Money as Debt

Not one in a million people knows where money comes from. Have you ever wondered about this question? Where does money come from? Does it come from the government? Does it come from the Federal Reserve System? The answer is neither. The vast majority of the money supply is created by commercial banks. Commercial banks create money out of thin air. How do they do this? They create money when they lend it to individuals and businesses. Commercial banks literally "lend" money into existence. This is the origin of money.

Actually, to be more accurate, banks don't really lend money. They lend credit. Specifically, banks lend you your own credit. How do they do this?

When you sign a promissory note for a loan from a bank, what the bank does is convert your promissory note to money through a legal procedure known as "monetization". The bank then uses the funds obtained from this monetization procedure as the source of funds from which to make you the loan. The process is the same for any type of loan, including credit card accounts, car loans, lines of credit, home mortgages, home equity lines of credit, etc.

Through a special government granted legal power that only banks possess, banks convert your promissory note/contract into "money" and then "lend" you this "money" at interest. The banks lend you your own credit, all the while pretending that they lend you money obtained from some outside pool of capital. This is quite possibly the greatest scam in human civilization.

Another Ron Paul Supporter?

ellory said:Please do not feed the troll
...says the vegetable avatar.

ZOG666 said:Why would someone not want Americans to understand their monetary and banking system? Is it not important that people understand such a vital and important part of our economy and society? I don't quite understand why someone would not want this information to be widely known.

Is that you Ron Paul?

pier0188 said:So that's why the National Enquirer is on the front aisle of grocery stores? We all must know the truth of Bat Boy! Feel his pain at being a bastard child not fitting into the human or vampire culture. I feel so bad, it's great that people like you are so willing to bridge the gap and spread the truth of his inner pain.

I'm not sure what this is supposed to mean exactly. Could you possibly elaborate further on your nonsensical post? Thanks in advance.

This is utter nonsense. Banks don't create money "out of thin air". The money that they withdraw to lend to their customers is supported by deposit reserves held by the Federal Reserve banks, just like the money you withdraw from your checking account is supported by deposit "reserves" you have available in your checking account. There are strict requirements, and serious repercussions if bank reserves do not meet reserve requirements, and banks actively trade federal funds to ensure that they are compliant.

The only difference is that banks are only required to keep a fraction of their deposits as reserves at any given time, which makes perfect sense because at any given time, only a fraction of their deposits will be withdrawn by their customers. This essentially allows a single deposit to support multiple loans from different banks, which is probably where this conspiracy theory comes from. But it is completely inaccurate to characterize this as creating money from nothing. A bank without any deposits or reserves would not be able to lend any money out.

Fractional Reserve banking is a good enough idea that just about every industrialized country uses it. So, sorry: no conspiracy here. You might want to pick a better blog to copy and paste from next time.

Oh well. I guess I should have known better than to attempt to raise an issue such as how our money and banking system functions on a site filled with clowns who get excited about savings accounts yielding 2.01% interest and the latest $20 family discount coupons from Chuck E. Cheese's. LOL

So a thread that discusses how our banking and monetary system functions is "off topic" and doesn't belong in a forum named "Finance"?

Okay, whatever. LOL

ZOG666 said:workindev,

Let's start with the basics. I'm not sure that you actually understand where the money supply comes from. Where does the vast majority of the money supply come from? Thanks in advance.I'm not sure you know where it comes from (hint: watching a cartoon on the internet doesn't make you an expert). Growth of the money supply is predicated on deficit spending by the government. The banking system on it's own cannot create new reserve currency, so they are directly limited by the federal funds market. The Federal Reserve manipulates the federal funds market by buying and selling US debt securities. Without a supply of bills and notes from the Treasury, the money supply would not grow, and all of the prerequisites for growing the money supply are out of the private banks' control. Kinda deflates much of the conspiracy in your cartoon, eh?

ZOG666 said:workindev,

Let's start with the basics. I'm not sure that you actually understand where the money supply comes from. Where does the vast majority of the money supply come from? Thanks in advance.That is a pretty interesting accusation considering that it seems as though your knowledge of monetary policy comes from a cartoon you found on the internet.

It isn't a big secret where our supply of money comes from. You don't really have look farther than the Fed 101 website set up by the Dallas Federal Reserve Bank. That is a very informative website and is well worth the time it takes to educate yourself on the subject.

Of course, the bulk of the money supply comes from open market operations from the Federal Reserve. The primary function of the Federal Reserve is to manage the money supply so that it can grow fast enough to help promote economic growth, but not too fast that inflation adversely affects economic decisions. Their current knob of choice to accomplish this is through the target fund rate. They set the target fund rate, and then carry out open market transactions, or the trading of publicly held assets in exchange for new money, to try and maintain this target. Thankfully, they have a supply of publicly held treasury securities that carry the full faith and credit of the US government that the Federal Reserve can buy in exchange for new money. If those treasury securities weren't available, they would have to purchase other public equity for new money, which is very bad. Kindof puts a damper on the arguments from the crowd in favor of balancing the Federal budget.

If interest rates are above the target fund rate, they buy more treasury securities to increase the money supply and drive rates down. If interest rates are below the target fund rate, they buy less treasury securities to drive rates up.

You'll note that all of this is completely independent of banks loaning out money. They can only do that if they keep enough deposits in reserves with the Fed after loaning the money out. But if the Fed was unable to carry out open market operations, they wouldn't be able to sell any money to the banks, and the banks would no longer have the ability to write new loans.