The Great Depression Online

Great Depression Online Archive Issue:

The Impending Wrath of Entitlement Programs

Day 3 of 7 - Seven Day Course

Inside Day 3 You Will Discover…

*** Why Entitlement Programs Will Drag the Economy Down
*** How the Federal Reserve has Ruined the Dollar
*** Nixon’s “Dirty Deed” and the Road to Hyperinflation
*** The Eventual Gift of Central Banking
*** And More!

The Impending Wrath of Entitlement Programs

On January 18, 2007, Federal Reserve Chairman, Ben S. Bernanke testified before the U.S. Senate, Committee on the Budget, on the long-term fiscal challenges facing the United States.


Federal Reserve Chairman, Ben S. Bernanke

"Unfortunately, we are experiencing what seems likely to be the calm before the storm.  In particular, spending on entitlement programs will begin to climb quickly during the next decade.

"The outcomes that appear most likely, in the absence of policy changes, involve rising budget deficits and increases in the amount of federal debt outstanding to unprecedented levels.

"A vicious cycle may develop in which large deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits.

"Ultimately, this expansion of debt would spark a fiscal crisis, which could be addressed only by sharp spending cuts or tax increases, or both.

"High rates of government borrowing would drain funds away from private capital formation and thus slow the growth of real incomes and living standards over time.

"To the extent that federal budgetary policies inhibit capital formation and increase our net liabilities to foreigners, future generations of Americans will bear a growing burden of the debt and experience slower growth per-capita incomes that would otherwise have been the case."

Bernanke's testimony was greeted with yawns from the Senate.  On February 28th, he repeated it to the U.S. House of Representatives, Committee on the Budget.  Again, more yawns.

Ironically, the proliferation of outstanding federal debt Bernanke spoke of was the creation of the very organization he Chairs: The Federal Reserve.

The Federal Reserve, The Dollar, and Paper Money

Passed in 1913, the Federal Reserve Act created the central bank to the U.S. Government.  By borrowing money into existence and lending it to the U.S. Government, The Federal Reserve has enabled deficit spending to bloom into a mammoth mountain of debt.

In May of 2007 the U.S. National Debt was over $8.8 trillion -- $8,800,000,000,000.  In other words, each citizen's share of this debt is over $29,000.

Since the creation of the Federal Reserve, the dollar in 2007 has an equivalent value in purchasing terms of what could be bought with a mere $0.05 in 1913.  In other words, it has lost 95 percent of its value.  And this trend has been accelerating.

Here's why...

Tricky Dick's Dirty Deed

In 1971, President Richard Nixon officially severed the dollars backing by gold making the dollar an unbacked fiat (paper) currency.  Without this restraint on the money supply, the Federal Reserve could create -- out of thin air -- an endless amount of dollars. 

And since 1971 the dollar has lost 80 percent of its value.


Former President Richard M. Nixon.
The Man Who Severed the Dollars Backing from Gold.

Whenever a central bank has managed a fiat currency, the end result has always been hyperinflation.  This is the eventual gift of central banking and happens when the money supply has been increased beyond what the economy can consume.

It devastates the purchasing power of public and private savings, encourages extreme consumption and hoarding of real assets, causes a flight of capital and discourages investment, and ultimately destroys the value of the currency.

It is the last resort of central bankers, trying to buoy up an economy overloaded with debt.

In short, the entire economy becomes a giant Ponzi scheme, where debt is repaid with the issuance of new debt, or in the case of a central bank, the creation of paper money.


M.N. Gordon
Great Depression Online

P.S.  Find out what you must know about Charles Ponzi in tomorrow’s edition -- Day 4 of 7 – of the Great Depression Online.


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