It seems that from conversations I’ve recently had with people, they think that it is only the government deficit and its relation to printing money to pay off bonds that creates inflation. This is wrong. While the major cause could be brought back to the Federal Reserve, it’s only one part of the scheme that banks as a whole run on a daily basis.
This scheme is known as Fractional Reserve Banking. This is when a bank will only keep a percentage of deposits in reserves while they loan out the rest. Now this is a commonly-known function of a bank. I think to a certain degree this can be a positive practice, but when they do it excessively, bank runs occur.
Imagine if you brought $1000 to the bank and deposited it. Now the bank keeps 10% in reserves (as required for capital adequacy ratio in the U.S.) and loans out 90%. So some guy in who-knows-where just got loaned $900. He can deposit that in another bank and the process repeats itself. Though you are still entitled to your $1000, another guy just gained $900. And while that guy has his $900, a guy further down the road is entitled to $810. Now when you go back to retrieve your $1000, they don’t have it. It’s somewhere else because they simply made money out of money. The money they created doesn’t exist. This is what’s called the money multiplier effect. Now worse yet is the fact that not only are they inflating it, they’re betting it on people and betting it in markets. Meaning that when everything loses equity from the bubbles that this system creates, a lot of this money simply vanishes.
Note: The equation for the money multiplier effect is the inverse of the reserve requirement. So let m represent the money multiplier. m = 1/.10 = 1000% Meaning the banks have inflated your deposit alone by 1000% of its original amount.
Obviously they didn’t create new actual currency, which is why a bank has runs. They inflated the M1, M2, and M3 money supplies, which are the money supplies aside from tangible money. The money doesn’t exist for people to have even though it’s in the economy. The 10% reserve requirements are designed to be a cushion for banks so the banks don’t have to liquidate assets. To be frank, it’s not good enough. At all.
When a bank experiences bank runs, the bank will fail. But the banks have no fear, because they’re said to be “Too Big To Fail.” Yes, it’s true: when the banks fail the economy is ruined. But when the public sector feels the need to prevent banks from failing, the business becomes corrupt. Industry will always have incentive to offer good products and services to its consumers because if they don’t, they will fail and all be out of jobs.
Well for the industry dealing with the most sensitive good (money), they are deemed too important to go under. No incentive to be careful is offered. The banks became corrupt because all they had to worry about was lining their paychecks short-term. And much of this money is supplied by the Federal Reserve. The Federal Reserve, our central bank, is a private bank. It has special interests to help make all of this money while devaluating the dollar. They are the oil that fuels the corrupt banking engine. It’s a dishonest trade now, and it makes billionaires richer and the economy poorer.
Notice the green money supply. This is the actual money in circulation. Most economists use M2 money supply to measure the amount of money in circulation of an entire economy. Notice the difference. It’s nearly 7,000,000,000,000.
If we really want to stop harmful amounts of inflation, the current banking system has to stop. The best regulation is to tell banks that they can indeed fail. Which means we will have to remove the Federal Reserve. Plain and simple. They stopped caring, because the government gives them the power to stop caring.
Banks are no longer required to supply the amount of currency as private-sector would demand. They inflate and practically welcome bank runs. Most economists don’t use the M3 money supply anymore, but just to show you how severely damaging the system can be, notice the difference between currency and M3. It’s over 9 trillion. The simple fact is that ever since the Federal Reserve was created, the dollar lost 98% of its purchasing power. And people wonder why the banks failed in the Great Depression. Blame the Fed. They ruin our banks, enable the fractional-reserve system, and they ruin us.
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