Who REALLY Controls Money, Inflation, And Interest?

Who’s Really In Control Of The Money?

Understanding how money, interest rates, and inflation truly work can seem overwhelming.

And that’s why so many people fail to ever learn how it all works, and who’s really in charge.

There are even rumors and theories that economics and finance were made intentionally and unnecessarily complicated to keep people blind to the truth.

Luckily, the way money, inflation, and interest really work is pretty simple. It’s just been obscured from our vision.

So here’s what the major financial powers of the world don’t want you to know about money and how to use it to your advantage.

The Evolution Of Money

Historically, economies operated on a barter system, where goods and services were directly exchanged.

However, this system had limitations, such as the double coincidence of wants.

This problem occurred when you’d try to trade apples for a pair of shoes, but the shoemaker doesn't need apples.

This inefficiency led to the creation of commodity money, like gold and silver, which everyone valued.

As trade expanded, so did the need for more practical forms of money.

Commodity money transitioned to representative money, where paper notes represented a claim on a physical commodity, usually gold or silver.

Today, we use “fiat money”.

And no, fiat money is not money used to buy Fiat cars.

“Fiat money” is actually currency that is not backed by gold and only has value because a government says it does.

But who creates the money?

Well, it’s the same entities who control inflation, interest rates, and everything else financially.

(Hint, it’s NOT the government)

How Money is Created

Money is NOT created by the government.

Money creation is created and controlled by central banks and private banking institutions.

Central banks, such as the Federal Reserve in the United States, are at the heart of the money creation process.

These institutions operate independently from the government.

They have the authority to control the money supply and set monetary policy, which includes the manipulation of interest rates and the regulation of banking activities.

1. Fractional Reserve Banking: Central banks regulate the amount of money that commercial banks must hold in reserve compared to what they can lend out.

For example, if the reserve requirement is 10%, banks can lend out 90% of their deposits.

This means if you deposit $1,000, the bank can lend $900 of it. The borrower then deposits that $900 into another bank, which can lend out 90% of that amount, and the cycle continues.

This process multiplies the money supply far beyond the initial deposit, creating money out of debt.

2. Issuing Currency: Central banks have the power to print money.

However, in practice, most of the money in circulation exists digitally rather than as physical cash.

Central banks can increase the money supply by creating money electronically and using it to buy government bonds or other financial assets.

Private banks also play a crucial role in money creation through the fractional reserve banking system.

They essentially create money by issuing loans.

Every time a bank gives out a loan, new money is created.

For instance, when you take out a mortgage, the bank doesn’t lend you money from its vault. Instead, it creates new money in your account, which you then owe back with interest.

Debt: The Backbone of Our Money System

Our money system is fundamentally based on debt.

That's because money IS debt.

Money is created when banks issue loans, meaning that for new money to enter the economy, someone must go into debt.

This debt-based system has several key implications:

1. Never Ending Debt: Every loan comes with interest, but the money to pay the interest is not created, leading to a perpetual cycle of debt.

This means there is always more debt than money in circulation, forcing individuals and businesses to constantly seek new loans to pay off old ones, creating a system of perpetual debt.

2. Government Debt: The government itself is a massive borrower.

When it needs money, it issues government bonds, which the central bank often buys.

This means the government is continuously paying interest on these bonds to the central bank.

A significant portion of tax dollars is used to pay this interest.

According to estimates, up to 90% of U.S. tax revenue goes towards paying interest on the national debt.

How To Build “Good Debt”

Robert Kiyosaki, author of Rich Dad Poor Dad, has long advocated for understanding and using debt as a tool for wealth creation.

Kiyosaki emphasizes that not all debt is bad. He differentiates between "good debt" and "bad debt."

Good debt is used to acquire assets that generate income and appreciate in value, while bad debt is used to purchase liabilities that do not provide a financial return.

1. Good Debt: Good debt is money used to invest in real estate, businesses, and other income-generating assets.

For example, you might take out a mortgage to buy a rental property. The rental income from tenants not only covers the mortgage payments but also provides additional cash flow.

2. Bad Debt: On the other hand, bad debt includes things like credit card debt or loans for depreciating assets, such as cars or consumer goods.

These types of debt do not generate income and can quickly become financial burdens if not managed properly.

Kiyosaki's strategy revolves around using other people's money (OPM) to invest and grow wealth. Here's how he uses debt to his advantage:

1. Real Estate Investments: Kiyosaki often finances his real estate purchases through mortgages. By doing so, he can acquire properties with a small down payment and leverage the bank's money to generate rental income. This rental income not only pays off the mortgage but also provides a profit.

2. Tax Benefits: Using debt for investments, particularly in real estate, offers significant tax advantages. Mortgage interest and property depreciation can be deducted from taxable income, reducing the overall tax burden.

3. Cash Flow: By using debt to acquire income-producing assets, Kiyosaki ensures a positive cash flow. The key is to ensure that the income generated from the asset exceeds the cost of the debt. This positive cash flow can then be reinvested into more assets, creating a cycle of growth.

4. Wealth Building: Kiyosaki’s approach to debt allows him to build wealth more quickly than if he relied solely on saving and investing his own money. By leveraging debt, he can control larger and more profitable investments than he could with his own capital alone.

Who Pulls The Strings On Interest Rates?

You guessed it, it’s the banks once again.

They use various tools, such as the federal funds rate, to influence the economy.

The federal funds rate is the interest rate at which banks lend to each other overnight.

By adjusting this rate, the central bank can either encourage borrowing and spending (by lowering the rate) or curb inflation and cool down an overheated economy (by raising the rate).

Interest rates then have a broad impact on the economy.

Here’s how they affect different sectors:

1.) Borrowing and Lending: Lower interest rates make borrowing cheaper for consumers and businesses.

This encourages spending and investment, which can stimulate economic growth.

Conversely, higher interest rates make loans more expensive, which can reduce spending and slow down the economy.

For example, during economic downturns, central banks often lower interest rates to stimulate borrowing and spending, aiming to revive economic activity.

On the flip side, in times of rapid economic growth and rising inflation, central banks may increase rates to cool down the economy and keep inflation in check.

2.) Savings: Higher interest rates offer better returns on savings accounts and other fixed-income investments, encouraging people to save more.

Lower rates, on the other hand, might discourage saving as returns diminish. This can affect your financial strategy, depending on the interest rate environment.

3.) Investment: Businesses are more likely to invest in new projects when interest rates are low because the cost of financing these investments is cheaper.

High interest rates can deter investment due to higher borrowing costs. This is why understanding interest rate trends can help you anticipate market movements and make informed investment decisions.

4.) Housing Market: Interest rates significantly influence the housing market. Lower rates reduce mortgage costs, making homes more affordable and potentially boosting home sales.

Higher rates can have the opposite effect, slowing down the market. For instance, if you're looking to buy a house, keeping an eye on interest rate trends can help you decide the best time to lock in a mortgage.

So Who or What Really Controls Inflation?

A lot of people think that the president or government directly controls inflation, but that's a common misconception.

The real power lies with central banks, like the Federal Reserve (often called the Fed) in the United States. But what exactly is the Fed?

The Federal Reserve, or the Fed, is the central bank of the United States.

It's an independent institution designed to oversee the nation's monetary policy, regulate banks, maintain financial stability, and provide banking services to the government.

The Fed has a significant impact on the economy by controlling the money supply and setting interest rates.

Other countries have their own central banks, like the European Central Bank (ECB) in Europe or the Bank of England (BoE) in the UK.

So, despite popular belief, the government and president don’t have direct control over inflation.

Central banks are designed to be independent to prevent political meddling in economic decisions.

This independence allows them to focus on the long term health of the economy rather than short term political goals.

Imagine a scenario where a government wants to lower interest rates just before an election to make the economy look good.

This might boost the economy temporarily, but it could lead to higher inflation later.

Central banks, being independent, can avoid this kind of short-term thinking and focus on keeping prices stable.

But what if the power to control interest, inflation, and the money supply falls into the wrong hands?

That’s actually exactly what happened on several occasions, where the richest bankers and investors in the world actually influenced the economy itself.

J.P. Morgan played significant roles in shaping the financial system, often to the detriment of public interests.

For example, during the Panic of 1907, J.P. Morgan is accused of orchestrating the crisis to manipulate the market for his benefit.

Now get this…This panic then actually influenced creation of the Federal Reserve in 1913.

Supposedly, this was to prevent future crises, but what it really accomplished was increasing central control over the economy for banks and financial institutions.

Using This Knowledge To Your Advantage

Understanding how money, interest rates, and inflation work, and recognizing that central banks, not the government, control these elements, empowers you to make strategic financial decisions.

Here's how you can use this knowledge to increase your wealth, save more, and minimize taxes and interest, with clear steps on how to do it, even if you're just starting out.

Making Smart Financial Moves

Timing major purchases can save you a lot of money.

Central banks adjust interest rates based on economic conditions. When the Fed signals a rate hike, borrowing costs will increase.

Conversely, when they lower rates, borrowing becomes cheaper.

Pay attention to Fed announcements. For example, in 2020, the Fed lowered interest rates to near zero to stimulate the economy.

If rates are expected to drop, plan major purchases like a car, a house, or financing a small business during these periods to benefit from lower interest rates.

Boost your savings by moving your money into high-yield savings accounts.

When interest rates rise, banks often offer better rates on savings accounts.

This can help your money grow faster without any extra effort. As of mid-2023, some high-yield savings accounts offer interest rates of around 4% compared to the national average of 0.39%.

Also, start investing even if you don't have a lot of money. Apps like Robinhood, Acorns, or Stash allow you to begin with just a few dollars.

Start small by investing in index funds or ETFs that track the market. These are generally low-risk and offer good returns over time. Setting up automatic investments can help build your portfolio gradually.

Maximizing Savings and Minimizing Bad Debt

If you have student loans, refinancing them when interest rates are low can save you a lot of money over time.

For instance, reducing your loan interest rate from 6% to 3% on a $20,000 loan can save you over $3,000 in interest over ten years.

Shop around for refinancing options that offer lower interest rates. Websites like Credible or SoFi can help you compare rates and find the best deal.

Use credit wisely to build your credit score, which can save you money on loans and credit cards by qualifying you for lower interest rates.

For example, a credit score increase from 650 to 750 can lower your car loan interest rate by about 2%, saving you hundreds of dollars over the life of the loan.

You can also try these 3 rules to help budget your spending and control your debt:

1. Rule of 72: This simple formula helps you estimate how long it will take for your investment to double at a given annual return rate. Divide 72 by your annual interest rate to get the number of years. For instance, if you have an investment with an 8% return rate, it will double in about 9 years (72/8=9).

2. Debt Snowball Method: Focus on paying off your smallest debts first while making minimum payments on larger ones. This strategy builds momentum and can help you become debt-free faster.

3. 50/30/20 Budget Rule: Allocate 50% of your income to needs, 30% to wants, and 20% to savings and debt repayment. This simple budgeting rule helps ensure you're saving and managing expenses effectively.

The BMM Takeaway

By understanding the true mechanisms behind money, interest rates, and inflation, and knowing that central banks control these factors, you can make informed decisions that improve your financial health.

It’s also eye opening to realize just how little the president and our own government are involved in the creation and control of money.

But now that you know how it all works, you can use it to your advantage.

Start timing your purchases, managing your savings and debt, or starting to invest, and you’ll soon take control of your financial future.