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Understanding the Impact of High Prices, Inflation, and the Banking System

Explore how high prices, mal-investments, and recessions are affected by the U.S. financial system. This breakdown discusses the role of the Federal Reserve, inflation, and Keynesian economics, linking government spending, bonds, and the complexities of fractional reserve banking. Delve into the mechanics of money supply expansion, the implications of excessive bank reserves, and the pressures on U.S. Treasuries and the dollar. Understand how these financial dynamics contribute to the continuous rise in prices and the potential for future inflation.

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Understanding the Impact of High Prices, Inflation, and the Banking System

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  1. The Effect is: High Prices! • Mal-investments • Boom and Bust Cycles • Recessions 1913 Fiat Money (Paper) IOU’s ( Bonds ) Federal Reserve INFLATION !! $16 Trillion Can only spend what it takes from it’s citizens Government $ Spend Trillions $ GovernmentPayroll $ Federal Programs $ War We the People Keynesian Economics The General Theory, 1936 All Spending = Income Pay Taxes!

  2. - 10% Fractional Reserve Banking Sets Fed Fund Rate Buys the Bonds (Credits Reserve Account by $1 million) Discount Rate Federal Reserve Sells IOU’s: BONDS ($1 MILLION) Excess Reserves Above 10% of Deposits Deficit Reserves Below 10% of Deposits Overnight Can Not Extend Credit / Loans Commercial Bank Loans @ Fed Fund Rate Commercial Bank TOTAL: $10MILLION IN CHECK BOOK MONEY!! Prime Rate Expands Credit / Loans Businesses Individuals

  3. Inflation Process OPEN MARKET OPERATIONS $1 Million Purchase of Gov’t. Bonds Sells Buys Federal Reserve Securities Firm Wall Street Writes a check ----- Fed Bank Deposits $1 Million Check with Fed ======== Reserves increase by $1 Million Deposits Fed’s Check $1 Million TOTAL: $10 Million Money Supply Increase! via Check Book Deposits Commercial Bank Money Multiplier 10 / 1 $9 Million in New Loans

  4. Bank-to-Bank Inflation Process U.S. Competitive Banking System Formula (1 Minus the Minimum Reserve Requirement) Bank #A = $1 Million x .90 = $900,000 Bank #B = $900,000 x .90 = $810,000 Bank #C = $810,000 x .90 = $729,000 Eventually over 100 banks pyramid $9M on $1 Million in Reserves: Federal Reserve TOTAL $10 MILLION Lends $9M check book deposit to Macy’s Buys $9 Million in furniture from XYZ Company $1 Million Reserves Check from # A Macy’s Commercial Bank # A Bankrupts Bank # A Deposits $9M Check into Bank # B Bank # B Presents $9M check for redemption from Bank #A Commercial Bank # B

  5. THE PROBLEM • The Commercial banking System has Excess Reserves of about ($)1.5- Trillion Dollars! • Legally they can create ($) 15-Trillion Dollars in new loans (inflate the quantity of money)! • Already the National Debt at 16 Trillion is out of control. 2. The pressure on U.S. Treasuries and the Dollar is threatening. • Prices on everything are continually increasing and now poised to soar (including interest rates)!

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