Inflation required for fractional reserve banking

Web of Debt author Ellen Brown on debt money, why money is collapsing and why central banks need adult supervision:

"Taking the long view, it's the end of a 300 year Ponzi scheme. Virtually all of our money is created by banks as loans; but banks create only the principal, not the interest necessary to pay their loans back. More is always owed back than is created in the first place, and new borrowers must continually be found to take out new loans to create the money to pay this extra interest. After 300 years, the whole world has been locked in debt, and the parasitic pyramid has run out of its food source."

(A Ponzi scheme is basically an inflationary system were fake money is created and put on the books (as a result of fake investments); and if someone wants some real money, a small fraction of the money that has been collected is returned. But you knew that already.)

This is the same thing I was trying to say in this article on fractional reserve banking and inflation.

And the Mogambo Guru put it this way in The Big Payback of Nonexistent Money:

Well, the only thing he wanted to talk about was how I was going to get my Fat Mogambo Butt (FMB) up off that stool and get out and not come back, which I did, but not before telling him that another parabolic curve is provided by Darryl Robert Schoon at, who says, “What people do not understand is that bankers loan money which doesn’t exist and then receive compounding interest and repayment of previously non-existent funds in return.”

Most descriptions of fractional reserve banking get hung up on details about how a bank will keep a certain portion of the money that it loans out in actual cash in case someone wants it and how bad it is if the bank uses up all this cash.

But now, thanks to the Federal Reserve, which has effectively lowered the fractional rate to zero, it is not necessary for the bank to keep any of the money that people deposit.  None of it.

So this makes it much easier to illustrate the point that banks make money out of thin air.  They loan this imaginary money out and then receive real money back as interest.  You know this is imaginary money because if you go to the bank and try to take out a loan for $100,000 and tell them you want it in cash you'll discover that they won't give it to you.  You can only write checks against your loan.  Or they will issue you a bank check you can deposit at another bank and you can try to the the $100,000 out of that bank.  I'd like to see someone try.  Instead, you write checks against your loan, which other banks will cash (possibly including the bank that gave you the loan!) and this imaginary money circulates.  At no time is there any actual money - no dollar bills, no gold, no coins ... no nothin'!

So when you heard that the banking system might have collapsed, you would have heard Federal Reserve and Treasury officials talking about imaginary money.  To fix this problem - that is - that the banks didn't have enough imaginary money - the Federal Reserve issued them some extra imaginary money that it created out of thin air.  The Treasury Department also forced the banks to take some imaginary money as part of the TARP program.

There is a continuing argument - are we facing inflation or deflation?  Both, technically.  It depends where you look - inflation and deflation are not uniform across an economy.   However, I maintain that most of the deflation is the removal of imaginary money from circulation while much of the inflation is in day to day items that I want to buy, like food and gasoline; there is also currently a great deal of inflation in stock prices.  The price to earnings ratio of the S&P 500 is 130 or some ridiculous number; a more sane ratio is 10 to 15.  So the S&P 500 stocks are inflated 10x over any reasonable price.  The reason is that the imaginary money that the banks received was sitting with nothing to do; so the banks bought stocks.  Right now, they seem to be buying each other's stocks, which bids the prices up, and let's them sell those stocks for more imaginary money, which they can put on their balance sheets, which are filled with imaginary asset values such as commercial real estate loans at 100% when the most that could possibly be paid back is 50%.

Our currency is going to collapse.  Nobody knows when and few will offer any predictions.  How would you predict when Bernie Madoff would turn himself in?  How would you predict when the SEC would have found him out if he hadn't turned himself in?

When our currency collapses a great deal of imaginary wealth will disappear.  Just as people who invested with Madoff went from rich to broke in a matter of five minutes so too a great deal of imaginary wealth in the US and around the world will disappear.  People will be forced to switch to some kind of currency that has some value.  I don't know what that will be.  In the worst ( non-violent) case we will all barter; in a lesser case perhaps the states will issue some currency with an inflationary cap.  I don't know.

All Ponzi schemes end and they end badly for many people.  The only safe thing is to not participate and that is really hard in today's world.  It's just not practical for most of us to live off the land.  I wish I could tell you how to survive the collapse but I don't even know when it will happen!  (Sometime in the next two years, methinks ... but who knows?)

Nonetheless, I would say it is better to go into this crisis with your eyes open; when the currency collapses it will happen quickly.  Maybe the powers-that-be will con us all with some new currency - a world currency - and the day of reckoning will be postponed yet again.  Who knows?  More likely, I think, is that the US dollar will be abandoned as a safe store of value by most foreign governments.  When that happens prices will go through the roof because we import so much.

Cripes, what a nightmare.

Here:  watch Debbie Downer; it will cheer you up.

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