Wednesday, June 8, 2011

How Local Banks Cause Inflation

What is money and how is it created? The answer to that question is that most of our money is created by our local banks. This counterfeiting behavior of our local banks is the reason why our economy inflates and has recessions.

For example, suppose you have a nice, crisp $1,000 bill and you wish to deposit in a bank for safe-keeping. The bill’s claim to reality is that it has its own unique serial number; the serial number gives it its own identity as a member of the money supply (what is referred to as the M1 money supply). After it is deposited in the bank, it is mixed in with other members of the M1 money supply and your checking account is credited $1,000. The conversion of your money from a bill to a balance in a checking account does not affect the money supply because the balance in your checking account is also included in the M1 money supply (economists correctly assume that the money is still in existence although it has changed locations).

However, the money that you believe is in your checking account does not really exist there. The bank is allowed to use that money for its own purposes – it is allowed to use it in a loan that provides income for the bank. This is where the M1 money supply gets perverted by the misleading behavior of our banks. The money that you believe is in your checking account is loaned out to someone else who invariably puts in into his own checking account. When this happens the M1 money supply is increased, because, as we have stated earlier, the money in a checking account, including this borrower’s checking account, is treated as real existing money just as the original $1000 bill was. In other words, the original $1000 dollars that was a part of the M1 money supply has become $2000 in the money supply by the simple action of the bank’s making a loan (actually, the amount loaned out is usually a little less than the full $1000 because of the bank’s requirement to keep a small fraction of the deposit in reserve).

Each time that a local bank loans money from a checking account, it adds to the money supply, inflating the economy and cheating every person wise and lucky enough to have savings; and each time it forecloses on a mortgage or otherwise closes a loan, it subtracts from the money supply, making payrolls harder to meet and endangering the jobs of hard-working citizens. As the money supply expands and contracts through the machinations of our bankers, our savings and our jobs increase and decrease in value, leaving us the victims of bubbles and busts that are underwritten by the politicians who protect the bankers that finance their elections.