All these problems that we face and are discussing here all dodge the biggest ball of them all. The very way that our monetary system is set up is by nature, causing the problems. For those of you who are not quite familiar, let me summarize how this entire things works, and the problems will become clear once an understanding is reached.
We set up a fractal reserve system of centralized banking in 1913-- The Federal Reserve. Most people think that the Fed is a government run institution. It is NOT. In fact, it is an independent body of board members and officers set up to run completely independent of the the government. The original Fed was stocked full of executives and bankers that were loyal to the huge industrialists and private bankers of the day-- Andrew Carnegie, JP Morgan, John Rockefeller and the list goes on. These gentlemen met in secret in 1913, unknown even to the government, to set up a centralized banking system for the US. Prior to that, there had been only one attempt to have a centralized bank in this country, and Andrew Jackson had it disbanded, sighting its potential for corruption, and violation of the constitution and spirit of capitalism.
The precursor to all this was the confabulated market meltdown of 1907. JP Morgan quietly spread rumors inside his circle of the wealthy that several New York Banks were insolvent and unsafe places to keep their money. Remember, this is prior to the Federal Reserve and the FDIC. If you lost your money, it was gone for good!. Before long, these rumors spread like wild fire throughout the wealthy, who started pulling their money out of these smaller and mid sized banks. More and more until the media got a hold of it. The short story is that by the time the frenzy was finished, JP Morgan successfully put 19,000 small private banks out of business by a simple rumor! That is how powerful his word was in his hay day. He effectively consolidated the Banking industry, setting the stage for a centralized bank, targeting the larger corporate banks to join.
1913 roles around and the Federal Reserve is born in secret. Now this was not some flick the switch government mandate. As a matter of fact, it was set up in such a way to attract private banks to participate. Remember that at this time, many banks had their own notes (currency) which was base on the faith and trust in that financial institution. These notes were redeemable anywhere the institution was known and trusted.
The roaring 20s was a great time! People were making money and for the first time, averge Joes were able to really leverage their money using Margins in the stock market. This allowed people to control huge amounts of stock, by only putting 10% down to control it. When the stock moved up a few clicks, you could cash in and take your money to the next company and do it all again. People were compounding their money at an amazing rate and gaining wealth like never before! There was a risk though… If the stock went down, you had to pay the entire loss over the entire value that you owned. And that’s what happened. At some point, the very wealthy saw the over exuberance of this market and quietly began to cash in their stocks. At first, it was no big deal, but as people sell stocks, they first stop growing, and then devalue. Soon, there was a selling frenzy. As everyone was invested on a margin, they could not afford to loose any money, so they sold.. and sold.. and sold, until so many were selling that the market crashed.
People lost everything. Their life savings. GONE. This was the first great assault on the comfortable Middle class who could not pay the margin call. They lost everything. Even the moderately wealthy suffered great losses. My grandmother’s family came from this American Aristocracy-- they were very wealthy and owned 50,000 acres outside of Pittsburg, which is now the suburb of Coraopolis Pa. They had to sell their land to keep their house! This happened everywhere.. Everyone was devastated-- except the super wealthy who all pulled out early. How convenient.
The Federal Reserve System rose like a phoenix out of the ashes, stronger than ever. Another 7000 banks went under during the depression, taking people’s life savings with them. The Fed offered the FDIC insurance, attracting private banks all over the country to join to insure their deposits, should another great crash come. Now the Fed had their stronghold, and the fractal reserve system was in place for good.
Let me explain how the Fractal Reserve system of banking works. Money, as you probably already know, is a figment of our imagination. It is not real. It is created literally out of nothing. Hers how. When the Federal government wants to put money into circulation, they go to the Fed and say -- Hey Fed, I need another 10 Billion for this economic stimulus package. The Fed says, OK, I will take 10 Billion in US Treasury Bonds in return. So the US government prints up these bonds that in 10 years will be worth 10 billion, and gives them to the Fed. The Fed in return, prints (or wires usually) $10 billion into a bank account somewhere in the US governments name. And Tah DAH! $10 billion has just been created. No lie-- its that easy! Money is created from DEBT.
Now there is $10 Billion of new money in a Bank. There is also $10 Billion in Bonds that have been issued at partial value—they mature in 10 years, usually at 55% of the mature value. The rule of 7.5% interest over 10 years doubles your money. There is now a market for these bonds. Other countries—the Chineese for example, will by these bonds from the Fed at say 70% face value right off the bat! Infusing another 15% of 10 Billion (1.5 Billion) into the economy on top of the $10 Billion already issued. Why, because in 10 years, their $7 Billion investment will be worth $10 Billion—a guaranteed 30% return in 10 years- No risk.
So now we have $10 Billion in cash, and another $7 billion in cash paid by the Chinese for their $10 billion bond—in effect $17 billion has been created out of nothing but the good word of the US Government. But it does stop there. In the 1970s (72 was it? Look it up!) the Fed came out with a document, “Modern Money Mechanics” in which it describes and outlines how the fractal reserve system of money works. Here goes.
Banks when they get a deposit, use that money to make more money, usually by loaning it out. That is why banks want your deposit business and reward you by paying you interest on the money. They are going to take that money, and loan it out. But, here is the catch. The Fed says that they only have to keep 10% of all the deposits in reserve, while 90% can be loaned out. Seems straight forward enough—10 billion comes in, you have to keep 1 billion in the vault, and you can loan out 9 billion. But, that’s not how it works. In fact, the bank can loan out 90% of every dollar it collects. So 10 Billion creates* another 9 Billion they can literally pull out of thin air to loan out, while they keep the entire original $10 billion in the bank. So, they bank puts 10 billion in the vault, and now can write $9 billion in loans out on it—so now. $19 billion has been created, plus the $7 billion the Chinese paid for the bonds. So we are now up to $26 BILLION from an original piece of paper that the US government *says* will be worth $10 billion in 10 years!
But we aren’t done yet!! That bank will loan out that $9 Billion to customers, some big and small. For simplicity sake, lets say they make one huge $9 billion loan to one customer. They will take that 9B, and deposit it in their bank. The cycle starts again. Their bank will hold the money, and be able now to loan 90% of its value out in new loans—creating the money out of thin air. The cycle continues. In fact, one $10 Billion infusion of cash, can result in $90 Billion in new money circulated in the economy! All created on the original $10 B note, that the US government promises (Promissory note) will be worth $10 Billion in 10 years.
As if created so much money from nothing was not problematic enough! Now, here is where the problem lies… *INTEREST* Every time this money is loaned out, the bank demands that the principle amount be paid back- the amount they created based on their deposits—along with a fee for using the money which is interest. So, you the borrower, get a loan for $200,000 for your home, and over 30 years, you are going to pay back that money—the entire $200,000 along with interest which for a mortgage, will be more than double the amount originally loaned, over 30 years. So at the end of it all, you will have paid well over $400,000 for this home. Well, we are all used to that… right? Such is life. But where does that other $200,000 of interest come from? If all money is created from debt (which it is) that means there is now a $200,00 shortage of money.
Look at it in a simple way. If in the whole entire world, there was only $1000 issued, and the bank loaned it all to you… Where would the money come from to pay the interest on that loan? There is only $1000 in the entire universe, but the bank wants that back, and then some. Where would it come from?? How would you get another $100 once you had paid back the $1000 to pay the interest if there was only $1000 in the universe?
The answer is simple. PRINT MORE MONEY. So.. The US government would go back to the Fed and say—Hey we are in debt and we don’t have the money to pay the debt. I need more money! The Fed would then say, ok, give me some more of those papers that say you’ll pay me later. So the government writes their IOUs (treasury bonds—promissory notes) and the Fed waves their magic wand and gives them more money. Indeed, this is what has been going on all century!
PROBLEM. What happens to the existing money when you print more? We all know that.. INFLATION. For every new dollar printed, it takes away value from the existing dollars. It’s the simple law of supply and demand. The more of something there is, the less valuable it becomes. Air, for example, is worth nothing, unless you happen to be in a place where this is none—then you would pay anything for it!
So, to recap. We have the Fractal Reserve system of banking, run by the Federal Reserve who creates money based on the promise from the US government that someday that debt will be repaid with interest. This money is loaned out to you and me, and our employers, and is expected to be repaid, also with interest. The Bonds that the US government issued will mature in 10 years, with a full cash value roughly 100% more than their original issued value, which also has to be paid to the holder (See why the Chinese are so worried? They hold TRILLIONS of these).
Interest has to be paid back, with the principle, thus creating a deficit of money, forcing companies and people to compete in the market to earn more money through labor and innovation, all in an effort to create some perceived value where people will trade money for a service or product. But, in the end, since there is NEVER enough money in circulation to repay the principle amount loaned (created) AND the interest due, more money is created, this diluting the current money supply, causing inflation, causing the dollar to be worth less and less, forcing people to work more to have enough money to by the goods and services they need and desire to survive.
Do some research folks. If you look at the buying power of a dollar in 1900 and now, it takes $26 bucks to buy what $1 would in 1900. SO, our currency has devalued 26 times in 110 years.. And if you look at the amount of dollars in circulation, it has increased exponentially. An inverse relationship. The more money out there, the less its worth.
We are being robbed—a little every day. As we all struggle to stay afloat, and forego raises and bonuses we depend on to keep our jobs, the cost of living is creeping up a little every day. Think of the cost of food to just 5 years ago. The cost of gasoline (another paper!), the cost of a home compared to your parents. We work harder and harder, for less and less return. And every once in a while, when the system can bear no more strain, there is a meltdown like we are in now--- about every 15 years—when we working class people loose all the progress we have made, and spend the next 10 years digging ourselves out, only to be hit again during the next cycle. The super wealthy—they loose money too—everyone does. But, they make it all back on the way back up while we, the working class, claw our way out of the h*** of the last recession.
This one will be different. There is now so much debt out there that it can never possibly be repaid. The Chinese are worried, and have made their concerns known. Much of their expansion is based on the trillions of notes they have with promised value that we cannot possibly pay if called to do so—and they know it. Soon, someone will cry “The Emperor has no cloths!!!” and the monetary system will crash. It is based on nothing but promise, and once the world swallows the bitter pill that it cannot all possibly be repaid, the reset button will be pushed! The next question is… how will we then do banking and define wealth? Whoever can come up with the new, better way, will win a Nobel Prize!