Northern Nevada is among the hardest hit areas in the nation financially. Consequently, more folks here are highly interested in economics and all the politician-created “stimulus packages” and “bailouts.” The various terminologies can be confusing yet their meanings are vital to comprehending what is going on.

What the government has created is frankly “The Great and Powerful Oz” and they are trying desperately to get us to “ignore that man behind the green curtain.” We are all in an economic stupor, bewildered by how so much bad news could have happened so fast, and why these giant corporations, lending institutions, even giant car companies, are facing complete and total collapse.

So, what is “inflation,” “deflation,” “fractional reserve banking,” “Keynesianism,” the “Federal Reserve,” and how are they all related?

Unfortunately, there is no way in a small column like mine to address all of the issues, nor am I arrogant enough to claim to know all the answers. But one thing I can very clearly tell after years of studying economics: “All roads lead to Rome” — the problems consistently are caused by government meddling in the marketplace.

Take inflation, for example. It means an expansion in the money supply greater than an expansion in the goods and services produced in an economy. It is almost always caused by the government “creating” money out of thin air. It is exacerbated by another government-created system, fractional reserve banking. Banks by law may keep in reserve as little as 10 percent of the money deposited. The other 90 percent can be loaned out, yet officially on the books the bank still claims to have 100 percent of the dough. When confidence in a bank is shaken and people rush down to collect their money — a “run” on the bank, something very rare nowadays, thanks to government “insurance” — this house of cards collapses. However, the critical relationship to understand is how inflation is a by-product. As the 90 percent loaned out goes into circulation, most ends up in other banks, which repeat the process, claiming it as “reserves” while loaning out up to 90 percent more. This process can go on almost indefinitely. Thus, the money supply through the creation of this credit is expanded exponentially.

Of even greater danger is when the original “deposit” of money is borrowed from the “Fed.” The Fed simply prints the initial amount of “money,” and the banks loan out 90 percent of non-existent wealth. These are the real headwaters of the very dangerous game of “expanding the money supply” we occasionally read about.

(Traditionally, capital to borrow came from “savings,” which was attracted to banks by high rates of compound “interest,” but that source no longer exists, a story of yet another government-created mess for another day.)

The Federal Reserve, a private banking system (responsible for what should be done by the United States Treasury as defined in the U.S. Constitution), controls the lifeblood of our economy: the money supply. Ideally, the money supply should be very consistent, not growing or contracting differently than the economy as a whole. (Easily said, difficult to do.)

Money stability is the greatest confidence creator and the ballast of a strong economy. Moderate amounts of inflation, as we recently witnessed, have a positive effect initially, creating a boom cycle, a “bubble” that unfortunately normally pops.

Deflation, by contrast, is a contraction in the supply of money or credit, not nearly as common nowadays as its cousin inflation (thanks to paper money). We are in a deflationary period now, as housing and fuel for example come back down from their inflation bubble highs.

This is all the result of government manipulation of one sort or another, justified by a government-to-the-rescue theory called Keynesianism, named after the early 20th century British economist, Lord John Maynard Keynes (pronounced “Caines”). In a nutshell, Keynesianism calls for government to “prime the pump” with massive spending in economic downturns and, largely ignored, massive taxation to create a rainy day fund for pump priming when times are good.

While highly debated by economists, Keynesianism has been totally embraced by American politicians, at least the part about massive spending to save the day.

The problem today stems from the excessive “pump priming” of the last couple of decades and the enormous level of both public (government) and private debt it encourages. Thanks to an economy based around credit-fueled spending, the upper limit has been met and the bubble has burst. Can more, even greater injections of credit save the day? President Obama, the liberals and the whipped GOP remnant say yes. Right or wrong, we will soon find out.

Ira Hansen is a lifelong resident of Sparks and owner of Ira Hansen and Sons Plumbing.