End Fractional Reserve Banking

[SaraStar]

Here is a link explaining why fractional reserve banking is at the root of the central banking scam, as well as the solution: Debt free money proportional to goods and services, like Lincoln's greenbacks.

http://fracturedreservesystem......erscam.htm

 

We can get the debt free money system started by incorporating a LETSystem into our community, which has proven successful in places in the world where they've utilized it.

http://www.gmlets.u-net.com/

 

I am so proud of all of you.  Love and respect to all you brave people.

[BackSeatEconomist]

LETS is not "debt free."  The entire premise is that one person owes service to another after having received service.  The lack of any real controls the creates substantial counter-party risk.

Our current problems are a result of poor fiscal policy, not monetary policy. We should be employing people with the government deficit not bailing out banks with it.

[dtramer]

Let us instead call for reforming the Fed, as I believe it is an important tool.  

 

Here is Senator Sanders on the Fed:

 

http://www.youtube.com/user/Se.....myU23PTA0g

[phys431]

A movie that I watched had me SOLD.  You can google it, it's "Money is Debt".  It's about 40 minutes long, but I saw this movie BEFORE the crash and it totally had me shaking my head.  It was unreal.

 

Only 10% of our money supply is actually backed by cash.

Banks have the ability to finance loans to businesses/industries that they believe will succeed, which allows them to drive what advances in society and what gets held back.

FDIC and other insurance corporations do not have sufficient capital to back the banks they insure (provided they don't have a domino collapse, which somewhat did happen).

The basis that the money supply must increase to finance debt is intrinsically BAD because debts grow due to INTEREST tacked on to debt.  Thus as debt rises, the money supply MUST rise.  Since no new currency is being printed, the remaining "fictitious" money (money that is only backed by debt) will eventually collapse when a default begins.  A default causes some of that fictitious money to disappear, and when banks or institutions who hold large amounts of this un-backed money (lack insufficient real capital), they go bankrupt when they can't pay their own obligations.  Thus a domino effect ensues, large amounts of money "disappear" because debts become defaulted.  The only thing left behind is the physical collateral (secured debt) and the lenders start to demand that property back.  They have effectively come from being the possessors of all the money to the possessors of all the physical property.  How's that for financial inequality??

 

I wrote in a different post in response to Passiflora.  She stated that the OWS movement needs education in political science, economics, law, public policy, education, and similar subjects to bring awareness to our country's situation and how to derive a means from the causes of our current crisis. 

Her post was long, but relevant.  She repeated a few things, but she too also had a sentiment that chanting "war cries" didn't feel effective.  I havn't been downtown, but knowing how a bank operates, a street protest is not the battleground against them.  Any rate, that's all for now.

[BackSeatEconomist]

Only 10% of our money supply is actually backed by cash.

Cash is just paper.  It has no more value than the numbers in the Federal Reserve's computer that make up the other 90%.  Our money has value because it's an agreed upon medium of exchange and because dollars are the only way to pay U.S. taxes.

Banks have the ability to finance loans to businesses/industries that they believe will succeed, which allows them to drive what advances in society and what gets held back.

Also the government can finance industries it wants to succeed -- at least when it's not afraid of "running out" of money.  We should be encourging the government to be making more direct investment in research, education, and infrastructure.

FDIC and other insurance corporations do not have sufficient capital to back the banks they insure (provided they don't have a domino collapse, which somewhat did happen).

The FDIC is part of the government.  It can never run out of money.  As long as it continues to insure only dollar denominated deposits, the FDIC can never become insolvent.  By contrast Iceland is in the mess it is because it bailed out bank depositors in Euros and Pounds as opposed to Icelandic Kronor.  This caused their currency to crash.

The basis that the money supply must increase to finance debt is intrinsically BAD because debts grow due to INTEREST tacked on to debt.  Thus as debt rises, the money supply MUST rise.  Since no new currency is being printed, the remaining "fictitious" money (money that is only backed by debt) will eventually collapse when a default begins.

The money supply does not have to grow because of interest.  It has to grow because the productive capacity of society is increasing.  As the amount of stuff  that can be consumed increases, if the money supply does not also increase then there is the same amount of dollars chasing more and more goods.  This causes deflation when aggregate prices (including wages) fall.  The reason deflation is bad is that it prevents investment and consumption.  Why should you spend your dollars today when they're going to buy more tomorrow?  This causes the economy to grid to a halt as everyone hordes cash.

Thus a domino effect ensues, large amounts of money "disappear" because debts become defaulted.  The only thing left behind is the physical collateral (secured debt) and the lenders start to demand that property back. 

The money is created when the loan is made and it is destroyed when the loan is repaid.  If I borrow $100k from a bank to buy a house from you, then default on the loan and the bank takes "my" house, you still have the $100k.  The money hasn't been removed from the monetary system.  Money is only removed from the monetary system through repayment of loans and payment of taxes.

There are problems with the Fed in moral hazards of bank bailouts, lack of transparency, lack of accountability, and failure to manage the economy in a way that benefits the middle class.  We should be focusing on reforming the Fed and ending all of the current austerity / government-is-out-of-money nonsense.  This the-entire-economy-is-a-conspiracy talk is really not conducive to that end.

[dtramer]

BackSeatEconomist -thanks for that post.

 

When you said:

 

"Money is only removed from the monetary system through repayment of loans and payment of taxes."

 

Was that correct?  If so, then what does that mean?  How is money removed from the monetary system in those cases?  Maybe I don't know what the monetary system is?

[BackSeatEconomist]

I probably should have said "repayment of bank loans," but otherwise that statement was correct.  By the monetary system I mean, money and the means used to keep track of it: paper money, computers that manage bank accounts, Federal Reserve accounts, etc.  Remember most money is just numbers in a computer somewhere.  When I say money is removed from the monetary system, that's really just saying it's destroyed, sometimes called extinguished.  Also note that I'm talking about money and not wealth.  Money is a convenient placeholder for wealth but they are not quite the same thing.  The total amount of wealth in the economy can grow without increasing the money supply and vice versa.  I hope you don't mind, its a little easier to talk about how money is created and destroyed than just destroyed.  This happens two ways: through the government and through banks.

Government

Note that here I'm talking about the U.S. government.  Our monetary system is very similar to the UK and Japan.  The Euro zone works quite differently however, but the reasons why is somewhat beyond the scope of this.

Lets say the government wants to send my mother her social security payment of $1000.  If she has $3000 in her bank account, all they do is change the 3 to a 4 in the computer system.  They don't jam a gold coin into the keyboard or anything like that.  They just change the numbers.  $1000 has just been added to the monetary system, and private savings have increased by $1000.  Note that the government can never run out of 4s.  Its spending is not fiscally constrained.  This is what people really mean when they say "printing" money.  It's not actually the printing that increases the monetary supply, it's the government spending the cash (putting it in circulation) or spending through changing bank account numbers.

Taxes take money out of the system.  When my mother pays $1000 in taxes electronically, they just change the 4 back to a 3.  There is now $1000 less in the monetary system and net private savings have decreased by $1000.  If she pays in cash, the IRS will thank her for contributing to the war in Iraq and then throw the $1000 in a shredder.  The bills have served there purpose.  You can go to Washington and buy the shredded money.  Think about it for a moment, what is the government going to do with a bunch of bills?  They're like football tickets issued by a stadium.  To you they might have value, but once you turn them back in to the stadium they just rip them up.  They have no value to the stadium.

This is why the whole debt ceiling debate is nonsense.  The government can never run out of money.  As a currency issuer it is not under the same constraints as a family or a business.  It can cause inflation if it spends recklessly, but the idea that we're mortgaging our future to China is just silly.  Every generation can consume what it produces — no more, no less.  We ran huge deficits in WWII and had 0% unemployment.  Are we currently building battleships to send back through time to pay off the debt?  All the national debt really is, is your grandmothers savings bonds.  "Paying off" the debt means taking the bonds (ripping them up) and converting them back to cash (printing new money).  Exactly the same is true for the 9% of our bonds that are held by China.  It should be obvious that doing this really has no bearing on the fiscal state of the U.S. Government.  We should select the size of government based on what we want it to do (how many firefighters and teachers do we want?) not how much we can afford.  There is no "affording" things for the government.

Banks

When a bank makes a loan it is creating new money, offset by debt.  If you get a loan from the bank they just increase the numbers that represent your account — they don't get the money from anywhere.  The total amount of money in the monetary system increases by the amount of the loan.  This money is offset by the debt, however, so there is no net increase in savings.  There is a law that restricts the amount of new money they create to a multiple of how much money the bank has in its account at the Fed.  When you pay the loan back, the bank just dials the numbers representing your account down by a certain amount.  This decreases the money supply (destroys those dollars).  Interest is handled a little differently as this actually gets moved from your account to the bank's own account.  No money is created or destroyed during the payment of interest.

I hope that all makes sense.

[dtramer]

BackSeatEconomist said:

I probably should have said "repayment of bank loans," but otherwise that statement was correct.  By the monetary system I mean, money and the means used to keep track of it: paper money, computers that manage bank accounts, Federal Reserve accounts, etc.  Remember most money is just numbers in a computer somewhere.  When I say money is removed from the monetary system, that's really just saying it's destroyed, sometimes called extinguished.  Also note that I'm talking about money and not wealth.  Money is a convenient placeholder for wealth but they are not quite the same thing.  The total amount of wealth in the economy can grow without increasing the money supply and vice versa.  I hope you don't mind, its a little easier to talk about how money is created and destroyed than just destroyed.  This happens two ways: through the government and through banks.

Government

Note that here I'm talking about the U.S. government.  Our monetary system is very similar to the UK and Japan.  The Euro zone works quite differently however, but the reasons why is somewhat beyond the scope of this.

Lets say the government wants to send my mother her social security payment of $1000.  If she has $3000 in her bank account, all they do is change the 3 to a 4 in the computer system.  They don't jam a gold coin into the keyboard or anything like that.  They just change the numbers.  $1000 has just been added to the monetary system, and private savings have increased by $1000.  Note that the government can never run out of 4s.  Its spending is not fiscally constrained.  This is what people really mean when they say "printing" money.  It's not actually the printing that increases the monetary supply, it's the government spending the cash (putting it in circulation) or spending through changing bank account numbers.

Taxes take money out of the system.  When my mother pays $1000 in taxes electronically, they just change the 4 back to a 3.  There is now $1000 less in the monetary system and net private savings have decreased by $1000.  If she pays in cash, the IRS will thank her for contributing to the war in Iraq and then throw the $1000 in a shredder.  The bills have served there purpose.  You can go to Washington and buy the shredded money.  Think about it for a moment, what is the government going to do with a bunch of bills?  They're like football tickets issued by a stadium.  To you they might have value, but once you turn them back in to the stadium they just rip them up.  They have no value to the stadium.

This is why the whole debt ceiling debate is nonsense.  The government can never run out of money.  As a currency issuer it is not under the same constraints as a family or a business.  It can cause inflation if it spends recklessly, but the idea that we're mortgaging our future to China is just silly.  Every generation can consume what it produces — no more, no less.  We ran huge deficits in WWII and had 0% unemployment.  Are we currently building battleships to send back through time to pay off the debt?  All the national debt really is, is your grandmothers savings bonds.  "Paying off" the debt means taking the bonds (ripping them up) and converting them back to cash (printing new money).  Exactly the same is true for the 9% of our bonds that are held by China.  It should be obvious that doing this really has no bearing on the fiscal state of the U.S. Government.  We should select the size of government based on what we want it to do (how many firefighters and teachers do we want?) not how much we can afford.  There is no "affording" things for the government.

Banks

When a bank makes a loan it is creating new money, offset by debt.  If you get a loan from the bank they just increase the numbers that represent your account — they don't get the money from anywhere.  The total amount of money in the monetary system increases by the amount of the loan.  This money is offset by the debt, however, so there is no net increase in savings.  There is a law that restricts the amount of new money they create to a multiple of how much money the bank has in its account at the Fed.  When you pay the loan back, the bank just dials the numbers representing your account down by a certain amount.  This decreases the money supply (destroys those dollars).  Interest is handled a little differently as this actually gets moved from your account to the bank's own account.  No money is created or destroyed during the payment of interest.

I hope that all makes sense.

It does and it doesn't :)

I do agree in essence with what your "ideology" is, I think.  I agree the debt ceiling debate was ridiculous and that we US govt will never run out of money because it can always "print" bills (either physically or "virtually" in a computer), but I'm not sure on some of the details you are mentioning. 

Specifically:

When your mom pays $1000 in taxes I understand that money gets removed from her account.  And if she pays in cash that cash is likely shredded; that the "bills have served their purpose".  You mention that the money is removed from the monetary system (including computer systems), but I find it hard to believe that the US Govt doesn't keep track of what is coming in and doesn't add that to some ledger.  Or are you not saying that?

[BackSeatEconomist]

I find it hard to believe that the US Govt doesn't keep track of what is coming in and doesn't add that to some ledger.  Or are you not saying that?

Of course the government does, but this is just a matter of record keeping.  It is not an operational constraint.  For example, right now money taken by the government in payroll taxes goes to the social security trust fund.  But this "account" is really just a number maintained by the government.  It's like if you kept a separate list of your budget for food, housing etc.  There's nothing to keep you from exceeding your food budget (running that make believe food account into deficit) until you run out of money in total.  The government's accounts are the same way except that it can never run out of money in total.

This isn't a free lunch though.  The true cost of government spending is the productive capacity removed from the private sector.  A firefighter is a consumer but doesn't produce anything.  If you have too many people like that, you get high inflation.  What I'm arguing now, and what I think we should all be arguing for now, is that with 9-16% unemployment (depending which number you use) there is very little risk of driving inflation through stimulus spending and the government should be actively employing people through spending on research, infrastructure, and education.

[freedomfighter]

I agree with BackSeatEconomist: End Fractional Reserve Banking.

It is fraudulent to store corn on the behalf of farmers and then issue claims on ten times the amount of corn i have stored.

Why is it not fradulent to do the same thing with money instead of corn? That is, if I am entrusted with $10,000 isn't it also fradulent to issue claims on $100,000?