Inflation and Money Creation 101

Since 1913 we have had a monopoly central bank commonly referred to as the Federal Reserve. Before the Federal Reserve we had, more or less, free banking with various federal government interventions, laws, and central planning. US Central Banks (1791-1811) and (1816-1841) were put out of business due to inflation, corruption, and general incompetence.

The First Central Bank of the United States (1791-1811) created inflation, corruption, and scandal

Under the private decentralized system of banking, banks typically loaned out 50% to 83% of their deposits. Today that number is legally 90%. Banks under the Federal Reserve System are MORE leveraged than under capitalism. A typical bank before 1913 loaned out 79% of its deposits in the form of loans. Before 1933 the public could redeem their dollars for physical gold. This prevented banks from printing money not backed by gold, or before 1873, silver.
The Federal Reserve remained on a loose gold standard, called the Bretton Woods system (1944-1971) that allowed selected central banks to exchange dollars for gold. In return for this privilege the central banks generally used dollars as their reserve currency “because it was backed by gold and as good as gold.” In 1971 Nixon removed the United States from the gold standard in part because of the pressures to finance the Vietnam War and increased federal expenditures on programs such as the “Great Society” social welfare programs designed to eliminate poverty.
First the basic principal of printing money is to give the money to your favorite constituencies so they can always be in a position to outbid the peasants for goods and services. The favorite constituencies of the Federal Reserve are the Washington politicians and Wall Street. The game is rigged, how can you compete against an institution that can print money whenever it wants? You can’t.

The second central bank of the US (1816-41) was ended due to inflation, corruption, and scandal

The elites watch you work like a dog creating wealth, and then steal your wealth through inflation and taxes. You always end up broke and the elites remain permanently enshrined in their positions of power and privilege, thanks to the wonders of the central banking system.
The elites want readily available credit and the ability to pay back their loans in cheap paper dollars, not hard gold or silver. The elites also want inflation for the prices of the goods they produce to exceed the wages of the workers. This is the secret to wealth inequality. Most workers do not have the educational background to understand inflation. Prior to 1933 they were protected from greedy bankers and politicians by being able to possess gold, but with a fiat currency backed by nothing they are at the mercy of the central bank that allows politicians and Wall Street to steal workers money by using inflation to disguise the theft.
So what has happened since 1971 as we prepare to march over the fiscal cliff of financial insolvency?
Since the complete transfer from a fiat currency the Dow Jones Industrial Average (DJIA) has increased 1,262% and the Gross Domestic Product (GDP) 1,233% using “nominal” numbers or numbers not adjusted for inflation. More or less in lock step as one would expect.
Total credit market debt owned has increased 2,902%, outstripping GDP growth by a factor of 2.35.
The Federal Reserve monetary base, (coins, paper money, and commercial banks’ reserves with the central bank) has increased 3,658%, outstripping GDP growth by a factor of 2.97.

The third central bank of the US will end its reign soon mired in inflation, corruption, and scandal

Gold, the traditional source of real monetary value, has increased 4,177%, outstripping GDP growth by a factor of 3.39.
What these numbers are saying is there has been a huge creation of credit and cash by the US central bank as well as the European Central Bank (ECB) that is inflationary and not justified. Gold is simply a barometer reflecting the increase in the money supply as well as the justified inflationary fears of investors.
In past times with gold and silver when times were good people demanded to use their money for consumption. This demand for money increased the cost (interest rate) for banking deposits. When the interest rate increased capital users of money stopped expanding (using money), waiting patently for the day when interest rates declined. When the economy slowed down consumers prefer to reduce consumption and save. This saving reduces interest rates and signals to capital users that now is a good time to expand when money is cheaper. This basic interaction between consumers and capital users of money works perfectly when there is capitalism and no central bank or federal government interfering in the market place. Money, gold and silver, are allocated in an efficient manner for the maximum benefit of society.

The Second Bank of the United States Chairman Nicholas Biddle was just as corrupt as Ben Bernanke

When a banker loans out money he would expect to see a return above the inflation rate plus 3%. Prior to 1913 there was virtually no inflation. Deflation was more common because producers found cheaper and more efficient ways to produce goods and services similar to today’s price reductions on electronic products. So a typical banker would loan out $1,000 would expect to see $1,030 paid back in a year.
So why are bankers loaning out the equivalent of $1,000 to get a payout of $425?
Your guess is as good as mine.
That is the essence of why the world is on the verge of a market failure and collapse. The central bankers have inflated the money supply to historic proportions. There is nothing backing this money but the promise to print more money. It is a Ponzi scheme. It will collapse.
The yield on a 10 year US Bond is 2.02%. With an official inflation rate of 3.6% why would anyone hold a 10 year bond till maturity, essentially losing 1.6% per year?
The answer is no one plans on holding that 10 year bond till maturity. They are hoping the economic chaos in Europe, China, and Japan will drive the price of the bond higher and they will be able to sell the bond for cash, and a profit, before the inevitable bust comes. As long as the number of suckers exceeds the number of people cashing out the game goes on.
Someday even the great and mighty central banks will not be able to print enough to keep pace with those cashing out. That day is fast approaching. When the US Treasury Department is bailing out Europe it is only a matter of time before the math catches up with the banking, government, and private sector elites.