As the general population loses more and more of its industriousness and the culture of entitlement goes from strength to strength, the nation as a whole starts losing competitiveness at a very alarming rate. Business is lost to other nations and the jobless tally rises. Also, since very few people are doing really meaningful work anymore, a collective feeling of purposelessness starts setting in. People do not understand this gaping void they feel inside and instinctively try to fill this void with more and more consumption. The natural result is a massive increase in obesity, depression and degenerative disease which only intensifies the downward spiral.
In another act of sheer idiocy, government economists decide that the economy needs to be “stimulated” back to life by injecting large amounts of money into the system. They propose two mechanisms for doing this: fractional reserve banking (combined with very low interest rates) and direct bailouts. Let’s take a look at how this turns out.
Fractional reserve banking implies that banks only need to keep a small fraction of total deposits in reserve (in case people actually want those deposits) and can loan out the rest. This essentially allows money to be loaned into existence as discussed in the video below where a single $1000 deposit could be loaned out over and over again to magically grow to $10000 (BTW, I would strongly advise that you watch this entire Crash Course video series). In essence, what the government has done here is to bestow the godly power of money creation onto lowly bankers, thereby spreading the corruptive influence of this power.
However, the government still has a mechanism through which it can control these new demigod bankers: interest rates. If interest rates are high, borrowing becomes less attractive, fewer people take on loans and this power is curtailed. However, if interest rates are low, people borrow like crazy and new money is created out of thin air at a truly astounding rate. And yes, since the government has now decided that the economy desperately needs lots of “stimulus”, they essentially give bankers free reins by setting interest rates close to zero.
This new innovation suddenly puts massive amounts of purchasing power at the fingertips of normal people who waste absolutely no time in making use of it. And yes, like most societies, the first thing that people want to buy with a big loan is a home. The result is that everyone suddenly has the purchasing power needed to buy a home causing the demand for houses (and therefore also the price) to spike as never before.
It is not long before this situation gives rise to a whole new class of “worker”: the market speculator. As described on a previous page, these guys use our bizarre financial system to lever up their bets and generate tremendous unearned wealth from the unnatural market swings they help create. These people have therefore found a way to make money without even adding the tiniest little bit of value to the lives of others. In essence, they have found a way to totally corrupt our free and fair value exchange economy.
As ever increasing numbers of people start speculating to gain access to this large quantity of totally unearned wealth, housing prices are driven upwards at a truly unprecedented rate. Home construction booms, jobs are created, salaries increase and people start feeling very prosperous. This collective feeling of prosperity gets people consuming like crazy and the added demand causes prices of all consumables to rise rapidly.
By this time, a lot of huge loans had been given to people with very low and unreliable incomes and all of these rapidly rising prices soon cause these people to start missing payments on their loans. As more and more homeowners start defaulting on their loans, the supply of houses increases and the price starts stagnating and even slowly declining. The speculators soon realize this and start selling everything they have as quickly as possible. This causes home prices to plummet and many people to be stranded with a massive loan on a rapidly devaluating home. As jobs are lost and salaries drop, these people realize that it is much better for them to just default on their loan and start over, thereby dumping even more homes onto the market.
In the end, this speculative bubble has caused a tremendous and totally unfair wealth transfer. Those speculators who bought at the bottom and sold at the top got tremendously rich (without adding any value to society whatsoever) and those who got stuck with the depreciating asset were financially ruined. The good speculators therefore legally stole billions from ignorant homeowners creating massive social inequality and, most importantly, a terrible moral hazard based on the fact that it is so much more profitable to speculate (creating bubbles and destabilizing the economy) than to produce (adding value to society).
As a result of this great speculative bubble, the economy is now in a deep recession again and companies, banks and other financial institutions start failing left, right and center. And yes, it is not long before the government valiantly steps in with its godly money-printing powers once more. This time it decides to directly bail out struggling institutions who only thrived because of the bubble (and even contributed to it). As a result they keep a large number of institutions running which really offer no significant contributions to society (or even make negative contributions through large-scale speculation).
By this time the inefficiency and corruption within this system has multiplied beyond any recognition and things finally begin falling apart. This final disintegration is described on the next page.