One for the thinkers out there ... a verbatim transcript of the brilliant opening to Zeitgeist addendum (do look it up on YouTube). Worth a read.
Little wonder there are many who think that gold should be double, treble (or more times) the price it is now.
"A number of years ago, the central bank of the United States, the Federal Reserve, produced a document entitled "Modern Money Mechanics". This publication detailed the institutionalized practice of money creation, as utilized by the Federal Reserve and the web of global commercial banks it supports. On the opening page, the document states its objective: "The Purpose of this booklet is to describe the basic process of money creation in a fractional reserve banking system". It then proceeds to describe this 'fractional reserve process' through various banking terminology. A translation of which goes something like this:
The United States Government decides it needs some money, so it calls up the Federal Reserve, and requests, say, 10 billion dollars". The fed replies, saying " sure… we'll buy 10 billion in government bonds from you." So, the government then takes some piece of paper, paints some official looking designs on them, and calls them 'Treasury Bonds'. Then, it puts a value on these Bonds to the sum of 10 billion dollars, and sends them over to the Fed. In turn, the people at the Fed draw up a bunch of impressive pieces of paper themselves, only this time calling them 'Federal Reserve Notes'…also designating a value of 10 billion dollars to the set. The Fed then takes these notes and trades them for the Bonds. Once this exchange is complete, the government then takes the 10 billion in Federal Reserve Notes and deposits it into a bank account…and upon this deposit, the paper notes officially become 'legal tender' money, adding 10 billion to the US money supply. And there it is… 10 billion in new money has been created. Of course, this example is a generalization, for, in reality, this transaction would occur electronically, with no paper used at all. In fact only 3% of the US money supply exists in physical currency. The other 97% essentially exists in computers alone.
Now, Government bonds are, by design, instruments of Debt and when the Fed purchases these bonds, with money it created essentially out of thin air, the government is actually promising to pay back that money to the Fed.
In other words… The money was created out of debt. This mind numbing paradox of how money, or value, can be created out of debt, or a liability, will become more clear as we further this exercise.
So, the exchange has been made and now 10 billion dollars sits in a commercial bank account. Here is where it gets really interesting, for as based on the Fractional Reserve practice, that 10 billion dollar deposit instantly becomes part of the bank's Reserves, just as all deposits do. And regarding reserve requirements, as stated in Modern money mechanics: A bank must maintain legally required reserves, equal to a prescribed percentage of its deposits. It then quantifies this by stating: under current regulations, the reserve requirement against most transaction accounts is 10%.
This means that with a ten billion dollar deposit, 10% or 1 billion is held as the required reserve, while the other 9 billion is considered an excessive reserve and can be used as the basis for new loans. Now, it is logical to assume that this 9 billion is literally coming out of the existing 10 billion dollars deposit. However, this is actually not the case. What really happens is that the 9 billion is simply created out of thin air, on top of the existing 10 billion dollar deposit. This is how the money supply is expanded. As stated in Modern Money Mechanics: " of course, they (the banks) do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes (loan contracts) in exchange for credits (money) to the borrower's transaction accounts." In other words, the 9 billion can be created out of nothing, simply because there is a demand for such a loan, and there is a 10 billion dollars deposit to satisfy the reserve requirements. Now, let's assume that somebody walks into this bank and borrows the available 9 billion dollars. They will then most likely take that money and deposit it into their own bank account. The process then repeats, for that deposit becomes part of the banks reserves, 10% is isolated and in turn 90% of the 9 billion or 8.1 billion is now available as newly created money for more loans. And, of course, that 8.1 can be loaned out and redeposited creating an additional 7.2 billion…to 6.5 billion.. to 5.9 billion etc. This deposit-money creation-loan cycle can technically go on to infinity… the average mathematical result is that about 90 billion dollars can be created on top of the original 10 billion. In other words, for every deposit that ever occurs in the banking system, about 9 times that amount can be created out of thin air.
So that we understand how money is created by this fractional reserve banking system, a logical, yet elusive question might come to mind: What is actually giving this newly created money value? The answer: The money that already exists.
The new money essentially steals value from the existing money supply … for the total pool of money is being increased, irrespective to demand for goods and services, and, as supply and demand finds equilibrium - prices rise, diminishing the purchasing power of each individual dollar. This is generally referred to as 'inflation' and inflation is essentially a hidden tax on the public."
Gold has for many thousands of years been seen as an asset to protect against inflation ...
Monday January 21, 2013 by