dimanche 23 juillet 2017

The insanity of our banking system .....

I finally (I made a months long effort a couple of years ago and failed miserably) figured it out. I'm reading a book, Tradgedy and Hope 101, a synopsis of Quigley's book, and the author does a good job of explaining what money is up to a point. So, he lists historically the types of money ...
Commodity money
Receipt money
Fractional money
Fiat money
Debt money

All is clear thru fiat money, but the jump to debt money remained a mystery to me. And, I've made a concerted effort in the past to understand the objections to debt money, but ... never could get it. Now I see that in most explanations there are missing steps, and now I see what they are and understand the problem, and I'll explain it here ...

Debt money - here we will bypass the book's write up and do our own - with fiat money the govt. prints the money and then uses it to buy goods and services, so it finances itself and creates money and puts it into the economy at the same time. The money derives its value by govt. fiat.

Now we ask ourselves how does 'debt money' get created ...

Debt money type 1 - simple:
What if the govt. printed money and then, instead of using it to buy goods, loaned it to the economy, i.e. persons, businesses. The govt. could charge interest, if it wanted, money would be in the economy, and the govt. would be holding a collection of I.O.U.s.

Debt money type 2 - twisted:
It doesn't at first blush make sense for the govt. to instead of loaning money into the economy, to create money by borrowing money from the economy. Yet that is the basis for our current system. Here is how it works.... the govt. wants money so it issues a govt. bond to borrow from the economy. Drawback #1 - the govt. has to pay interest on the money. The govt. sells the bond to a bank. The bank takes money from its vault and pays the govt. So far, money has been taken out of the economy. But, the bank counts the bond as an asset, and using fractional banking, can loan money into the economy equal to say ten times the bond face value. Thus, the bank loans money equal to ten times the bond value into the economy, creating new money, and profits handsomely for its efforts. What an unbelievable racket !

Edit - even here there is a missing subtlety, when the bank buys the bond its vault money goes down by the face value of the bond, while its bond holdings go up. So, its net assets remain unchanged. However, there is a distinction in the types of assets banks hold, with the bond representing a type 1 asset that the bank can use as the basis for fractional lending, where as the vault cash is a type 2 asset that doesn't serve as a basis for fractional lending. !!!

via International Skeptics Forum http://ift.tt/2uNdPZZ

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