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Comparing the Canadian and American Monetary Systems

Here is an email I received in response to one of my essays.

Money System

Drew Nathan : : 2005-12-26

I read your piece on the monetary system in Canada. I’m also familiar with the Federal Reserve system in the U.S., which, of course, is designed to bankrupt the middle class and place a money monopoly in the hands of the private bankers. I have a few questions for you if you would be so kind as to answer for me.

1) What are the fundamental banking differences between Canada and the U.S.? Are we basically in the same boat in terms reaching the same inevitable crash course — i.e. rising inflation, increasing debt, plummeting dollar, etc.

To best answer those questions see the book Funny Money.

Canada and the USA are similar. The Americans have slightly stronger laws about bank reserves. Canadians do officially own the bank of Canada where in the USA the equivalent institution is a private corporation with private shareholders.

You were probably aware the Bank of Canada can just print money or create it by entering a line in a ledger, but you might be surprised to learn the chartered banks can do so as well. This was not always the case. Prior to Prime Minister Mulroney, banks were required to maintain an 8% reserve. This allowed them to lend the same money out 12.5 times. Mulroney dropped the reserve rate to 0%. This means banks can lend out as much money as they please, even if they have nothing to back it. (In the USA, reserves are 3% for current accounts and 0% for savings accounts).

2) When do you see a catastrophic economic collapse in which paper money becomes basically worthless? Will it crash heading on its current path or will dramatic reform take place?

In the USA you can plot the trend. US currency is worth about 25% less than when Bush took office. He has created so much new debt, every president thereafter will have to deal with it. It makes it that much harder for subsequent leaders to correct the mess. The other harmful economic trend is outsourcing. That might be easier to undo. You can look at the way debt is growing and project it out. At some point the debt becomes so high that 100% of tax revenues would be needed to pay the interest. The actual collapse will come considerably before that. 30 years ago economists projected that would happen around 2030, but the rate of debt increase is much higher today than back then. Just straight projecting, I think is PollyAnnish. The price of oil is going to rise and rise. The USA will be competing with other nations for a dwindling supply. Since the USA is a net importer, this will bankrupt them even faster. Another problem is the USA contributes to over half the world’s greenhouse gases and continues to insist there is no problem. Like Pharaoh and the seven plagues, they will stubbornly insist the expensive freak weather events are just flukes. Americans have been extremely foolish in refusing to prepare for the end of oil and global climate change with more fuel efficient cars, efficient appliances, efficient homes and alternative energy. I am not an economist. I don’t know how to account for the effect that as the crunch comes people will surely not continue to sit on their butts and ignore the problem. I will guess the crunch will come by 2020.

3) Is there still opportunity for people to amass wealth given the declining dollar and inevitable scam that is the money system? What will happen to people who have money?

The trend has been an unprecedented transfer of wealth from the poor and middle class to the elite. That will continue. If you own land, real estate, a factory that is still wealth and no matter what happens to the money, you are still covered. Further, the wealthy are clever at diversifying. They don’t put all their eggs in one basket the way ordinary folk do.

3) Do you see a global currency happening?

The EU is already a bigger country than the USA. The USA gets a free ride by providing the world’s petrodollars. That free ride will become intolerably huge as the price of oil rises. It is too big a plum to give to just one country. Further, there are more and more countries hostile to the USA. They will deliberately want to harm the US currency. It is becoming quite unstable — not good from the point of view of long term contracts. So you might first see contracts where the deal is negotiated with a bundle of currencies e.g. 50% US, 40% EUR, 10% OPEC (the Organisation of Petroleum Exporting Countries). A world currency could emerge out of that practice.

The Euro itself could become a good world currency. It has mechanisms for multiple countries to issue it. It is strong. Over the next decade we will see the fortunes of the USA declining and the fortunes of Europe, India and China rising.

Right now there is more US currency outside the USA than inside. This allows the USA to effectively tax the globe by printing money and causing inflation. US dollar holders are the ones who suffer, inside or outside the country. As US debt mounts, the only way to deal with it will be to dilute it with inflation. This will mean international dollar holders will tend to dump their US$. This will fuel the inflation in a vicious spiral.

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