theanonymousamerican.com

I spent several hours speaking with people (I won't name names) on Capitol Hill yesterday, and it helped me to realize that even the most educated and influential of our society are still not grasping some very important concepts.  My hope is that this allegory might help simplify the issue of the money supply.

If you will; imagine that the domestic economy of the United States is a beach ball.  The Federal Reserve System is the pump attached to the beach ball.  Credit, better known to the public as "money", is the air that the pump pushes into the ball.  The mandate given to the pump is to keep the ball inflated; just the right amount for prosperity.  However, the pump, being a private corporation, is paid not based on national prosperity.  Instead, the pump's profit comes from interest payments collected from the total volume of credit pumped into the ball. 

The pump inflates the ball, and this is called "inflation."  During the inflationary cycle everyone in the ball can get easy money, but that is often counteracted by rising prices.  Eventually the ball gets overly filled and there is more money than there are good investments inside the ball.  This will cause the ball to rupture.  When this happens the excess credit being pumped into the ball will flow towards the bad investments, or in this case, the rupture.  As the money rushes out of the ball, never to return, it is called "deflation."  Let's recap.  Inflation is the creation and introduction of new credit/money into the beach ball/economy.  Deflation is the destruction and loss of existing credit/money in the beach ball/economy.

Now common sense tells us that we should allow for the deflation so that free enterprise might come in and repair the credit rupture by buying up the over valued investments for much less than the original (bad) sell price.  However, the Keynesian model, to which the U.S. currently subscribes, is not based on common sense.  Our current solution is to attempt to try and overcome the natural pressure deflating the ball  by pumping even more credit in than that which is leaking out.  There is no objection from the pump itself, because they are paid based on the volume of credit entering the ball, and not the success of their mandate.  There is very little objection from the ball, because the overwhelming majority of the ball does not understand what is happening, and focuses only on there decaying standard of living, and loss of jobs.  Unfortunately, the question "why" is lost on the ball.

This faster pumping can continue for quite some time.  But as more is pumped in the added pressure on the rupture causes the tear to widen.  Each boom-bust cycle requires a greater volume of credit to re-inflate the ball.  Eventuality the ball will collapse no mater how much new credit is pumped into the system.

The most disheartening thing to realize is that the credit being pumped into the ball must be paid back down the road with interest, and we are being charged by the amount of credit pumped, not by the amount of new capital returned.  And let us not forget who co-signs the note on each pump; its you and me.