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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: John McCarthy who wrote (87933)	9/2/2007 7:59:04 PM
From: The Vet	Read Replies (1) \| Respond to of 306849

Hi John, I agree that is all seems rather crazy, but I really think that the whole mechanism of a fiat currency which can be created at will by debt, combined with fractional reserve lending is rather weird if you start the examine it. The whole concept only works if there are strict controls on the generation of new money, and I am starting to believe that there are no such controls since all lenders are effectively allowed to generate money and profit by the interest on that money. The system is governed by rules set down by the CBs, but inventive bankers and financiers have managed to circumvent or ignore those rules. Obviously the 40 trillion or more in various derivatives are not "real" money and those trillions have never been issued or authorised by any CB or government. So where did they come from? I know that someone will jump up and tell me that most of those huge sums actually net out to much less as they are just opposing balancing positions. However in the event of a major default of one side, the money suddenly becomes real in that each counterparty suddenly is left with either an unpayable debt or an uncollectable profit depending on which side defaulted. The numbers are so huge that they will swamp legitimate trade and commerce with what was only financial fiction! Obviously if every individual or organisation could create fiat currency at will the monetary system would be unworkable. If only a single authority was given that power, providing they were a responsible, benevolent dictator it may work, but once they delegate that right to others then we have started the rot. It's pretty easy to see that in an expanding economy, money supply has to expand either in quantity or quality to accommodate the needs of business and legitimate commerce, but generating money by debt to cover the "double down" bets of the derivative players must be folly. Either you need more dollars or each dollar has to be worth more. Increasing the "quality" of money is hugely detrimental to borrowers as it increases the burden of repayment. That is one way to define deflation. Increasing the quantity of the money is detrimental to lenders because it reduces the value of their savings and loans. The borrower benefits as he repays in "cheaper" dollars. That's simply inflation in my book. However if an economy is to expand then more money has to be created not only to allow that expansion but to generate sufficient surplus to repay the interest accumulating. It seems almost invariable that some inflation is essential and deflation is the result of poor management by the central banks. Gold is looking better all the time...