Archive for the ‘Fractional Reserve Lending’ Category

“When you or I write a check there must be sufficient funds in our account to cover the check, but when the Federal Reserve writes a check there is no bank deposit on which that check is drawn.  When the Federal Reserve writes a check, it is creating money.” 

~ Boston Federal Reserve Bank Publication

Okay, I know, a great place to start this morning–in the weeds.  But, hold onto that quote, because it will come to be very powerful later in the post.

Today we have to deal with the $8 trillion gorilla in the room: the Federal Reserve.  I’ve already been hammered for talking about this by people in LaLaLand on the Internet, so why not go back for more punishment, right?  The reality is, as I discussed with a FFRL (friend from real life–yes, I have some) just the other day, it would probably be impossible to get rid of the Federal Reserve, since it does have more power than Lord Voldemort and Word Girl put together.  However, having average citizens in the United States aware of the Fed and what exactly it is and does is a laudable goal.  Of course, I understand the average citizen probably isn’t reading this post, but hopefully that’s where you come in (spread this message far and wide, my people!).  In any event, the Federal Reserve is the single most important institution in the United States, and probably in the world, and will have the single biggest impact on global monetary policy (yes, that thing I apparently “know nothing about”) in the next 5 years.  I won’t dare project beyond that, but the next several years are certainly shaping up to be a doozy, and the Fed is going to be in on this in a MAJOR way.

Again, with American Endgame, I am trying to recreate my own learning experience for the reader.  And while I understand the whole “lead a horse to water” theory–and certainly don’t expect anyone to learn the same way I did–I want to create an opportunity for people to have a couple bread crumbs to start their own journey.  So, if we’re throwing down bread crumbs (or tiny pebbles that shine in the moonlight, because we know the bread crumbs get eaten, and then you end up in a cage in a gingerbread house being poked by a witch with a stick), then we have to go back to Chris Martenson and his Crash Course.  This series of videos is what first allowed me to wrap my brain around the really complex stuff that’s going on–I highlighted this series as an important resource here.

Today we start with Chapter 7, which deals with Money Creation.  Watch the video, embedded below (takes 5 minutes).  The key vocab from today’s lesson is “fractional reserve lending.”  Please watch:

So, as you see, lending money is key to the current monetary system, but is a double-edged sword since any defaults really foul things up.  Now, please keep this last chapter in mind and take another 8 minutes to watch the next chapter, which discusses the Federal Reserve.  This is where the red meat is:

So, what do we take away from this?  Essentially, what really set my mind reeling–and what I immediately recognized as something that had major implications for how our nation’s currency is managed–is the fact that our currency is literally created out of thin air when our Congress runs out.  I was occasionally told by my father growing up that “money doesn’t grow on trees.”  Well, now I can emphatically tell him I disagree with his premise.  No wonder Congress can’t stop spending: they can get more money anytime they want!  As Chris puts it in the video, there are two kinds of money: one kind is “loaned into existence,” and the other is “printed out of thin air.”  This is where I start to get concerned and wonder what exactly my entire financial and monetary world is built upon…

So, where do we go from here?  The suggestion that the Federal Reserve can print more money without necessarily anything backing it–we don’t even have gold or silver backing our currency, which is a major cause of the (hyper)inflation we are all experiencing, and is probably the subject of another post–should make us all take pause.  It may take several days for you to truly appreciate the idea that your money is not worth anything and that the Federal Reserve is printing it like toilet paper, but once you make that cognitive leap, come back.  We’ll be ready to walk farther down this spooky path, closer to the gingerbread house.

~DS