Tuesday, September 28, 2010

Monetary Theory and Debt


People always hold out that if you renege on your loan and default, you are harming your neighbor because he uses the same bank.  In other words,, you are effectively borrowing money from your friends and neighbors and if you don't pay it back, your neighbors will do without.

First things first.  To the best of my knowledge, this isn't true at any level.

We are in a fractional reserve system here in the US.  The Fed and the States sell the rights to run a bank to buddies (This statement may not be entirely true and if you take me to task for it, I will not be able to respond as vociferously as normal, but it sure appears to be true to me).  The buddies then deign to give you and your friends and neighbors a pittance for letting them hold your money.

Once the buddies have you money, they can work magic with it through the completely legal Ponzi scheme known as fractional reserve banking.  As soon as they convince the kid who mows your lawn to put his money ($20.00), in an account at 2% interest, they can go out and cut a 1-year loan to the kids mom for $180.00.  The deposit earns the kid 1%, the loan earns the bank 9.5.  BTW, I just googled Bank loan rates and this was number three on the list.  Checked the info against my Credit Union and it appeared to be pretty similar.

So, the buddy bank pays the kid $0.20 at the end of the year for keeping his money.  The kid now has $20.20.  The bank earns $197.10 for the loan, and they get to keep most of it. They pay the kid back his $20.20 and then the bank pockets $176.90.  You see, the bank gets to keep it.  The money that they create out of thin air is theirs.  That is the key point that everyone seems to miss.

Banks are nothing but a license to create money.  They aren't your friend.  They aren't respected members of the community.  They are licensed charletans.

Imagine running this scam with $1,000,000 as seed capital.  8.85 large is a nice way to end out the year.
So remember kiddies, when you don't pay back your loans to a bank, you aren't hurting your neighbors, you are preventing the nice buddy banker from buying his cherished Beluga.


russell1200 said...

Banks do create money.

In fact some pretty smart people say they are not even restricted by fractional lending.


But the bank does have to remain solvent: at least in the long run. Liquidity
used to be an issue, but modern Fed guarantees have (wisely IMO) taken care of that problem.

Not paying off loans essentially causes deflation. That can cause a lot of problems. Particularly for people who are themselves in debt.

But it has been set up by our modern financial system as a business decision, not a moral one. If the home owner is worried about the morality of their position, they are pretty much by themselves.

Mayberry said...

That's it, in a nutshell. Money is created out of thin air. It is a Ponzi scheme of epic proportions. But trying to convince the sheep of these facts is virtually impossible...

Andrew not the Saint said...

Here's a thought experiment I posted on one of the financial forums, mainly consisting of Aussies.