I have often said that you cannot possibly appreciate the why of Gold and Silver as monetary assets unless you understand (and become adequately reviled) by how our current debt-based, unbacked fiat monetary system works.  Almost nobody actually understands what fiat money is, or how it works, hence they don’t understand the role that Gold and Silver play.

Let’s start by the idea that one should, if properly informed, be somewhat repulsed, if not reviled, by the nature of our system.  Let’s review some quotes;

    It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.

    Henry Ford

    Read more at http://www.brainyquote.com/quotes/quotes/h/henryford136294.html#EfwICMtjEWfP21td.99

And this;

    The process by which banks create money is so simple that the mind is repelled.

    John Kenneth Galbraith

    Read more at http://www.brainyquote.com/quotes/authors/j/john_kenneth_galbraith_3.html#evJo4mO0OTz2DT3J.99

Most folks believe that banks take in money via deposits, and loan it back out at interest, making money on the spread.  That is not the case… almost every penny that is loaned out is created on the spot out of thin air because.. well.. that is what banks do and that is how our money system works.  As Chris has said in the Crash Course, “all money is loaned into existence”.  Thus the, “debt” in debt-based money.    Even knowing that, without a very clear example of how this actually works, most people still won’t quite get it.  They still won’t really internalize what the two learned folks quoted above were getting at.  Let me, therefore, make it real to you through a hypothetical example;

Buying and losing a Home

This is a simple story.. we all probably know, or know of, someone who has gone through a similar experience.  A couple buys a house… YAH!  The American Dream!  They scraped together a down payment.. maybe fairly low on a % basis, but still many thousands of dollars.  They also scraped together the money for the closing costs, some of which flow back to the bank.  At closing the bank came in with a huge check that gets handed to the seller, and the couple now has a mortgage loan.  They get into the house and spend thousands more doing some work, painting, upgrading a few things.. cleaning up the garden beds.  House proud!

Things go well for a few years.. the couple have jobs, and they are making their mortgage payments, but the housing market has gone down a bit, wiping out the small amount of equity they had via their small down payment.  Not realizing at first that mortgage loans are heavily front-loaded with regard to interest, they notice that, although they have made more than $30K worth of combined mortgage and tax payments over the first two years.. they have made only the slightest dent in the principle they still owe.  They worked really hard for that $30K, as well as the $18K it took them to get into the house (some of it still owed back to the father-in-law), and the ~ $7K they have pumped in to home improvements.  $55K!!!!!

Now the husband loses his job.  The couple have to make some hard choices because unemployment doesn’t cover the expenses.  There is no real option to sell the house because they are in a negative equity situation.. they would have to come up with money they don’t have in order to unload the house.  They stop paying the mortgage.  Eventually, the bank takes the house back.  The bank now owns the house outright.

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Now all of us, even me, accept that this is just how it works.  We also can all understand how hard one must work to earn all of the dollars involved in the scenario above.. that was real labor, and real saving, required.  What is kind of harder to understand is that a bank can create money out of thin air, as they did with the underlying mortgage for the house in this example, and end up owning it outright, even after the couple poured two or more years of blood, sweat, and tears, not to mention $55K, into it.

We don’t understand it because we can’t ourselves relate to the ability to conjure money out of thin air.  We can’t.. we have to work hard for it.  It feels good in our pockets.. and for most of us (me excluded) it makes us feel safe seeing a big balance in our bank account.  Banks conjure money out of thin air.  That is how money is made.. and how our money system expands.. more conjuring of loans.  It is, when viewed clearly, an OBSCENE power to have.  Through ignorance, we have come to accept this as normal.  We have given banks this power, and it has become all encompassing… it is at the root of our corporatocracy.  It is how and why we become debt slaves.

Once you realize how obscene this system is… once your mind becomes repulsed and repelled..  then you will finally realize how important it is to find alternative forms of money in which to place your savings.  The rush for alternatives is less about their attractiveness and more about the repulsiveness of our fiat money.  The very small segment of the the US that understand this are in the process of backing up the truck as we speak;

http://investmentwatchblog.com/almost-nobody-actually-understands-what-fiat-money-is-or-how-it-works-hence-they-dont-understand-the-role-that-gold-and-silver-play/