Fractional Reserve Banking

As a result, the world’s economy is now based upon unsound banks dealing in unsound currencies. Both have degenerated considerably from their origins.

Probably the most prescient call of the year, made with two months lead time. Those EU area residents, particualrly the Greeks, who heeded the warning have now gained the freedom to sail past capital controls and bank holidays. What may have been overlooked is that I also prepared a list of what countries (and bank domiciles) may be next.

Keynesian policy of manipulating economic “aggregates” through countercyclical macro-measures appeared to work when balance sheets were not stretched to the brink. The glaringly obvious result of such policies, gross capital consumption through malinvestments epitomized through a serial bubble economy, did not discourage our money masters. The best and brightest even suggest bubbles are the only remedy to what they believe is some sort of secular stagnation. Just as drugs, the abuser must increase the dosage to feel the same high and spend accordingly.

Is Deustche Bank the next Lehman is likely the wrong question to be asking. Is Lehman the template for European banking may be more to the point. Take it from the guy that called the Lehman debacle 5 months before the fact.

If millions of young Americans don't start earning more money, they can't afford to have children, or take care of them properly, and that is the end of us as a nation.

“You can’t stop an idea whose time has come.”

"Those who might want to borrow are no longer creditworthy due to excessive debt and/or stagnant income, or those who qualify to borrow more are not interested in borrowing more at any interest rate: they are done with debt." The Fed can push interest rates down and make it easy for banks to loan more money, but it can't (yet) force us to borrow money we don't want or need.

"The War on Cash is the attempt by governments to phase cash out of their economies. Governments hate cash because they hate the financial privacy cash makes possible. And they prefer that you keep your money in a bank to help prop up an unsound fractional reserve banking system." As Ron Paul warned, “The cashless society is the IRS’s dream: total knowledge of, and control over, the finances of every single American.”

This may take you the entire weekend to digest, but if you are an unsecured creditor/lender (have a checking, savings or demand deposit account) to a euro zone bank, I would consider it your fiduciary responsibility to yourself to sit down and parse this piece with care and aplomb!

Centrally issued money centralizes wealth and generates systemic inequality. This is equally true of all centrally issued currencies.  But the inequity that is intrinsic to this system is politically, socially and financially destabilizing, and so this system is unsustainable.

Creating even more money will not help the situation, only exacerbate it. Hyperinflation is a cancer that lurks in our monetary structure. Time to surgically remove it before it metastasizes.

It matters not who is in charge of the Fed or what rules Congress may insist that it adopts. Once money printing, via fiat or fractional reserve credit creation, is seen to be both feasible, justified, and legal nothing and no one can stop it. The political pressure to fund government programs will be irresistible. Everyone knows that the Fed seemingly has the ability to solve their problem by monetizing the federal debt. Should it refuse to do so, we would see riots in the streets similar to what is happening in Europe as protesters target the European Central Bank. The only solution is to destroy the monster that makes it all possible, the Fed.

Government mandated fiat currency simply does not work in the long run. We have empirical evidence galore – every fiat currency system in history has failed, except the current one, which has not failed yet. The modern fiat money system is more ingeniously designed than its historical predecessors and has a far greater amount of accumulated real wealth to draw sustenance from, so it seems likely that it will be relatively long-lived as far as fiat money systems go. In a truly free market, fiat money would never come into existence though. Greenspan was wrong – government bureaucrats cannot create something “as good as gold” by decree.

With historically low long-term interest rates, the opportunity cost of holding gold and silver are close to zero or even negative, in other words you would “lose” money if you buy bonds (the benchmark) instead of gold and silver. When people realize that their money is not “safe” with the banks they will start withdrawing cash from their accounts and buy physical gold and silver instead. Depending on circumstances this could possibly bring down the (fractional) banking system. Why keep money in an account that gives you a negative return? Swiss banks are already witnessing stronger than normal interest for physical gold.

Exactly as I warned 3 wks ago, Nordic countries are facing pressure. Here's strong evidence of a krone break, havoc to ensue in global banks, how to monetize when skittish brokers pull access & leverage.