Every day countless millions of transactions are facilitated with money. Why do
we need money? How does it get into “circulation?" Who puts it there? Who
creates money? And on what basis? Is it the government? If not, why not? Who is
it? And how do they know how much to “print?" What if they add too much or too
little to the economy?
TThree chapters of my book How To Profit From The
Coming Great Depression , are devoted to these questions. Most people are
shocked when they first learn about our “fractional reserve" money system, which
has sewn within it the seeds of its own destruction.
First of all, we
need money because the barter system is too unwieldy. If you are a building
contractor and I am a potato farmer, and I want you to build me a house, how am
I going to pay you? How many potatoes can you and your family eat before they go
rotten?
Clearly we need something that represents both houses and
potatoes. But note that that does not make money a resource in itself. It is
merely a vehicle for transferring the value of resources from one person to
another. There are natural resources, both under the ground and above it, and
there are human resources – labor and intellect. Put these together and man can
produce. But although money may be used to value and transfer these resources,
money is not a resource itself. Those who control money really want the
resources that money represents.
Centuries ago things like gold and
silver were used as money, before we had notes and coins like today. Remember
the old western movies where highwaymen would hold up the stage coach and people
would have to hand over all their valuables? Why, on earth, would people carry
their gold and silver with them? Because they had nowhere else to put it.
This created an opening for the goldsmiths, who were the forerunners to
our modern day bankers. They built large, secure vaults and allowed people to
deposit their precious metals in these safes. In return they gave people
“receipts" confirming the amount of gold held on their behalf. In time people
began trading with the receipts rather than the gold. Today these receipts are
called banknotes.
But that’s not all the goldsmiths did. They even paid
interest to those who had deposited gold in their vaults (e.g. 3%), but then
lent the gold out to others (in the form of more receipts) at say 6%. That’s how
they covered their costs.
In time the goldsmiths noticed that nobody
ever came back to collect their gold, and not all being honest, began to lend
out more in new “receipts" than was represented by the gold in their vaults. In
time there was ten times as much “money" in circulation as there was gold in the
vaults.
That’s exactly how our money system operates today. For every
dollar you deposit in a bank, the bank lends out about ten dollars. Money is
created by banks – out of thin air! All money comes into existence by way of a
bank loan. Less than 5% of it is ever converted to notes and coins. Most of it
is never anything but a balance on a computer at the bank.
A hundred
questions come to your mind. Right? They are all answered in my book.
Why do I say the system has sewn within it the seeds of its own
destruction? It has a use-by date. That is why we have an economic depression at
least once each century. It is not a question of if the system implodes. Only
when it implodes.
Let’s say you borrow $100,000 from the bank (which
takes security over your real estate worth $150,000). But you have to pay back
$110,000 with interest added.
Where does that other $10,000 come from?
You will have to get it from someone else. Where will they get it? What’s the
only way money comes into existence? They will have to borrow it from a bank.
Can you see how in our debt money system it is not possible for everyone
to pay their debts? Some have to go bankrupt. And as money is sucked out of the
system in interest by the banks, money supply is reduced. The only way it can be
replaced is with more borrowed money. So debt must rise exponentially. Can you
see now why we have a debt bubble and why there is no solution to it other than
a massive purging, with all of the horrific deflationary economic consequences,
not to mention social dislocation that will come with it?
How can you
protect yourself from these consequences?
The Graham Dyer Newsletter has not missed a month’s publication since July 1983. His track record for forecasting is the envy of many, including the 1987 stock market crash, the demise of the Japanese economy and stock and real estate markets in the 1990s, the bull market for bonds from 1989, and the real estate boom this decade. His book is entitled:
“How to Profit from the Coming Great Depression." If you want to know the pitfalls of investing as well as the opportunities, Graham Dyer’s world class work is a must read.
» left by dan ashmore from ohio (279 days ago.)
What does the bank do with the interest? They pay it to their shareholders... who either invest it, lend it, or spend it on goods and services. They can gain no utility from meaningless bits of magnetic data on their banks computers.
Recall that money is simply a substitute for weath (some combination of labor and real capital); the banks cannot create more money than is needed to carry the value of existing capital and labor combinations. If they do, the value of each monetary unit will be reduced to maintain a sum total of currency value equivalent to the sum total of wealth value. The total quantity of dollars grows only as they are demanded to support the conveyance of value. This is where monetary policy, including debt markets come into play, since they use market expectations of future value creation (recombinations of labor and real capital) to set the quantity of money in circulation.
The financial system only fails to function when these markets fail to function properly (as is the case with opaque instruments like CDOs). This is why the proper role of the government as protector of the interests of it's citizens is to regulate the debt markets. It has failed to do so, and we are seeing the results of that. Respond to this comment
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