On The Money Multiplier, Direct Deposit, Debt and Capitalism

Blubs of Verbs, Commentary, Executive Papers, Life Lessons, Thought Crime Comments (4)

The government should create, issue, and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers[....] Money will cease to be master and will then become servant of humanity. – Abraham Lincoln

Remember, back in the old days, you had to GIVE the bank money to hold your money. Right now, the promise of getting all your money back is what keeps you sane, and better yet,the government will just print more (cause, really, it can.). Let’ not talk about the inflation if the government just prints money. Let’s stick to the point.

As a mediocre, yet understandable economist, as well as a trained business manager, i get taught alot about the money multiplier. And the more I learned about it, the more I wanted to put my money under a mattress. The Central bank, the way we keep credit and “inflation.” is all a product of how we keep track of money, and this “check money.” of keeping track is more and more entrenched in our lives. It’s hard to think that “central” banking (as we know it)was created in the 60’s 70, while the theory and applications of central banking long existed. A credit crisis? We created it, and it leads us to a particular hell.

What am I talking about. Well, let’s really examine why everyone likes you to direct deposit your check.

Put $100 in the bank. The bank is allowed to loan all but 20% out, so they keep $20 and loan out $80. Using that as a perfect circle of deposit and lending it comes out to $457.05 deposited, $357.05 loaned out and $100 saved with the Central bank, $89.26 in their vault and 10 people have put money in the bank. Say your employer had to pay you $100 (you’re a really had good month). The bank does not have $100 actual cash to actually give you. However! However, they do have paper assets of $457.05 on tap, and $357.05 Account receivables. You could actually claim to have $814.10 (but that requires more finance than you’re going to sit thru) point is, the bank doesn’t have $100 -cash- to give. But the bank can transfer $100 in assets to you; And tada, you’ve been paid. The bank hasn’t lost anything- Incoming $100, out going $100- but it does have a new $100 to play with! and we already said it could turn that into $814.10!

Any student of accounting and finance is probably having a fit now. Why? we (and I say we) been taught that’s not really kosher, however, this is how some of those hedge funds and investment products are bundled. And this is how you, yes you, suddenly lose $200 when the bank fails, and the bank goes under for , yes, you got it, $1600. Paper money.

And that’s the amount the government has to recover when a bank fails. $1600. Paying back that much makes you’re money worthless and inflation takes off. The Dollar bottoms out and everyone loses. About this point and time, your running thru the math again, wondering how I turned $100 in to 1600, and more importantly, why you lost your $200, and your boss fired you (remember he’s poor too) and his business fails and your neighborhood feels the blow.

if the bank was good at investing, the bank took all it’s loans and said, hey, here is my loans, of $357.05 with incoming interest that’s worth really $400. If you give me $375.00 you can keep the profits of $25. Now a sale is made, and the bank now has actual cash of $375.05. Yeah! it can pay off all the people who may want money. But wait, it only has to keep 20% so yes, it sells the new money as loans! (the cycle continues).

The hidden question? Where did the seller get $375 to pay the bank? Did they pay in cash? probably not, they paid in Cash Equivalent Assets. (remember, we need to really add dozens of zero’s on the end here. No one walks around with that much cash).  Well because they used Cash Eq, they used, yes, Paper Money (called Check Money).

Now there are millions of dollars of paper money, yet no real cash. The invisible problem? This is really all debt. It’s a massive pyramid scheme with governments promising to help you (the small investor) if it collapses. I mean, at some point, some one has to -print money-. Unless you can find a new market, and therefore new incoming cash. Basically, the system is praying you do not want your money back, ever.

Btw, this is how insurance companies work too. Generally in major disasters, they go bankrupt. If you pay attention, you’ll see this “creative accounting.” infects all parts of our lives.

This is debt nation; and this is why we have to export a love of money. We need it to keep going.  And that was saving. Want to see what happens when we spend? I didn’t think so.

Welcome to capitalism.

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OceansOfThought @ June 18, 2008