During my 20’s I was trying to unravel the various conspiracies and confusing machinations of the world. I was into the Sovereign Citizen movement, which first gave me the idea that banks are not all they are assumed to be.
So after researching for a while, I eventually stumbled upon the real issue with our financial system. People such as Richard Werner and Alexander Faure (among others) have shown the way. The real issue is Credit Creation.
It turns out that banks can create money out of nothing. Regular banks do it, even your local bank. Most bank workers are not aware of this, or at least unaware of the problems it can cause. They just enter the digits into the computer, and let the automatic accounting process take care of the rest.
So how do they do it? It happens when you take out a loan. Let’s use a home loan as the example. You take out a $1 million loan for a house. The bank puts $1m into your account, and $1m into their ‘accounts receivable’.
A home loan takes about 30 years to pay back, but when it is all paid back, their ‘accounts receivable’ will drop down to $0. Well, not exactly, because they have other customers, but you get the point.
So money is created, and then it is destroyed. Thus it is temporary, and technically not money at all, but is referred to as credit. Nobody really knows about this, and probably wouldn’t believe you if you told them on the street. Maybe some people think its crazy, maybe other people don’t know what the problem is or why they should care. I’ll get to that.
Many economists and central banks freely admit this is how the economy works. The Bank of England describes it in their quarterly bulletins, and they have a YouTube video explaining the process. There was even a debate in UK Parliament about the dangers of such a system.
So what is the problem with credit creation? There are 3 main issues.
Charging interest on such loans is fraud. There is no risk of loss, because the money has been created, not transferred. Basically its a big scam.
It allows house prices to rise. There is no limit to the amount of money that can be created, since it depends on how much the house costs. Therefore, prices can keep going up because loans can just keep getting larger. While there are other factors involved, banning credit creation would lower house prices by 50%-90%.
Fluctuations in the money supply. Since commercial banks can create and destroy money, the overall supply has the potential to dramatically rise or fall depending on lending criteria. This is inefficient at best.
We can see that credit creation directly affects house prices because when lending is restricted, prices go down. The vast majority of people are not bothered by taking on debt. If the banks lower standards and allow more people to borrow, then more people borrow.
We can also see that lending affects the money supply. Most western countries’ money supply has increased similarly to Australia’s over the last few decades. Where is this money coming from? The government? No, we have data on fiscal balances. Governments try to run a budget surplus and not a deficit anyway. The money comes from the commercial banking system.
There are meant to be limitations on credit creation using reserve requirements. These never really had any effect, but I don’t need to explain why because most countries have removed them by now anyway.
There are various theories on how banking works. Most of them are wrong, and underestimate the level of corruption and financial oppression that we experience. If we ban credit creation then instead of paying $500k for a house and $400k in interest, people would just pay $200k plus $30k interest.
References
Commonwealth Bank of Australia. (2018, November 15). Economics: Issues. What are the near term leading indicators of dwelling prices telling us? Retrieved from https://www.commbankresearch.com.au/apex/ResearchArticleViewV2?id=a0N0e0000074mepEAA&un=elise.shaw@cba.com.au&tk=YTBOMGUwMDAwMDc0bWVwRUFBOmVsaXNlLnNoYXdAY2JhLmNvbS5hdQ==
Kent, C. (2018, September 19). Money – Born of Credit? [Speech]. Reserve Bank's Topical Talks Event for Educators. Sydney, Australia. Retrieved from https://www.rba.gov.au/speeches/2018/sp-ag-2018-09-19.html
Werner, R. A. (2014). Can banks individually create money out of nothing? — The theories and the empirical evidence. International Review of Financial Analysis, 36, 1-19. ISSN 1057-5219. https://doi.org/10.1016/j.irfa.2014.07.015
Werner, R. A. (2014). How do banks create money, and why can other firms not do the same? An explanation for the coexistence of lending and deposit-taking. International Review of Financial Analysis, 36, 71-77. ISSN 1057-5219. https://doi.org/10.1016/j.irfa.2014.10.013
Can Banks Create Money out of Nothing?
Holy hell
The bankers were hoping we would never notice! And most of us still don't. Thanks to you for waking me up to the reality of the economy!