The key to financial survival is to understand how the economy works and subsequently the cause of the present financial situation. But that is easier said than done. Finances and banking policies have become extremely complex, and you have probably heard and read many commentaries on the subject, some of them contradictory. Included in the modern creative banking toolbox are "credit default swaps", "futures", "derivatives", "CDOs" (collaterized debt obligations) and the "fractional reserve system", just to name a few. Going into detail cannot be covered within the scope of this book. Instead, we will stick to the main causes behind all the complexities and then concentrate on financial survival preparedness solutions.
This subject is divided up into 2 sections:
There are 2 main reasons at the core of the current crisis in the world's economies:
However, if we have a problem, we cannot just blame something outside of ourselves. We have to take accountability and admit that we have allowed ourselves to become vulnerable to the weaknesses in the present system.
1. Removal of the Gold Standard.
The main reason why world economics has been able to become so complex and "creative" today is that decades ago the big bankers convinced the politicians to "liberate" paper money from a solid backing, which was gold. In simplified terms, the removal of the gold standard meant that if banks loaned you money, they no longer had to have the gold in their vaults to back it. The removal of the gold standard happened at different times in different countries. In England it was 1931 and in the U.S. it was 1971.
Despite these activities by the big bankers, people still recognize gold for its intrinsic value and as being a financial indicator. James Turk is a renowned authority on gold and the precious metal markets, and editor of the Free Gold Money Report. Here is an excerpt of his May 3, 2009 report:
"Governments want a low gold price to make national currencies look good. Gold is recognizable the world over as the 'canary in the coal mine' when it comes to money. A rising gold price blurts the unpleasant truth that a national currency is being poorly managed and that its purchasing power is being inflated. This reality is made clear by former Federal Reserve Chairman Paul Volcker. Commenting in his memoirs about the soaring gold price in the years immediately following the end of the gold standard in 1971, he notes: 'Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake.'
If you think that it is just theorized that in tough economic times people revert to the safe haven of gold, then take Zimbabwe for instance. Due to hyperinflation, their dollar is worth nothing. The link below is to a video report on The Guardian newspaper's website entitled "Zimbabwe - gold for bread". It describes how in some areas they only trade in gold. People are starving, and they pan the rivers every day for small grains of gold just to buy enough bread to survive. They use their paper money as normal paper, including folding it up to keep their grains of gold in. Here's the link to the video: Economic survival in Zimbabwe (Hopefully the page still exists.)
Another website has a picture of someone in Zimbabwe holding up a sign that says: "Starving billionaire"! That says it all.
A very down to earth example of gold as "sound money" that holds its value, as opposed to paper currency, which is manmade and has NO intrinsic value, is a story from Jack Weber's www.goldeneagleenterprises.net website:
"To make his point [about gold's intrinsic value], he asked me what I had paid for the suit I was wearing. I told him that it had cost about $50. He held up a gold coin and told me that it was currently worth $45 and that if I were to buy one (and since they were essentially of equal value), he could absolutely assure me that I would always be able to purchase a suit of clothes for whatever the coin would be worth at any given time. Well, today, 43 years later, a decent man's suit of clothes costs about $400 and those same coins are worth just that amount. If I still had those $45 paper dollars, they'd hardly buy a decent dress shirt and tie today. Perhaps this true story will help you see the point of holding gold over paper dollars as a store of value -- that will protect the purchasing power of your savings! I certainly hope so." [Ed: This was written a few years ago. Gold has been above $1000.00 since about October 2009.]
2. The Misuse of Central Banks.
The removal of the gold standard was not the first big step in the wrong direction. A previous big step was the creation and subsequent misuse of central or "national" banks, like the Bank of England and the U.S. Federal Reserve. Many countries have such a bank. They sound like they are a part of the government, but many are privately and independently controlled, even though they are technically accountable to the government. The main problem with them is the creation of debt, which will be discussed below. The same problem exists with the larger entities like the World Bank, the International Monetary Fund, the Bank of International Settlements, etc.
Another major problem with most national banks is that they have been given the power by the government to control the money supply and interest rates of their country, and there is not always sufficient oversight. For example, there has never been an audit of the U.S. Federal Reserve that was not kept a proprietary secret; it has never even been made available to Congress in closed session. This has motivated almost 200 Congressmen, led by Dr. Ron Paul, to sponsor the Federal Reserve Transparency Act, H.R. 1207.
When a government overspends, goes to war, or otherwise needs more money, it either has to raise taxes (which can be political suicide) or print more money via the central bank. Printing excess amounts of money (not backed by gold) leads to inflation and the devaluation of a country's currency, which can destroy a country's economy. Zimbabwe got into its hyperinflation mess by printing money to pay down its debt. In Germany, from 1918 to 1923, hyperinflation and deficit spending caused 30,000 percent inflation and led to the collapse of their economy. In 1910, Lenin said, "The surest way to overthrow an established social order, is to debauch its currency."
Many countries are sowing the seeds for rapid inflation with all of the massive "bail-outs" in 2008 and 2009. Printing money is one thing, but for the government to have to borrow it first at interest from a national bank controlled in part by private bankers is something else! Central banks have been given immense power; as Mayer Amschel Rothschild of the Rothschild financial dynasty once said: "Permit me to issue and control the money of a nation, and I care not who makes its laws".
The other problem with printing excess money is discussed in Murray Rothbard's book, The Mystery of Banking . In it he states: "The expansion of the money supply has caused inflation; but, more than that, the essence of inflation is the process by which a large and hidden tax is imposed on much of society for the benefit of government and the early receivers of the new money. Inflationary increases of the money supply are pernicious forms of tax because they are covert, and few people are able to understand why prices are rising."
You can see that central banking is a complex subject all on its own which few have the will to challenge. There are many resources on the subject. For a start, go to www.wikipedia.org and search "central bank" and "Federal Reserve", although it does not reveal nearly enough. One revelation that IS stated there is this: "Some economists including Milton Friedman, Ben Bernanke, Robert Latham Owen and Murray Rothbard believe that the Federal Reserve System helped to cause the Great Depression."
We have become a society of debt, and have become hooked on it just like people get hooked on narcotics. It gives us an immediate, short-term "high" i.e. the immediate gratification of buying something we do not have the money for. The banks and credit companies, via the central banks, have made it so easy for us to do that it is very difficult to resist, even though the long term effects can be devastating, especially in economic tough times.
For a start, they have created the "fractional reserve" system. In essence, this means that the banks only have to keep a fraction of the money you deposit with them. The rest, often around 90%, can be lent out to other customers, putting them in debt. So banks are walking a tightrope, hoping not too many people will withdraw money from their accounts at the same time. To make things worse, the banks and credit companies have been allowed to create debt out of nothing, like an electronic money printing press. This is also a complex subject. If you would like more details, there are many resources on the Internet. You can start off by going to Money as Debt.net and clicking on Reference Links, or try Sound Money on the Campaign for Liberty.com website or Financial Crisis for Beginners on the Baselinescenario.com website.
Our governments have not been a good example for us at all. In fact they are some of the worst culprits, with massive government deficit spending in many nations. This is actually a large part of the present economic problems we have. Politicians do not have the courage to do what is right, because it will be inconvenient for everyone for a long time while they get the government out of debt. They would rather hide the problem and settle for short term popularity.
There are many other factors affecting the economy. Here are just two. First, is the current use of stock markets with prices based partly on confidence (emotions and opinions) which make them vulnerable to massive manipulation. Second, is the U.S. dollar as the world's reserve currency. The main reason why the U.S. economy has survived so long, despite all of the debt creation and other problems discussed above, is that it has been used as the world's reserve currency for many decades. But now there are many countries proposing starting a new basket of strong regional currencies to replace the dollar as the world's reserve currency. It is just a matter of time, and when that happens, economic problems in the U.S., and other countries linked to it, will accelerate. I sincerely hope this does not happen, but if it does, be prepared. Possible outcomes will be hyperinflation and a depression.
Next section: Financial Preparedness
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