Friday, November 18, 2011

Money is Debt

Modern money is created by debt and therefore the supply of our money fluctuates with the amount of debt that exists in our economy. An economy expands into a boom period when people are sinking deeper into debt and it contracts into a recession when people are acting responsibly and paying down their debt. The irony of our modern monetary policy is that recessions are the result of people climbing their way out of the hole of debt that they have dug themselves into and economic booms are really just artificial bubbles that are the result of people borrowing money that they will eventually need to repay.

Whereas at one time money was a made out of something that had an intrinsic value, such as gold, most of today’s money is just a claim to a debt between a bank and one of its borrowers. When the amount of debt goes up, the claims to those debts increases and thereby increases our money supply; when the amount of debt decreases, the money supply decreases.

How does debt turn into our money supply? A small portion of our money is real; it is printed currency and does not represent someone’s debt. However, this currency represents only a small fraction of our money supply, serving as only a seed to vast amounts of money that is produced by our private banks. Our real money supply, known as M1, includes this currency, regardless of whether it is in your pocket or your checking account. However, when that currency is deposited in your checking account it no longer exists as currency. The bank has loaned most of this currency to a borrower who now has it in his pocket. That money that counted as part of M1 when you deposited in your bank still counts as part of M1 but it again counts as part of M1 when it is in the borrower’s pocket.

The currency cannot exist in two places, but the bank fraudulently represents that it exists in both the borrower’s pocket and in your deposited account. The bank, using its ability to produce account balances on paper, has effectively duplicated the money that originally existed as currency. The original amount of currency still exists, but there is twice the amount of money on paper. On paper, the original currency has been duplicated.

The money that has been duplicated gets duplicated again when the borrower deposits the money in his account and it gets loaned out again. This process continues until eighty percent of the money in the economy has come into existence only through the making of loans by the private banks. The money that we believe we are spending is largely just a debt that can evaporate when the borrower chooses to “Neither a borrower nor a lender be.”

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.

Friday, April 15, 2011

Recessions and Our Fraudulent Banking System

Recessions are caused by an unstable money supply. Recessions, like the one that we have been in for the last three years, are not the result of a lack of consumer confidence and they are not cured by deficit government spending. Regardless of what the primitive Keynesian economists tell us, the unemployment that characterizes a recession is simply the result of a money supply that makes employees a bargain during a period of monetary expansion (inflation) and an intolerable burden during a period of monetary contraction (deflation). One of the goals of the following posts to this blog will be to demonstrate the necessary connection between recessions and an unstable money supply.

So, the question has to be asked, if a recession can be avoided by a stable money supply, why can’t a government simply keep the money supply constant and make its citizens happy and employed. The answer to such a question is simply that governments do not have control of the supplies of their own money because they support and protect banking systems that are inherently corrupt, fraudulent, and economically destructive – banking systems that allow banks to produce their own form of counterfeit money – what is called fractional reserve banking. It is another goal of the following posts to this blog to educate the readers, in plain language, how banks inflate the economy by creating their own money from nothing and then deflate the economy by destroying that same money and returning it to nothing. Employees are a bargain during inflationary periods and are a problem when money again becomes relatively scarce (deflation).

Fractional reserve banking cannot be justified legally on any grounds, nor can it endure the moral scrutiny of an informed people. It is simply fraudulent in that it is founded upon false pretenses and has the effect of taking people’s wealth without their knowledge or consent. Fractional reserve banking is simply the result of greedy bankers and dishonest or ignorant politicians and judges. A third goal of the following posts here will be to show how fractional reserve banking is inherently criminal in nature and in its effects upon innocent people.

There is a wonderful book on the damaging effects and underlying illegality of our federal reserve banking system. Money, Bank Credit, and Economic Cycles, by Jesus Huerta de Soto. It is a scholarly (yet readable) work that is perhaps worthy of a Nobel Prize for its author. This wonderful work describes in accurate detail the criminal nature of fractional reserve banking, how it necessarily leads to recessions, and how governments are powerless to protect us from its effects. Unfortunately, it is a tome of nearly 900 pages and will therefore not be read by the people who need its information the greatest – the average voter. Its basic premises, however, are relatively simple and can be published in blogs such as this one.

It is the intent of this blog, therefore, to show clearly and in plain language the following three truths that can not only prevent further recessions, but can help protect hardworking people from having their savings diluted and destroyed by greedy and irresponsible bankers:

  1. Recessions and high unemployment are the result of a money supply made unstable by fractional reserve banking;
  2. Banks create money from nothing by fractional reserve banking, rendering the government unable to stabilize its own currency; and
  3. Fractional reserve banking is inherently deceitful, destructive, and criminal in nature.