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How Does Our American Economy Work?

Updated on May 26, 2014

The American economy is one that defies all odds and really shouldn’t really work, but somehow, for the moment, it does. Our economy is not made up of known value, but made of numbers on a screen. Namely over 99% of our actually economy is not made up of dollars and cents, something you can hold, it is just made of digits on a computer screen, in reality not existing.

Through the generations, economies were made off of a finite source of wealth. This would be salt, seashells and precious metals. These were a form of money that was valuable to each culture and one that there was only a certain amount of the money was available. Today in this economy, we have taken away the value of what we use as currency, so the dollar is what would be called fiat currency.

Fiat currency basically means a currency with no value. The problem with this currency besides the fact of no value, there is also not a finite amount. Our dollar can be produced anytime the government needs more money, so in reality there is an infinite amount of it. This being the case, our dollar has actually lost over 95% of the value of the dollar since the beginning of its creation. In a sense, each dollar that is printed takes value out of every single other dollar that is already in existence.

Beyond our dollar using money each and every moment, America has also adopted a banking system that makes money appear like there is more than there actually is. The type of banking that we use in this country is called fractional banking system. What this actually means is that a bank only has to keep a fraction of the deposited money in its possession. This basically gives the bank the right to not have enough money in the bank for everyone who has put money in to it. So for every hundred dollars that a person deposits into the bank, the bank only has to keep ten percent of it in there. So if everyone wanted to take out all of their money at the same time, 90 percent of the depositors would not receive a dime.

To make matters worse, the bank then takes the extra 90% of the money and loans it back out to individuals or to other banks. Those banks can then loan the ninety percent of the ninety percent back out again, thus creating money out of thin air. So if you think of the hundred dollars that was deposited, ten stays in the bank you chose, and then ninety dollars are loaned out to another bank. The next bank will keep nine dollars in their bank and then loan out the other eighty one dollars. The next bank will take the eighty one dollars and keep a little over eight dollars and loan to another bank seventy eight dollars and so it continues. As you can see, this is a problem because the banks are actually creating money out of nowhere. So all these dollars and cents in the computers, don’t really exist because all of this money came from your initial hundred dollars.

To know how our economy is doing, most economist look at the country’s GDP. “The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy.” The problem with this is, with fractional banking, our economy is mainly made up of debt. So if banks aren’t loaning money out, our economy shrinks according to GDP. So in essence, to keep our economy going, more Americans must go further into debt.

This debt driven society has made the governments push for cheaper loan rates that are more accessible to the common American. This has caused many problems in the banking community by way of defaults and bubbles bursting. The government knows that if Americans do not continue to put themselves into debt, the GDP of the country will decrease and more countries holding our debt will become skittish to receiving more. The banking industries has struggled to take on all this economy raising debt and the government has in turn loaned out their own money, or should I say, created money.

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