Citation

Kritzer, Adam. (2009, February 10). Is the Fed Hurting the Dollar in the Long-Term. CurrencyTrading.net. http://www.currencytrading.net/2009/is-the-fed-hurting-the-dollar-in-the-long-term/

Purpose

The purpose of this article was to examine how recent Federal Reserve and US Treasury Department actions to stimulate the economy may have an impact on the long-term value of the US dollar.

Summary

Due to the severe downturn in the US economy, policymakers and analysts have taken to debating the efficacy of various programs the government has created to address the crisis. However, these debates have focused on short-term goals, such as stimulating the economy, improving credit flow to businesses and consumers, creating jobs, and increasing benefits to those out of work. The long-term effects of these programs and stimulus packages on the value of the US dollar is a topic that has not been addressed nearly as much.

In fact, since the crisis began, the Federal Reserve has been inflating the money supply by creating various new programs, discount windows, action facilities, and buying mortgage backed securities. But these have not stimulated spending, as consumers are saving more, creating the threat of deflation. Growing the money supply while confidence is being lost in the dollar may lead to a complete collapse of the currency and an inflationary depression.

Foreign countries, of course, have noticed the actions that the Fed and the Treasury have taken and have begun to shift away from the dollar as reserve currency of the world. While the dollar still remains the reserve, holdings of Euros have increased, and some countries that pegged their own currencies to the dollar have abandoned that peg as being too costly. China has also decreased the amount of dollars that it holds from 70% to 45% of its total reserves.

Conclusions

Essentially, the US government is relying on an assumption that creating vast sums of new money will not lead to large increases in prices down the line. The stimulus packages and attempts to paper over losses at banks, it is hoped, will have some other result than inflation or hyperinflation. Through low interest rate policies, the Fed is also hoping that it can fight deflation and encourage consumers and businesses to begin borrowing money and spending again. But this devaluation of the dollar in order to save the US economy may have grave impacts on the role of the dollar as reserve currency of the world. Other countries are already looking for a replacement for the dollar, or at least additional options to hedge their bets against the US defaulting on its debt and the destruction of the dollar.

Implications

Can the government really expect to create trillions of dollars of new money and expect inflation not to increase over the long term? Can the government borrow trillions more dollars from the rest of the world and not be expected to default on that debt sometime through a national bankruptcy or hyperinflation? Only time will tell, but this may be a case of "to ask the question is to answer it." The US Treasury and the Federal Reserve are furiously creating programs to bail out nearly every actor in the market, including banks, industries, insurance companies, borrowers, and consumers. This vast money creation will have to lead to higher taxes or inflation in the future. Kicking the economic can down the road for decades got the US economy to where it is now -- kicking it a little further will only increase the likelihood of depression as the economy collapses and hyperinflation as the dollar is destroyed.

Can the government really save the banking system? What does it mean that the banks have such low stock prices right now? What should ordinary people like us do to protect ourselves against the government's destructive policies? These are just a few of the questions that people are asking themselves as they watch the US economy slide into a depression.

The fact that banks have very low stock prices now compared to what they were just a few years ago proves how little trust there is in the American banking system. The banks took advantage of their creative financing schemes and wasted all of their trust around the world on subprime mortgages and securities fraud. Now that so much corruption has leaked out, there is no private capital available for these companies.

So the government has stepped in to begin nationalizing the banking system. Although politicians state that this is the last best hope to prevent a complete meltdown and save the world, and that they are only doing this reluctantly, government has always wanted to take more power. It already has control over the central bank through the Federal Reserve. Now it is taking ownership of the banks, where most of the money in the economy is created.

Nationalizing the banking system through the TARP and other methods is not so much an indication of socialism as it is of fascism in America. The banks will not be owned by "the people," but instead seem to be entering into partnerships with government, where bureaucrats will place restrictions on salaries, bonuses, and dividends, while dictating how the companies are run and who gets loans. The taxpayers, while receiving none of the benefits of the system, will be left on the hook.

The real danger is if the government takes on so much bad banking debt (from defaulted subprime mortgages, foreclosed homes, credit card delinquencies, and so on) that it loses its credit rating. US government debt has enjoyed a AAA rating from the credit rating agencies, but this may change if the government has to create so much debt in order to bail out the financial sector of the economy.

Through its inflationary policies, government can wreck vast areas of the world. Weimar Republic Germany, the US during the Revolutionary War, and Zimbabwe today are all examples of how vast money creation impoverishes a people. The role of money in an economy is too important to leave in the hands of politicians, who too often abuse the printing press.

If this happens in America, the dollar's current position as the world reserve currency will be threatened. As a result of this, the American empire itself may be threatened, as the military and the dollar act in conjunction to keep both the most powerful in the world. Lack of money is already turning America into a depression-era police state in some localities throughout the country.

So what is the solution? In effect, families must become their own central banks and leave behind their blind faith in the dollar and the Federal Reserve. People can purchase small quantities of gold, silver, and other hard assets to protect against a government that has so far created nearly $8 trillion to bail out the banks. Although asset prices are falling now, the overreaction to deflation will lead to hyperinflation down the road.

The average American has been conditioned to believe that taxes are an inevitable part of life and necessary to provide the most basic public services like roads, police protection, and social welfare programs. But direct income, sales, and property taxes are only the most visible ways that government takes over the rewards of productive activity from the poor and middle class, all while rewarding high income earners and corporations with tax breaks. Two regressive taxes that have hurt Americans include higher Social Security payments and inflation.

There seems to be a perpetual cry in the media and from politicians in Washington that Social Security will be insolvent within decades; therefore, either payroll taxes have to be increased for workers or benefits decreased for retirees. Unfortunately, government projections are routinely fudged, and making predictions regarding the state of a social program that typically runs a surplus every year is wildly pessimistic. In reality, warnings of Social Security going broke is nothing more than an attempt to shift tax burdens from the rich and corporations onto workers and the poor.

Because of the stable rate of taxation and the income cap, payroll taxes affect low income earners much more than those earning higher incomes. Combined with the portion of Social Security and Medicare that employers pay for their employees, nearly 14% of a wage earner's income is given to the government. Those with incomes over $90,000 only pay payroll taxes on this first $90,000, leaving them without a Social Security burden even if they take home millions of dollars every year. The amount of their income going to fund these programs is a substantially lower percentage than a family earning less than $90,000 per year.

Claiming that the welfare programs will go bankrupt in decades also ignores the fact that the entire government is bankrupt right now. There is always a budget deficit that the federal government funds by borrowing from other countries or borrowing from the Federal Reserve. Social Security, on the other hand, has historically run a surplus, bringing in more than it has paid out. This surplus is raided by the government, though, in order to lower the budget deficit very slightly every year.

Thus, calls for higher Social Security payroll taxes or decreased benefits is nothing more than a way to increase taxes on the poor and middle classes so that the government has more money at its disposal without raising taxes on the upper classes or business. Former Federal Reserve chairman Alan Greenspan routinely called for higher payroll taxes and decreased benefits in order to prevent a shortfall in the Social Security fund that was predicted decades into the future. This is simply scaremongering to convince worried workers to give the government more money to create a surplus which is immediately taken anyway.

But no acceptable amount of higher taxes or decreased benefits is enough for the federal government to meet its budget deficits. For this, the politicians turn to the inflation machine at the Federal Reserve, which prints any shortfall out of thin air in exchange for interest payments on Treasury Securities. Inflating the money supply, though, devalues the dollar and drives up the price of goods and services. Money growth over the past decade has driven up the price of food, oil, gold, and many other commodities.

The government and the banks in which the government deposits this newly printed money get a chance to use it before the inflationary effects are felt throughout the economy. This means that the rich and politically connected benefit from essentially free money, while the rest of us have to shoulder the burden of a debased currency and higher prices at the gas pump and the grocery store. Just like with Social Security, inflation is a regressive tax on the poor and middle classes and a way for the government to raise more money than it takes in while claiming to keep income taxes low.

Both payroll taxes and inflation affect the lower and middle classes more than big businesses or higher income earners. These are two of the most pernicious, regressive taxes that are imposed on the people disproportionately. Unfortunately, the scaremongering relating to the Social Security Trust Fund as well as the veil of secrecy around the issue of money creation and inflation have combined to trick the people into agreeing to pay more in exchange for a secure retirement and blaming speculators or Middle Eastern countries for rising prices. Government, though, has already raided the retirement accounts leaving worthless IOUs in exchange, and has debased the dollar in order to fund higher and higher deficits and make big government bigger.

Considering the slowdown in the economy generally, the credit crunch, the meltdown of the subprime mortgage industry, and steep declines in real estate values, there is an increasing possibility of numerous bank failures. But for homeowners who are stuck in devalued homes or are facing a resetting payment or will be experiencing a financial hardship, hoping for a collapse of their mortgage company will probably not let them off the hook for paying the loan back.

In fact, in the event that bank failures are so severe in the coming months and years that there is simply no company to send the monthly payment to, homeowners should plan on saving as much as they can. Bill collectors have the longevity (and often the personality and appearance) of cockroaches -- even after a nuclear attack or planetary disaster or economic crisis, they will shake off the dust and start doing what they have always done: harass people into sending them money for debts they never owned.

Also, even if the federal government takes over the failed lenders and begins the administration of the bank's activities, the best that may happen is that the mortgage loan will be sold off to vulture buyers and the homeowners will have a new lender to send money to every month. For loans that are prime, the sale price may equal the value of the mortgage; for subprime loans, they may be sold at a discount to anyone interested (even for pennies on the dollar), but homeowners will be the last ones to know if their new mortgage company bought the loan for less than the total amount owed.

Homeowners who have loans through the largest banks have probably the least likelihood of seeing their mortgage simply erased due to a failure, but possibly the most danger if the lender does fail. The largest financial institutions have been designated by the government as "too big to fail," and will be bailed out for as much as necessary to keep them going until the government itself needs to be bailed out or fails. However, some investors and customers may lose significant portions of the money they have invested with these banks, although mortgage clients will still have to continue paying as long as anyone is around to collect.

Bank failures were a common event during the Great Depression and runs on the banks were even more likely to happen during local or system-wide panics. These failures, however, did little to stop the largest banks from coming in, buying up mortgages from failed regional banks, foreclosing on farms and homeowners who were behind, and taking large portions of the country under their own control. When the supply of money dried up for average workers and families, only the banks could create enough money out of thin air and use it for their own purposes to ensure the poverty of the nation for a decade.

Regardless of how the banking system operates in the coming months, it is becoming clearer that one party to many mortgages must fail. Either homeowners and Americans will be going into foreclosure while bailing banks out, or the banks will have to fail but maybe fewer homeowners will end up losing their own homes. The only way the people can bail out these banks now is by massive inflation, which has been the Federal Reserve policy for, well, ever. Rising food, transportation, and materials prices due to a transfer of money from people to the banks will just cause more families to fall into foreclosure, which will require even more liquidity injections into the banking system.

In any event, the best that homeowners can do during difficult economic times is to plan for the future as much as possible. Keep paying the mortgage, save for a rainy day, and examine or help set up solutions to foreclosure in the community. Money is drying up for the average family, as banks refuse to lend and money transfers back into the hands of banks to pay off loans. As it dries up even further and the Fed gives the banks even more hundreds of millions of dollars, prices will continue to rise and homeowners will continue to fall behind. The best time to stop foreclosure is before missing a mortgage payment.

The initiating factor for the slowdown in the economy has been the fallout from the subprime mortgage industry and the resulting credit crunch due to higher than expected foreclosure rates. But it would seem that more homeowners facing foreclosure should not cause such widespread repercussions throughout the banking industry; in other words, the effects seem to be greater than the cause.

The reasons for the credit crunch, though, are far more numerous just people falling behind on their mortgages. Money is created primarily through the issuance of credit in the forms of mortgages, credit cards, business loans, and so on. Banks are able to create this money out of thin air, based on how much other money they have on deposit which has also been created out of nothing.

As long as loans are being paid back over time, this money creation scheme can continue for long periods of time. But the problem comes in when the principal for loans are created but not the interest. Banks make money from collecting interest, but they only create the principal amount of the loans.

This leaves the entire economy with a vast shortfall between the money created through debt and the money needed to pay back the interest on all of this debt. People who take out loans are forced to compete with each other to obtain as much money as they can in order to pay back the interest on the money they have previously borrowed but which had never been created.

The results of such a system are easy to predict: some homeowners will be able to gather enough money through production and pay off their debts in full. Others, though, may engage in successive cycles of borrowing, refinancing their homes and taking out new loans to pay back old interest but never coming out ahead.

Eventually, some people who borrow money will find that they have not gathered enough of principal money from other borrowers and they will have no choice but to default on their debt. Defaults are eventually written off by banks or the loans are discharged through bankruptcy proceedings, but the debts are eventually destroyed.

Banks, of course, plan for a certain amount of their loans to go bad or their borrowers to fall into bankruptcy. It is a necessary cost of creating principal out of thin air but never issuing enough money for all of the interest to be paid back. These loans, which the bank counts as assets because they were expecting to be paid back, are simply written off and the money is counted as destroyed.

Larger than expected defaults, however, cause larger than expected destruction of the money supply. Following a huge increase in the money supply by giving loans to people who could not afford to pay them back on properties with inflated values, large destructions of the money supply can affect the lending industry as a whole.

The amount of money banks are able to lend depends on how much money they have in reserve. If a large number of loans goes into default or foreclosure, bank reserves will shrink and the amount that banks can lend to homeowners or individuals or businesses will also shrink.

Coupled with the loss of confidence in the previous loans that had been made, banks will no longer even be willing to lend money to each other, let alone individuals or small businesses. This is the resulting credit crunch as banks raise lending guidelines or refuse to create any new money as debt to circulate in the economy.

But without the creation of new money, a new threat is faced by both borrowers and lenders. That is, even fewer people will be able to obtain the remaining money necessary to pay off their loans, and more bankruptcies and foreclosures will result from the credit crunch caused by the destruction of debt money from previous bankruptcies and foreclosures.

This is one reason that the credit markets have begun to freeze up, regardless of the central bank interest rate or money supply manipulations. Banks created money for people who would never pay it back, and they have no choice now but to suffer the consequences of these decisions or hyperinflate the money supply by creating new loans in the hope that it will result in old loans being repaid.

In essence, the subprime mortgage experiment was a Ponzi scheme at its least thought out. But now that both the people and the banking industry have grown accustomed to federal government and central bank bailouts, without a fundamental change in the monetary system, little can be done to help homeowners ever pay off their debts to the banks.

While I was out running this weekend, it was difficult not to notice all of the new houses for sale in the area, along with all of the old houses that have yet to be sold after nearly a year. I have little doubt why these properties have not yet found buyers, as banks are simply not lending to new loan applicants unless they have great credit and lots of cash. In a community built on manufacturing jobs, those two circumstances are not likely to be met.

But it was also not surprising to notice that gas is now well over $3.00 a gallon in the middle of the winter. Of course, the fact that Americans are spending more of their shrinking supply of dollars on transportation costs just to get to their increasingly insecure job contributes to the problem of not having enough money to pay the bills, let alone save up for a down payment or overcome a financial hardship.

Why is it that the cost of nearly everything essential, such as food and oil, has been going up, even as consumers are saving less money and the economy is slowing down?

Looking to the government, the problem should become obvious. As the banks realized how much bad mortgage debt they held, panic set in. The Federal Reserve bailed out the banks with newly-created money, attempting to inject liquidity into the system. But the banks did not use that money to keep operating and lending, instead using it to bail out underperforming hedge funds or to serve as a reserve for future losses.

In essence, the banks got free money which will help them ride through the economic slowdown without having to make wiser financial decisions to make back their losses. So they will not have to provide mortgages to home buyers and create profits from offering a service that will benefit customers. They can just use the inflated money to prevent from having to make good lending decisions.

Now the homeowners who are facing foreclosure are simply being shut out by large lenders, who refuse to lend them money to refinance or work with them to put together a loan modification or repayment plan. With the banking industry bailout, the banks have no incentive to do anything but foreclose on the houses and let them sit until the real estate market recovers and they can make a larger profit. After all, the money they would have received from collecting payments on good loans has been provided free of any risk by the Federal Reserve.

Why not just do away with the entire lending process altogether? Banks can now start giving out loans to those who can not afford homes at all, then get the money they would have made on a good loan as a gift from the Fed, and end up with the real estate, as well.

If this sounds like many mortgage lenders are parasites using homeowners as their hosts, sucking away as much cash as possible and then leaving the house an empty shell after the foreclosure victims are evicted, this analogy may not miss the mark by much. It's just more evidence of the "Tapeworm Economy" in action.

Of course, not every homeowner will experience this in action, but many will find out just how little their bank cares about them when they begin missing payments. We get emails every day from homeowners trying to stop foreclosure, asking why the bank is not accepting their payment any longer, or why they can not get a call back from the bank, even when they want to work out a solution.

In an economy where the banking industry can do as it pleases, making loans it knows will never be paid by the homeowners, but knowing they will make their money back through inflating the money supply, and end up with the underlying asset, is it any wonder banks would rather make new loans instead of provide service to their existing customers?

It would be interesting to examine how banks would act if they were not certain that poor decisions would result in a central government bailout.

The book that is the subject of this review is Gold: The Once and Future Money, written by Nathan Lewis and published in 2007. Lewis, “formerly the chief international economist of a leading economic forecasting firm,” provides a thorough examination of using gold to support the value of a currency (the gold standard ), as well as a history of gold standards in the past and his arguments for returning to a gold standard from the international floating currencies now in use. The purpose of the book is to argue the case for a return to the stability of the gold standard, and to dispel the most common myths of the failures of past gold standards.

Lewis divides his book into three distinct sections. The first section, “Money in All its Forms,” provides much general economic and historical background of gold. Such topics are examined as the stability of gold, the differences between hard money and soft money, a history of various gold standards, taxes, and inflation, deflation, and the value of currency. Although much of the information presented in these chapters is very technical, Lewis breaks up the monotony of the discussion with historical events and anecdotes. In fact, one of the more memorable sections of the book is the history of the gold standard in ancient and pre-modern civilizations. One common feature of these stories is that civilizations, once the gold standard is abandoned, quickly march towards currency devaluation and destruction, but, if the gold standard is reinstated, there can be a return to normalcy.

In the second section of the book, “A History of US Money,” Lewis examines the history of currency in America, from the time before the Revolutionary War and its hyperinflationary results, to the numerous competing currencies of the new country, to the pseudo-gold standard of Bretton Woods, to the current floating dollar. Interestingly, the US was “the sole major power to stick to the gold standard" through World War I, and this is one of the reasons for its post-war boom in the 1920’s. And after World War II, the strong US dollar was used as the new gold standard through the Bretton Woods system, whereby other major nations pegged their currency values to the dollar, which was in turn pegged to gold. Obviously, this system was not a true gold standard, and it broke down in 1971, and currency values have floated since then. Lewis also discusses the relative success and failures of various Federal Reserve chairmen, such as monetarist Paul Volker throughout the 1980’s, and the gold standard advocate Alan Greenspan through the late 1980’s, 1990’s and into the beginning of the twenty-first century.

The final part of the book “Currency Crises around the World,” is an examination of modern currency crises faced by nations, mostly in the 1900’s and early 2000’s. The first country Lewis discusses is Japan, focusing on the period after the Second World War and the nation’s amazing rise to economic prosperity. Through low taxes and low interest rates, Japan was able to improve the strength of its currency against gold and encourage economic growth to become the third-largest economy in the world. It has only been recently, since leaving behind many of its pro-growth policies, that Japan has experienced a long recession. As Lewis states, “Japan’s two great periods of economic success, from 1868 to 1914 and from 1950 to 1970, were both eras in which floating currencies were replaced with hard currencies.”

Other currency crises that Lewis looks at include the Asia Crisis of the late 1990’s and Russia, China, Mexico, and Yugoslavia. Throughout his evaluations of each of these events, Lewis points to various recurring themes. In each of these countries, the falling value of the currency caused economic hardships, and their responses to these crises directly affected the countries’ ability to recover or their worsening financial conditions. Lewis points out that lowering taxes and encouraging private enterprise had far greater stimulating effects than raising taxes and higher government deficit spending. Also, in countries that received loans and “advice” from the International Monetary Fund, the currency tended to weaken even further, prolonging any economic recovery. Countries that began IMF programs and later abandoned them experienced a rate of recovery faster than that resulting from the IMF program, and countries that accepted no help from the IMF and instead lowered taxes and interest rates experienced little hardship and fast recovery.

In fact, some of these themes play out throughout the book, as Lewis examines the policies of various countries in various times of economic hardship. When countries experience a loss in the value of their currency, it is far better to return to a stable currency. Thus, Lewis sees most of the conventional economic wisdom used by central banks as misguided, from targeting interest rates to encourage growth or relying on higher taxes, wage and price controls, and government deficit spending. The most important tool of central banks that Lewis examines is their ability to create or destroy base money, by selling or purchasing government bonds. This adds or subtracts from the supply of money, and is more easily managed and a stronger indicator of the health of the currency, according to Lewis.

Lewis’ book provides strong arguments and common sense examples that support a return to a gold standard for the US dollar and other currencies worldwide. Far from there being shortcomings of the gold standard, Lewis shows that inflation and currency devaluations have resulted from countries abandoning the gold standard at various points in their history, most often during times of war. Various arguments to explain the actions of the economy and currency values have been proposed over time, with the result being the current strategy of central banks to manipulate the economy through monetary and fiscal policies, rather than pegging the value of the currency to gold. These new techniques, according to Lewis, have failed and will continue to fail, as they give central banks the excuse that they are not in control of the currencies of their nations. This is a mistake, and the current era of worldwide floating currencies will come to an end; the only question remaining is how difficult and voluntary the transition will be.

As part of their advertising campaigns, many banks offer their customers some sort of enticement or sign-on bonus for opening a new account with that particular bank. While most banks used to hand out some sort of gift, such as toasters or duffel bags or the like, some large banks are now offering new customers extra cash, as long as they keep the account open for a certain amount of time. These sound like great deals, but, as with everything else with banks, there is another side to the story.

Banks offer these enticements in order to get more customers to do business with them. With such a vast amount of competition in the banking industry, large banks are working as hard as they can to remain as large as they are, and are looking for as many customers as they can get by rewarding new customers who open accounts.

Due to the nature of the US banking system, if a customer were to deposit even $100 with the bank in the new account, the bank will be able to loan out nearly $90 of that money to other customers. If they decide to give the customer back $50, and give them an opening balance of $150, then they can loan out even more: in this case $135 of the original $100 that was deposited. So these arrangements always end up working in the bank's favor, since they can loan out more and make more money on interest that they collect from their lending activities.

This is because banks make their money on how much money that their customers have on deposit with them, since they will use those deposits to make loans and collect interest. Giving a customer an extra $50 that is created out of thin air is really very little to them, and comparable to other banks that may give their customers a $50 gift bag or toaster or some other appliance. But cash is a better enticement and works out better for the bank, as well, because the bank creates the money without having to spend it on an actual gift.

Many of these accounts, though, have strict time limits that the account needs to be open, or the bank will claim back their cash gift. There is no consequence if the customer decides to close the account after the initial period (which is usually at least 3 months), but it is important that the customers do not write bad checks or create overdrafts. Those activities can have consequences later on when they try to open another bank account with a different company. But just opening or closing a bank account doesn't impact the customer's credit, since they are not borrowing money that they have on deposit in the first place.

Our next post will look at what does happen, though, if a bank customer has a serious overdraft and is unable to cure it. In these cases, the bank will give the customers a period of time in which to come up with the extra money, but will close the account if there is no way to get back on top of the account. Having a bank account closed due to an overdraft problem is a very serious problem for consumers, and it is more common in homeowners facing foreclosure than we would like. The same financial hardships that can lead to foreclosure will often lead to charged-off credit cards, collection accounts, or closed bank accounts. The closed bank account, however, is arguably the most devastating of these events, and it is what we will examine next.

The book that is the subject of this review is Gold Wars, published in 2001, by Swiss banker Ferdinand Lips. Lips' stated purpose is to inform the public of a critical monetary, currency, and gold war. His book spends much of its time examining the role of gold in our current worldwide fiat monetary system. The subject of sound money is one that should interest homeowners who find themselves falling behind on their mortgages and in danger of foreclosure.

Lips wastes very little time in explaining how money works and getting into in-depth theoretical discussions of monetary policy and the gold standard. He starts with a brief overview of the role of gold as money throughout history, from the Ancient Egyptians up to World War I, the Genoa Convention, and the Bretton Woods agreements of the 1940's. Lips sees the beginnings of the current financial crisis in these events and agreements, as they allowed for governments and central banks to print paper money with no backing.

The book spends much of its time moving throughout the history of central banks' manipulations of gold as money. Lips states that governments strive to keep the price of gold down because the precious metal is one of the few goods that they can not control. National currency that is backed by gold would not allow for governments or bankers to destabilize the price of gold arbitrarily, or cause inflation by printing too much money.

A vast number of other issues relating to the use of gold are also raised. Some of these issues include the manipulation of prices caused by hedging, the role of the International Monetary Fund in controlling gold prices, and the financial and human devastation caused by the manipulation of the price of gold in poor gold-producing countries, mostly located in Africa. Although there is little room in this short (280 page) book to examine each of these items in detail, Lips does a remarkable job of bringing these often overlooked issues to light.

It is the last chapter, though, that seems to touch the author most intimately. He examines the betrayal of Switzerland in the 1990's that caused that country, whose currency was one of the last to be backed totally by gold, to abandon its sound money and join the rest of the world in the funny money fiat game. Lips sees the country's joining of the IMF as the real end of Swiss monetary sovereignty, although the nation did not officially abandon its gold until 1997. This event caused the Swiss currency to float against all the other currencies of the world, and the country has sold much of its gold since this time.

The overriding theme of the book is the gold wars that have been waged between central banks and the precious metal. Although it is inevitable that the current system of debt-based paper money will eventually fail, the designers of this system have chosen to manipulate the price of gold ever more, in order to keep up the appearance of gold as a poor backing for sound money. However, through quote after quote from respected bankers and researchers, Lips presents the case that this manipulation will only make the crash of the current system all the more serious when it finally arrives. Lips uses such sources to back up his arguments as Alan Greenspan, former chairman of the US Federal Reserve, and Congressman Ron Paul, former member of the Congressional Gold Commission who recommended that gold once again be used in monetary policy.

This book is an amazing introduction to the ideas of gold as money and its manipulation by central banks throughout time and across the world. It is also a well argued treatise on the futility of continuing to drive down the price of gold and the cruelness of the current credit-based system that is so easy for governments to manipulate. The book is highly recommended to anyone who has ever wondered why prices always seem to rise even when their own financial situations have remained stagnant or are declining.

It is often amazing to witness how much of a homeowner's income goes towards paying for taxes and interest on their debts. Even more expensive than these costs, though, is a hidden tax that affects the lower and middle classes and causes the value of their money to drop year after year. This tax is caused by inflation, or the rising of prices for goods and services in the economy. And because no one addresses this hidden tax, it is very easy for homeowners to miss it, until it has become a problem.

Obviously, no one likes paying income tax, sales tax, the gasoline tax, or any other form of tax. Accountants spend much of their time consulting their clients on how to reduce their tax burden as much as possible, while remaining within the boundaries of the tax system. Stories about businesses and individuals who do not pay their taxes are common in the news, with labels like "tax cheat" and "crook" being applied to the alleged perpetrators in almost every circumstance.

And interest charges are no better. One of the main causes of the current record foreclosure numbers is the simple fact that many homeowners took out adjustable rate mortgages (ARMs) and now their interest rate is too high. They were used to paying a small amount of interest and can not cope with an interest cost almost twice what they were originally paying. Interest on credit cards is even higher, and many homeowners fall behind on their bills because they are futiley trying to pay back the interest on the money they borrowed to pay last month's bills.

Inflation, though, causes even wider-ranging problems in the homeowners' financial situations. When the cost of gasoline, natural gas, food, or other goods and services increases, and is not coupled with an increase in the consumer's income, then the consumer has to use more of their money to purchase the same amount of goods. The value of their dollar has gone down, and they will have to purchase less, make more income, go without, or borrow. Most consumers choose to borrow, putting the most basic necessities on credit cards and then taking out home equity loans to consolidate credit cards and repeating the cycle. But the first instance of inflation causes homeowners to begin losing money, and then borrowing, combined with higher interest payments on the amount they borrow, contributes even further to more and more of their income being spent on phantom taxes and interest. Rather than being able to make necessary purchases, or contribute to their savings, they have to borrow money and pay it back.

This is one reason that banks set guidelines on the percentage of income that a homeowner can dedicate towards their house payment (usually 28-55%). Banks know that taxes will cover around 25% of a homeowner's income, interest on car loans and credit cards made by banks may cover another 10-15%, and that leaves the mortgage to cover another 30-50%, leaving somewhere between 10-35% of the homeowner's income to pay for basic necessities, such as heat, food, water, and clothing. If any is left over, it can usually be spent on recreation, although most banks would much rather that homeowner use credit cards to pay for entertainment, which increases the interest charges to the homeowner. Add in inflation to this, and homeowners see their share of the income steadily dropping, as they have to spend more and more on basic necessities and recreation becomes a thing of the past, or is increasingly put on the credit card.

Inflation, interest, and taxes are the three areas in which homeowners see most of their income disappear into a black hole from which they get no return and which provides them with nothing to show for these expenses. As energy prices continue to rise even further, this will cause general price increases in almost every sector of the global economy, causing continuing inflation, unless changes are made to the way money is created in the first place. Unfortunately, as 2008 Presidential Candidate Ron Paul explains, "The inflation tax, though hidden, only makes things worse. Taxing, borrowing, and inflating to satisfy wealth transfers from the middle class to the rich in an effort to pay for profligate government spending, can never make a nation wealthier."

With home prices falling, the value of the dollar declining, inflation running rampant, and energy prices rising prematurely, it should cause all of us to take a few moments to consider what money actually is, and why we all place such a huge value on it. Is the pursuit of green paper, coins, or digital points worth the efforts that we put into them, and why, increasingly, is the same efforts generating less money -- even as inflation indicates that there is more money to be had?

It is this question that homeowners nationwide should be asking. For all of their hard work, they are rewarded with job cuts, higher prices for everyday goods and services, and increasingly strict lending guidelines to take out a loan from a bank. This begs the question of who is in control of the economy and the money -- the people, or some secret decision-making body who decides how much or how little money to filter out to the population. And where does all of this money get its power from?

Obviously, the value of any form of money is based solely on the faith of the people using the money. If no one in the world believed they could trade goods for green paper, then all of the dollars in the world would be worth little more than paper to recycle into something more worthwhile to humanity. But, because hundreds of millions (if not billions) of people believe a dollar is inherently valuable, the US economy can continue functioning the way it has for decades. Of course, the dollar used to be backed by precious metals; i.e., gold, but now it is solely backed by faith. The paper used to be a receipt that could be traded in for an amount of gold, but now it is only a medium of exchange, better than some, worse than others.

And now, even the paper is disappearing as the banking system has converted more and more to electronic "points." These "points" are simply a number in a computer that can be traded for actual things. I can trade you some nonexistent points and you would give me your car, or even your house. In fact, you would probably rather I give you these points than if I offered you cash for your house, since you would just take the cash and convert it into points in the end, anyway. And then you would use your new points to buy other goods.

This may seem like the arcades that were popular in the 1980's and 1900's, where you would play a game (go to work) in order to earn tickets (get paid a salary), and then trade the tickets in for a prize (down payment on a house). The difference in real life is that everyone else is playing the same games, less tickets are being given, and the cost of prizes has skyrocketed. Not to mention the fact that any game that you are playing can, without notice, stop the game and kick you out of the arcade. And you can not just go to another game and start earning tickets again -- you must wait for a whole new arcade to offer you the chance to play their games and score points.

Welcome to the monetary system in America. Go to your arcade-work, play your game-job, and ask for enough tickets-money to afford the biggest prize-house, and hope against hope that the arcade-work will not reject-downsize you.

And where do the banks fit in, you ask? Remember those machines where you'd put in your (relatively) valuable dollars in exchange for (relatively) worthless tokens? Please deposit your paycheck (Payday loan), car (title loan), or self-esteem (signature loan), and get your new loan that will not be enough to improve your life in any substantial way.

If you think you have money problems, just remember -- you only have the problem because you (and everyone else around you) believe that money has some value to it. It doesn't.

Have you ever wondered why your mortgage has gone up significantly in the past couple of years and for some months now? This has caused many of you to miss payment, face foreclosure, lose your homes, and be evicted.

Obviously, much of the reason for these unfortunate occurrences has to do with the fact that you're in an adjustable rate mortgage (ARM), which means that as rates go up, so do your payments. But this doesn't even begin to give any reasons for rates going up, does it?

In an earlier blog, we discussed how the two major entities, the federal government, and the Federal Reserve System, control how money works in the economy. The government controls the fiscal policy, and the Fed controls the monetary policy. As the article discussed, it is the Fed who determines the rate at which banks borrow money from the government, and this rate affects all of the interest rates in the economy.

So, logically, if the Fed increases its rates, and rates increase throughout the economy, then, eventually, when the time comes, your ARM mortgage payment will increase. When this happens, you may find yourself completely unprepared for the huge increase in your payment and you may begin falling into foreclosure. So, in effect, it's the Federal Reserve Bank's fault you have to stop foreclosure, right? Well, not entirely.

You see, the Fed sometimes has to increase the rates, in order to give people who hold dollars a reason to keep their dollars. If the interest rate on dollars is higher, than the value of the dollar remains high, which means the price of goods and services remains low. It is a very bad sign if the dollar loses value, because this means that you will need more and more dollars to buy the same amount of goods. When this happens, prices rise: gas, heating, food, electronics, everything.

So the Fed had been raising rates for quite some time, before recently leveling off. Has this affected the value of the dollar, keeping prices low and dollar values high?

Unfortunately, in another bad sign for homeowners facing foreclosure, the value of American money has fallen quite noticeably. In fact, your money may be worth more when its recycled into something besides money. Yes, this means that you could, potentially, take your pennies and nickels, melt them down, and sell the metal for more than what the pennies and nickels were worth.

How is this possible, though?

Very simply, the value of the metal in a penny is now worth $0.012, or 1.12 cents. As a penny, you can only trade it for goods worth 1 cent. But as a metal, you can trade the metal the penny is made out of for goods worth a little more than one cent. Nickels are acting likewise: the metal in a five-cent nickel is now worth 6.99 cents.

Therefore, the materials your money is made out of is worth more than the world's faith in the American dollar. Scary, huh? Further declines in the value may make our currency worth even less, or, scariest of all, nearly worthless.

This may explain why some of you are seeing your mortgage payments increase by hundreds of dollars per month. Put very simply: your money isn't worth enough to the economy anymore. In order to function in society as a homeowner, you have to give more and more dollars, since your money is worth less and less.

And if you're thinking of getting some extra cash by melting down some of your loose change, you may want to reconsider that option very quickly. New rules released last Thursday state that you may face thousands of dollars of fines or even jail time, if you melt down your currency.

Think you've found a loophole by taking the money to Canada or Mexico to melt it? Think again. As USA Today states, it is "illegal to export the coins for melting. Travelers may legally carry up to $5 in 1- and 5-cent coins out of the USA or ship $100 of the coins abroad 'for legitimate coinage and numismatic purposes'."

So where are homeowners left? Well, to sum up, you will have a very tough time keeping your mortgage payment low, due to the higher rates. Also, you will have a harder time making your payment, as your money is worth less. You won't be able to capitalize on the metal in the currency, since it is illegal to melt it down. And you can't ship the money out of the country to be melted down, since that is illegal.

This is one of the main reasons you need to examine every option to stop foreclosure, including doing it yourself, and enlisting the help of third parties who are trustworthy. As the value of money keeps decreasing, you'll have to use it more wisely, and learn to do more on your own to keep your home. If you're already in foreclosure, you have to stop foreclosure as soon as possible. Every day, your lender adds more fees and interest and charges to the account, requiring you to pay more and more money to them to save your home. If your money is worth less (or worthless), then you will be guaranteed to lose your home if you do not act in time and act wisely.

You need to know your options. You need options to save your home fast. You can't wait anymore, since you don't know if today is the last chance you'll ever have to keep your home.

This post is focused on an arcane bit of knowledge that illustrates how money works in the economy. It does not directly relate to foreclosure or real estate, but the policies that are used to control money directly influence the behavior of the real estate market, including the increase or decrease in home values. Having a basic knowledge of how money is supplied to the economy can help homeowners understand how economic-related hardships become more probably at certain times, and how best to stop foreclosure in any economic cycle.

The mechanisms of money are controlled by two parties: the federal government and the Federal Reserve System. The government controls the supply of money through a process called "fiscal policy." The Federal Reserve Bank controls the supply of money through a process called "monetary poclicy." We will briefly discuss each of these policies, how they are enacted, and the eventual repercussions within the economy.

Fiscal policy is controlled by the federal government through the tax policy and government spending.

Through the use of taxes, the government can indirectly increase or decrease the supply of money that consumers and businesses have access to. When the government lowers taxes, everyone has more money to spend on other items, such as new homes, personal goods, or business equipment. If taxes are raised, the government collects more money from everyone, thereby decreasing the amount of money in the economy. This causes a general increase in prices due to the higher demand for fewer dollars.

In reality, this can be related to quite easily. If you receive a large tax refund every year, then you have more money to spend on items like TVs, computers, vacations, and food. If millions of people have extra money to spend on these items, then prices will increase to meet the rising demand. A small tax refund, or having to send the government a check due to higher taxes will cause you to spend less money on bills or consumer items. Prices will fall due to fewer people being able to afford items such as iPods or home additions.

In terms of the other method of influencing the economy, the amount of money the government spends can increase or decrease the supply of money in the economy. If the government increases federal spending to programs, then more money enters the economy. Alternately, if the government decreases its spending on federal programs, then less government money enters the economy.

In practice, this means that if the government spends extra on the federal forest fighting program, for instance, then more employees are hired and more firefighting equipment is purchased, which puts extra money into the economy. And if programs are cut or scaled back, employees are laid off and contracts are canceled for equipment, thereby decreasing the amount of money in the economy.

These are general explanations of the two main ways the government can influence prices of goods in the economy: through taxes and government spending. The effects of this fiscal policy techniques are felt indirectly by the economy as a whole and do not have the same level of impact as the monetary policy practiced by the Federal Reserve Bank.

The Federal Reserve Bank is the central bank of the US and sets the interest rates at which banks can borrow money from the federal government. The Fed, as it is commonly called, can control the supply of money in the economy directly by a number of different tactics.

The first way involves the Fed purchasing or selling government securities, such as Treasury Bills. If the Fed buys large numbers of these, then they exchange money for the securities, and more money is put into the economy when investors exchange their Treasury Bills for money. When the Fed sells these securities, then they are exchanging money from investors for the promise of money in the future, and this decreases the amount of money in the economy. Investors trade their dollars for Treasury Bills, and the Fed holds onto the dollars, preventing them from going back into the economy to be used for other purposes.

The Fed also controls the amount of money that banks have to deposit with the Federal Reserve Bank. When banks have to deposit a large amount with the Fed, then this money can not be used for additional loans for consumers or businesses. This can raise interest rates, because more parties are competing for less money. If the Fed lowers the deposit requirement (known as the reserve requirement), then banks can use more of their money to extend credit to customers, and this money finds its way into the economy. Interest rates for loans and mortgages will go down, as there is more supply of money to be loaned out.

A final way that the Federal Reserve can control money is by directly raising or lowering the interest rate at which banks borrow money from the Fed. When banks have short-term problems paying extending credit or paying on demand deposits (such as checking accounts), they can borrow money from the Federal Reserve directly to meet their needs. If the Fed raises interest rates, then banks are less willing to borrow money and do not lend as much money, or lend money at higher rates. As the Fed lowers its rates, then banks can also lower their rates or extend extra credit, as their cost of borrowing decreases.

The Fed directly influences the economy by controlling the total supply of money by creating or destroying money and determining the rate at which consumers can borrow money.

Homeowners are the group most directly affected by these changes in the money supply. If home values decrease as a result of higher interest rates, or a recession in the economy, then homeowners in foreclosure may find that they owe more on their homes than the current value. They will have a hard time selling their homes to stop foreclosure, and may not be able to refinance at all.

Thankfully, the economy operates in cycles of increasing and decreasing values, with a general optimistic trend. This means that prices, even if they decrease, can generally be expected to increase to their original price in the near future and will almost always increase beyond their original price in the long term. Of course, this is only small consolation for foreclosure victims who would benefit from higher home values in the short term.

Hopefully, this post explains clearly how the supply and cost of money in the economy, with a focus on home values, is affected by changes in governmental policy and operational policy of the Federal Reserve System. It is meant to give homeowners a bit of information regarding the broader economic context of their fight to stop foreclosure. It is not meant to provide an exhaustive explanation of how our economy works, but merely to be a meaningful introduction.

Knowing that the economy operates in cycles that are affected by these two entities can help homeowners realize that a foreclosure season in the economy is just like any other season: it comes periodically, may have extreme conditions, but will eventually pass into a different phase leaving only memories.