Banks Create Money

 

 

 

Ponzi Scheme Called The Banking System

When banks give out loans, they do not give out money that they already have. They simply give the loan which is a promise to pay the actual money which they never really have to do. In the economy, 95% of the money is in the form of bank credit. There is no real currency backing it.

Whenever we borrow money, the bank creates new money. This process constantly (almost) expands the money supply. This dilutes the value of the existing money. This is because total debt has to keep expanding in order for people to be able to pay back what they owe, otherwise there simply won’t be enough money to earn to pay back what we owe. When that happens, we declare bankruptcy, there are foreclosures, unemployment and so on which causes the vicious cycle of deflation.

Money is in the form of credit

Current credit based monetary system is a game of musical chairs. As long as the music keeps playing (as long as total debt keeps increasing), system keeps running. The moment debt expansion stops (credit expansion stops), then money creation stops and it becomes impossible to pay existing debt (principal + interest) with the existing credit expanded (~existing money), thus some of us are guaranteed to go bankrupt (standing when the music stops). This is because there simply is not enough money in existence to pay the existing debt principal + interest. An interest free monetary system may be the fix.

To understand deflation better, read this free deflation report:

Deflation

How Do Banks Create Money Out of Thin Air

Here is full length Money as Debt video that explains the banking and monetary system in layman terms.

 

How do banks create money? Accounting details - Here is how a bank makes loans in Fractional Reserve Banking and how a bank can get into trouble:

 

Current Financial Crisis - Credit Bubble

Ellen Brown presents the facts that lead to the financial crash. How banks create money, inflate the credit supply and how the system crumbles under it’s own weight.

Part 1:

 

Part 2:

 

Part 3:

 

Part 4:

 

Part 5:

 

Charging interest is bad for the society

As explained above, mathematically, we understand that the existing credit based system, with it’s ever expanding interest demand, can cause deflation and guaranties bankruptcies. The practice of constantly expanding the money supply steals from the savings of honest earners who want to use money as a store of value. Ordinary people should not need a Ph.D. in finance to figure out where to put their savings. Money, however it is defined, should be able to do that job in an uncomplicated way.

Most of us are conditioned to “make money work for us”. It is common wisdom to expect some interest for your money. Adam Smith claimed when individuals maximize their gains, that would ultimately serve the society and move it forward. This is not always the case. Here we have displayed why credit based monetary system that uses interest as a vital component falls short of satisfying the society’s needs. It creates conditions in which the human productivity is curtailed and focused on financial gain instead of supplying the necessities of life. Real economy is being burdened by a large financial economy that has to live off of the effort of the real economy.

Good for one, Bad for All

Religions (notably Islam today, Christianity earlier) forbid the practice of usury. There seems to be valid reasons for this and some think that we need to devise a new system to correct our wrongs. However, until then you need to know the dangers of the current system and operate accordingly (Threat of inflation, deflation, unemployment, risk of default, currency devaluation, business cycles to name a few).

Here are observations from the society where maximizing one individual’s gain hurts the society.

Sex Selection

In some cultures (India, China), parents prefer a male child. This is because a female child eventually requires the parents to pay a dowry, and the male carries the family name. Thus, to maximize their own good, parents decide to end pregnancies for a female baby, and keep male babies. This eventually brings an imbalance in male / female population ratio such that some males are not able to “carry on the family name” because they cannot find a bride to marry.

Wal-Mart

Wal-Mart is the store that has the lowest prices. To optimize our own gain, we go and shop there. But it comes with a price. It brings lower wages to the community. Workers have less benefits. Wal-Mart may cause other competitors close down their doors causing unemployment in your community. It will have ripple effects. Therefore, in this example, even though we maximize our personal gain in the immediate future, it effects the community in a negative way.

The Tragedy of the Commons

Here is a story by Garrett Hardin, in his essay "The Tragedy of the Commons, 1968".

There is a pasture owned in common by the residents of a village. The pasture is at full capacity with regard to the number of the sheep the villagers have. It is such that if villagers add one more sheep, it will start degrading the pasture.

With their natural greed and an urge to maximize individual gain, each villager thinks if he adds one more sheep he will make more money. Thus they keep doing this. As they see the pasture land loose it’s productivity, their mentality will be “it is dead anyway, we should get what ever we can” and keep adding sheep as much as possible. This brings them to a state where the pasture will be damaged threatening their entire flock with devastating losses. It would be prudent for them to agree on a balanced production capacity and limit themselves and police the community to make sure everybody obeys. If not policed, volunteers will be hurt by others who grab their share. Thus, volunteering does not work in these cases.

This story is similar to the loan interest situation. Some volunteers may deny doing business with interest. But this is not enough to save the society. Law must forbid interest or it won’t work.

Paying Off Debt

Here is a poll, from September 4, 2009 CNN Money:

Pay off debt

In light of the above videos, this chart sums up the mood. People are trying to pay off debt. Since our entire money supply is borrowed money, when we pay it off, the money supply shrinks. This is why FED is trying to print money to counter the deflationary forces. That will probably have bad inflationary effects later down the road. But for now, we are heading into deflation. The credit bubble is shrinking. The deflationary effects of a slowdown in borrowing is explained here.

How does the ponzi scheme last?

Banks operate with the implicit guarantee of the FED and with the threat of “too big to fail” they blackmail the congress and get bailed out by the tax payer. The bankers know the system will fail again and again. But if they take precaution, they will loose money. Instead they take maximum risk and cause the bubbles as big as possible so that they have to be bailed out at tax payer expense!

Part I

 

Part II

 

.

 

 

Home | Stock Market | Latest Opinion | Forex Trading | Inflation | Housing Market | Financial Crisis | Elliott Wave | Contrarian | Forecasting | Conquer the ... | Socionomics | Market Signals | Banking System | Free Download | Message Board | Financial Web Sites | Great Depression | EWI Articles |

webmaster@tradingstocks.net

 

Trading the Stock Market - Stock Market Timing

Bookmark and Share  

November 29, 2013
Janet Yellen is About to Make History

August 2, 2013
Deflation in Europe

July 20, 2013
Extreme Sentiment Threatens Europe

June 19, 2013
How to Spot a Stock Market Top

Marh 6, 2013
Jaguar Inflation - A Layman’s Explanation of Government Intervention to Free Markets

February 7, 2013
Should you or should you not diversify your investments?

December 14, 2012
Are we in Bull Market?

October 17, 2012
How to Prepare for the Coming Crash

September 23, 2012
Bond Market Bubble

July 27, 2012
Stock Market Crash

June 29, 2012
Is Your Bank Safe?

April 14, 2012
How to stay safe during the next economic crash?

March 28, 2012
European economy is contracting, is the US next?

February 5, 2012
How Deep Will the Cuts in Government Services Go?

January 25, 2012
Why do Traders Fail?

November 15, 2011
What are the Best Technical Indicators for Stock Market Trading?

October 20, 2011
Money, Credit and the Federal Reserve Bank

September 19, 2011
How Does Money Disappear in the Stock Market?

September 2, 2011
Behind Closed Doors at the Federal Reserve

August 18, 2011
Stock Market in Free Fall Territory

July 4, 2011
Can the Fed and the Economists Forecast the Future?

June 27, 2011
Trading and Investing Using Elliott Wave Theory

June 10, 2011
Is Lower Trade Deficit a Bullish Sign for the Stock Market?

May 3, 2011
Bin Laden and the Stock Market

April 19, 2011
Is deflation a threat despite Bernanke's printing press?

March 10, 2011
Pop culture, markets and the social mood

January 6, 2011
Do Earnings Drive Stocks?

December 22, 2010
Why Diversification Does Not Work in Today's Markets

November 24, 2010
Individual Investors Have Jumped Into Another Fire - Muni Bonds Crashing

October 27, 2010
Why You Should Care About DOW (DJIA) Priced in Gold

September 23, 2010
Signs of Deflation

August 19, 2010
Efficient Market Hypothesis - Is the Market Really Efficient?

August 10, 2010
Economic Crisis That No One Saw Coming

July 12, 2010
Stock Market Bottom and DOW Dividend Yield History

July 2, 2010
Deflationary Crash Ahead - Long Bear Market Looming

April 19, 2010
Goldman Sachs Charged With Fraud

April 6, 2010
Understanding the FED

March 16, 2010
What To Do With Your Pension Plan?

March 15, 2010
Popular Culture and the Stock Market

March 11, 2010
Five Fatal Flaws of Trading

March 9, 2010
Does Gold Always Go Up In Recessions and Depressions?

February 25, 2010
Credit Default Swaps Indicate Trouble for European Debt

February 23, 2010
News is Not What Moves the Markets

February 22, 2010
What Chinese Malls Tell Us About the Economic Reality

February 20, 2010
How Elliott Wave Principle Can Improve Your Trading

February 19, 2010
Europe’s Return to Risky Investment

February 17, 2010
Stock Market Myths

February 11, 2010
Robert Prechter on Herding and Markets\’ “Irony and Paradox”

February 10, 2010
Will The Bears Relinquish Control?

February 5, 2010
EUR/USD: What moves forex markets?

January 27, 2010
Can Bernanke Survive the Bear Market?

December 4, 2009
If You Think the Past Decade Was Bad For Stocks, Wait Till You See This

November 20, 2009
The FDIC Anesthesia Is Wearing Off

November 6, 2009
Financial Mania: What record trading volume says about confidence

October 29, 2009
Black Monday: Ancient History or Imminent Future

October 20, 2009
Gold: Bull or Bubble?

October 9, 2009
Death of the US Dollar

October 5, 2009
Why Technical Analysis Beats Out Fundamental Analysis

September 17, 2009
Germany’s DAX: Free Insight into Europe’s Leading Economy

September 15, 2009
Five Tips for Successful Trades

September 8, 2009
How A Bear Can Be Bullish And Still Be Right

September 4, 2009
Prechter Stands Alone Again - He’s Done the Math

September 2, 2009
How IRAs Can Tie Investors’ Hands

August 20, 2009
The Bounce is Aging, But The Depression is Young

August 13, 2009
Emotional Pitfalls of Trading

July 23, 2009
The Three Phases of a Trader’s Education

July 15, 2009
Spot a Pattern That you Recognize

June 15, 2009
A Road Map To SENSEX 100,000

May 29, 2009
Gold Is Still Money

April 23, 2009
Think That Central Banks Move the Markets? Think Again

April 2, 2009
Bob Prechter on Silver & Gold

March 25, 2009
Key To Trading Success: Ignore Nature's Laws?

March 19, 2009
Are We Near a Low in the Stock Decline?

March 11, 2009
6 Questions You Should Be Asking About the Financial Crisis (And 6 Must-Read Answers)

March 6, 2009
How To Tell a Good Forecast from a Bad One

February 26, 2009
A Better Way To Handle a Shrinking Business

February 19, 2009
The Last Bastion Against Deflation: The Federal Government

February 10, 2009
10 Things You Should and Should Not Do During Deflation