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Michael Maloney: "We Pay Tax For The Privilege To Have Currency"

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In this video excerpt from the Casey Summit When Money Dies, Rich Dad advisor Mike Maloney explains how currency is created, "fractional reserve banking," and why our banking system is a pyramid scam of epic proportions.

 

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Tue, 10/25/2011 - 17:39 | 1810096 Conrad Murray
Conrad Murray's picture

The government can print all the USD they want. Why do you slaves pay taxes and prentend defecits matter?

Tue, 10/25/2011 - 17:49 | 1810123 TruthInSunshine
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If there was a movement to ensure that all 8th graders (or high school seniors - or even college freshmen) truly understood what fractional reserve banking was, how it operates in the real world, and the toxic consequences its very practice, many would begin to question almost everything they had been told their entire lives, on the assumption that they were being told the truth.

Fractional reserve banking using inherently worthless fiat currency is the most cunning and destructive ruse that man has ever created.

Tue, 10/25/2011 - 17:53 | 1810130 dwdollar
dwdollar's picture

Yeah right...

It's not taught for a reason.

Tue, 10/25/2011 - 17:57 | 1810135 TruthInSunshine
TruthInSunshine's picture

You are absolutely correct.

Fractional reserve banking as state doctrine is akin to having a system in place whereby all babies would be born pre-addicted to a potent drug, and then keeping them on that drug for the rest of their lives, withdrawing it or providing it in excess, depending upon what behavior TPTB wanted to induce from the populace.

Fractional reserve banking allows a handful of people to create a broken-willed herd of debt serfs.

And it is extraordinarily efficient.

Web of Debt
Tue, 10/25/2011 - 18:01 | 1810142 Pladizow
Pladizow's picture

Again Mike is promulgating a myth as to how interest is paid to the Fed, it does NOT have to be borrowed!

WHO CREATES THE MONEY TO PAY THE INTEREST? - G. Edward Griffin.


One of the most perplexing questions associated with this process is "Where does the money come from to pay the interest?" If you borrow $10,000 from a bank at 9%, you owe $10,900. But the bank only manufactures $10,000 for the loan. It would seem, therefore, that there is no way that you - and all others with similar loans - can possibly pay off your indebtedness. The amount of money put into circulation just isn't enough to cover the total debt, including interest. This has led some to the conclusion that it is necessary for you to borrow the $900 for the interest, and that, in turn, leads to still more interest. The assumption is that, the more we borrow, the more we have to borrow, and that debt based on fiat money is a never-ending spiral leading inexorably to more and more debt.

This is a partial truth. It is true that there is not enough money created to include the interest, but it is a fallacy that the only way to pay it back is to borrow still more. The assumption fails to take into account the exchange value of labor. Let us assume that you pay back your $10,000 loan at the rate of approximately $900 per month and that about $80 of that represents interest. You realize you are hard pressed to make your payments so you decide to take on a part-time job. The bank, on the other hand, is now making $80 profit each month on your loan. Since this amount is classified as "interest," it is not extinguished as is the larger portion which is a return of the loan itself. So this remains as spendable money in the account of the bank. The decision then is made to have the bank's floors waxed once a week. You respond to the ad in the paper and are hired at $80 per month to do the job. The result is that you earn the money to pay the interest on your loan, and - this is the point -the money you receive is the same money that you previously had paid. As long as you perform labor for the bank each month, the same dollars go into the bank as interest, then out the revolving door as your wages, and then back into the bank as loan repayment.

It is not necessary that you work directly for the bank. No matter where you earn the money, its origin was a bank, and its ultimate destination is a bank. The loop through which it travels can be large or small, but the fact remains all interest is paid eventually by human effort. And the significance of that fact is even more startling than the assumption that not enough money is created to pay back the interest. It is that the total of this human effort ultimately is for the benefit of those who create fiat money. It is a form of modern serfdom in which the great mass of society works as indentured servants to a ruling class of financial nobility.

Tue, 10/25/2011 - 18:02 | 1810151 tmosley
tmosley's picture

The interest rate is less than or equal to the default rate.  If more people default than the interest rate, the result is price inflation.

Not justifying it in ANY way, but that is the way it is supposed to work.

Tue, 10/25/2011 - 18:22 | 1810209 Ratscam
Ratscam's picture

The PRESENT interest rate is less than equal to the PRESENT default rate.
just fixed it.

Tue, 10/25/2011 - 19:59 | 1810436 gangland
gangland's picture
no no, wars open "free-markets" so We Pay Taxes For The Privilege To Have WARS

 

there, fixed.

 

neoliberalism + militarism is where "free-markets" "Washington consensus" "trans-Atlantic alliance" and Neoconservativism meet & converge & = fascism

#PeacePrize bichezz Kinetic War for Kinetic Peace (Iraq, Vietnam after we left)

Full Spectrum Hope & Change

Print & Awe

 

#antisec

Stop Nato

Tue, 10/25/2011 - 20:15 | 1810505 Ricky Bobby
Ricky Bobby's picture

I know I have jumped the shark because that made perfect sense to me.

Tue, 10/25/2011 - 20:43 | 1810568 wisefool
wisefool's picture

Same with me. ZH has been a terrible mixed blessing. Its kinds like knowing in advace what the reaper/revenuer will be wearing when they show up on your doorstep. (To the IRS: Fonzi garb will be the best for me to see as you take my stuff)

Tue, 10/25/2011 - 20:56 | 1810597 The Fonz...befo...
The Fonz...before shark jump's picture

Whoa!

Tue, 10/25/2011 - 21:21 | 1810665 gangland
gangland's picture

 

unreal...no, no, no, seriously...WTF? very fractalish

Wed, 10/26/2011 - 02:27 | 1811375 Fish Gone Bad
Fish Gone Bad's picture

War is needed to create social upheaval and unrest.  The upheaval is needed to liberate the spoils of war, i.e. the victors get to loot the place.  In the process of conquering a country, wealth that had been "trapped" is then liberated/stolen. 

This has been going on for a very long time.  It is what people do.  Maybe I should get a job with the state department.

Wed, 10/26/2011 - 08:59 | 1811876 FEDbuster
FEDbuster's picture

Of course there are practical solutions to this messed up debt based currency.  Bill Sill offers an elegant one in this eight minute video, but will people (politicians?) adopt something like this?  I would have more "trust" in this than what we have now:

http://www.youtube.com/watch?v=qoVlcWvxffc&list=FLDqTwQ_Aj90G1wgtmXVbQxA...

Tue, 10/25/2011 - 20:22 | 1810526 Bicycle Repairman
Bicycle Repairman's picture

I learned about fractional reserve banking in college.  The entire economics department at my university were avowed communists, so they had no problem laying it on the line.  When we got to the point in the lecture, the professor changed his tone to a jovial one and said, "then the Fed  makes the money up out of the air.  They just print it!!!".  He finished with a flourish and paused.  The students didn't react and continued taking notes.  Their notes probably said "money printed by FED".  I thought "crazy commie!!!"

Tue, 10/25/2011 - 21:42 | 1810763 Al Gorerhythm
Al Gorerhythm's picture

Crazy tenured Keynesian commie.

Tue, 10/25/2011 - 23:24 | 1811128 jekyll island
jekyll island's picture

Crazy tenured Keynesian Fabian commie.  

Tue, 10/25/2011 - 23:40 | 1811180 UP Forester
UP Forester's picture

Probably the reason I got a D in Econ 101.  If shit don't make sense the way it's taught, you kinda zone out....

Tue, 10/25/2011 - 22:26 | 1810925 palmereldritch
palmereldritch's picture

It wasn’t note taking as much as it was those future Apparatchiks diarizing their job 20 years hence as communist central bankers/primary dealers to loot and rob the wealth of a vulnerable ‘free market’ middle class corralled by fiat debt and consumption after they were naively led astray in their pursuit of the false promise of economic liberty and independence.

Wed, 10/26/2011 - 07:56 | 1811677 myne
myne's picture

I believe this is partly the logic behind central banks.

They sit outside of the normal accounting standards, so one of their roles is to remove currency from the system. 

Also, the explanation of the fractional reserve system is rather simplistic. It focuses on the stock of currency and ignores the flow.

Steve Keen's models detail how exogenous money creation can work and can provide profits. Interest is a form of profit, so therefore his model shows that interest can work.

I believe his statement was "profits are equal to investment".

Of course, it always results in an ever expanding currency supply.

Problem is, we're fucked when we hit zero population growth. We'll have to resort to saving based system, probably using a commodity currency like gold.

Tue, 10/25/2011 - 18:04 | 1810152 TruthInSunshine
TruthInSunshine's picture

In the interest of objectivity and fairness, this is the literal playbook of The Federal Reserve Bank, in implementing its practices of fractional reserve banking (posted so those who are interested can read it and interpret it as they wish):

Modern Money Mechanics : Federal Reserve : Free Download

The purpose of this booklet is to describe the basic process of money creation in a "fractional reserve" banking system. The approach taken illustrates the changes in bank balance sheets that occur when deposits in banks change as a result of monetary action by the Federal Reserve System - the central bank of the United States. The relationships shown are based on simplifying assumptions. For the sake of simplicity, the relationships are shown as if they were mechanical, but they are not, as is described later in the booklet. Thus, they should not be interpreted to imply a close and predictable relationship between a specific central bank transaction and the quantity of money.

 

Tue, 10/25/2011 - 18:18 | 1810199 Pladizow
Pladizow's picture

If your not already familiar with this work - it may interest you.

Merrill Jenkins - Money: The Greatest Hoax on Earth - Published in 1971 (Out of Print)

Tue, 10/25/2011 - 19:31 | 1810416 dick cheneys ghost
dick cheneys ghost's picture

just found this video of what seems to be the author......

 

http://www.dailymotion.com/video/x8mdd4_money-the-greatest-hoax-on-earth_creation

Tue, 10/25/2011 - 22:03 | 1810843 kridkrid
kridkrid's picture

that was interesting.  Thanks for sharing.

Wed, 10/26/2011 - 06:43 | 1811482 pelagivore
pelagivore's picture

agreed, excellent video clip; it's amazing how long imbalances can be sustained, particularly when markets go global

thanks for posting

Tue, 10/25/2011 - 18:20 | 1810204 Buzz Fuzzel
Buzz Fuzzel's picture

Money = wealth

Wealth = the sum of unconsumed human productivity

increased productivity + reduced consumption = increased wealth

increased wealth = increased money supply

trying to convince yourself there is another way = hopeless

Tue, 10/25/2011 - 18:23 | 1810215 Motley Fool
Motley Fool's picture

Your mistake is in the first line.

 

Money  != wealth.

 

If it were, then the FED could print everyone a million dollars tomorrow, and everyone would be rich.

Tue, 10/25/2011 - 19:42 | 1810446 s2man
s2man's picture

No, the Fed creates currency, not money.  Money has value.

Tue, 10/25/2011 - 20:05 | 1810485 Silver Bully
Silver Bully's picture
"Gold is Money. Everything Else is Credit."

-J.P. Morgan

Tue, 10/25/2011 - 22:59 | 1811043 TruthInSunshine
TruthInSunshine's picture

 

 

In a fractional reserve banking system:

money = debt

debt = money

Wealth is something far more lasting and rare, but typically consists of true storehouses of value (I dare a Keynesian to tell me how gold hasn't preserved its purchasing power using a hundred year...or a thousand year!...chart), revenue generating assets (preferably owned free of any encumbrances/debts) and assets that provide a means to ascertain what's needed to live a healthy life.

What good does it do a man to save every measure of fiat that he earns, for an entire lifetime, if someone as reckless and/or evil as The Bernank can reduce the value of said savings to nil on a whim?

Wed, 10/26/2011 - 00:23 | 1811260 Buzz Fuzzel
Buzz Fuzzel's picture

Your mistake is you did not read and comprehend the full idea.

Money is a what we use to represent wealth.  Printing money does not produce wealth only human productivity creates wealth.  What ever it is that the Fed and Central Banks all over the world are doing has no impact on wealth.  Creating more currency out of thin air only subdivides the wealth into ever increasing ammounts of currency, also know as inflation.  Judging by the response I see perhaps this concept is too difficult for a majority here at ZH.

You want to be wealthy you got to work, or think and produce value.  You can also obtaing vast amounts of money through theft but then you are really poor, as in poor in spirit which is poverty defined.

Wed, 10/26/2011 - 01:05 | 1811315 Transformer
Transformer's picture

Wealth is roads, power plants and distribution systems, dams, public water systems, communications systems, buildings, factorys, homes, gov buildings, cars, trucks, trains, planes, furniture, TV's stereos, swimming pools,  and on and on and on.  Money represents the latest things produced in this wealth economy, so that the producers can exchange their production for more of whatever they want.

If you doubt this, just go to some desolate 3rd world country, and see what's there.

 

There, fixed it.

Wed, 10/26/2011 - 16:45 | 1814179 Buzz Fuzzel
Buzz Fuzzel's picture

What is missing in those 3rd world countries, and I have visited a few, is the rule of law and the freedom to benefit from the fruits of your own labor.

Watching the accelerating destruction of the rule of law in the US and the ever increasing constraints on our freedom and right to the fruits of our own labor I am confident that we are on the road to 3rd world status ourselves.

Wed, 10/26/2011 - 06:44 | 1811483 onthesquare
onthesquare's picture

To fix the entire mess would be simple.  All the US has to do is start printing Chinese Yuan.

Wed, 10/26/2011 - 11:39 | 1812765 I did it by Occident
I did it by Occident's picture

increasing wealth = increasing free will

or in other words, wealth breaks down constraints to a man's free will.  Being poor doesn't give a person many options.  Having wealth gives one many options and thus more "freedom."  but in gaining that wealth one has to work and produce, which makes one wonder if one is really free.  I am of the opinion freedom is an illusion even for the wealthy. 

Wed, 10/26/2011 - 16:40 | 1814165 Buzz Fuzzel
Buzz Fuzzel's picture

Freedom is a state of mind.  It defines the condition of your spirit.  You can be free in prison or imprisoned in a mansion on your own private tropical island surrounded with escape mechanisms and all the stuff you ever wanted to posess.

A very free person once said "you shall know the truth and the truth shall make you free".  Knowing and believing are the keys to freeing your mind, body and spirit. 

That free person inherited the estate of the one who gave you the gift of your free will.  They await our acknowledgment of the gift at which point we have been promised participation in the inheritance.

Freedom is no illusion.

Tue, 10/25/2011 - 19:15 | 1810375 Timmay
Timmay's picture

Capital = labor

Labor = physial work and/or skills

Wealth = excess capital over and above that needed to survive

Money = store of wealth and/or medium of exchange of capital

Increased productivity + reduced or level consumption = increased wealth

increased wealth = more free time (REAL WEALTH) 

Wealth = a reserve capacity of Capital

Money printing/Fractional Reserve Lending = theft of the true value/excess reserves of Capital

Tax = Forcible confiscation of Capital

Debt = Future capital (labor) pulled into current time

Strike = Refusal to contribute Labor or Capital and then be taxed

Riot = Realization that "Wealth" is not what is created with money printing, debt is what is created. See definition of debt. Taxes will be used to pay off debt. See Taxes.

War = Since so much debt has been created and can never be repaid, realization that the debt was backed by current and future Labor through taxes, realization that those that control the issuance of debt actually control the population to service that debt through taxes.  And nations who, facing rebellion from its' citizenry over the "discovery" that the current fiat monetary system has not, in fact provided prosperity but debt enslavment, realize they must have REAL resources to calm their populations and the control of those REAL assets can only occur through forcible actions since every other nation realizes the same thing at the same time. 

Fiat Currency = no longer will be an asset under taxpayer rebellion.

 

 

Tue, 10/25/2011 - 19:15 | 1810376 Timmay
Timmay's picture

Capital = labor

Labor = physial work and/or skills

Wealth = excess capital over and above that needed to survive

Money = store of wealth and/or medium of exchange of capital

Increased productivity + reduced or level consumption = increased wealth

increased wealth = more free time (REAL WEALTH) 

Wealth = a reserve capacity of Capital

Money printing/Fractional Reserve Lending = theft of the true value/excess reserves of Capital

Tax = Forcible confiscation of Capital

Debt = Future capital (labor) pulled into current time

Strike = Refusal to contribute Labor or Capital and then be taxed

Riot = Realization that "Wealth" is not what is created with money printing, debt is what is created. See definition of debt. Taxes will be used to pay off debt. See Taxes.

War = Since so much debt has been created and can never be repaid, realization that the debt was backed by current and future Labor through taxes, realization that those that control the issuance of debt actually control the population to service that debt through taxes.  And nations who, facing rebellion from its' citizenry over the "discovery" that the current fiat monetary system has not, in fact provided prosperity but debt enslavment, realize they must have REAL resources to calm their populations and the control of those REAL assets can only occur through forcible actions since every other nation realizes the same thing at the same time. 

Fiat Currency = no longer will be an asset under taxpayer rebellion.

 

 

Tue, 10/25/2011 - 20:21 | 1810524 wisefool
wisefool's picture

Timmay G = Leader of fight club.

Not to diminish anything you proved in your post, but in that context, and to add to it as the peanut gallery should in times like these.

There are a ton of smart people. many of them go into banking. if the USA was not fight club, we probably could find a non tax cheat to put in charge of TRES/IRS. The USA put a tax cheat incharge of Sec-IRS.

Timmay(OP) is wise beyoind his years.

Tue, 10/25/2011 - 21:13 | 1810641 KickIce
KickIce's picture

If we stayed true to the founders tax would be protection in exchange for the ability to conduct ones business in a manner he/she sees fit within the boundaries of society. 

Wed, 10/26/2011 - 06:46 | 1811486 onthesquare
onthesquare's picture

Wealth = excess capital over and above that needed to survive + material and resources stolen from others.

Tue, 10/25/2011 - 21:43 | 1810760 thurstjo63
thurstjo63's picture

Money ? Wealth. "Wealth consists of physical energy (as matter or radiation) combined with metaphysical know-what and know-how." (Buckminster Fuller).

Money is only a commodity that is useful as a medium of exchange. You're making the assumption that even without government coercion we would still be using dollars or euros. It's a fantasy!

May I suggest, for those who want a better understanding of this to get, "The Mystery of Banking" by Murray Rothbard.

Wed, 10/26/2011 - 03:07 | 1811399 acttang
acttang's picture

What you said is how it is SUPPOSED to work, but not how it ACTUALLY does. Your 1st line should be

Money should be = wealth

This assumes that credit creation ultimately leads to wealth ceation. But if credit merely leads to more credit, enabled by a financial system that multiplies credit much faster then it can possibly create wealth, you get what we have today.

Wed, 10/26/2011 - 16:55 | 1814197 Buzz Fuzzel
Buzz Fuzzel's picture

No, what I said is the way it is.  We can fool ourselves into believing the laws of nature have bee suspended and that human work and productivity is no longer necessary to produce wealth but eventually mother nature catches us in our arrogance and house of cards collapses.  Money is = to wealth.  You can not increase money without increasing wealth.  You can create a currency to represent money but by creating more currency without creating more wealth you simply devalue each unit of measure in the money supply. 

Wed, 10/26/2011 - 03:07 | 1811400 acttang
acttang's picture

What you said is how it is SUPPOSED to work, but not how it ACTUALLY does. Your 1st line should be

Money should be = wealth

This assumes that credit creation ultimately leads to wealth ceation. But if credit merely leads to more credit, enabled by a financial system that multiplies credit much faster then it can possibly create wealth, you get what we have today.

Tue, 10/25/2011 - 19:44 | 1810449 traderjoe
traderjoe's picture

This speech got it wrong on a couple fronts. One, the Primary Dealers can create the frns themselves to buy the treasuries. Commercial banks create most of the money in the system. Second, when you have $100 on deposit at a bank, the bank can create $900 and loan it out. See the Credit River case and decision.

Tue, 10/25/2011 - 20:18 | 1810519 Nobody special
Nobody special's picture

Yup.  I picked this part up quickly too.  It's exponential growth without end, not $100 becomes $1000.  It is by definition, an unrestrained ponzi.

Tue, 10/25/2011 - 22:33 | 1810955 palmereldritch
palmereldritch's picture

TIS it's not Federal Reserve

it's Federal Re:Serf

Tue, 10/25/2011 - 18:06 | 1810162 Motley Fool
Motley Fool's picture

You know.

 

Part of the reason the Keynesians have been winning so long, is because their opponents waste enormous amounts of time and energy fighting them on things that aren't even problems.

 

Fractional reserve banking is not the problem.

 

Go learn some economic theory. Think a bit.

 

Even in a 100% gold backed standard fractional reserve banking happens.

Tue, 10/25/2011 - 18:24 | 1810214 dwdollar
dwdollar's picture

Fractional reserve banking is the problem. However, in a system with a gold standard and/or no central bank, it's never able to grow so large that it smothers all productive industry.

Tue, 10/25/2011 - 18:26 | 1810223 Motley Fool
Motley Fool's picture

No, it is not.

 

You are also not paying attention to history.

 

We  have had many gold standards. They also fail eventually because the amount of claims on the gold becomes unpayable. The losses are then socialized and a new fiat regime emerges, until that collapses under it's own weight again as the wealth of the productive class is stolen. Rinse and repeat.

 

People just don't fucking learn.

Tue, 10/25/2011 - 18:30 | 1810232 dwdollar
dwdollar's picture

Or they are removed by bankers who want to expand the money supply. Believe whatever you want.

Tue, 10/25/2011 - 18:34 | 1810246 Motley Fool
Motley Fool's picture

Blaming the bankers doesn't help. The cause lies with the people. They want easy money( or at least a large segment of them do, the unproductive segment).

People will not allow bank failures. They won't allow their fellow man that pain. They will always socialize the losses.

 

People as a group figure it's better  for everyone to have a little pain, than for specific segments of the population to have terrible pain and leaving others unscathed.

 

I'm likely wasting my breath trying to explain. But hey. :)

Tue, 10/25/2011 - 18:38 | 1810250 dwdollar
dwdollar's picture

I agree (mostly) with that. Actually, that's the first sense you have made. Banking is still the root cause. It is a doubled edged sword which is almost never handled properly.

Tue, 10/25/2011 - 18:40 | 1810260 Motley Fool
Motley Fool's picture

The problem is simple really.

 

Some people want to borrow money( so they want it to lose value), other people want to save value( so they want it to keep it's value or grow worth more).

 

This sets up a massive conflict.

 

The problem is using one thing for both spending and saving.

 

Currency is for spending, gold is for saving.

Tue, 10/25/2011 - 18:52 | 1810275 dwdollar
dwdollar's picture

+1

Again, I agree.

Banks should be allowed to fail. Rarely would they become so big or dangerous in a more competitive market. The society has to be intelligent enough to understand this and allow dumb shits to lose their wealth on malinvestments. Normally, this would be achieved by a decentralized banking system or a gold standard, but I'm sure many other things could work. Oh, and don't forget about educating people on how the system really works.

Tue, 10/25/2011 - 21:20 | 1810669 KickIce
KickIce's picture

still doesn't address the interest, although eliminating bailouts would help this immenselly.  If you fail your fail, if some parties take a bath as a result the too bad, they knew the risks going in.

Actually I've never quite understood why a government would allow a private institutuin to control it's money supply.

Tue, 10/25/2011 - 23:42 | 1811187 narlah
narlah's picture

Wait wait , some people WANTS ?

100% of them have NO CHOICE at all. Thats a system build, enforced and cramed down their throats for generations.

Do you think lybians wanted the new central banking as they had own bank that lend on 0% ?

"Some people want to borrow money (so theyw ant it to lose value)" is to like say "Some people want AIDS so they get free healthcare" ...

Wed, 10/26/2011 - 07:36 | 1811617 Archduke
Archduke's picture

not exactly... yes, asset bubble aside, some loans are only for consumption...

 

others on the other hand are for capital formation.  that's when you borrow

to build a bridge, or to build a sawmill and turn a forest into lumber..

in theory this is what the debt is tied to when money is being created.

 

our problem is that we have allowed the fractional reserve system to

consider as capital investment loans that are entirely artificial.  a share

in a company is a capital resource.  a derivative however is not.  It is a

tool to manage the asset more effectively, but its effect is variable and

hard to price.  In the same vein the forest and sawmill is a capital asset,

but the value and effectiveness of its labour and management is not.

they are simply inputs that help determine the actual output of the mill.

the idea here is that leverage should not be created out of new debt,

only out of current savings and earnings.

 

for example a house is actually a durable consumer good, not a capital asset.

we shouldn't encourage leveraged speculation on such a good via CDO/MBS/SPV.

 

I think we need to control and restrict money-creation to tier-1 capital,

greatly reducing the extent and number of fractional tiers therefacter.

this would correct the over-expansion and velocity of money creation

which got us into this mess.  not sure how to do it but there must be

an economist or two with an idea on this.

 

 

Wed, 10/26/2011 - 02:10 | 1811360 Hephasteus
Hephasteus's picture

"Blaming the bankers doesn't help. The cause lies with the people. They want easy money( or at least a large segment of them do, the unproductive segment)."

Of course they want easy money. The bankers get easy money. The bankers get free servants and the bankers get rights beyond the law.

Until you counterfeit money, bold face lie to the judge about it. Then murder your persecuters. You have not achieved equality with the banking class.

Wed, 10/26/2011 - 03:17 | 1811406 acttang
acttang's picture

I agree with you. The fact your comment got 1 to 3 ups-to-downs ratio indirectly proves its correctness. We human kind likes to blame others for our own problems, because it makes us feel better. Self critism is one quality we collectively lack. Banks aren't created in vacuum, they are there to serve a need. As you correctly pointed, easy money is what everyone wants (and eventually becoming what everyone thinks he needs). Just like any useful facility, banks  can be over-built. When that happens, question we not the need, but the excess. That's it. 

Wed, 10/26/2011 - 03:17 | 1811407 acttang
acttang's picture

I agree with you. The fact your comment got 1 to 3 ups-to-downs ratio indirectly proves its correctness. We human kind likes to blame others for our own problems, because it makes us feel better. Self critism is one quality we collectively lack. Banks aren't created in vacuum, they are there to serve a need. As you correctly pointed, easy money is what everyone wants (and eventually becoming what everyone thinks he needs). Just like any useful facility, banks  can be over-built. When that happens, question we not the need, but the excess. That's it. 

Wed, 10/26/2011 - 03:17 | 1811408 acttang
acttang's picture

I agree with you. The fact your comment got 1 to 3 ups-to-downs ratio indirectly proves its correctness. We human kind likes to blame others for our own problems, because it makes us feel better. Self critism is one quality we collectively lack. Banks aren't created in vacuum, they are there to serve a need. As you correctly pointed, easy money is what everyone wants (and eventually becoming what everyone thinks he needs). Just like any useful facility, banks  can be over-built. When that happens, question we not the need, but the excess. That's it. 

Tue, 10/25/2011 - 18:40 | 1810259 fnord88
fnord88's picture

It fails because its price is set by the government. ANybody who advocates the gold standard is advocating government price fixing. And trusting the government not to change the price when it sees fit. It amazes me the austrian econ guys who hate government, but then want it to fix the price of gold.

People just need to learn to spend currency, and save gold. Currency can never work as money (savings). It's mathamatically impossible.

Tue, 10/25/2011 - 18:56 | 1810326 Thisson
Thisson's picture

The value of gold priced in money doesn't matter, as long as it remains constant.  It's the prices of goods and services that will adjust.  Besides, you don't literally need a gold standard, you just need to allow people the freedom to trade in gold rather than in currencies.  This means no legal tender laws and no income tax payable only in FRNs.

Tue, 10/25/2011 - 19:00 | 1810332 Motley Fool
Motley Fool's picture

No. The price of gold being fixed to currency is part of the problem.

Tue, 10/25/2011 - 19:42 | 1810444 mr_sandman
mr_sandman's picture

The price of gold in gold can't be fixed by anyone.

 

If the government said that taxes were some amount of gold a year, or a person's income had to be marked by a publically traded market to gold, that would be the amount of gold they had to pay in taxes a year.

Tue, 10/25/2011 - 22:18 | 1810889 buyingsterling
buyingsterling's picture

Wrong. The trade is not in dollar denominated gold, but in gold itself. It's impossible to fix the price. X grains buys x calories. If it buys more it's because food is abundant. If less, it's because food is scarce. That's the way a pricing system is supposed to work, and only gold does it over the long term.

Tue, 10/25/2011 - 18:40 | 1810262 MayIMommaDogFac...
MayIMommaDogFace2theBananaPatch's picture

 They also fail eventually because the amount of claims on the gold becomes unpayable.

Now who is showing their ignorance -- or is it that promoting false memes...Please explain for us the mechanics involved in this scenario, specifically HOW the number of claims BEGINS to exceed the available supply. 

Oh I see, the problem is not GOLD per se, it is human horseshit disguised as ingenuity.

Tue, 10/25/2011 - 18:45 | 1810283 Motley Fool
Motley Fool's picture

See below in response to 'seek'.

Tue, 10/25/2011 - 18:53 | 1810312 Thisson
Thisson's picture

We've never had a gold standard without also having fractional reserve banking.

I agree that a gold standard isn't enough - you must also ban fractional reserve banking to prevent inflationary credit expansion.

Tue, 10/25/2011 - 18:56 | 1810321 Motley Fool
Motley Fool's picture

The gold standard is a barberous relic. ^^

Tue, 10/25/2011 - 21:18 | 1810660 TheFourthStooge-ing
TheFourthStooge-ing's picture

The gold standard is a 'barberous' relic.

...yet all the 'haircuts' are happening in a purely fiat system.

 

Wed, 10/26/2011 - 05:47 | 1811456 UP Forester
UP Forester's picture

.... and will happen somewhere south of the chin....

Tue, 10/25/2011 - 19:02 | 1810341 FreedomGuy
FreedomGuy's picture

In terms of hard currency the balance should always be one to one in that there are only as many dollars as gold to back it. The sum total is always zero because gold has intrinsic value. The problem seems to enter with fractional reserve banking because more "money" is created than actually exists in currency and gold...if the currency is even backed.

What I do like in these discussions is the different "types" of money. I argue that currency is simply a receipt for your work. If you get paid $2000 at the end of the week currency acts a receipt for the work you did. You can now trade it with your fellow man who alos has receipts for his work or products he produced. This is when money is real in that it really represents products and services that have already been performed.

The problem is that you cannot tell real money based on real labor from pure debt money or money with nothing backing it. When a bank, government or central bank prints and purchases anything with it, it is a form of theft, especially in the form of inflation.

Tue, 10/25/2011 - 19:24 | 1810352 Element
Element's picture

 amount of claims on the gold becomes unpayable.

 

I'm sure you can see that's a problem of endemic bankster fraud, that's NEVER properly uprooted and massively severely punished (guillotine), by the political muppets, rather than any SYSTEMIC fraud issue with a Gold Standard, per-sec.

The problem with Fiat has always been that at its very basis it is intrinsic SYSTEMIC fraud itself.

It's the very formalisation and legalisation of the Banker's fraudulence.

Fiat is just the SYSTEMIC reaction that occurs when the political class agrees that it will NEVER prosecute and eliminate these fraudsters - instead they legalize the fraud.

So then they can then openly stand around in public, making bogus trite videos about their fraudulent global activities and yap about bubbles, and wax-on about how they cheat and rort everything on Earth.

With Gold it's just more stark and clear who's a SYSTEMIC crime-operation masquerading as a 'bank'.

 

It's not all that complicated.

Tue, 10/25/2011 - 20:50 | 1810584 midtowng
midtowng's picture

History shows that currencies fail because governments spend too much on war. That goes for the gold standard or fiat.

However, wars under gold standards tend to be smaller and less bloody.

Tue, 10/25/2011 - 23:05 | 1811072 csmith
csmith's picture

The losses are then socialized...

THIS is the one and only purpose of a central bank; to socialize losses. In a system WITHOUT a central bank, debt default and the resulting deflationary forces, whatever the source (i.e. waste, catastrophe, fraud, etc.) cause losses to specific individuals and organizations. If these individuals and organizations account for a meaningful portion of the economy, the deflationary forces can be substantial and feed on themselves. A central bank acts as guarantor of these private debts via its ability to creat money from nothing to pay them, buffering the deflation. 

Tue, 10/25/2011 - 18:30 | 1810235 philgramm
philgramm's picture

Bingo.  The problem isn't fractional reserve lending.  The problem is the monopoly that gov't and the Fed wield in creating ONE currency.  That currency (the FRN), and only that currency, can be legal tender.  Therein lies the scam.  Why not allow competing currencies?  That would basically take away all the power that gov'ts have to fund deficit spending, endless wars, entitlements etc.

Those on ZH who continue to harp about the gold standard don't really understand that you can still inflate away a currency even in a gold standard.  That's how we had to come off the standard in the first place.  So going back to a gold standard would buy us ~ 40 yrs before our gov't indebted itself enough to necessitate coming off the standard.  

You can tell what gov'ts fear most by observing grass roots movements and seeing which ones they absolutely CRUSH before the movement even gets off the ground.  A while back there was a post on ZH about a gentleman who was arrested for trying to make and distribute "the liberty dollar".  That's all you need to know about what a government fears the most.  Governments know that they are irresponsible with money.  They know that they couldn't compete with any other currency issued by private enterprise.  Governments will always be the free man's greatest enemy.  

www.c4ss.org

Tue, 10/25/2011 - 18:58 | 1810327 Thisson
Thisson's picture

What you miss is that people advocating a Gold Standard don't mean that literally.  They want to be free to use gold as a currency, and some of them also want to ban fractional reserve lending.

Tue, 10/25/2011 - 20:39 | 1810554 Incubus
Incubus's picture

The problem isn't fractional reserve lending.

Okay, if you say so. Now, who gets to be "in" on the government sanctioned fleecing? You understand fractional reserve "lending" isn't really lending at all, right? They don't even possess what the hell they're loaning you--a 900% "creation" of NOTHING (+interest) that's "satisfied" through actual assets/wealth/fiat. And that's just on the 1/10 fractional ponzi plan.

It's a fucking con-game. Do you understand this?

IF this is fine by you, then shit--let me write up a "loan" for you.

Tue, 10/25/2011 - 21:37 | 1810739 FreedomGuy
FreedomGuy's picture

Good point. I have been trying to think this through, myself. The fractional reserve system makes money cheaper but it is what leads to inflation and therefore devalues the money itself. It also severely multiplies losses. When a bank is levered ten or twenty to one it is easy and quick to lose the original real money.

If banks were limited to loaning real money...no multiplier or fractIional reserve the price of money would be much higher. I am guessing 20% interest or higher. There are several good things that happen. Saving really pays, again. It pays more to produce stuff than play with money and currency...as it used to be and banks have to be way more careful how money is lent out...as they did in the beginning. It remphasizes the core principle that they are actually loaning out YOUR or other people's money, not the bank's. Deficit spending by governments would be history overnight.

There are several negatives of course. Besides interest rates, about 90% of your branches would close and no more free stuff like checking. Banks would become money vaults/warehouses as they were in the beginning. Services would have a price...as I think they should.

Anyone who actually attempted to do this would be assassinated, however...or "suicided".  

Tue, 10/25/2011 - 22:15 | 1810882 philgramm
philgramm's picture

@Incubus,

Nobody needs to have the power.  In a system with competing currencies (gov't not having monopoly to force the use of THEIR currency), if the issuer of one currency inflates away said currency you can choose to use another currency whose issuer is more responsible.  You call it a con game.  So is every casino in Vegas.  The difference is that the casino doesn't FORCE you to play.  The gov't FORCES you to play their game. 

Wed, 10/26/2011 - 01:45 | 1811352 juslen
juslen's picture

I'm glad you get it. Remove the state's monopoly on taxation and money creation and legal tender laws cease to exist, people are fee to choose their own "gold standard" whether it be with silver, gold, paladium, titanium or any other rare element or substance which is easily identifiable, divisible, exchangable, durable and not easily counterfeited or produced.

Tue, 10/25/2011 - 18:33 | 1810241 clymer
clymer's picture

the way I see it, the major problem stems from having a private banking cartel control the issuance of currency and credit. A private cartel that is owned and controlled by a small handful of families, most of which are not even us citizens.

The constitution put the power of the purse in the domain of the congress.

The constitution also stipulated :

"No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility."

The Constitution is NOT a list of what the federal government cannot do. It is NOT a list of prohibitions on the federal government. The Constitution IS a list of what the federal government is authorized to do, with ALL ELSE being DENIED to it by default.

We lived on a gold standard with limited and mostly non-existent inflation for a very long time. The average life span of fiat currency is 39 years, historically. The FED is a fraud, and what the central planners have in store for humanity, we can only guess - but it likely isn't benevolent.

http://www.save-a-patriot.org/files/view/whofed.html

 

 

Tue, 10/25/2011 - 18:37 | 1810252 Motley Fool
Motley Fool's picture

It's a nice ideal. The problem is that your constitution assumes all men are honourable. This is a mistake. Sadly.

Tue, 10/25/2011 - 18:44 | 1810278 MayIMommaDogFac...
MayIMommaDogFace2theBananaPatch's picture

The problem is that your constitution assumes all men are honourable.

Constitution assumes nothing of the sort.  Constitution assumes rule-of-law is applied equally.  "Honorable" is for fuzzy stuff from charm school.  The fact that the rule-of-law is not enforced is THE PROBLEM.

 

Tue, 10/25/2011 - 19:50 | 1810461 caerus
caerus's picture

"men never do good unless necessity drives them to it; but when they are free to choose and can do just as they please, confusion and disorder become rampant."

- machiavelli discourses on livy

Tue, 10/25/2011 - 21:44 | 1810774 FreedomGuy
FreedomGuy's picture

Actually, the Constitution assumess men are corruptible, power is corrupting and government is fallible. Modern liberals assume the opposite. Liberals assume free men are corrupt. Men in government are honest and disinterested and power produces good and results in fairness and equity.

The Constitution limits the power of the government, limits the Federal government's responsibilities which limits its power and also limited the amount of time in government. No one pays attention to the Constitution but that was the idea. Modern liberals find the Constitution inconvenient and ignore it routinely or get judges who say that it actually says that the Federal government can do whatever it likes as long as it is for the collective good.

Tue, 10/25/2011 - 18:39 | 1810257 seek
seek's picture

"Even in a 100% gold backed standard fractional reserve banking happens."

And when it does, as is the case with fiat, it is fraud.

Lending something claiming it is 100% backed by something, when it is not, is fraud.

Tue, 10/25/2011 - 18:44 | 1810276 Motley Fool
Motley Fool's picture

It's not fraud. Let us say I deposit one gold coin in my local bank. A businessmen comes along and wants to loan a coin to expand business (capital investment).

 

Just to be sure the bank asks you if this is okay. You agree this guy will definatelt pay you back.

 

He loans the coin.

 

The bank still owes you one coin.

 

His business faild due to a act of god.

 

Uh-oh. ;)

Tue, 10/25/2011 - 18:46 | 1810285 MayIMommaDogFac...
MayIMommaDogFace2theBananaPatch's picture

Fraud is the other 30 guys the bank loaned your coin to without your permission or knowledge.

Tue, 10/25/2011 - 18:50 | 1810300 Motley Fool
Motley Fool's picture

No. Assume they don't do that. Assume it is illegal. No fractional lending eh.

 

Ok.

 

So the guy who the businessman bought the capital from puts it in the bank, just like you. It is loaned to another credible business man. He buys some capital.

 

Now.

 

There is still one coin. The bank owes you one, and he owes the other guy one.

 

Uh-oh.

 

And there you have fractional reserve banking with every action according to the law.

Tue, 10/25/2011 - 19:10 | 1810360 mr_sandman
mr_sandman's picture

That would be a fractional reserve of 1.00, meaning full reserve banking.

In our current system, the bank takes that gold coin and loans it out to 9 more people.

 

Think about it in terms of capital equipment.  Like, say, a cow.  The cow would be the capital equipment, the milk would be the product, and the bank would lend the cow to a businessman who milks it and some milk would be returned to the depositor for interest.

 

The problem is you can't get 10X the milk by MILKING 10 FUCKING COWS WHEN ONLY 1 COW EXISTS.

Tue, 10/25/2011 - 20:28 | 1810536 TwelfthVulture
TwelfthVulture's picture

Actually what is described is zero reserves not full reserves.  Nothing is being kept in reserve.  1 coin in, 1 coin out, 1 coin in, 1 coin out, ...  One coin being passed around forever.

 

Your cow example is an example of full reserve banking.  You own one cow.  You lend out the cow to your neighbor who milks the cow daily, say for 10 buckets of milk.  He pays you one bucket per day as "interest."  Your neighbor then takes the other nine buckets to market and sells them.  There is only one cow.

Under fractional reserve banking, your neighbor deposits his milk proceeds in the bank.  The bank then lends a businessman down the way the price of a cow.  The businessman buys the cow from the stockyard.  The stockyard deposits their proceeds of the sale of said cow in the bank.  The next door neighbor of the businessman, who is himself also a saavy businessman, borrows money from the bank.  The price of a bull.  This businessman buys a bull.

The two businessman then decide to form a corporation which mates the bull and the cow and over the next several years breed a small herd of 10 cows. 

Their venture is so successful that they are able to pay off the loans for both the bull and cow, with interest.  The produce close to 100 buckets of milk per day, which when combined with the 10 buckets of milk from your cow are enough to provide the entire village where you dwell with ample milk.  The price of milk decreases in value due to supply meeting demand.

In addition, the cows have also calfed male cows which have been neutered and once matured sold to the local butcher. 

Your neighbor still milks your one cow daily and still provides you with one bucket of milk per day which is worth signifcantly less now than it was before the businessman who borrowed the price of a cow began to give you competition.  You are worse off but the village as a whole is better.  Cheaper, more plentiful milk and beef as well.

Competition is not the problem.  Corporations are not the problem.  Banks are not the problem.  Fractional reserve banking is not the problem.

Our problem lies in the faulty basic premise of Keynesian theory, to wit: that there exists no difference between borrowing to spend on PRODUCTIVE assets and borrowing to spend on NON-PRODUCTIVE assets.  Nearly one hundred years of ignoring the basic economic concept of "no free lunch" is what has led us to this point. 

Tue, 10/25/2011 - 20:48 | 1810552 mr_sandman
mr_sandman's picture

No.  His example is not zero-reserve banking, it is full reserve banking.

 

In full-reserve banking you can't simultaneously withdraw your capital while it's being used.  You can't have your cake and have someone else eating it too.  There is a time-criterion on deposits in full reserve banking.

 

Zero-reserve banking would be like Ben printing Bernanke-bucks at the Fed where an asset is created with a big fat zero on the other side as a liability.  It's an infinite leverage scenario.

Tue, 10/25/2011 - 21:12 | 1810632 TwelfthVulture
TwelfthVulture's picture

No.  It IS ZERO RESERVES.  Nothing is being held in reserve against the deposit.  His ONE coin on deposit is being lent out to the businessman in toto.  Fully.  As in, ZERO RESERVES.

 

Under full reserve banking THERE IS NO LENDING AGAINST DEPOSITS.  NONE.  ZERO.  NO LENDING.  FULL RESERVES.  It has nothing to do with time deposits.

Tue, 10/25/2011 - 21:16 | 1810654 mr_sandman
mr_sandman's picture

Ok, maybe by your crazy definition.  But the definition that everybody else in the world uses (including the Fed) is that the money multiplier is the inverse of the reserve ratio.

Tue, 10/25/2011 - 21:22 | 1810683 TwelfthVulture
TwelfthVulture's picture

Do you know what reserves are?

Tue, 10/25/2011 - 21:29 | 1810710 mr_sandman
mr_sandman's picture

Do you?

http://en.wikipedia.org/wiki/Full-reserve_banking

http://en.wikipedia.org/wiki/Money_multiplier

In full reserve banking, if the money is lent out to another party, the depositor is not allowed access to the money while it is being lent.  It is not a prohibition on lending.

Tue, 10/25/2011 - 21:47 | 1810786 TwelfthVulture
TwelfthVulture's picture

Your words:  In full reserve banking, if the money is lent out to another party, the depositor is not allowed access to the money while it is being lent. 

 

As I said, YOUR ONE FUCKING COW example (FULL RESERVE) as opposed to the ZERO RESERVE example of a one coin deposit becoming a two coin deposit of the previous poster.

 

p.s., I wouldn't need to resort to google/wiki in order to answer such a simplistic question.

Tue, 10/25/2011 - 22:07 | 1810820 mr_sandman
mr_sandman's picture

No.

If you bothered to read the damn definitions that literally everybody in academia, finance, and government uses, you would see that one bank created 1.00 worth of money with 1.00 worth of deposits which is known as full reserve banking, by fucking definition.  If that bank had created 5.00 of money with 1.00 of deposits, it would be known as fractional reserve banking.  If that bank had created 1.00 of money with 0.00 of deposits, it would be known as zero reserve banking.

But besides that point, he's assuming that it's inevitable that fractional reserve banking will always exist because the depositor will have access to withdraw money from his account at any time.  This is simply not true.

Tue, 10/25/2011 - 22:22 | 1810903 TwelfthVulture
TwelfthVulture's picture

Wow!  You really don't know what reserves are.  Do you?

Tue, 10/25/2011 - 22:40 | 1810988 TwelfthVulture
TwelfthVulture's picture

Here's a clue:

Full Reserve Banking = reserve ratio of 1 = 100% reserves

Zero Reserve Banking = reserve ratio of 0 = 0% reserves

fractional reserve banking = reserve ratio >0 and <1 = 0 < reserves < 100%

 

Your words: created 1.00 worth of money with 1.00 worth of deposits which is known as full reserve banking, by fucking definition.

NOT A TRUE STATEMENT.  If money is "created" it IS NOT full reserve banking.  Full reserve banking IS 100% reserve requirement, therefore no money is "created."  1.00 comes in, 1.00 goes out.

Your words: If that bank had created 5.00 of money with 1.00 of deposits, it would be known as fractional reserve banking

PROBABLY.

Your words: 1.00 of money with 0.00 of deposits, it would be known as zero reserve banking.

PROBABLY FRAUD BUT NOT ZERO RESERVE BANKING.  Zero reserve banking has deposits, just zero reserves. (hence the name: ZERO reserve banking).  Zero reserve banking implies a zero reserve ratio.  NOTHING is held in reserves.  1.00 comes in, as much as the bank wants goes out (infinity).

 

Here's another hint:  before cutting and pasting from google/wiki, try and take some time out to actually learn what it is you're  talking about.  google/wiki are great places to START.

 

Wed, 10/26/2011 - 00:17 | 1811039 mr_sandman
mr_sandman's picture

Fine.  I'll concede.  His particular example has zero reserves/

My other criticism is valid though.  He's claiming that fractional reserve banking is inevitable because even in the case of only one bank you have to have money in two places at once.

This situation isn't inevitable though, and one bank can lend 100% of the deposits as the form of a CD (and have "zero" reserves) but be fully capitalized if there is a legally agreed-upon date which the depositor can access his money.  This is fully consistent with "full reserve banking" because at any given time, 100% of the legal obligations can be paid.  In fractional reserve banking, if everyone who had a deposit showed up at once, they would legally have a right to it and not be repaid.

I'm more concerned about the counteirfeiting aspect though.  The CD scenario also has a money multiplier of 1.00, which means money in = money out.  No new money is created. If you take the zero reserve example from above, it doubles the money supply if constrained to a single bank with demand deposits and would create an infinite money multiplier if further identical banks are involved.  However, if demand deposits are taken away, that example becomes full-reserve banking from the perspective of the money multiplier.  The capital is just transferred from one place to another but it can't be used by both parties simultaneously.  So with the CD example you could have one bank issue a CD which is loaned to another bank which does the same to another bank... continuously, but no new money would be created.  Zero-reserves exist in the original bank, but there can only be a total of 1 times the original capital in the banking system.  So from the standpoint of the banking system, this is full reserve banking.  You can also think of a person receiving the loan at the endpoint as a full-reserve bank.

 

Wed, 10/26/2011 - 09:03 | 1811901 jonan
jonan's picture

isn't fully reserved the same as allocated accounts?

Wed, 10/26/2011 - 01:22 | 1811337 Motley Fool
Motley Fool's picture

Heh. Fair enough. That will teach me to create quick examples while annoyed. :P

Wed, 10/26/2011 - 07:57 | 1811678 Archduke
Archduke's picture

but it's not a closed system consisting of only cows milk, otherwise there would be no growth, no imbalance, and no system.

fractional reserve represents growth through innovation, meaning somebody comes up with the idea of making cheese

instead of milk, thus creating a whole new market.  this is the fundamental driver in our modern growth and wealth.

I see nothing wrong with creating new debt for a bright idea like cheese.  it's when it's for something fuzzy like a CDS

that things break down.  You want to use your own savings to speculate on a CDS: fine -but don't consider it as a tier-1

asset and don't allow naked leverage on it, or worse have it backed up by insured depositor funds.

Tue, 10/25/2011 - 20:19 | 1810404 mr_sandman
mr_sandman's picture

No, but you're missing the whole concept of why banks charge interest when they provide loans.  It isn't just for profit.  It also has nothing to do with your conception of 'fractional reserve banking.'

They're supposed to have 1.00x of some capital and they charge some number known as "interest"--say--0.05x covers the losses on some percentage of that capital going bad.  If a bank was unable to manage this risk appropriately, they would go bankrupt. This is what people think banks do.  They kind of do with a gigantic caveat.

What really happens is for every 1.00x of initial capital in a bank, the banking system can ultimately create 9.00x of loans outside that bank.

- Edit: I corrected my post to indicate that it's the banking system as a whole that multiplies up the money, not one individual bank.

Tue, 10/25/2011 - 19:00 | 1810337 Thisson
Thisson's picture

What you describe is not fractional reserve banking.  It's full reserve banking, and in your case, the bank would fail and the depositor would lose his deposit.

Fractional reserve banking would be if you deposited one coin and the bank loaned out 9 coins, which is effectively what our current system does.

Tue, 10/25/2011 - 19:05 | 1810345 Motley Fool
Motley Fool's picture

Repeat that process 30 times. Now that coin is loaned out 30 times.

 

Now. Imagine due to some reason someone in that daisychain is unable to repay their coin, due to say a act of god.

 

Now what?

 

The answer historically is: Right. We start up another fiat currency, and socialize the losses.

Tue, 10/25/2011 - 21:14 | 1810650 Raging Debate
Raging Debate's picture

Who gets sacrificed to the gods? Of course the priest makes the selection. But after, the priest has gotta go while adding more shareholders. Circus tight rope indeed. Greenspan sacrificed himselfs to the gods today. Who is next?

Tue, 10/25/2011 - 19:23 | 1810393 Restcase
Restcase's picture

It doesn't need to happen. It's not part of a gold standard or silver standard - fractional "works" with anything.

Keen and other post-keynsians, BTW, deny that bank lending is associated with fractional reserves. They say that banks write loans regardless of reserves.

This does not jive, however, with Basle accords or other bank capitalization regs, I think.

But perhaps I am missing something...

Tue, 10/25/2011 - 22:49 | 1810555 cranky-old-geezer
cranky-old-geezer's picture

 

 

Even in a 100% gold backed standard fractional reserve banking happens.

But there's no such thing as a 100% gold-backed currency. No bank would ever do that when they discover they can print more currency than gold in the vault and hardly anyone cares until the excess printing becomes obvious, people suddenly lose confidence in it, and the currency collapses.

However, a 100% gold-redeemable currency, at a fixed exchange rate, stated on the currency so the bank can't change it later on, would do much better at discouraging a bank from printing more currency than gold they have in the vault.

That's what currency is supposed to be. Paper claim checks on gold in the vault. That's how paper currency started.

And there's no reason to limit a nation to that bank's currency. Any other nation's gold-redeemable currency would do just as well.

Critics say there's not enough gold around for a nation the size of America to have a gold-redeemable currency.

No problem. Do a silver-redeemable currency too. And a platinum-redeemable currency too. And a copper-redeemable currency too.

Then those currencies have intrinsic value. They're claim checks on fixed amounts of real well-known commodities.

And let anyone issue those claim checks who has proven stores of the commodity in their vault.

Paper currency is supposed to be a CLAIM CHECK on A FIXED AMOUNT of a REAL LIVE COMMODITY.

That's when currency has intrinsic value, and cannot be printed helter-skelter on a printing press.

Currency is supposed to be a convenient way to exchange value for equal value in day to day trade. It has to have a stable value that doesn't change over time. The only way to do that is make it redeemable or exchangeable for a fixed amount of a well-known commodity.

Currency is not meant to be a vehicle for central banks to steal wealth from citizens and give it to governments, banks, and crony friends by running the printing presses.

A gold-redeemable currency would NOT allow for fractional reserve bnaking. Fractional reserve banking would be impossible.

Fractional reserve banking developed as a way to control how much fiat non-redeemable currency, worthless paper with no intrinsic value, is allowed to be printed. It's the ONLY way to control that.

Without reserve requirements banks could print all the fiat paper currency they want, and quickly destroy all confidence in that currency.

A gold-redeemable currency (or silver or platinum or copper ect) doesn't need reserve requirements to control how much of it is printed.

It's controlled by how much gold, silver, platinum, copper, etc is in the vault.

You think fractional reserve banking isn't the problem?

Well guess what? The Fed has NO reserve requirement. They can print ALL THE DAMN U.S. DOLLARS THEY WANT. MOUNTAINS OF THEM.

...and give them to this corrupt over-spending government, corrupt criminal banks, and all manner of corrupt criminal crony friends

...and there's not a GOD DAMN thing YOU or I or ANY OF US can do about it.

Tue, 10/25/2011 - 21:00 | 1810606 Melin
Melin's picture

"Fractional reserve banking is not the problem." 

Thank you.  As I posted a coupla days ago...if a free man wants to start a bank, take deposits, make loans, keep enough reserve to cover withdrawals, keep insurance in case of catastrophe or error, he has a right to his fractional reserve bank. 

And again, if I'm misunderstanding the issue, feel free to edify me but fractional reserve banking itself is not the problem.

Separate the economy from the statists.  

Wed, 10/26/2011 - 01:03 | 1811302 cranky-old-geezer
cranky-old-geezer's picture

 

 

he has a right to his fractional reserve bank.

Are you CRAZY?

Fractional reserve banking IS a problem. A HUGE problem.

When it comes to money, human beings are SELFISH and GREEDY and QUITE ready to DEFRAUD other people and STEAL FROM other people.

A banker spending all day, day after day, dealing with MONEY, comes up with all manner of ideas to steal a little here and a little there. It's HUMAN NATURE.

The ONLY way to keep a banker honest when it comes to paper currency is NOT ALLOW that selfish conniving banker to print ONE SINGLE BANK NOTE more than he has gold in the vault.

And the ONLY way to do that is require ALL bank notes he issues to state ON THE NOTE (a) what commodity it is exchangeable for, and (b) how much of that commodity it is exchangeable for.

The bank note then becomes a CLAIM CHECK on that amount of that commodity IN HIS VAULT.

No, you CANNOT allow that conniving banker to print one single bank note more than what he ACTUALLY HAS in the vault.

No, you cannot allow that conniving banker to practice ANY form of fractional reserve.

Paper currency that is NOT a claim check or anything, combined with fractional reserve methodology, gives that conniving banker ALL MANNER of opportunity to DEFRAUD and STEAL FROM people.

For bank notes to be free from MANIPULATION by that conniving banker, they MUST be redeemable for a specific amount of a physical commodity in the bank's vault, that is stated ON THE BANK NOTE so the redemption amount CANNOT be changed by that conniving banker when he gets more GREEDY, as bankers ALWAYS do when dealing with money day after week after month after year.

WHEN should the revolution have happened in America?

It should have happened when the government declared the U.S. dollar is NO LONGER REDEEMABLE for gold or silver.

THAT is when the U.S. dollar became COUNTERFEIT. When the REDEEMABILITY was removed.

THAT is when the government (or Fed) could start printing ALL THE U.S. DOLLARS they want, giving them to whomever they want, expanding the amount of currency in circulation, correspondingly reducing the value of each dollar.

Reducing the value of a bank note after it is issued is FRAUD. It is THEFT from the person holding that bank note. You have STOLEN some of their wealth.

Wed, 10/26/2011 - 13:24 | 1813206 TheSilverJournal
TheSilverJournal's picture

If the banks tells the depositor that their loaning out the deposits and the depositor knows that they may not be able to get the money back whenever they want, then it's not fraud. Yes, fractional reserve banking may not be as safe. But who are you to tell someone that they can't depositor their money in a bank that practices fractional reserve banking, take on the risk, and earn interest becaus of the risk? Otherwise, if the bank isn't loaning out the deposits, then the depositor will instead have to pay a storage fee?

Wed, 10/26/2011 - 07:18 | 1811568 pelagivore
pelagivore's picture

I would say that the reason that Keynesians have been winning (but ultimately digging their own grave - depending on your time frame in my view) for so long is largely to do with the current generation's obsession for quantifying/modeling economic data to produce forecasts with an incredible degree of inflated confidence. With imbalances becoming more apparent these models are now embarrassing failures.

I agree that fractional reserve banking is not the problem; it is a symptom. If there is one key problem, in my view it is the inability to quantify long-term risk properly (the inclusion of black swans and the like) and/or the inability to understand the nature of value creation, is there a long-term rate of sustainable growth?

A gold standard has the drawback of stifling bursts of productivity or short-term productivity imbalances I believe, but the benefits of longer-term stability could outweigh the shorter term costs. I don't know.

I also agree that ultimately, we the people are the problem, not their representatives or whatever.

Tue, 10/25/2011 - 18:08 | 1810170 Ratscam
Ratscam's picture

that is why we need to get back to the old Austrian School economics.
Introducing negative interest rates or banning interest rates at all is an interesting thought, Silvio Gesell and many others have played with and in cases successfully implemented it. It would abolish the fractional reserve banking system as would a 1% sales transaction tax in addition to a VAT tax on any stock exchange transaction!

Tue, 10/25/2011 - 18:51 | 1810301 Thisson
Thisson's picture

You indirectly have discovered the point of the system: the only way to extinguish debts created in this manner is with labor - slave labor.  Since you do not have the money to pay the debts, you must perform labor for your debtors to earn the money to repay them.

Tue, 10/25/2011 - 21:21 | 1810672 Raging Debate
Raging Debate's picture

Ya exactly. Jubilee sounds awsome! But no one would buy anything outside your town for a long time. Zombie land. Haircut the debt so the numbers work and move on. At least the discussion is very public now.

Wed, 10/26/2011 - 00:47 | 1811294 Dantzler
Dantzler's picture

There is nothing wrong with paying a price to borrow money.

 

What we need is to end the .gov monopoly on our money and allow competing currencies. End FDIC, TBTF, etc.

Tue, 10/25/2011 - 20:18 | 1810509 Mine Is Bigger
Mine Is Bigger's picture

Labor does not create money.  So, I think what you are saying is incorrect.

The $80 you get from work was created as debt.  So, interest is attached to it.

You may not have to pay interest on the $80 personally, but when it was created somebody else promised to pay back with interest.

So, it only seems to have no interest attached if you just look at it from your perspective.

Well, but I am no economist, so I am probably wrong.

 

Wed, 10/26/2011 - 01:01 | 1811310 Dantzler
Dantzler's picture

What does labor create then?

Does money != value?

Suppose the laborer is a miner/refiner?

Tue, 10/25/2011 - 22:10 | 1810859 Au Shucks
Au Shucks's picture

So either we're a slave who cannot pay back our debt due to there not being enough money to pay back the debt and are forced to have our assets and liberty seized in repayment of said debt, OR we are enslaved to a labor camp for the sole purpose of repaying our debt and forced into an unnatural and unfulfilling pursuit such as waxing the floor of a bank. 

I say if it smells like an enslaved duck, talks like an enslaved duck, and walks like an enslaved duck, .... who really cares if the shackles are around it's feet or its feathers.

Wed, 10/26/2011 - 00:49 | 1811297 Dantzler
Dantzler's picture

Choose to eschew debt.

Tue, 10/25/2011 - 22:13 | 1810878 Al Gorerhythm
Al Gorerhythm's picture

That's fine for the productive part of the economy but it is the productive who bail out or pay for the borrowings of government who don't contribute a cent to the debt reduction of the loan. My problem is with the unfettered borrowings of government getting me further ino debt and demanding that I pay for it. 

The interest can never be paid. It's impossible to pay using currency needed for interest beyond the principal. The govt or fed won't accept a dozen eggs and a basket of vegies when the principal is paid off. If they have the principal portion of the loan in their hands, where does the interest come from? In fact, if the loan was a ledger book creation, where does the currency for the principal come from? From future earnings. It eventually has to be printed. It ALL has to be eventually printed. There is only one other option other than kicking the Ponzi down the road and that is default. It's time to kick Bernanke et al down the road.

Now, if money can be created out of future earnings, why is there a cartel monopoly on who gets to issue it?

Tue, 10/25/2011 - 22:22 | 1810902 buyingsterling
buyingsterling's picture

The money to pay for the labor must also be created, or the equation remains the same, and there's not enough $ in circulation to pay the debt. The borrower earning money is just shifting it from one account to another.

What's more accurate (tell me if I'm wrong) is that the system isn't static - by the time the fellow pays back the note, lots of other money will have been created and be circulating as a result of unrelated transactions. The borrower taps into that with his labor over time, and is able to repay the loan.

Wed, 10/26/2011 - 00:01 | 1811219 batterycharged
batterycharged's picture

Good, clear explanation. Yeah, it's not really some magic trick.

A simpler explanation is this:

One party has access to new money; banks. If we want to grow the economy, we go to the banks for new money.

As long as we all pay the banks back, they are in a unique position to make money for solely being...a bank.

Banks are like Saudi Arabian princes and oil. They have unique access that others don't and it makes them rich.

He says paying down sovereign debt would collapse the system. Well so would a huge wave of defaults. What happens when all that borrowed money ends up in the hands of the top 1% and it won't make its way back to the bank to cover all the other loans it lent on fractional deposits?

I think we know.

There are several ways to skin this cat.

Wed, 10/26/2011 - 08:18 | 1811737 cynicalskeptic
cynicalskeptic's picture

In a sound economy the supply of 'money' does not expand faster than the level of economic activity.   In our current system the supply of 'money' in the form of paper currency, securities, derivatives and other 'paper' or electronic forms has expanded exponentially - far greater than the level of economic activity.  This expansion was not matched by any increase in economic 'value'.  The huge increases in housing 'values' and the stock market  and such were/are all simply INFLATION - reflecting this vastly increased money supply.

Much of the 'value' created in these securities SHOULD now be 'destroyed' (as the value of housing - the 'tangible asset' these securities were based on has decreased - at times to near zero).  But this has not happened.  You also have things like CDS's which have NO tangible 'value' to back them - being pure 'bets' - nothing more.   We SHOULD be seeing massive 'deleveraging' as many of these forms of 'money' go to their true value (ZERO) but government is not letting this happen - they are buying these securites or guaranteeing their value.  Government is also propping up the stock market - directly with market intervention and indirectly with 0% 'loans' to financial institutions.

If 'money' (currency)  is created at a faster rate than the economy grows, you have inflation and a devaluation of the currency in circulation.  That is why housing prices zoomed.  In other 'booms' it was tech stocks or something else.....

In the past - with supplies of gold and silver acting as very real physical constraints on the expansion of the money supply you DID have issues with the economy growing faster than the money supply.  You also had the issue of 'hard currency' (gold in particular) going out of the country to pay for imported goods.  The way Britain treated the 13 colonies made this an ongoing issue - as raw materials wer exported to earn 'hard money' which was then spent on more expensive imported manufactured goods.  The colonies existed to benefit theparent country.  This problem continued with independence into he early 1800's.  The US also had to borrow substantial amounts of money to finance its industrialization but growth - expansion westward with increasing population (including immigration) - made it possible to repay that debt.  Once the US had railroads (a better transport system) it could readily export more agricultural products.  With the construction of factories the US no longer needed to pay for imported manufactured goods and was also earning money with exports.   A negative balance of trade will drain a nation of 'hard' money.   This was an issue with Britain's silver going to China in exchange for tea - and Britain's 'imposition' of the opium trade on China to offset that balance of trade deficit.

Periodoc 'panics' in US history were worsened substantially by shortages of 'money' - banks extended credit in good times and then sought repayment in hard times when supplies of hard moeny were tight.  The siinking of the USS Central America - with its load of gold - caused problems in the NY financial markets at the time.   The requiremnt that banknotes (printed by PRIVATE BANKS) be backed by gold limited the money supply (despite some fraud).  When the Fed was created you still had a requiremnt in olace for fractional backing - which is why FDR had to confiscate gold (and revalue it).  As banks failed people took their money (currency) out of banks and out of circulation - literally burying it in their yards or stuffing it in matttresses.  There was a very real shortage of money (currency) in circulation, affecting commerce.  But you could not print more currency without gold in vaults to back it.

In our current system we have a HUGE negative balance of trade.  We have financed this trade through 'borrowing' - the creation of additional debt.  We owe the rest of the world more than we can ever repay with out own 'labor' - in fact we have exportted much of our domestic means of production, shipping US factories overseas wholesale.  While US agricultural products and some high tech goods are exported, these are not sufficient to ovecome our vast trade deficit.

The US has created FAR more 'money' - and taken on far more government debt to support that 'money' than can ever be repaid.  This is especially true given the DECLINE in productive economic activity in the US.  You have government debt held overseas - 'loans' that financed US imports. You also have government backing of worthless securities issued by banks and other financial institutions - a HUGE incurring of debt propping these institutions up and preventing theiur FAILURE - and the devaluation that SHOULD be occurring.  

You also now have government 'aid' to its citizens increasing at massive levels.  Keynesian economics says you should SAVE in times of good to build reserves that can be spent to boost economic activity in bad times.  Ancient regimes stored grain in times of plenty to feed people when times are bad.  If they did not do so, the people would starve, rise up and overthriow their rulers.  

But in this day and age governments don't EVER do this.  Modern governments NEVER save.   They focus on government spending in the bad times to boost economic activity - financed y incurring MORE debt.  This CAN work if you pay people FOR economic activity - as in the WPA or CCC.  In those programs people were paid and produced econiomic value (maybe not commensurate with what they were paid but value WAS created).  NOW you are paying people simply NOT to work - to fund copnsumption.  But that consumption is of goods not necessarily produced here so it does little to boost US economic activity.  And with government moeny goping to financial institutions on a massive scale they are looking to profit so they are 'investing' in things that DO make money - like commodities people need(food and fuel) further driving up prices and hurting consumption and economic activity.

Even with the deleveraging - destruction of 'value' that SHOULD occur (but is not), the massive increase in debt cannot be 'paid off' by increased production. The massive increases in the money supply WILL result (and IS resulting) in increased inflation - which in effet 'destroys' the excess 'false value' that was created by increasing the money supply.  The problem is that this inflation destroys the 'money' honestly earned and saved by those that produced it with their labor instead of just destorying the dishonestly created money issued by govenrment and created by banks ad others. 

A quote from another - paraphrased : 

FDR borrowed money from Americans to put other Americans to work so they could buy goods made by other Americans putting more Americans back to work.  Now the US borrows from foreigners (or itself - literally creating money out of thin air by having the Fed buy back Treasury debt) to pay Americans NOT to work sso they can by goods made by foreigners.  This does little to help the US economy and in fact only increases the debt that will have to be repaid BY US citizens.   

 

Tue, 10/25/2011 - 19:27 | 1810338 Element
Element's picture

 Fractional reserve banking as state doctrine is akin to having a system in place whereby all babies would be born pre-addicted to a potent drug, and then keeping them on that drug for the rest of their lives,

 

Dude, you say that like it's a bad thing ... as though it's fundamentally unhealthy on every possible level ... fricken doomer

Tue, 10/25/2011 - 19:19 | 1810388 skunzie
skunzie's picture

Isn't that what the premise of the Matrix movies was all about?

Tue, 10/25/2011 - 21:14 | 1810647 clymer
clymer's picture

"doomer".. Sorry, man - the labels don't apply anymore. Anyone who isn't a doomer in these times, be they liberals, new-agers, repub's, green, lefts, rights, moderate fucking let's all get along to go along fools -  are just fucking oblivious to a mathematical certainty; your currency is rapidly being printed out of existence. The end result of massive deflation, or hyper-inflation results in the same end scenario: total loss of confidence in the people in charge and the system they created. I can go along with fractional reserve banking (shit, it provides the liquidity for a complex economy), I can even go along with fiat currency to a certain extent, believe it or not (tally sticks seemed t fit the bill for quite a while). What I fail to understand is how even the most stockholm-stricken FED defenders can justify the system in it's current form.  

Wed, 10/26/2011 - 00:54 | 1811301 Dantzler
Dantzler's picture

Word

Wed, 10/26/2011 - 08:52 | 1811850 jonan
jonan's picture

i've be a doomer since doom was a sidecrolling msdos prompt activated action thriller...

Fri, 10/28/2011 - 03:03 | 1820007 Element
Element's picture

umm ... you realise I was completely taking the piss with that "fricken doomer" comment, don't you?

Tue, 10/25/2011 - 18:13 | 1810182 SilverRhino
SilverRhino's picture

What he failed to explain was the inverse relationship between the required reserves percentage (set by, you guessed it, the Federal Reserve) and the money multiplier effect.   His message would have been a lot harder if he explained how a bank with a billion dollars in it only has 100 million if the FED sets the RR at 10%.   Or only the first 10% get their money out in case of an FDIC failure.

Reserve Requirements Liability Type Requirement % of liabilities Effective date Net transaction accounts 1      $0 to $10.7 million2 0 12-30-10      More than $10.7 million to $58.8 million3 3 12-30-10      More than $58.8 million 10 12-30-10 Nonpersonal time deposits 0 12-27-90 Eurocurrency liabilities 0 12-27-90

 

by way of comparison

Country RR%  Australia 0 Canada 0 New Zealand 0 Sweden 0 Czech Republic 2 Eurozone 2 Hungary 2 South Africa 2.5 Switzerland 2.5 Latvia 3 Poland 3 Russia 4 Chile 4.5 India 6 Bangladesh 6 Lithuania 6 Pakistan 5 Taiwan 7 Turkey 8 Jordan 8 Zambia 8 Burundi 8.5 Ghana 9 Israel 9 Mexico 10.5 Sri Lanka 10 Bulgaria 10 Croatia 14 Costa Rica 15 Malawi 15 Hong Kong 18 Brazil 20 China 21.5 Tajikistan 20 Suriname 25 Lebanon 30

 

 

 

Tue, 10/25/2011 - 19:12 | 1810365 Biosci
Biosci's picture

It's not taught for a reason.

The reason being that those doing the teaching have no understanding.  I'm not arguing that there is no institutional incentive not to teach these real-world concepts, but I'd guess the simpler reason is the more pervasive one.  How many high school econ teachers understand this?  How many high school econ teachers are there at all?

Tue, 10/25/2011 - 19:37 | 1810430 Poor Grogman
Poor Grogman's picture

A system of deceit straight out of hell
Only truth will kill this creature.

Tue, 10/25/2011 - 20:18 | 1810518 lincolnsteffens
lincolnsteffens's picture

ditto not taught for a reason. ditto for teaching personal financing, ditto for nutrition for health, ditto for civics, ditto for Constitution history and Bill of Rights, ditto for critical thinking, ditto............ditto """""""""""

Wed, 10/26/2011 - 08:49 | 1811833 jonan
jonan's picture

the state was 2nd after god and before family until i actually learned what the state was all about and pulled my head out of my ass...

the scary part is that i probably thought that way be design...

Tue, 10/25/2011 - 18:09 | 1810172 junkyardjack
junkyardjack's picture

Everything except a farm with animals is inherently worthless fiat.  You can't eat Gold and silver you just have to hope that there is some sort of barter system that uses it if everything really collapsed.  Food, shelter, guns and clothing are the only worthwhile currencies, everything else is a fiat system.

Tue, 10/25/2011 - 18:39 | 1810256 Prometheus418
Prometheus418's picture

Water, tools and energy as well.

All other things being equal, I'd go all in on energy, if I had the money to develop a hydroelectric dam, or some other means of reasonably sustainable production, that'd be far more interesting to me than farming, and plenty easy to barter for food from those farms.

Tue, 10/25/2011 - 20:04 | 1810482 chemystical
chemystical's picture

and sex, and drugs, and medicine, and alcohol, and eyeglasses, and.....anything else that people want.   their values - as we all know - being determined by their scarcity and the demand for them and ultimately the abundance/availability of the resources and labor required to produce them.

I don't care how many cows you have or how many acres of corn.  You can't eat it all, and when your diabetes kicks in overdrive i sense that you just might want some of my insulin.

I agree with the lead metaphor, and you can kill me and take all of my stuff if you want, but don't bother digging me up and asking me how to manufacture insulin after your pilfered supply runs out.

directly tying labor to currency was last tried (as far as I know - which isn't very far) by Nazi Germany.   They moved quickly from wheelbarrows of fiat for a loaf of bread and the horrendously punitive Versaille Treaty (among the other WWI treaties)...to emerge from the Depression faster and more effectively than anyone.   Refusing to join the banksters, however, does have consequences, and boy did the Nazis ever learn that lesson.  and Saddam and Khadaffi and probably Chavez sooner or later.

Tue, 10/25/2011 - 18:49 | 1810268 Smithovsky
Smithovsky's picture

At the most basic level, lead is the only true currency.

And you can't even eat it.

Tue, 10/25/2011 - 19:16 | 1810377 Don Smith
Don Smith's picture

The effectiveness of lead as a currency is a function of the velocity of the money...

Tue, 10/25/2011 - 20:06 | 1810490 BigJim
BigJim's picture

Not much use without gunpowder, or brass, or steel, though, is it?

Tue, 10/25/2011 - 23:51 | 1811204 UP Forester
UP Forester's picture

How 'bout a sling?

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