[slide 1] This box right here represents the yearly federal budget.
We're going to divide it up into 2 parts: [slide2] the part paid for by tax dollars, [slide3] and the part paid for by everything else. For the purposes of this video, we'll say about [slide 4] 2/3 of the budget is paid for with tax dollars, but you should know that in this year, 2009, taxes account for much less.
[slide 5]Now we're going to divide this up further and look at just the portion paid for by using money outside of taxes. [slide 6] On the left, we'll put the part paid for by privately purchased treasury bonds. [slide 7] This will contribute to the infamous national debt, which is currently approaching $11.7 trillion dollars.
[slide 8] The other part is paid for by printing money. This is done by an institution known as the federal reserve, also known as The Fed.
The Federal Reserve is NOT officially part of the government. Theoretically, the reason for this is to make sure that the government cannot print money directly to pay its bills. The Fed is supposed to act independently and not print money unless it is in the interest of the economy. However, the end result of this is that the government gets all the printed money it asks for, regardless of the effect it may have on inflation and the economy.
Whenever a government or central bank prints money, it causes inflation.
Inflation is a classic double-edge sword. [slide 10] By making the currency worth less, people who owe money in that currency OWE less. This includes the US Government.
Many shortsighted economists see this as a Godsend to quell the ever-expanding national debt. However, there are many downsides to inflation as well.
[slide11]Stocks and property tend to rise in price along with everything else. Therefore, people who have their savings in stocks or hard assets aren't as affected by inflation. However, the less wealthy the individual, the more they deal in cash. It is in this way that inflation affects the poor more than the rich.
[slide12]In addition, by helping debtors, you are by definition hurting lenders. This includes those who own treasury bonds. Generally speaking, these lenders are not in the business of losing money. [slide13] Some lenders will therefore choose to put their money elsewhere.
[slide14]In order to try and entice the lenders into coming back, interest rates on the loans will have to increase.
[slide15]The problem with both of these outcomes is that they lead directly to even MORE inflation.
This type of thing has happened in numerous other countries in the past. It happened to Germany after World War I, and it's happening to Zimbabwe now.
[slide16]As this is happening,[slide17] the budget will be growing exponentially as interest payments on the national debt balloon.[slide 18] This will compound the problem.
[slide19]This cycle of printing and lending will continue until [slide20] the treasury is no longer able to find any lenders to buy the bonds at all. [slide21]At that point, inflation will get out of control. This is known as Hyperinflation.
[slide22]This is where the economy really starts to suffer. People will start losing their jobs or quitting because their paychecks aren't worth the paper they're printed on. That, combined with higher prices, will lead to people saving less and spending more. Taking money out of savings increases the money in circulation. This will further contribute to inflation.
[slide 23]More unemployment leads to LESS revenue. [slide 24] With the budget remaining the same or even growing, [slide 25] this leads to yet even more inflation.
Eventually, people will lose faith in the dollar and stop using it. [slide26] This is known as a currency collapse.[slide 27]
The question is: where is the United States in this cycle? [graph1] The answer is quite complicated. As you can see from the graph of the money supply, over the past 40 years, we have done everything we could to destroy our currency. Even still, our GDP is so strong, the world still sees our treasury bonds as a good investment. [graph2] It's only been recently, with the Fed printing more money than it ever has before, has the world started to grow wary of our position.
This is the reason people like [pic]Ron Paul ,[pic] Jim Rogers,[pic] and Peter Schiff all come out strongly against our current monetary policy.
