovereign
Debt to deal with. China, for example, is awash with
US Treasury Bonds. The paper currency, the US dollar, our reserve currency, and
the US Government, face a dual jeopardy, reflecting on most currencies in the world. On one hand, a continual and rising debt to
the Federal Reserve Bank, and on the other hand, an ever increasing debt to the
rest of the world, particularly China. There
is no way out, effectively, but to print more and more currency. That is why the purchasing power of the
reserve currency, the dollar loses its purchasing power ever faster. Other
central banks have been also involved in quantitative easing, an ‘official
speak’ for printing currency, allowing their value, their purchasing power, to
be diminished in the process. This is reflected in the relative values of
currencies in the international currency markets. Each country now is hoping
that their currency will be relatively lower in this market to help their
export effort. Put in another way; help to give away the country’s wealth cheaply.
But, surprise, surprise, their imports become more expensive. Not many countries export more than they
import! The acceleration of the loss of
purchasing power of paper money is assured.
financial world has changed forever. The
slow erosion of the purchasing power of the world’s reserve currency, the US
dollar, accelerated beyond expectations, taking with it the purchasing power of
other currencies, such as the pound sterling.
As far as most people are concerned, those who exist on average incomes,
this development has changed the prospects of financial security. Why?
Because we now have to take into account
a number of new components that impact on our plans to ensure that we make a
reasonable living and create some kind
of a financial security for ourselves.
For most people, this is a much more important issue than who gets what
bonus in the banking sector or who owns one or another bank despite the
apparent media and public obsession with these items.