Money = Debt

This is quite a hard subject to address concisely but I will try my best to explain this system: the system of modern money. A system where money = debt.

Most every modern nation operates under what is called "fractional-reserve banking" in which a Central Bank controls the supply of a nation's money. In our country we have a Central Bank know as the Federal Reserve, but more on them later. To understand our 'modern' money system one must understand what fractional-reserve banking is.

When a commercial bank receives a deposit (e.g. you take your paycheck to the bank and put it into your savings account) the bank will add those funds into their reserves. Now many think the money is saved inside the banks vault and you can access that money at anytime. This is false. A bank does keep some money inside of its vaults but only the amount of reserve it is required to have on hand. This "reserve requirement" is set by the Central Bank, and is typically set around 10%. What does that mean? It means that for every $100 you deposit in the bank they will only keep $10 in their reserves.

So what happens to the the other $90? Well that money then becomes available for the bank to loan out, hence the name "fractional-reserve banking"--they only keep a fraction of deposits as reserves. The $90 can now be lent out as a loan since it is considered "excess reserves" and the bank is not required to place it in their reserves. Now for our example let us say the bank lends out the $90. What happens next? Well here is where the story gets interesting and complex so please pay close attention.

One would reasonably assume that $90 comes from the actual deposit of the $100, where $10 is keep in reserves, and the remaining $90 is lent out. But this is not the case. The bank actually keeps all $100. When it lends out the $90 it simply writes the money into their books and becomes new credit *tada!* in the form of $90 is suddenly created out of thin air. Now this is where most people become lost. How can the bank just write the $90 into their books if it does not exist? It is because the Central Bank grants commercial banks the power of money creation called the "money multiplier" or "multiple deposit creation" (link to federal reserve sheet). This process continues on as the person receiving the loan will then deposit the $90 in their bank, where they keep 10%, or $9, in their reserve, and can then loan out $81, and so on for theoretically infinity, until about $900 dollars, or 9 times the original deposit can be created from this system out of thin air. So again, the bank does not loan out the actual $90 it is not required to keep in reserves, it merely uses that money as a liability to back the creation of a new $90.

So here's the crux, here's where money actually equals debt. Because banks create this new money based off the promise of the debtor to pay back his debt, they do not actual loan out people's savings. New money is given value only by a debtors promise to repay the loan. Hence, money = debt. Let's continue to see the full effects of this.

The $90 from the original deposit is actually used by the bank for their own investments. This way if everyone decided at once to remove their money from the bank, the bank would default and fail. This is called a "bank run" and happened various times in history (most notably during the Great Depression). This happens because the bank only holds about 10% of all deposits in their holdings. The rest becomes invested in various funds or assets and would have to be liquidated (meaning sold off so the bank can receive cash for them) for the bank to recover all deposits. Considering the trillion dollar balance sheets of major banks, such a process is impossible. This is way such an institute as the Federal Reserve has to exist. Called the "lender of last resort" the Federal Reserve was established to prevent such disasters as bank runs, by being given the power to create their own money.

Take a look at a dollar bill. At the top you will see the words "Federal Reserve Note". You will also notice the words "This bill is legal tender for all debts public and private". What this means is that you are required by law to repay any debts in court with only these Federal Reserve Notes. The Federal Reserve controls the supply of money in the economy through the use of "Open Market Operations". These operations include the buying and selling of government securities, also known as bonds. Bonds are loans made to firms or institutions based off their debt. So in order for the Federal Reserve to introduce new "credit" into the financial system it buys and sells government bonds, aka government debt. So again we see the same formula, money = debt. The Federal Reserve prints up (or more specially enters into a computer a new entry) Federal Reserve Notes in exchange for Government Bonds. Debt for Money, Money for Debt.

What does this mean for me and you, normal everyday people? What this means is that we can never, never get rid of debt. Our entire monetary system is based on the application of debt in order to create money. The banks create money out of thin air, out of liabilities, and we wonder how in just a matter of days last Fall we "lost" trillions of dollars of wealth. And since the Federal Reserve inserts money into the economy through the purchase of government bonds, the United States will always be in debt--to it's own central bank. Money (like everything) has no reason to be controlled by the government. But first we must understand what money is to understand this.

Money has three functions: it acts as a store of value (you receive compensation for you work in the form of money as physical value), a unit of account (goods and services are quoted in terms of money), and a medium of exchange (it functions as a common good in use of market exchanges instead of straight barter). Money itself is a commodity--it is a good by itself-- but a commodity that is used as a medium of exchange. Examples of money have included: tree bark, seashells, wooden sticks, and most notably gold and silver. The reason people accepted these goods as a common medium of exchange is because they found value in them. The coinage of gold and silver throughout history has shown to be one of the most effective and accepted mediums of exchange, but anything can act as money as long as people find value in it and can effectively use it as a medium of exchange. In our Central Bank monetary system our money is pieces of paper. These pieces of paper themselves are so cheap in real terms that they are essentially worthless. The only reason our dollars have value is that people have faith in the Central Bank to keep the supply of currency in balance with the demand for goods and services. My question is then: why would we place such power in the hands of so few people?

Well, there is only two answers to such a question: our leaders are delusional and believe in faulty economics such as Keynesian, which tell them they have the power to fix entire economies; the other option is that they want power-- they want to control our lives in every way possible and controlling our money is one of the most potent ways to do it.

I could go on explaining how our system is both UnConstitutional and unethical but I have written quite enough. It is so important to understand this system, the effect it has on your life, and how broken it has become.

Further Study:

Zeitgeist Video explaining monetary system (I don't agree with this whole movie but their explanation of the monetary system is extremely well put together)

Money As Debt Video (great history behind our current system)

The Creature from Jekyll Island (overview of the Federal Reserve)

What Has Government Done to Our Money? (great book by the amazing Murray Rothbard)
please read as much as you can on Mises.org, it has an enormous amount of information available for free.

Unemployment: A Response to my Economics Class

I think this may have to become a daily occurrence because everyday I find something just wrong (substitute Keynesian) about what I'm taught in my Intermediate Economics Class. Today we dealt with Unemployment. I have no problem with the basic assumptions of what makes up the numbers and how such numbers are acquired, but I do have a problem with the "Policy Implications".

One implication was that in order for government to spur "job finding" they could force firms to pay most or even all of unemployment insurance. The absurdity of this statement made me almost gag in class. The theory is that if firms have to pay for unemployment insurance that they will be less likely to fire people. There is such a major flaw in this logic I cannot believe people actual think it plausible.

The goal of a firm is to make profits, not to employ people. Firms need people in order to produce or provide a good or service. Firms hire people based off their qualifications and if the marginal benefit (increased profits) provided by hiring them exceeds the marginal costs (their wage) a firm will hire additional workers. Part of this process involves firing workers whom a firm decides their marginal cost exceeds their marginal benefit. This keeps a firm competitive and thus keeps costs down, and ultimately establishes prices at their lowest possible levels. If a firm is unable to fire workers, or in this case has to pay an extreme price to do so, there is no way they can possibly find the most efficient workers and their costs will ultimately be higher in the long-run, which of course leads to higher prices.

What would logically happen is that firms would become extremely selective in their hiring process and I would assume less people would be hired. A firm would be extremely hesitant to take chances on prospective employees since the cost of firing them would be extreme. I do agree that firms may fire less people, but the amount of people they wouldn't hire would greatly offset such changes.

Such a policy would not spur "job finding" but rather would cause firms to hire less. However, most people (especially politicians) and even economists fail to see the huge logical flaws in such arguments, and in their desire to protect the worker in fact harm them even worse. Once again, the whole theory of "forcing" someone to do something, even in good intentions, never leads to the desired result. Freedom of choice is the only way for equality to become a constant in society.

White House Releases Monstrous Budget

White House delivers $3.6 Trillion Budget to Congress

In a time where everyone is forced to spend less in order to effectively deal with the current economic crises, Washington has decided to cut loose with one of the largest federal budgets in history. The budget includes plan for increased health care benefits, shifting the energy economy from oil and gas, and boosting federal aid to education. But, some good news is Obama is committed to taking the troops out of Iraq... by sending them straight to Afghanistan (he's still keeping his promise right?). So much for "increased diplomacy". Where is all the money for this budget going to come from?? Higher Taxes on those "plenty of rich people" Barney Frank hates so much.

It's all part of "trickle-up" Keynesian Economic thinking politicians have fallen in love with: simply put, by giving money to the lowest class they will in turn immediately spend the money, business will have more profits and hire more people, more people have jobs so they spend more money, and so on. Problem is in order for the government to give the lower classes money they need to take it from somewhere: the upper and middle classes. Don't get me wrong, I think everyone deserves a tax break. Everyone. For god's sake half the country doesn't even pay income tax! No, the problem is not the rich have to much money--the problem is the government has too much power. It is the only entity to have positive growth last year, the highest employer last year, and with no coincidence, the biggest debtor in World History.

The government has become the dead beat junkie relative, always needing just a little more money, then he'll sober up. But if you don't hand over your money he won't survive, so he says. The thing is you have the choice to not give your dead beat relative money, but with the government they don't give you a choice. There is never a choice with the government, they hold all the power and can force you to do anything. It doesn't matter if you don't agree with a single thing the government does... you still have to pay your taxes or face the penalty. The worst, and saddest, part of it all is people actually believe the government isn't a dead beat, but rather they see Salvation. But the reality is, no matter how much you want to believe and hope--2+2 will always = 4... even if the government says its 5.