Archive for the ‘Debt’ Category

Have you ever pulled out a dollar bill from your pocket and ever wondered, how it came into being?  If not, you are not the only one.  But ponder this.  Currently, there is no one able to print this.  Well, not legally anyway.  And yet here it is in your hand.

Many people falsely claim that central banks print this money and give it to banks in order to be lent.  Many believe that the money that you see in your hand is not even owned by the government.  It is owned by the federal reserve who holds bonds as collateral or some such scheme as this.  These ideas are complete nonsense.

No,  in the US money is not printed out and handed to banks.  If this worked there would not be any capital markets.  Central governments would have replaced them a long time ago, which would solidify political power.  And the Soviet Union would be here today.

Physical dollars are created by the bureau of engraving, not the Federal Reserve.  It prints dollars and furnish them to banks based upon withdraw demand, not lines of credit. Basically, bank buy physical dollars with their reserves.  You can read about it here.


But where do the banking reserves come from?  They come from deposits.  Money is created through the fractional reserves system when a loan is created.


The St Louis fed came out with a publication called Money Mechanics years ago.  In it, it showed how a simple $10,000 deposit can generate up to $90,000 worth of loans assuming a 10 to 1 reserve ratio,.  Yes, that is right. Go ahead an Google it and you will see.

For the most part, money today is nothing more than digital lines of credits between banks that reside within a closed banking loop. This is why central banks exist. Central banks exist so that other banks will except checks from member bank.  And central banks exist so that all domestic money stays within the closed loop.  Otherwise, money can leave from nation to nation, like it would if gold coinage was traded as money.  This is why such things are taxed.

This idea is foreign to most people.  For most people, they have to earn their money,  They never thinking of where it came from. In order for money to enter circulation, someone must borrow it form a commercial bank.

You see money is created with loans.   The more deposits (reserves) a bank has, the more it can lend.  As a loan applicant  gets a new line of credit, a line of credit is established on the banks book entry.  Then, the consumer simply writes checks From one bank to  bank to another a book entry is adjusted at the central bank.  Existing Money simply changes ownership.

But the dirty secret is that when one with draws there money, after it has been lent, any loans made with this money is not recalled.  It is not tied directly to the loan. And this despite is redeposited in another bank, it gets lent again.  So, in essence you can have multiple loans on the same money.  This is where inflation comes from.

The actual transfer of the check is nothing more than a line of credit from one bank to another, not physical dollars.  If it were physical dollars, when one were to withdraw the cash, money would leave banking reserves and not lent until it got redeposited.  But today everything is done electronically, not cash.

Banks are encouraged to make loans  to inflate the money supply.  Inflation gives rise to an artificial boom, jobs, industries, and, most importantly,  is a source of additional tax revenue which means more government spending.  And in this way government can pay for things that normally could not be afforded, like social security, and welfare.  And is paid for by the poor who must feel the effects of inflation.

In essence new money created and lent causes a boom as the money supply expands.  But money that is lent must be paid back, which causes a bust as  money flows back into banking reserves waiting to be lent again.  As long as there are more people are borrowing more money, the boom is continued.  This is why we have the housing crises.  Houses produce a lot of new money in the economy, which is taxed.  At some point people are unable to borrow enough money to support the economy.

This is why that without consumer debt, there is no economy.


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If gold is such a good value, then why are people selling it for dollars?

Most of those pushing gold never answer this simple question. There are a lot of people who push hyperinflation in order to paint a picture of economic collapse so they can sell you gold. But in who’s interest are they pushing for? Theirs our yours?

The common statement that “Gold in fact has not been value for thousands of years everywhere” is misleading. If anything it is silver that might be able to make that claim but even that is a stretch. However, there are some areas of the world that have used this in one form or another for a long time, but it always has varied from place to place.

For the most part of world history people have traded on lines of credit, domestically, in local villages. However, Gold and silver allow these markets to expand new lines of trade and with more people whom they did not know and did not trust, over greater distances. It was a form of credit that could be carried from market to market in ones pocket. Of course they carried other commodities, but this was simpler to handle and account for.

If you believe in hyper inflation, then ask yourself what happened to the soviet union? And why is North Korea not inflating away? If anything, goods and services in such places are shrinking. In fact, the problem in the soviet union was that there were nothing to spend your money on. People has less choices. It suffered a form of deflation.

But creating a “gold standard” today is not the same as free trade. It only means that the current debt gets replaced by gold. And this would mean that the same banks who are inflating the economy would now own the gold. In other words it is not a liberator but a wealth concentration tool.

Even so, there would still be a desire to leverage their gold reserves as they have done before on countless times. Just like today with the money supply and current lines of credit, banks would still sell more notes than gold in existence. Why? Because despite the rhetoric, without inflating the money supply, the worlds current nations would not be able to exist nor could they pay benefits. And people care more about benefits. Leveraged (inflating) the money supply allows for higher tax revenue collections and thus more spending.

People confused money with production. Money is nothing more than a medium of exchange and a accounting mechanism for government collected taxes. But in the absent of government regulations, it can be anything that two or more people decide upon. Legal tender laws levy property in order to force people to use the government approved currency, by having to pay taxes. even today, you can buy gold, but you must still pay the taxes in dollars.

Now, I not saying that gold is worthless. And it is certainly better than what we have now. But to assume that Gold gains value because of hyperinflation, is simply wrong. It could and probably will is some markets, but not all. People that say this do not understand banking or free trade. Money’s value is subjective and determined by those whom trade it, not by governments. Government can set artificial prices and force assets to be valued in legal tender, but that only distorts its true value for those who are willing to trade things with it.

But instead of trading, most people want it to rise in value in terms of dollars. They want the price of gold to inflate so that they can get a return. They see it not as currency but as a means to acquire more dollars; hence making a profit. And this is speculation, not a wealth hedge. They don’t realize that if Gold did get that valuable, then it would be because of nations that are declaring default in one way or another. And this would change the everything that most people thought they knew. It would mean that a lot of governments would go away and banks too. And it would take away markets with it. But this claim of hyperinflation is nonsense. The problem currently, is that not enough people are borrowing enough money to support the current economy. The money multiplier is dropping; hence deflation. Of course this will not always be the case.

But what would this mean to the local markets? How many people have gold to spend? How many can provide the change? Some do, but not many. And unless the community produced things themselves, how would they have a market, assuming that the banking went under and the deliveries stopped. And what would happen to large corporations and those that depend on some type of government subsidy. For them it would be end game in such a scenario. Because hyperinflation not only destroys governments but destroys banks, which is why it is not going to happen.

There will be government default long before this. And without finance, everyone would be accountable for diminishing returns. Everyone would have to live within their means, including large businesses and governments, which many cannot do and as such would end. But this would mean that many global distributions centers would shut down as well as no more welfare checks or food stamps. So, what happens to these people who have have nothing to buy anything with. How will they get out. After all what do they produce? Even warlords in Somalia must have a market for their plunder. If not, they disappear too.

And even if a state decides to accepts gold and silver as legal tender for taxes, what does this really mean? It means that they now the state will have the gold and silver. Will these states pay people in gold and silver? No. Why? Because these people are believe in mercantile economies that depend on inflating the money supply. And more importantly, they lose political clout and an endless supply of money to spend on their campaigns. So, this would not be in their best interest, politically.

Realize also, that if a state did decide to pay in gold and silver, then there is no way to make sure that gold and silver stay within the state. This is the reason why nations were created in the first place. They were created in order to keep money within borders. They were created in the west when various land barrens realized that people were buying silk from china taking gold out of there kingdoms. But they had nothing that foreign markets wanted. So, gold was leaving and not returning. Remember Robin hood? They could not collect enough taxes.

A nation exists solely for the concentration of wealth for political power, not for a common good as so often quoted. And it keeps competition out from friends and allies and those it deems not worthy through regulations. In this way it can collect larger tax revenues from fewer people and enrich themselves in the process. And it keeps people money from leaving even if they go from place to place. Domestic currencies only change ownership but never leave the country. It is liken to a lock and key. Us dollars allows others to buy US goods and vice versa.

Currently, there is about 10.4 trillion dollars in the money supply with over $56.3 trillion in lines of credit according to federal reserve estimates which is fueling the economy. And this does not include over $220 trillion dollars in unfunded, unaccountable obligations, as Professor Lawrence Kotlikoff of Boston University points out. How can any of this exist or even get paid. it is an impossibility unless the base money supply grows, not the money multiplier, which grows upon loans.

Economist refer to this type of default as a collapse of the division of labor. And by the way, I mean individual production (individual labor), which is more diversified than by large corporations. Corporations would not exist if it were not for the way money is created ether. But this is a different matter. And labor not as physical labor but as a good or service created, which offers choice. Companies, industries, economies that would otherwise not exist, cannot after the great default occurs.

Today, everyone knows everyone and the same system is everywhere. And new ideas spread like wildflower through the internet. So, to assume that gold currency will be the natural outcome of all of this is naïve. At one time tobacco was the currency of choice in the early colonies, not gold. Gold is often desired by mercantile economies. But the mercantile economies are collapsing.


People do not realize that living under a strict “gold standard” will force people to live within their means. And most people have no idea of what this means. Nor, do they want to do this. Thus, the money problem is really a political problem. It is a problem of theft as it legalizes the plunder in order to pay for another person’s benefits. Without inflation, there are many people whom would not get their benefits. The world economy is all artificial.

What people really need is to find an alternative source of income. They need to be able to own and define their own labor and compensation. In this way they could charge for gold or whatever they deem worthy, not others. And people need to understand that in a deflationary times, the value of gold as well as assets will reduce in terms of dollars, not inflate as so many commonly believe.

The inflation that you see today is the result of the ending of various subsidies and shutting down of markets which had, up to this point, artificially reduce prices. They are not a result of more money in circulation. It is the result of diminishing returns and natural cost that rise over time. Without regulations, new products would emerge that would reduce costs. And at some point the economy will get better. Then, people will start to borrow which can lead to massive, but not hyperinflation. But there are so many people burned, who knows how many. But it the borrowing would return. But this still will not be enough to fund government obligations.

In order to fix this, Governments should not declare legal tender laws nor levy property, but only accept the form of money from the population for things like taxes.

And banking reform only needs this:

1) mandate 100% banking reserves so that banks cannot loan own more money than they have.
2) mandate ownership rights are granted to deposits so that banks cannot lend out other people money
3) mandate that banks that act as loan intermediaries only so that people, who want to speculate, can decide to whom to loan their for profit.

Everything else will fall into place in time. It is that simple.

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