Central banks, the financial system, and money formation (and deficits)


In a market economy, the financial system gives money from positive savers (i.e., depositors) to passive savers (i.e. people who are short of funds and need loans to purchase real estate, etc.). Moreover, financial systems facilitate cashless payments. From individuals or legal entities.

The financial system has a monopoly on services under the law. Only banks can accept deposits, only insurance companies can provide insurance services and mutual funds can be better managed with a large bank rather than an individual investor.

How is money created

In the past, one of the reasons for the power of the ancient Greek states was the ability to create their own currency. In the time of Pericles, the silver drachma was the reserve currency of the era. The same applies to the gold coin of the Philip from Macedonia. Each of these coins could have been exchanged for a certain amount of gold.

Nowadays, the Fed creates the US dollar and the euro from the European Central Bank, which are both paper money i.e. money without intrinsic value that has been identified as real money by government regulations, and therefore, we have to accept it as real money. Central banks trade coins and paper money in most countries representing only 5% -15% of the money supply, the rest being virtual money, and enter accounting data.

Depending on how much money central banks create, we are in crisis or have economic development. It should be noted that central banks are not government banks but private companies. Countries gave the right to issue money to private bankers. In turn, these private central banks lend the states at interest and, thus, have economic and of course political power. The paper money in circulation in a country is in fact public debt, that is, the countries owe money to private central banks and the repayment of this debt is ensured by issuing bonds. The guarantee that the government gives private central bankers to pay off debts is taxes imposed on the people. The higher the public debt the higher the taxes, the more the common people will suffer.

The heads of these central banks cannot be dismissed by the governments nor do they report to the governments. In Europe, they report to the European Central Bank, which determines the monetary policy of the European Union. The European Central Bank is not under the control of the European Parliament or the European Commission.

The state or the borrower issues bonds, in other words, accepts that they have an equal amount of debt to the central bank which on the basis of this acceptance builds money from scratch and lends it at interest. This money is loaned through the accounting entry, however, the interest rate is not present as money in any way, it is only on the obligations of the loan contract. This is the reason why global debt is greater than real or accounting debt. Therefore, people become slaves because they are forced to work to obtain real money to pay off debts, whether public or individual debts. Very few of them managed to pay off the loan, but the rest went bankrupt and lost everything.

When a country has its own currency, as is the case in the United States and other countries, it can “compel” the central bank to accept state bonds and lend the state at interest. Therefore, state bankruptcy is avoided because the central bank acts as the lender of last resort. The European Central Bank is another case because it does not lend to the member states of the Eurozone. The lack of safe European bonds leaves the eurozone countries at the mercy of the “markets” that, through their fear of not getting their money back, are charging high interest rates. However, European safe bonds have recently gained gains despite differences in European policymakers, while the Germans are the main reason for the lack of such bonds as they do not want national commitments to be single European liabilities. There is also another reason (perhaps the most risky) that by owning this bond the euro will be devalued as a currency and the interest rates on borrowing in Germany will rise.

In the United States, things are different because the country borrows its own currency (the US dollar) from the Federal Reserve, so the local currency is devalued and thus the value of the state’s debt is reduced. When the currency is devalued, the products of a country become cheaper without lowering wages but the imported products become more expensive. A country with a strong primary (agricultural) and secondary (industrial) sector can become more competitive by owning its own currency provided it has its own energy sources, i.e. it must have sufficient energy. Banks with deposits ranging from $ 16 million to $ 122.3 million have reserve requirements of 3%, and banks with deposits in excess of $ 122.3 million have reserve requirements of 10%. Therefore, if all the depositors decide to take their money from the banks at the same time, the banks will not be able to give it to them and the bank is established. At this point, it should be noted that for every US dollar, euro, etc. deposited in a bank, the banking system creates and lends ten. Banks create money every time they make loans, and the money you create is money that appears on your computer screen, not real money in the vault of the bank that lends it to. However, the bank lends virtual money but gets real money plus interest from the borrower.

As Professor Mark Job mentioned, no one can escape paying interest rates. When a person borrows money from the bank, he / she has to pay interest rates for the loan, but whoever pays taxes and buys goods and services pay the interest rate to the primary borrower as the taxes have to be collected to pay the interest rates on the loan. Public debt. All companies and individuals selling goods and services are required to include the cost of loans in their rates and in this way the whole society supports the banks even though part of this subsidy is given as an interest rate to depositors. Professor Mark Job continues and writes that the interest rate paid to the banks is a relief to them because the legal / accounting money they create is legal money. This is the reason why bankers have such large salaries and that is why the banking sector is so huge, because society supports the banks. In terms of interest rates, the poor usually have more loans than savings while the rich have more savings than loans. When interest rates are paid, money is transferred from the poor to the rich and, therefore, the interest rates are favorable for wealth accumulation. Commercial banks earn from investments and from the difference between deposit interest rates and loan interest rates. When the interest rate is added regularly to the initial investment, it brings more interest due to the presence of compound interest that greatly increases the initial capital. Real money is not increased per se because this rate of interest is not derived from output. Only human labor can create an interest rate of increasing value but there is downward pressure on the cost of salaries and at the same time increase productivity. This happens because human labor needs to satisfy exponentially increasing demands of compound interest.

The borrower has to work to get the real money, in other words, banks lend virtual money and get real money in return. Since the loaned funds are larger than the real money, banks must create new money in the form of loans and credits. When they increase the amount of money, there is growth (however, even in this case with the increase in the specific banking and monetary system debt) but when they want to create a crisis, they stop making loans and due to lack of money so many people go bankrupt and depression begins.

This is a “smart trick” devised by bankers who have noticed that they can lend more money than they have because depositors will not take their money in full and at the same time from the banks. This is called fractional bank reserve. Quickonomics’s definition of fractional reserve banking is as follows: “A fractional reserve banking system is a banking system in which banks keep only a fraction of the money that their customers deposit as reserves. This allows them to use the rest to make loans and thus essentially create new cash. Commercial has the ability to directly influence the money supply. Indeed, although central banks are responsible for controlling the money supply, most money in modern economies is created by commercial banks through fractional reserve banks.

Are savings protected?

In the case of Italian debt as in the case of Greek debt, we have heard from politicians (employees who are already paid by bankers) that they want to protect people’s savings. However, are these savings protected in this monetary and banking system? The answer is simple no. As mentioned, banks have low cash reserves. This is why they need the trust of their customers. If there is a bank, they will run into liquidity problems and go bankrupt. There are deposit guarantee schemes that, under European Union rules, protect depositors ’savings by guaranteeing deposits of up to 100,000 euros, but in the case of chain reactions, commercial banks need to be saved by governments and central banks acting as lenders to the latter. Shelter.

What’s Next?

The economic system shaped by the power of the banks is not viable and does not serve human values ​​such as freedom, justice and democracy. It is illogical and must be changed immediately if humanity is to survive.