The US Chief Economist's Recent Explanation of How Money Now Works Is the Most Important in History
And why all of this matters to normal people like us
Most of you don’t care about economics.
But if you don’t understand the basics of how money works, you will never experience the good life.
No matter your understanding of economics or finance, this post is going to reveal the most important principles of how money now works (that 90% of people don’t know).
Jared Bernstein was the chief economist in the US to President Barack Obama (this post isn’t about politics, and both right and left are guilty). Right now he’s the chair of the US economic council and drives economic policy.
This recent quote lit the internet on fire:
"The U.S. government can't go bankrupt, because we can print [create] our own money."
The interviewer then says:
"Like you said, they print the dollar, so why does the government even borrow?"
The most important lesson in history on how money works
Those two quotes above have changed history.
I don’t say that lightly and that’s why they must be dissected because they affect every one of you and what you work for every day.
Even if you don’t live in the US, it doesn’t matter. The US dollar is the strongest and most powerful currency in the world. All the other countries follow what the US dollar does, and function the same as what you’re about to understand.
1. The US cannot go bankrupt
Few understand this.
The US government in conjunction with the Federal Reserve (central bank) has the power to create money from nothing.
Imagine you created a video game like Mario Bros, and the currency in the game that could unlock unlimited rewards and character advantages was all yours to control. You could create as much currency as you wanted. No one would stop you.
Well, it’d be a pretty boring game. At the same time, no outside player could compete with you because you have infinite advantages. That’s what the US has right now and the simple term to describe it is “printing money.”
Instead of the government collecting more tax revenues, which pisses off citizens and stops them from voting, they simply add more zeroes to their bank account
2. Why does the government even borrow money?
This is the most misunderstood part.
The normal understanding of economics tells us in school that the government collects taxes to buy things, and borrows money if they don’t have enough.
In the US, and many countries around the world, this is no longer a reality. Since the 2008 financial crisis the world has changed. Governments in partnership with central banks figured out they can create their own money from nothing without approval.
But most of you didn’t know this.
That’s why the Jared Bernstein interview is so crucial. He basically explained in plain english that this is what the government does. No president or elected official has ever done that so blatantly before, the way Jared accidentally did.
It’s changed history.
The average person is one step closer to understanding how money really works.
Why you can’t see money being created out of thin air
That’s probably what you’re wondering.
This all may sound like a conspiracy theory, although it’s not. This process of creating new money from nothing is a fancy version of counterfeiting a currency. To ensure the process doesn’t get revealed to the voters, there’s a lot of smokes and mirrors.
One, there’s this illusion that the US government and Federal Reserve are separate entities. Not really. They both know what they’re doing and work together. If the government tells the Federal Reserve what they need, they do it.
Why? Because if this money creation process is broken, it will bankrupt America.
No one wants this to happen. This version of how money works has been running for so long now that it can’t be stopped. You can see this in the literal sense when interest rates go up and down, and the inflation rate goes higher then lower.
These two elements are the government and the Federal Reserve trying to create balance again in a world that has never recovered from the damage of the 2008 recession.
Secondly, the reason you can’t see this process is it’s complicated. It’s given all sorts of labels such as:
Modern Monetary Theory
Quantitative tightening or easing
Government bond buying program
The breakthrough is that not even Jared Bernstein, whose job is to understand all this, gets it. In the viral interview of him, he says:
“A lot of times, at least to my ear with MMT, the language and the concepts can be kind of unnecessarily confusing but there is no question that the government prints money and then it uses that money to um, uh … I guess I'm just, I can't really, I don't get it, I don't know what they're talking about.”
There’s no hiding it anymore.
The complexity is to ensure people don’t understand this money creation process, because if they did, they’d learn about these horrific effects…
Why all of this matters to you?
The Jared Bernstein admission of guilt got overshadowed by this comment from an everyday citizen:
The wealth of a nation is the result of what it produces: agriculture, natural resources, and manufacturing.
When money is created out of nothing, it does not create value, instead, it decreases the value of the currency. This is called inflation.
If a person or corporation were to print millions of dollars, they would go to prison for counterfeiting, but the government does it to the tune of trillions and gets away with it.
It's important to recognize that every time the government does this they are stealing from every person who gets paid in dollars, has dollars in savings, a retirement plan, or even public assistance.
When the government sends billions to Ukraine, we pay for it at the grocery store, the gas station, and every time we get paid.
See why this matters to you? If you earn money in a government-issued currency (we all do), then you’re paying for the consequences of money being created from nothing, whether you know it or not. Said another way…
Inflation is a hidden tax on your money.
When you hear inflation from now on, just think “theft",” or “having my purchasing power reduced,” or “less money to spend on what I need to live.”
If you feel poorer or like you need to earn more money to live the same lifestyle you had before, this is the reason why. Jared’s explanation of how money works is the cause.
Why does the government do this?
Like I said, this isn’t a conspiracy.
Governments had to change after 2008 to bail out their financial systems. If they didn’t adopt this new way of running their countries, then some of them would have gone bankrupt.
People would have then lost faith in the global financial system, and wars would have likely begun over money. This clever system of stealing a percentage of everyone’s money each year to pay for government debt wouldn’t have been possible.
So we’ve all benefited from this change in how money works.
The problem is some people have benefited more than others.
How? Well, people like me knew about this process so we just exited the financial system. We bought hard assets, known as inflation hedges, that allowed us not to save our money in a government-issued currency.
We’d get paid from a job or business we own, convert the money to hard assets, then go about our day. Only when we needed money to buy something would we sell hard assets back into currency, buy the thing, then keep living.
Takeaway
We’re now all forced to understand how money works.
The financial system debases government-issued currencies, creates excess inflation, and allows governments to borrow as much money as they need.
But this system can’t go on forever. At some point it will break, but likely not any time soon. So to protect yourself from this important change in money, you must:
Get a financial education.
This will allow you to understand:
What M1 and M2 money supply is
True price discovery – meaning to measure the value of something in a unit of measure other than your country’s currency
How to look out for unusual problems that pop up in treasury bond markets, which will signal when this money game is likely to end
Now you know how money works. Protect yourself by buying hard assets and treating the US dollar and any government-issued currency as monopoly money.
Tell me in the comments section below whether this idea makes sense to you, and what you’re going to do about it.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.
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Great post, Tim.
That the US government and the Federal Reserve work together should've become clear to everyone in 2020 when they produced trillions of dollars, in part to create stimulus checks, 90% of which weren't necessary. Some of them went to the stock market anyway.
The military help the US provides to other countries is pure genius: The US "helps" by lending money that ends up in the US when those countries buy their weapons. They create money out of thin air and boost their manufacturing, while making other nations poorer.
Finally, I want to touch on the euro. It's often seen as a sign of unified Europe. Nothing could be further from the truth. The euro created more problems for smaller countries like Greece. They can no longer produce their own currency and make debt payments. They need euros, which is the European Central Bank, an entity that Greece doesn't control.
Owning assets is the only way to build wealth nowadays. We must be financially savvy in ways our parents couldn't even have dreamt of.
Bitcoin 🙏