Page 93 - #letter to son

#SangamNiti SUNSET CONTEMPLATIONS
and becomes loan-making capital. In the United States, when the
Federal Reserve (Fed) wants to increase the money supply, it buys bonds
from banks in the open market and uses a straightforward formula to
calculate how much money it is actually creating. Instead of using gold
as the basis for the monetary system, as was the custom until 1971, the
Fed requires its member banks to keep aside a specific amount of money
in reserve to keep a lid on the uncontrolled expansion of fiat money.
These reserve requirements are the major safeguard of the system.

When the economy slows down, the Fed attempts to jump-start it by
lowering interest rates. The Fed lowers interest rates by injecting money
into the system by buying bonds from the banks, a process that was
in play post the Lehman Brothers collapse, and is often referred to as
‘quantitative easing’. However, on the other hand, to keep the system
from becoming inflationary, the Fed keeps a lid on how much banks can
actually lend and for this they use a bank reserve management system.
Inexplicably, the reserve management system is not an exact science but
tends to work as long as the public buys the validity of the system. The
reverse becomes true when the Fed wants to tighten credit and slow
down the economy. It sells bonds to banks, thus draining money from
the system, again based on the reserve formula.

So, if you analyse this closely, you’ll know that fiat money is controlled
by the central bank and the government. And money is never printed to
be differentiated either as interest or as principal. Money is money. So
in an exchange of money from the hands of the lender to the hands of
the borrower, in its circulation, how is it possible that ‘X’ amount loaned
as principal will yield ‘Y’ as interest? ‘X’ will continue to remain ‘X’. So
if you extrapolate this to the bigger picture, you’ll come to identify with
the fact that global debt that has skyrocketed to 3x the world’s GDP
has an interest component that is but ‘air’; it exists only on paper and
does not have an adequate collateral backed against it. Interest is mere
depletion of the principal. Nothing else. One is surprised when one
thinks that debt is all-pervasive. The government is in debt, the common
businessperson is in debt, the student is in debt and the industry is also
in debt, but who is issuing this debt? This reality clearly seals the case for
a debt-free economy that I’ve been proposing for long.

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