"Money creation is truly a bizarre thing to ponder, let alone accept. It’s actually a very simple process, but really difficult to accept."
It's all in the math (and not even rocket science math!)
- Initial deposit, D = $1,000/-- Money multiplier = 1/R, where R = reserve ratio (in percentage).
- Using 10% reserve ratio, 1/0.1 = 10x multiplier (a lower reserve ratio increases the multiplier effect). This is simple logic, the less of depositor's money held by the bank (lower reserve ratio), the more of depositor's 'money' it can 'take' to create 'new' credit or money (or more precisely, 'debt').
- Money supply = D x 1/R = $1,000 x 10 = $10,000 'new' money created. It's all simple arithmetic. The math, however complex and imprecise as it is turned into and applied to the real world, is still the work of men not of God.
1) All new money created ($9,000 in this example) exist only in the form of "debt". Money is loaned into existence" and we worked (hard) for part of that money 'pool' (we're only one part of the system, albeit an important part). All these new (created) money is backed by an equivalent amount of debt ($10,000 in the example).
2) On a macro level, these so-called 'fiat money' is printed (or typed into a computer) out of thin-air by the central banks of a sovereign country. There is no intrinsic value in them (other than the value of the paper and ink, or the computer software & hardware).
3) These fiat money is backed only by faith in the issuer of these money ie. the govt, central banks, the banking system; in other words, they're backed by 'debt'. This single process is repeated and a multiplier effect is created. Almost every country in the world uses the same banking system. Don't believe! Check the paper note in your country. On it will be printed the name of the central bank that issued the note. If it's issued by the central bank, you can be sure the money used operate in the same FRB system.
4) When faith is lost on these issuer of currency, or if borrowers default on loans, or (fill in the blanks) then the system collapses, eg. lost of faith through excessive printing of money which debases the currency and caused excessive amount of debt.
5) If faith is lost in the system, then a bank-run will occur, and as could be seen from the chart, the banks will not have enough 'money' ($1,000 in this example) to pay all the depositors.
6) All the debts (no matter if created by commercial banks via loans or the central bank via money printing earned 'interest' (compound interest, to be exact). "Each and every year it must grow by some percentage. Because our debt-based money system is growing by some percentage continually, it is an exponential system by its very design. A corollary of this is that the amount of debt in the system will always exceed the amount of money [...] at a minimum, each year enough new money must be loaned into existence to cover the interest payments on all of the past outstanding debt. [...] perpetual expansion is a requirement of modern banking." We all know that in nature, nothing could expand or grow forever. So a man-made "perpetual expansion" system runs counter to the natural law of this world. It will eventually collapse.
7) Therefore, we always hear on the news that the central bank of any country is always trying to control its monetary policies and inflation via interest rate. Therefore, we now have very low interest rate, or zero interest rate policy in some country, to control the money supply. If interest rate were to rise there could be trouble, to put it mildly.
In summary, "What happens when a human-contrived money system that must expand, by its very design, runs headlong into the physical limits of a spherical planet?" Simply put, one cannot consume more than one produces. Even my young niece knows that if i can only produced two ice-cream from my fridge, she will not asked me to give her three ice-cream from there. Same analogy with creating money out of thin air or creating more credit/money with non-existent money.
More detailed explanation and an easy to understand video.
The video that ties the two together: http://youtu.be/iFDe5kUUyT0 (this brilliant video pieced together the cryptic jigsaw puzzle so neatly and politely).
No comments:
Post a Comment