I’ve been thinking a lot recently about the banking system in the USA and how banks create money out of thin air (if they have the reserves).
Under the fractional reserve system, banks are allowed to create money through a multiple of their reserves. When they create the money, it becomes the reserves for the next bank and so on and so forth. The reason why this is corrupt is because the banks don’t create value. They only create money. They only create money through loans, meaning they own the real value until you pay them back with their fake, newly minted, money
As this crisis continues they have stopped lending…. This has an important side effect. When a bank lends, they create new money. This is the only way a bank will lend because it’s virtually risk free for them. They now see money creation as too risky.
The problem we are running into now is that the banks aren’t creating new money, ahem, they aren’t lending. This can be seen here in the recreated M3:
As banks continue to go bankrupt, their creation of new money dwindles. The effects of which can be seen in the decreasing M3 over the last few months.
This is why the banks continue to get preferential treatment over average citizens. They create the money. New money is ESSENTIAL to the functioning of our economy.
The reason is quite simple actually. When the bank system loans new money, they don’t lend out the interest payment. Meaning, a new loan must be taken out by the economy in general to pay the interest of that person (or company). Thus, new money is essential to keeping the race going.
Without new money, more and more people won’t be able to pay back their loans. We are already seeing this happen with the never ending “foreclosure crisis.”
Until new money is being created by the banks then there is less and less money to be able to pay the banks their interest.
What’s really cool about this is that the government has been doing EVERYTHING they can to buoy the balance sheets of banks and they still aren’t creating new money. In fact, the banks don’t want government money because they can’t give themselves billions in bonuses.
The decreasing M3 is due to people paying off their loans. This has an amazing effect of causing less money to be in the system. In essence, if all loans were paid off, there would be no money anywhere.
So in the mean time, more foreclosures will occur both in residential and now commercial real estate. The banks will continue to be in bad shape regardless of how much they legally or illegally manipulate their books. This will cause no new money to be issued thus making the problems worse.
All those people talking about a “recovery” have no idea what’s really going on. A company’s balance sheet may look good but until the banks start issuing new money, the public will stay in a world of hurt. Foreclosures will remain high and jobless numbers will keep being massaged downwards.
So what are we to do? Well, the government has been trying to fund projects to inject money into the system. The problem here is that the government is getting the money… from the banks! Our government must pay back the interest on that… meaning…. you, me, our children, grandchildren, and, well, generations will be paying back that money.
If the government actual did the constitutional thing, and took the money creation powers back from the banks and reinstalled it with Congress, we may actually have a chance to make it. As it is, I am very pessimistic about the economy due to the fraudulent ponzi scheme run by the Federal Reserve.
Last note, the Federal Reserve has a mission to have a stable currency and try to maintain high employment. They have failed on both account horribly. They have debased the dollar by 95% over the last century, and unemployment is now 20%+ using actual numbers and not the fudged ones produced by the government. A stable currency would mean 0% inflation/deflation over 100 years. A target of 2% inflation per year is NOT stable. It’s exponential growth.
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