Have you ever been wondering where all the money comes from? Every single country is in debt - it's a lot of money to be borrowed, right? Where is it taken from? The truth is more than inconvenient, but the mechanism is brilliant in its simplicity. First thing we all have to realize is the fact that today money does not represent the amount of gold, silver or copper like it used to. Today money represents debts. Every time the bank gives you a loan for a car, a flat or whatever you need completely new amount of money is being injected into the economy. By "new money" I mean money that has never existed. It is just typed into the computer and it represents your debt. Now most of you probably think that money for loans comes from deposits, which is only partially true, because banks are allowed to lend a lot more than they really possess.
To ilustrate this ingenious process of money creation I recommend you to watch this short fragment of movie called "Money as debt":
( you can skip to 5:00 )
As you can see - by placing a small amount of "high power money" in the central bank, the banking system can create about 90 times as much completely new money (with fractional reserve of 9:1). Imagine what happens in countries with fractional reserve ratio of 20:1 or 30:1. New money is not only created out of thin air - don't forget the interests have to be also paid. In other words, with little more than $1000 placed in the central bank the banking system can generate $ 100 000 and collect interests while the initial amount is still untouched. That's business!
Now you know how every country can be in debt of private bankers - simply because banks lend money they never had and collect interests out of it. It makes even more sense when you realize that almost every deposit you make comes from someone's debt. When you take out a mortgage loan for a new flat your property developer receives a big amount of newly created money and in most cases he deposits it back . Now two things happen:
- bank can lend even more taking into account the money created as a debt.
- workers hired by your developer get their salary from money created by your debt (and yes - in most cases they deposit their salaries in a bank which, help to give new loan and so on..)
As you can see loans becomes deposits, which then become loans and so on. An infinite loop of multiplied debt that has to be paid someday. Banking at its best.
Questions:
1. What is your opinion on "money creating" process?
2. What can happen if the loan bubble bursts?
1. Its bad, what else can I say about it? It's been created by cheating without considering long term outcome and is expected to hold up just because it's a big thing. But hey, that's what the bubbles are all about!
ReplyDelete2. What will happen then? Well, currency inflation, devaluation and all other sorts of stuff which may break down a coutnry, even as big as United States. But only if you consider them as a country, becuase some states may outbreak before that and things will get even more interesting. Will that effect others? Partially. Most of the big players see these problems and they move their assets to safer places, like gold (just take a look at gold prices in recent years) or safer, more stable currencies thus making them less stable (look at swiss franc - around 2008 crisis). US dollar has been plunging since FED and I wouldnt expect it to change any time soon.
Well said @Łukasz Zalewski and i have to agree with you. Seriously i think the same.
ReplyDeleteWhen you think about the world banking, you can get a headache because this is so baaaaad and at the same time really simple and logical. The process is just a part of the whole thing, but we have to remember the banking is also all about predicting, speculating, manipulating currencies value and building money power. In example, Goldman Sachs Group is one of the most powerfull investment banks in the world and they actually rule the world of banking. In 2009 they have said - "We will no longer profit from undermining Polish zloty". It brings really important question, which is "WHAT?!". And your second question? Bubbles are also created in our minds, no such things exists i guess, there is nothing to burst, it is the decision of group of people, we can borrow indefinitely and i have no idea where this is all going because i am not a banker, but i have a feeling, that something really catastrophic could happen if someone would have decided that the bubble had burst.
The goverments can steal money from people by using "money creating process". If they print more money, the money that people have would be worth less.
ReplyDeleteGood idea was to bind money with gold. The gold standard was using by some countries years ago. It was good because gold is more inflation-proof than money and it's not dependent on government actions.
You can read more about gold stanard here: http://en.wikipedia.org/wiki/Gold_standard
Of course it doesn't mean that people would be safe. Unfortunately even if governments can't steal your money using inflation they can always prohibit having gold.
That happend in 30's in USA:
http://www.the-privateer.com/1933-gold-confiscation.html
1.
ReplyDeleteAs stated by the author,nowadays we do not carry around with us pots of gold or silver to see how much we are worth. Our money is pretty much virtual and we live on credit cards and loans. Unfortunately, as harsh as it is, the banks own us.We need to be very cautious to use the money wisely and not to fall into the trap of banks luring us with the 0% APR or low payments options.
2. I think the world would be very chaotic if one day the money bubble burst. On the other hand,it would be interesting to see what would happen to people's debt. Would all debt be forgotten and suddenly we wouldn't have to worry about the payments? I do not think that it is that simple unfortunately.
ReplyDeleteI'm not realy shocked I know about it from some time. But not from school ofcourse :) I do not appreciate that, but I can do nothing about it. As s7495 said "the banks own us" and I think this is good summary of this topic.
What would happen if the bubble brokes? Only people who have food will survive this war and chaos.
Natalia - You do not appreciate that, but You can do nothing about it.
ReplyDeleteI can't agree, of course You can do something about it. You can use the bank wisely, don't trust them esily. We are not doomed to debts.
@ Karolina Skrzyniarz - I agree that we are not doomed yet. Besides I have read many press articles about the issue and there is one thing worth to be added to the topic - the reason we take bank credits. In many many cases people take bank credit not only for a flat. They take another one for brand new car and onother one for a vacation and another one for a motorcycle etc. While flat is something that you need to live in peace with your partner, to raise kids, to have your HOME - taking bank credit to buy luxury goods you dont really need and you cannot afford - is plain stupidity.
ReplyDeleteThis idiotic persuit of wealth, material goods and - the most importand - desperate need to have more than others.
And then suddedly you loose your job, and It would be no tragedy, cause your wife is able to pay for mortgage, but you also have 3 other bank credits and you're going down. This is the common case. So yes - banks ARE the root of evil, but they wouldn't be where they are now if not for the stupid people.
When I cannot afford a car - I dont buy it, for f#@! sake! :) I would take it on credit only as a tool for work, which will pay off later on. I dont have to posses a 50" TV and $ 20 000 watch. However there are people (and this usually is connected with poor self-esteem) that value others (and themselfs for that matter) by the amount of goods/money they have.
That is amazing flair for money creating, but if you are not Jesus Christ you will not make something out of nothing. If someone claims otherwise is lying and hence problems will come soon. Cunning operations on money cause someone's tears and because banks are so common nowadays it will hurt many people. However at present we all can not exist without that institutions. Even my 80 years old grandpa whose pension is paid into a bank account.
ReplyDeleteMy opinion on this kind of money creation is completly negative. I use banks almost everyday, I took some loans from them and I pay it back. It is fantastic I can have some goods practically immediately when I desire, but I do not want it at the expense of even theoretical market collapse as we can see live in Greece. Unfortunately bank experts do not warn customers about risks and financial specialists know everything, but too late. Lans are for right people, but fools do not understand it. The restraint is needed as soon as possible!
I think if this bubble explodes a lot of gullible people will cry, but if those people were warned before taking the loan they would think twice. Then banks would not lost their "completly new" artificial shekels.