Money As Debt

Tyler Durden's picture

On a day when Lagarde happily trots out statement after statement that the IMF has another bucketful of promises to solve the world's excess debt problems with its own debtors providing more of the wealth-creating debt in ever-increasing circles of ridiculous indebtedness, we may have found the perfect antidote. Perhaps, given the weakness in European sovereign markets this week, bond market investors have already watched the following presentation. Explaining in simple terms and for the broadest audience Paul Grignon's 'Money As Debt' explores the baffling, fraudulent and destructive arithmetic of the money system that holds us hostage to a forever-growing debt - and how we might evolve it into a new era. Get your popcorn ready.

 

 

Where does Money Come From?

By Paul Grignon, the creator of “Money as Debt”, the animated cartoon seen online by millions worldwide and available on DVD from moneyasdebt.net. This is a condensation of an article that may be downloaded from http://paulgrignon.netfirms.com/MoneyasDebt/Money_or_Credit.pdf

The simple answer to the title question is DEBT. Whether paper cash or numbers on a computer screen, all money (except coins) is “evidence of debt”.

What is "cash” and where does it come from? Cash can be the familiar paper stuff, or it can be credit at the national central bank which banks use to settle accounts between banks. “Credit cash” at the central bank is always convertible to “paper cash” upon demand.

So, where does cash come from? Is it just printed by the government as we are shown on TV?

NO. Cash is created out of thin air by the central bank of the country (which is often privately owned). The central bank can just have it printed for the cost of printing, by the government or privately. The central bank then uses this cash it creates out of thin air to buy interest-bearing public debt in the form of government bonds.

Government debt is perpetual and thus interest paid on it is perpetual. Therefore a good definition of cash might be: evidence of public debt on which taxpayers will be paying interest forever.

So what is credit? Everything else that isn’t cash.

Take for example your bank account. Your bank account tells you how much cash the bank OWES you if you demand it. It isn’t cash itself. All those numbers in bank accounts are just “promises to pay cash”, nothing more than IOUs created by banks. However, we typically think of these bank IOUs, or “checkbook money” as “money”.

Little wonder. This checkbook money, especially in electronic form, is much more convenient and secure than paper money. Therefore we can transact all of our business with these promises to pay cash instead of cash itself.

So… are there more promises to pay cash than there is cash to fulfill them? You bet. That is because banks usually make what they call “LOANS” by promising, rather than providing, cash.

With a base of “cash” usually much less than 8% of the total they will “loan”, banks create their so-called "loans" as “promises”. How? It is astonishingly simple.

You, the so-called borrower, sign a document that promises to pay the bank X amount of money over time plus interest on the outstanding balance. Your promise is backed by the collateral you agree to forfeit and the effort you will expend to earn the money. Your promise to the bank is an ASSET to the bank. To balance its books, the bank creates a matching LIABILITY. The bank promises the borrower X amount of “cash” on demand.

The “loan money” that the bank puts in the borrower’s account is not “cash”. It is an IOU. It need never be cash unless the borrower demands cash. And, because we accept these IOUs as money itself, and do almost all of our business trading these convenient and secure IOUs instead of inconvenient and risky cash, banks can safely issue many more IOU’s than there is cash to back them up.

Perhaps the simplest and most "magical" feature of this system is "net" transactions. Only the net differences of transactions between banks need to be paid in cash. In theory, if all the banks are getting as much bank credit coming in as is being withdrawn, all the IOUs balance each other out at the end of the day leaving a net difference of zero. No cash required at all, from anyone! In practice, banks are competing.

Winners can demand losers pay in cash. But that amount is still only a small proportion of the whole amount of credit issued. The exception to all this is coins. They don't begin as debt. The government Mint stamps them and the government sells them at face value to the banks, no returns. But coins are an insignificantly small part of today's money supply.

The significant thing about coins is that most people’s understanding of money has not yet developed much beyond the idea of coins, simple POSITIVE tokens of value.

They fail to see how we have been ensnared by a money system based on NEGATIVE shackles of debt. The current system pretends to be “money” but is, in truth, a financial black hole sucking us all in to seemingly inescapable control by our so-called “creditors. The truth we need to see is that WE are the real creditors, because it is WE who produce the real value in the world, not the banks.

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Ahmeexnal's picture

Freedon is slavery.

Hope and Change.

TruthInSunshine's picture

Fractional reserve banking, conjuring what they claim is 'money,' but that which is really debt (since there is nothing of inherent value backing it), from thin air, leveraging it up by many multitudes, getting a nation to endorse it as monopolistic fiat (and enforce the monopolistic recognition of it as such), is the problem.

If 95% of loans go bad (or more), the fractional reserve bankers lose nothing. They created this fiat money from nothing and received the protection of the nation in distributing fiat monopoly currency. Not only do they lose nothing, they actually gain any real assets that were pledged as collateral to securitize most of the loans that went 'bad' - Harvest.

Repeat this process of Harvest by first inflating the money supply, getting people deeply indebted (many of whom weren't indebted before), and soon enough, with enough cycles of harvest, what belonged to many will be concentrated in the hands of a few, all via the sham that is fractional reserve banking.

It's the biggest scam in the history of mankind.

Once a person grasps this basic concept, they'll understand why events have taken place as they have (Bretton Woods*; Plaza Accord; Federal Reserve Act of 1913; closing of the gold standard in 1971*, etc.), and they'll finally grasp how a select few have rigged the game to be able to harvest assets continually, and concentrate wealth and power, by doing nothing other than maintaining Deep Capture of a nation's legislative and judiciary branches (and executive, in the case of the U.S.) of government.

*On August 15, 1971, the United States unilaterally terminated convertibility of the dollar to gold. As a result, "[t]he Bretton Woods system officially ended and the dollar became fully fiat currency, backed by nothing but the promise of the federal government." This action, referred to as the Nixon shock, created the situation in which the United States dollar became the sole backing of currencies and a reserve currency for the member states. At the same time, many fixed currencies also became free floating.

If you could print a currency at no cost, that had no instrinsic value, and get the legal system to recognize it as the only legally permissibly 'tender' to satisfy all debt, public and private, would you print as much as you could, loan it out to as many entities and people as you could, and sit back, not caring whether 90% or 9% of the loans were repaid, since it cost you nothing to produce the loan, meaning that you can only gain assets (securitized) and indebt institutions (create indebted parties that you can then garnish), and literally lose not one atom of anything of inherent value?

Further, if you had access to an entity that could do the above, and you could borrow that currency at absurdly low interest rates, and moreover, you had an express or at least implicit taxpayer guarantee against losses (too big to fail), would you also not do exactly the same?

If you're the former entity, you literally can lose nothing, no matter how reckless your actions or lending standards.

If you're the latter party, your risk of loss is inconsequential, since you're backed by the taxpayers (involuntarily), and even if you weren't, if you're a very large entity able to tap absurdly low interest loans from the former, unless you are galactically idiotic on a level that equals Lehman or beyond (where derivatives did them in, along with a non-bailout), you'd be hard pressed to lose money if even - completely hypothetical and arbitrary % - 20% of the cheap interest money you borrowed and then re-loaned out wasn't paid back to you.

If you're the former, you have not only no risk, but you can't possibly lose anything, since your investment is nothing.

If you're the latter, your risk is incredibly small.

This is why our economy, under fractional reserve banking practices, using currency created from thin air, tied to absolutely nothing of inherent value, and bestowed monopoly status as legal tender, is a factual, literal Ponzi Scheme.

This is why we had to close the gold standard, lest we couldn't show "growth" (even though it was merely nominal, credit/debt based transactions) in our official GDP going forward.

You don't even have to tie the fiat to gold in order to force the economy to produce honest numbers and detect the real level of economic growth or contraction: tie the currency to anything that has inherent value, and that can be stored, and that isn't infinite in quantity.

The mind bender part for the newly initiated (as I was at one time) to the Matrix is that there's no real 'debt' from the perspective of the fractional reserve central bank; it's hard for those steeped in conventional economics to rip out the notion from their brain that the fractional reserve central bank can't lose anything (they didn't lend anything of value or that cost them anything - they have ZERO skin in the game), and that their favored entities that are TBTF have only slightly less risk (because they will always be able to socialize their losses via taxpayer bailouts in the wake of busts, while they retain their ill-gotten gains during the booms), and that what most refer to as debt in this system is only a liability for the debtor. If the debtor doesn't repay what was they borrowed (a monopoly currency that cost the lender nothing to produce), they can lose their farm, construction equipment, home, machinery, infrastructure, vehicle, etc. that was used to securitize or collateralize the loan, or even if the loan was unsecuritized, they can at least see their revenue or wages garnished, be sent into involuntary bankruptcy (where their general pool of assets will be seized upon by creditors, including lenders), and squeezed in other ways.

The only way to avoid this is to not play the game. During crack up booms, you miss out on fiat-based gains, if you don't play the game, and the incentive for playing that game is that if your timing is correct, you can get rid of all debt and convert the excess fiat gains into hard assets having inherent value or other things of inherent value, before the fractional reserve alchemists induce another inflationary-deflationary (or vice-versa) harvest.

If one were fortuitous enough to play the game, and have the skill and/or luck to convert fiat gains into real wealth before the boom turns to bust, they'd probably be idiotic to repledge their real wealth assets as collateral for loans ever again (I say probably, because there are exceptions to every general rule, but these people would have to be extremely smart, competent and or connected to the alchemists in such a way that they'd be assured a bailout in the event of another bust whereby their real assets are pledged as collateral for fiat loans).

The Harvest is the end game for the fractional reserve bankers and their minions. As just one example of the rape that is harvest, even generations of families that were land rich (let's say a family that has owned two square miles of prime farmland yielding high value crops for three generations, carrying no debt) can find that an economic downturn suddenly forces them to take the step of obtaining a loan, pledging their farm and equipment as collateral, in the belief that the loan will allow them to survive the downturn and become more profitable at some future point - they're now 'harvestable.'

By pledging real assets to secure a loan of fiat money (conjured from thin air at no cost), one is playing right into the hands of The Money Masters.

 

The Secret of Oz - Winner, Best Documentary of 2010

 

Money As Debt-Full Length Documentary


The Money Masters - Full Version

 

Money, Banking and the Federal Reserve

Maos Dog's picture

This is my favorite zh poster. Thanks!!

flacon's picture

Money As Debt is the documentary that opened my eyes to the world around me. It was my RED PILL. I remember being physically sick to my stomach when I learned the TRUTH! 

AldousHuxley's picture

in practice US dollar is worth less than a real debt.

In IOU, borrower of gold promises to pay back more gold in the future.

In US dollar, borrow of gold give promise the same, but you end up with half of original gold returned because Fed took it.

 

it is more like an iPAd. depreciating asset which becomes worthless as time goes on.

 

there is no true appreciating asset in the long run except time...your life you lose away as you work for the all mighty dollar.

Richard Chesler's picture

2008 presented a great opportunity to seize the parasite bastards. Instead, most fell for the banksters' corrupt puppet selling hope and change.

http://www.surepost.org/fileManager/viewFile.php?group=5&sec=2&SID=&user...

TruthInSunshine's picture

Plad, Griffin is right to lay bare the rough and tumble question of whether one system of fiat money creation by private, commercial banks should be replaced by another of fiat money creation that's (truly) done by government, but I'm not quite sure it's fair of him to essentially state that the who that is allowed to create the fiat currency matters not.

I realize that he is arguing, in the purest sense, for a hard money/real money system of economics, but IMO he should at least concede that pegging creation of fiat currency to the larger creation of something of inherent value, whether gold, oil or grain, partially accomplishes what he desires, if even indirectly - as it restrains the arbitrary and unlimited creation of fiat money.

At any rate, so long as the dilution of pure fiat currency, unbounded and unrestrained by any built-in disciplinary measure, continues, at least if the government does this, not at the direction of the commercial banks that now form the fractional reserve banking syndicate, the people at least have the opportunity to control their rate of inflation. as they are voting for those who can no longer hide behind an entity such as The Fed ("It's the damn Federal Reserve! - as they vote to renominate its Bernanke/Greenspan/whomever), and will have direct accountability for creating high rates of inflation.

Expatriate in Italy's picture

Thanks, you really illuminated me. In life, if we don't wake up, we just lose our life working for some illusion (not only the dollar).

Thanks again

AldousHuxley's picture

happiness = how lucky you are

luck = good timing

good timing = buy low, sell high

buy low, sell high = get richer, more money

more money = more power over resources exchanged under such currency

 

getting rich is all about timing your investments (labor, education, business). Has nothing to do with productivity, production quality, etc. That's just banksters don't do shit except trying to time it right. everything else is marketing PR bs to get more of other people's money.

Max Fischer's picture

 

 

If 95% of loans go bad (or more), the fractional reserve bankers lose nothing....

Pure garbage.

So.... 2008 was a hoax?

Max Fischer, Civis Mundi

Corn1945's picture

2008 was largely a nothingburger for the banking establishment in the US. How many elite bankers have gone to jail or even lost their jobs?

So yeah, it pretty much was a hoax for them (not for the average Joe of course.)

 

We have a system where the banks are instantly reliquified when they face any losses. That's part of the problem with a monetary system that has no hard backing. 

Max Fischer's picture

 

 

2008 was largely a nothingburger for the banking establishment.....

I can't even fathom the level of ignorance required to believe that the insolvency of Wall Street, the implosion of Lehman, Bear, BlackRock, the country of Iceland, etc. etc. etc.  was......

.....ALL A FUCKING HOAX?

You guys are really fucking whacked-out, or you simply don't have the slightest understanding of banking and economics.

 when they face any losses......

Wait a minute!  Mr Delusional in Sunshine just told everyone that those banks really didn't loose anything! 

Please clarify.....

Max Fischer, Civis Mundi

Corn1945's picture

I notice you are very angry. Calm down. 

I'm talking about major banking institutions. 

Lehman and Bear are on a very short list of real failures. 

Why is Bank of America still in business? Why is Goldman Sachs still in business? Why is AIG still in business?

 

I find you very angry and offensive and people like you are really ruining the comments section.

It looks like the Tylers did Round 1 of the comment section cleanup a couple months back.

I think it's time for Round 2. 

AldousHuxley's picture

why is America still in business?

 

because they have the biggest guns in the world.

 

goldman sachs, fed, us government, all that shit doesn't matter. It comes down to who has the biggest guns. Big guns will get you the real assets like natural resources from other nations to support petrodollar and cover up fed's mistakes and bailouts of banking sector and politicians bad decisions, set the interest rates artifically low and support retarded CEOs and businesses they run.

 

Elites are not stupid. That's why they spend more on defense spending than all the other countries in the world combined and nearly half of your tax dollars when they close schools and don't even offer healthcare.

http://www.rickety.us/wp-content/uploads/2011/06/Defense_Spending_by_Cou...

Xkwisetly Paneful's picture

WOW you are turning into one of them?

Yes the world has decimated their militaries in favor of social spending and are largely just as broke as the US otherwise excellent point.

30% is not almost 50%.

The dollar is the world's standard bearer largely out of lack of competition.

Guns is not what sent US bond rates to less than 0% incl transaction costs in DEC 2008.

Want free healthcare, sell your house move into one half the size, sell one car,

use the money to fund healthcare-now you live like the typical Euro receiving state sponsored healthcare.

 

 

Reptil's picture

"Pax Americana" all of that is great in case of europe 1945-1971, but it relied on VOLUNTARY cohabitation in a USA controlled space.

After the globalistas were done with subverting and exploiting banana republics, the next logical step is to turn the USA and Europe into a banana republic. Which is now.

It's all a big "farm" isn't it? Farmville XXL.

A large militairy force needs a healthy economy and broad intellectual base (high level of education) to sustain it. And that's the weird part. That seems to be not necessary anymore.

Why?

Diogenes's picture

"A large militairy force needs a healthy economy and broad intellectual base (high level of education) to sustain it. And that's the weird part. That seems to be not necessary anymore.

Why?"

You used to have an economy with a government and military establishment appended to it. The Soviet Union had a government and military with an economy appended to it.

They proved you do not need a healthy economy or a broad intellectual base to sustain a totalitarian government with its secret police and military.

Xkwisetly Paneful's picture

Yes major banking institutions came away scot free, their market caps being a fraction of what they were is not a loss.

I find the preposterous shit like that idea posted here daily Xkwisetly Paneful.

 

Regardless you nor any of your ilk is ever changing the game.

The guy who came into it with nothing and walked away with something was the winner.

 

ZDRuX's picture

Iceland wasn't a HOAX because they finally realized and understood what was written by the OP. This is why they're so much better off now. If only the rest of the population would say FUCK YOU to the bankers and their loans, we'd all be better off.

So what happened to the banking institutions that had lent all this money to Iceland?... Oh right, NOTHING.

AldousHuxley's picture

1)Iceland has small population. Every Saturday 2% of population came out to protest. Imagine 6million OWS protesters outside whitehouse.

 

2) iceland's debt was only $50B versus Greece's $500B, Ireland's $2,000B

 

still they were rescued by IMF with large loan and many of their corporations and financial institutions like the stock exchange got shut down.

TruthInSunshine's picture

Max, I'll waste a few moments of time even on the likes of you, whom I know to be a troll extraordinaire.

Answer the following, simple questions, Max:

 

1)   Forget the smaller (or even larger) banks that have failed, such as regional and community banks, not carrying systemic risk to the Ponzi Web of counterparties that underpins the fractional reserve banking network, for a moment. If you carefully read what I wrote, you'll notice that I am speaking of the too-big-to-fail institutions, who feed off the teat of the FRBNY.

Now, do you believe AIG (or Citi, or Bank of America) were fundamentally insolvent at any point during the last 4 years (if not, stop reading here, because you're either a hopeless moron or incorrigible troll)?

If you concede that one, two or all of them were insolvent at any point, how is it that they avoided bankruptcy/being shut down by banking regulators?

The only reason is they avoided this fate is because the fractional reserve banking entity that is the Federal Reserve printed enough fiat currency (which becomes part of the national debt, as appropriations Congress that are beyond the revenue raised by the U.S. Government turn into deficit spending, aka debt, in the form of treasuries that are sold, which the Federal Reserve buys the majority of - at least since 2009, with fiat money conjured from thin air) to allow it and the Treasury Department to socialize their losses, correct?

2)  Do you think that the Federal Reserve will ever mark the assets it now holds at FMV (as in real, and not fairy tale valuation), and if not, why not?  

3) Do the Federal Reserve Notes have inherent value, apart from the so called "Full Faith & Credit" implicit pledge of the collective U.S. taxpayers to 'lend' (pun intended, so to speak) value to these pieces of green and white paper and electronic issuances?  Do you think that the Federal Reserve Notes that exceed U.S. Government revenue, printed by the U.S. Treasury, much of which have been sopped up/monetized by the Fed over the course of the last 3 years, have any inherent value?

If so, is it only by the "Full Faith & Credit" implicit pledge, or in what other ways do these fiat notes have value?

 

Pièce de résistance  -

 

4)  If an individual or company borrows Federal Reserve Notes from a lender that's part of the Federal Reserve System, and they pledge an asset to secure that loan, whether land or equipment or a vehicle, where did the Federal Reserve Notes that are loaned originate from, and what is the ratio of actual Federal Reserve Notes that the lender must minimally carry on hand versus those being loaned out? 

What happens if the loan is defaulted upon?

What happens if the entity that originally made the loan, or any subsequent holder of the note securitizing the loan, goes belly up (hint - who/what ends up with the collateral that was pledged in exchange for the original loan)?

Ahmeexnal's picture

If so, is it only by the "Full Faith & Credit" implicit pledge, or in what other ways do these fiat notes have value?

You are forgetting the other piece of the puzzle, also printed on the fiat notes: "IN GOD WE TRUST".

Yes, the FED is owned by the vatican. It's not only the collapse of the banking system at stake.  It's the complete collapse of the church of Rome, a fiat religion.

Both will happen.  SOON.

Tijuana Donkey Show's picture

Where is this? I would like to see something on that. 

Oh regional Indian's picture

You can kind of start here and work your way around the rabbit hole....

/more-ows/

 

ori

Max Fischer's picture

 

 

You haven't answered or defended your claim that "if 95% of loans go bad, the fractional reserve banks lose nothing." 

YOU HAVEN'T DEFENDED IT.   All you did was write up another post with 25 different questions in it.  You're like a politician... answering a question with another question, or 25 of them.

You're avoiding the fact that you really have no idea what you're talking about.  Some of the banks lost EVERYTHING, while others were on the verge of losing everything...... that's why they had to get bailed out.  It's so simplistic, I can't even believe I have to write it.

Max Fischer, Civis Mundi

 

 

TruthInSunshine's picture

Why would I need to defend it? It's inherently factual.

Just because you don't understand it, or you won't concede this, doesn't make it any less so.

Theoretically, 99.99% of loans that were provided by conjuring fiat money at zero cost from thin air could go bust, and the entity that is conjurer won't lose a penny. What is there to lose when that which the conjurer loans is free to create and can be created in larger and larger batches without restraint?

Look above at my prior response to your idiocy, and recognize the distinction between the too-big-to-fails and central (fractional reserve banks, themselves), and the smaller participants that don't carry enough counterparty risk to threaten the too-big-to-fail entities (lest they be AIG, textbook definition, and be bailed out).

Why are the too-big-to-fail owners of the Federal Reserve larger now in terms of assets held/debt held/market share/deposits held (i.e. more concentrated) than they were pre-2008?

AldousHuxley's picture

what you lose is the credibility of the institution that's printing it.

 

money is based on trust. you lose the trust, you attract unwanted attention to your goose laying golden eggs and people start looking for alternatives (ie. gold). all of sudden you have competition. your profit margin erodes, and you have to work to compete against the competition. Eventually competition gets strong enough, you lose power and end up on the receiving end of someone else's abuse.

 

China, India, Russia, Brazil, Iran are all looking for alternatives.

 

you don't need capitalistic society and republican brainwashing to have real natural free market do its thing.

checks and balances exists in nature. humans are no match against forces of nature.

 

 

 

Sam Clemons's picture

Say you are on an island and you have 1 orange to eat. Now assume a genie shows up and gives you the ability to create more.  You create 7 and lend 6 of them to others on the island with apples pledged as collateral, and eat one yourself as a bonus for doing "God's Work" well.  The others decide to eat their oranges and they don't have the ability to create the orange so they can't pay you back (fixed amount of oranges for everyone but you).  You now get their apples.  

Now you have consumed one orange, saved one orange, and have six apples.  Have you lost? 

Yes, pn the surface you lost a whopping 88% of your initial orange position.  However, before you knew the jig was up, you still got to enjoy the fruits of your labor and save the original one you had, and now have six apples.  

TruthInSunshine's picture

It's even more lopsided than that.

The one with the food can essentially get the one with no food to do anything he wishes in exchange for a single bite of one his apples or a slice of his orange. The one is a literal slave to the other.

So long as the Federal Reserve enables the Treasury to print Federal Reserve Notes, that have monopoly status, with law enforcement backing this arrangement, debt slavery persists.

Max Fischer's picture

 

 

It's hilarious to see someone rant/lecture so passionately about a topic which they obviously don't understand. 

I'll make this very simple:

1.  Banks have the right to "create" money ex nihilo, and the quantity that they can "create" is based on a particular fraction of their cash reserves; hence the term, fractional banking.    

2.  When a bank "creates" money, it also, simultaneously, creates an IOU; as with anything in accounting, the right and left side of a ledger always have to match.  

3.  In other words, when money is "created," it's done in the form of a loan such as a mortgage or a car loan. From the bank's perspective, the money that's created is a liability for them, and the IOU is the corresponding asset.  This is called debt-money.... money goes into circulation as a debt.

4.  Let's assume the money "created" was for a mortgage.  Max Fischer got a loan for $100k.  The bank "created" $100K with a keystroke, and then Max gave the $100k to the home builder.  The bank has just "created" $100k, and it now has an IOU from Max to pay the money back.  

5.  This IOU is an asset that the bank books on its balance sheet.  It can keep the IOU and the interest that it yields, or it can sell it.  It can be sold over an over from one bank to another, always representing an IOU.  Passing this IOU around is EXACTLY what we do when we use the money in our wallet; we are passing around an IOU, owed to the Federal Reserve.  

6.  HOWEVER, as Max begins to pay this IOU, the IOU becomes worth less and less.  This is a process of slowly DESTROYING an equal amount of money that was "created" ex nihilo.  In the end, when the debt is paid in full and the IOU is worthless, an equal amount of money that was originally created has now been DESTROYED, except for the interest (but that's another subject).  This is the PAID-IN-FULL scenario.  

7.  Now, the default scenario...... Let's assume Max looses his job due to a recession and can't pay the IOU (the mortgage).  The bank that "created" the money, must now use its own money to "back up" that IOU. That IOU cannot just vanish, even if it becomes worthless!  It must always stay whole.  When a IOU defaults, the bank MUST use its own cash to make it real.  This is called de-leveraging.  Banks sell other assets to "back-up" bad assets, bad IOU's. 

8.  If a bank issues a million of these IOU's and they all suddenly become worthless, or 50% less, or 20% less, and if the bank must always keep the IOU whole, you can easily see how the bank could completely implode.   

9.  That is (in a very simplistic nutshell) how money is created, how equal amounts of money is destroyed, and how banks can suffer huge losses in a fractional reserve system.  To say that defaulted loans which were originally created ex nihilo is not really a loss is to totally misunderstand the mechanics of fractional reserve banking.  

10.  Besides, if you claim that banks really don't lose anything when they conjure money out of thin air, then you're also saying that 2008 was a hoax. 

Max Fischer, Civis Mundi

 

 

Revert_Back_to_1792_Act's picture

Ah, now we are in a dialog here.  Good.  I think there are a lot of people here who want to gain understanding.

The builder creates the home and supplies the lumber, etc.

The person taking the loan supplies the labor to pay it off the (principal + USURY).

What does the bank put into this transaction?

The bank creates ONLY the principal at the time of the loan.  Where does the usury come from?  In a system such as this, it only seems logical that the bank would eventually own ALL the real property.  In a system such as this, it pits people against each other in a big fight and conflict with each other to get the Usury they need to pay off their loans. 

Anyways, lets continue.

In most cases, the bank sells the notes as soon as they are created.  Where is the risk if they don't even hold the note?

Even if the borrower defaults, the loan is backed up by the security for the loan (home + the 'real estate' it sits on) - how can you say it is the cash in the banks vault?  Are you saying they have to make payments on their own note if the guy defaults? 

In modern times, the bank purchases insurance on the loan so they get paid even if the borrower defaults.

 

In the old system, money could be put into the system by anyone via the Assay offices and the Mints.  Real wealth circulated as silver and gold values.  There were tens of thousands of small businesses and farms in America.  It was the strongest possible system - no too big to fail, just thousands upon thousands of prosperous people all meeting each others needs in a very local and sustainable way.  The Silver dimes quarters were how they kept accounts and settled up with each other - value for value.  The USA made 50 percent of the worlds goods, there was NO income tax on labor and our Federal and State treasuries all had a HUGE surplus.  The Federal government derived most of it's revenue from taxes on imports and exports.  There were poor people but their needs were met by charity - there was very little poverty.

Credit money (bank notes or paper money) was created on top of these real values and loaned out by the bank.  The bank notes were redeemable - however, the bank who created the bank note also provided the specie for redemption.  The banks were charted and strictly regulated by the State and also provided a source of income for the State and the people who lived in the State. 

In the old system, the banks had to redeem their own notes.

With the system we currently have, the American People supply the means of redemption for the banks currency.  If you try to redeem a note, they tell you go see the Treasury.  The guy in this video is trying to redeem one.

http://www.youtube.com/watch?v=e5Cp6Me26JA

How did these notes become an obligation of the people to redeem them?

I keep thinking I am missing something but it seems that way to me.  Is there something I am missing here? Some mechanisim I don't understand?  Can you read this speech and tell me where he is wrong?

http://www.afn.org/~govern/mcfadden_speech_1932.html

Bankruptcy and Statute of Limitations used to provide some relief valve from this.  I also think additional money is put into the system via programs and government spending like Social Security, Medicare, and Grants and things like Food Stamps and such but it seems like people are slowly doing away with those things because they think they the poor souls that rely on such things are freeloaders.  It seems like the culture that created the Fed had things like this in mind and the unlimited power to provide for needy people back when the 'New Deal' was created.  But now because of ignorance people are doing away with the very things that keep the system going - for these systems are the very thing that put the extra money into the system to pay the Usury.  The people who are judging and wanting to do away with these things have also never been old or sick.

Here are a couple of Vetos from past presidents (back when Men were Men and you put your objections on the record).  Please take the time to read them and follow their logic.

Jefferson lists many other problems that I haven't even touched on.

http://avalon.law.yale.edu/18th_century/bank-tj.asp

Jackson's Bank veto.

http://avalon.law.yale.edu/19th_century/ajveto01.asp

Follow the logic in their opinions.  Study how the system used to work in the USA.  It was a system of Prosperity that was based on Liberty and Charity.  With the technology we have now, we can still fix things.  Make things right again. Bring back prosperity.  Restore the paths to dwell in.  I don't think we need to blame anyone - most of the people who are running this system now (and trying to keep it from coming off the rails) weren't even around when it was created. 

 

Oh regional Indian's picture

Superb Revert!

Awesome links and you clearly know/have considered this deeply. Thanks.

I think the missing step that everyone here mightbe missing is what happens immediately post ex-nihilo.

What happens to that IOU and where does the treasury come in (hint: immediately). That principle is "techincally" off the bank's books and on the treasury's.

From what I understood (still re-searching), this is then tied directly to your UCC account. 

More as it appears to clarify, thanks again.

ori

TruthInSunshine's picture

Wow. It's incredible that even Krugman would concede that trillions of Federal Reserve Notes were essentially created from nothing (I supposed he'd argue and emphasize they are backed by the Full Faith & Credit Clause, and that's 'something, since again - taxpayers back that debt in terms against risk of loss) in order to bail out dozens of too-big-to-fail partners in the fractional reserve Ponzi game (with AIG being a textbook example of the why, as it owed enough debt/fiat money to the likes of Goldman, JPM, et al., but that it didn't have to pay them - so Tim, Ben & Hank stepped in to ensure it received what's now over 220 billion to pay its counter-parties), yet Max the Naive still believes that the losses that accrued from the derelict & even criminal gaming of financial markets by too-big-to-fails have adversely impacted those entities in any real way, and that they didn't essentially shift their losses onto the U.S. taxpayer with the aid and abeyance of Congress (with Paulson's "tanks in the streets" the Kabuki theater justification), Treasury & Ben Helicopter Bernanke.

There was a time in history when most people who were participants in the economy and financial markets suspected that they would live or die by the soundness of the decisions they made and the natural frequencies of something approaching free market capitalism, and they therefore were far less likely to engage in absurd and even criminal behavior, since they would never dream that no matter how absurd and even criminally reckless their decisions, they'd be bailed out not just once by taxpayers (involuntarily), but many times over.

Coke and Hookers's picture

The concept of "asset harvesting" needs to become mainstream because that's what this is all about. In order to harvest assets a bank needs to create a bubble by expanding the money supply. Now, when a bubble is created, an opportunity exists for the bank to go bankrupt when it bursts. The value of collateral drops and the bank is caught with its pants down. So obviously banks can go bankrupt. Nobody's doubting that. Let's look at this more closely. Banks need to grow debt for two main reasons: To pay bonuses/bribes and to engineer the bubble necessary for asset harvesting.

So... when banks create bubbles they KNOW it will lead to their bankruptcy - because there will be little or no asset harvesting without a bubble - which will then become unsustainable for the bank. This is what's called 'suicide banking.'

Banks destroy themselves on purpose to harvest assets.

So, what happens when the bank becomes insolvent?

1) If the bank has bought the Government, it will get bailed out with future taxpayer money and current assets (through inflation/interest difference).

2) If the bank doesn't get bailed out, its harvested assets will be bought by another bank (usually owned by the same people who owned the failed bank).

So this is really a zero risk/loss game, as long as banks own the Government. And as we have seen, the financial system owns the Government and controls taxation into the future.

The banks will continue to find new places for bubbles until they own everything - both current assets and future earnings.

TruthInSunshine's picture

I agree. G. Edward Griffin, in Jekyll, coined that term and applied its usage in the context of the fractional reserve banking scam, and it's the perfect word/verb to summarize the process of how Crony Capitalism (aka another variety of Socialism) rigs the rules of the game to allow those who capture government to reap more and more assets in a concentrated fashion over time.

In a truly capitalistic system, this couldn't happen, because capital would have to flow in accordance with the rules of supply & demand (those who come along and build better mousetraps or at least less expensive but effective ones would knock off the former market leaders; not those who captured the government would stifle budding competitors).

soccerballtux's picture

You've asserted, but not proved, that banks are interested only in asset harvesting.

TruthInSunshine's picture

Where did I assert the generic sentence that "banks are only interested in harvest?" If you had read more carefully you'd certainly concede that I never stated that.

I did say that the apex banks and financial institutions that own The Federal Reserve have at the core of their very 'business model' the need to harvest real assets that can only be perpetuated in a cyclical fashion through the ability to swell and shrink the volume of fiat money used to make fiat money loans and that this has allowed a greater and greater concentration of assets in the hands of fewer entities and individuals with each and every successive boom-bust cycle.

Have you noticed that the largest banks, aka the too-big-to-fails (JPM, WFC, BAC, C, and GS), now possess assets valued at 56% of U.S. per annum GDP, whereas they 'only' possessed assets valued in an amount equal to 44% of U.S. GDP pre-2008? But...but...how is that possible? Many of these entities either were or still are technically insolvent (BAC and Citi are but two examples), in reality, so why weren't/aren't they liquidated?

In fact, here's a quotation of mine that maybe will help you with the essential distinction I clearly made between garden variety banks and the apex banks and financial institutions that actually do own The Federal Reserve:

"The Harvest is the end game for the fractional reserve bankers and their minions. As just one example of the rape that is harvest, even generations of families that were land rich (let's say a family that has owned two square miles of prime farmland yielding high value crops for three generations, carrying no debt) can find that an economic downturn suddenly forces them to take the step of obtaining a loan, pledging their farm and equipment as collateral, in the belief that the loan will allow them to survive the downturn and become more profitable at some future point - they're now 'harvestable.'

 

By pledging real assets to secure a loan of fiat money (conjured from thin air at no cost), one is playing right into the hands of The Money Masters."

 

Revert_Back_to_1792_Act's picture

You speak of the UCC. 

If you are investigating that and if you have a checking account, you should look at a couple things. 

First get a deposit slip and look at the left side of the slip or down at the bottom of the slip - there will be some little teeny tiny mouse print.  Read that.  Weird huh?  Bet you never saw that before until I pointed it out to you.  There are tons of things like this that I am discovering while investigating this and trying to figure out what is really going on.  There has got to be a banker here on ZeroHedge that can jump in here and help us out.

Go to your bank and ask them for a copy of what you signed when you opened the account.  Read the part in that document about "US Person" carefully - that paragraph uses the word "Includes"

Then go read this.

http://www.losthorizons.com/comment/TheLawMeansWhatItSays.pdf

I doubt that the few people who actually read what they sign have that meaning or understanding for the word 'Includes'.

That puts a whole new spin on "alienating or unalienable rights" doesn't it?

Here is more on this subject.

http://www.constitution.org/mercier/incon.htm

I am not sure that all banks are doing this.  Let me know what you find out by replying to this.  You see, they have to get your permission to do this stuff. Overall, this just makes me really, really, sad because people still have a lot of trust in the banks and the government.   

These two videos are also interesting.

http://www.youtube.com/watch?v=buiO1K_kRSg

http://www.youtube.com/watch?v=VJpUQ-6cZrE

 

Bag Of Meat's picture

read the comment  2363060 again 

and the interest is not just "another subject"...

i think your problem is you don't follow the flow of "money" up to its source

Ghordius's picture

excellent post Max - I usually start like this:

I have a fully paid house. I pledge 80% to the bank, the bank creates on their accounting books, based on the collateral (the pledged asset) an USD 80k in my favour. For the bank, it's a "zero game", on one side their claim on my house, on the other side my claim on their cash.

As a hedge/insurance, the bank pledges a fraction of the deal (from their capital) to the Central Bank. The funny part starts when I go and want to cash in my 80k, if I'm the only one it's fine, otherwise we have a bank run. But hey, we have a Central Bank! They come and... (end of part one) ;-)

soccerballtux's picture

is this a scenario where you are taking out a mortgage on your fully paid off house? (confused as to when this would happen)

Ghordius's picture

in europe, some older buildings have been mortgaged/paid-off some dozen times

ForTheWorld's picture

A bank can also resell that one house over and over and over again, creating more and more money each time it's sold. If a house was purchased 5 times in a 10 year period (possible with all those people "flipping houses" in the past), and they have to loan/create money each time, even if the original purchase price never changed, they've created at least $200,000 from nothing just for those purchases, and there is still only the one original asset.

When I say at least $200,000, Person A borrows $100,000 to buy a new house. After two years, Person A sells the house to Person B, who borrowed $100,000 to purchase the house. Person A then settles the debt by giving the bank the $100,000 they received to pay off the loan. So if Person B went to sell to Person C, there wouldn't be any real requirement to create another deposit, because Person C borrows the $100,000 from the bank that was returned by Person A.

This still leaves us with double the money in the system. Also, when you factor in rising house prices, more and more money has to be created to resell that one asset at the inflated price. In the event of a default, the bank "keeps" the house, and then has to create another $100,000 (or more) for the next purchaser (because the money wasn't returned). However, that money went somewhere else, and thus we're creating more money again against that one asset.

That's the main problem. Infinite money created against a fixed number of assets.

soccerballtux's picture

the money from Person A was extinguished when the loan is paid off because the bank doesn't get to keep the Asset (house) backing that debt when the debt is paid off. The Asset is transfered to Person A, who transfers it to Person C in exchange for the money.

I don't get what you're saying.

soccerballtux's picture

Hm, why must the bank back up that IOU? Why can't they create that cash out of nowhere?

 

Can you explain what happens in #6 to the interest that was paid ("but that's another subject")?

 

I need to understand these things better before I can discourse.

The issue we have with the Federal Reserve is that it creates $1000 to purchase a $1000 TBond from the government, yet the government has to pay back $1000+interest that was never created. As a result a 2nd TBond must be created, carrying its own interest, to pay back the interest in the first bond that was never created. Hence the impossibility of being debt free.

zhandax's picture

Someone may have hit on this down post, but I don't have the patience to read more than one page of comments.   What is missing here and what Max is overlooking is that the banks securitized the loans they made.  IOW they converted those loans into marketable securities.  Not all the banks had the sense to sell all this paper.  When TSHTF, the banks got big brother government to change the FASB rules to allow them to pretend that those securities with which they are now stuck are worth close to 100 cents on the dollar.   Ergo, no balance sheet impairment. 

donsluck's picture

So true, so simple. EXCEPT, you just admitted they got bailed out and hence, LOST NOTHING!

Ar-Pharazôn's picture

idiot, read, learn, understand..........................