Why the poor is getting poorer.

After graduating middle school in summer of 1965, I landed in California for my college study. During 1966 summer, I worked as a busboy at a restaurant in Redondo Beach. I was making US$600 a month. My monthly expense was about US$90. At that time, a Volkswagen Beetle costs US$1,400. Imagine I could buy a brand new car with cash in 3 months!!

At the town of my college, you can knock on someone’s door asking to mow their lawn. When finished, you’ll get a dollar. You can lunch at McDonalds and still have money left over for a matinee movie. In the afternoon, you can mow another lawn. Get your dollar and dine out at McDonalds with you girlfriend. Not bad for a homeless guy, eh!

In those days, money worth something—a lot, compared to now. People could make an honest living. There was much less incentive or pressure to steal, cheat or gamble.  People were much more honest, and kind in those days. And those were the good money days.

Looking back, 1965 to 1970 was the peak of the United States. Started in early 70s, things started to go bad. Money started to worth less every day, every year up until now.

Government’s money printing is bad business for everyone. Worst of all is the Fractional Reserve Banking Act. When the government prints one dollar, the banks inflate it many folds depending on the reserve requirement.

From Wikipedia, Fractional-reserve banking is the banking practice in which only a fraction of a bank's deposits are kept as reserves (cash and other highly liquid assets) available for withdrawal. (Ref. http://en.wikipedia.org/wiki/Fractional-reserve_banking)

For example, at the last Winter Olympic, Canadian government put in C$40 million to build the Oval speeding skating rink in Richmond, BC. As this $40 million entered the banking system, the banks would lend it out. At 10% reserve requirement, the banks could loan out enough money for consumers to buy six high rise buildings. (One building with 15 floors, 8 units on each floor worth half a million each.)

The amount of new money flushed into the economy creating demands the suppliers can hardly catch up with. It creates immediate shortages of materials and labor, meaning inflation. This inflation eats in everyone’s money buying power day and night.

At first, everyone seems to be happy: their home prices going up, their wages going up. At certain stage, many people would feel wealthy. But as inflation catches up as new money kept being created, general public starts to feel the pinch.

The rich always knows how to get richer in such environment. Those who collaborate with the government get make-work projects thought political means. Those who understand the economics can rip handsome profits from the markets.

Workers always get left behind in such inflationary environment. As everyone finally notices, the rich get richer and the poor get poorer.

The damaging effect of money printing is huge. Since the effect cannot be quantified, the general public and even the politicians can blame it on someone or something else.

It is like the ocean. You see the waves but you don’t see the current let alone understand it. But if you truly want to understand it, this video explains it well.