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This caught my eye in this week's economist - it sums up the situation very well!

Enjoy.

The Problem:

This is an attempt to state it simply, because if you understand the problem, then you're going to see the solution clearly as well. If it doesn't make sense the first time you read it, try reading it again. Eventually, the whole picture will sink in...

A quick history of money

1) Once, gold and silver were considered the only real money, but it was heavy and risky to carry around...

2) So people paid goldsmiths to store the money, and got paper receipts for it...

3) After a while, people used the receipts like money, and left the gold in the bank most of the time. So the bankers got clever and came up with a scam...

4) The banks printed off receipts for more gold than they actually had, and loaned those receipts out to charge interest on it. They kept their fingers crossed, hoping that not more than a few people would come in asking to redeem receipts for real gold at the same time. This let them make a lot of money charging interest, because they could charge interest on MONEY THEY DIDN'T HAVE.


An analogy can be made using property and titles. Here's the scam in another way:

Step 1: Acquire a vacation home.
Step 2: Sell the title to the home to one person.
Step 3: Sell the title to the home to ANOTHER person.
Step 4: Hope both of them don't show up on the same weekend!

Fractional reserve banking lets a bank say to a depositor that all his money is safe and sound at the bank, while at the same time they get to loan most of it out to someone else and charge interest on it. So there are two people with a legitimate claim to the same pile of money. So whose is it, really? And where is it?

This profitable scam runs the risk of discovery when too many customers ask for what is theirs all at the same time. This is called a run on the bank, and the best the banks can do is call in their loans and see how much money they can cough up, which is invariably far less than what people believed they had deposited.

The story of the vacation home is a good analogy of how banking works today, except for one important thing: there is no home. Because our money is no longer backed by gold, we have all been trading titles to property which does not even exist! Paper backs paper, and all they represent are promises to pay. This is the reality of money, and is quite different from how most of us expect it to be.

What's the result?

1) Loaning money while claiming it is still on deposit increases the money supply, essentially creating more money (otherwise deposits would vanish). In essence, for the bank to have your cake and loan it too, it must create more cake. This increase in money supply is the cause of inflation.

2) Almost every dollar that exists is owed to a bank somewhere, because at some time in history, it was created when it was loaned out.

3) The amount of money owed to banks is more than all the money in existence! So we cannot possibly get out of debt under this system. The bulk of this debt is in the form interest, which is an arbitrary amount of money banks demand in return, but never gave.

4) There is no money, in the real sense. Just checks, data stored on computers, and promises. It is all created by typing on a keyboard, and signing signatures. The only tangible assets in regard to money anymore is the collateral we pledge when we ask for a loan. The money they loan you comes from nowhere, but the assets you lose in foreclosure are real!

5) Because the US government borrows from the Federal Reserve, bankers have the power to influence our society and government by controlling finance. They decide to create (or not create) money depending on who's asking, and for what. They choose what projects get funded, and let other needs wither on the vine by starving them of working capital. This subtle yet immense power is more than enough to undermine democracy, and guide the course of a nation's history.



So what's the solution?

Simple. The public must demand that money must not be created by loaning it into existence. It must be something that is openly and publicly controllable, issuable, accountable, and interest-free. Otherwise, a class of parasites will rise to power in society by cleverly disguising the fact that the money they are creating, spending, and controlling us with is

MONEY THAT ISN'T EVEN REAL.

Taken from a comment to an Economist article:
http://www.economist.com/business/displ ... de=comment

This is an article very much based on the current situation on the US. But it also amazes me that in the modern economy money is all based on trust (unbelievable isn´t it, that we trust each other in this matter!). Money is all virtual nowadays, since in every modern economy the money supply is not based any more on gold reserves. I think the solution is very utopian, sounds communistic to me (or also Islamic?). It is a system that works if people and banks take their own responsibility. Banks should be very carefull to whom to loan (and in most countries they are, they don´t loan to just everybody) and people should take not to loan above their abilities.

Flying Dutchman wrote:This is an article very much based on the current situation on the US. But it also amazes me that in the modern economy money is all based on trust (unbelievable isn´t it, that we trust each other in this matter!). Money is all virtual nowadays, since in every modern economy the money supply is not based any more on gold reserves. I think the solution is very utopian, sounds communistic to me (or also Islamic?). It is a system that works if people and banks take their own responsibility. Banks should be very carefull to whom to loan (and in most countries they are, they don´t loan to just everybody) and people should take not to loan above their abilities.

I agree - the capitalistic system we are in right now lives and dies on 'market sentiments'. (Edit - and also, this is a description of the global banking system, not just the US)

Its not quite Islamic - as that teaches macro-economics based on real assets. Islam forbids interest, but taxes capital (i.e. in effect the interest rate is negative).

Under the Islamic system, loans are made on a profit share basis - so lenders need to be very careful about who they lend to, and on the borrowers side there is little opportunity to live beyond one's means (which is a good thing in my opinion).

The money will be distributed quicker and won't necessarily gravitate to the richer people (in contrast with the rich getting richer under the current system).

Bizarely, the deregulation of the US markets (under Clinton) led to the credit bubble and during the 'good years' the lack of Government regulation was celebrated by those getting very rich. Now that their excesses has led to failures - they want the government to step in and bail out banks (which the Fed has done).

A commentator has called this 'socialism for the rich'.

In my home country, the UK, the Government refused to back-date Police pay-rises which would have cost about £30m, but have bailed out a bank to the tune of almost £100 billion!

Its a crazy world (and I work in it!)

Cheers,
Shafique

shafique wrote:
Step 1: Acquire a vacation home.
Step 2: Sell the title to the home to one person.
Step 3: Sell the title to the home to ANOTHER person.
Step 4: Hope both of them don't show up on the same weekend!

Is this whats called TIMESHARE!