(Continued from Part 1, yesterday.)
The Purpose of the Federal Reserve Banking System Is Quite Clear
Madhava Setty, MD, Collective Evolution, August 27, 2019
So, where does the money come from?
The bank is essentially creating money out of debt and subsequently collecting interest on it.
This money is added to circulation and when this happens, the value of every single dollar in the system gets depleted.
Prices go up.
This is inflation, and it can exact a devastating toll on the system depending on how much debt is created.
As amazing as it may seem, banks are only required to keep available a fraction (10% or less) of the amount of money they lend on hand to meet the needs of their depositors.
Clearly there may come a time when a large number of depositors demand their money to be returned at the same time.
This is the dreaded “run on the bank” which should send the bank into insolvency.
However, this rarely happens these days for two reasons.
One is based upon the confidence we place on our banking institutions to make sound loans and upon the economy in general.
As long as we are confident that the bank will return our money if we asked, we won’t demand it back.
Secondly, banks operating in the central banking system are able to borrow money from other banks to meet the demands of their depositors when needed.
The Fed is a Monetary Cartel that has been setting us up for bigger failures
The Federal Reserve, with the power Congress has endowed it with, sets standards for the portion of money banks within its system are allowed to loan compared to the money in their “vaults.”
Because the profitability of the bank is directly related to the amount of money they loan out, banks are motivated to maximize the amount they lend.
Furthermore, because a lifeline to more money through other banks exists, there is little reason for any individual bank to be conservative.
By uniting banks under common lending practices it becomes clear that no individual bank will be allowed to go bankrupt.
However, there now exists the possibility that many or all banks may fail simultaneously with a deep and widespread dive in consumer confidence and/or an accumulation of a great amount of bad debt.
Note that the latter will automatically give rise to the former as in the case of the great recession of 2008 when it became recognized that a massive number of irresponsible home loans were made over the course of a decade.
When such a crisis arises, it is made clear to the public that a dire situation is at hand and it would result in major suffering for all if the government didn’t intervene.
Government steps in by infusing the banking system with large sums of money.
This money does not exist anywhere.
It is created on the fly by the issuance of government bonds, essentially IOUs.
But who would be willing to accept government IOUs in such a crisis? Nobody.
Nobody, except the Federal Reserve.
Through the purchase of government debt the Federal Reserve floods the system with essentially a limitless amount of “money.”
This money did not come from the sale of goods and services or gold bars from the treasury.
This money is ink on paper called Federal Reserve Checks which are used to fund government debt and ultimately result in greater balances in commercial bank accounts when the government spends it.
The crisis gets averted. Or does it?
In the short run, the economy does not grind to a halt, and we laud the intervention as a success.
However, there has been no increase in the amount of goods, commodities or services that the nation possesses.
There is just more money out there.
When that happens, the value of every single piece of currency, including the money in your wallet, drops.
We grumble at the necessity of more taxes and less governmental services but few taxpayers realize the extent that their own wealth has been decremented by an unseen cost called inflation, the direct cause of poor lending practices of our banks.
We are told that we are in a crisis for a number of vague and complex reasons having to do with rarely agreed upon economic theories and a failure of our leaders to appreciate them.
In fact, the reasons are simple.
We have a system where banks can and will make the most profit if they make more loans.
When they fail, the Federal Reserve ultimately steps in by creating more debt, which we shoulder by allowing our earnings and savings to be devalued.
(Concluded in Part 3, tomorrow.)