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Politics : Mainstream Politics and Economics -- Ignore unavailable to you. Want to Upgrade?

To: grusum who wrote (6784)	1/12/2012 11:19:56 PM
From: Little Joe	Read Replies (1) \| Respond to of 85487

I wrote "and to try to understand the inevitable depressions that must occur in a fractional reserve banking system, which by its very nature results in a depression." To which you replied: "i have to disagree here LJ. without fractional reserve banking, our economy would be less productive. less production would mean fewer jobs and lower pay. loans would be much harder to come by. there would be no interest on bank deposits. instead, you'd have to pay to keep your money in a bank, because your deposit money couldn't be used to fund loans" Under a fractional reserve system banks create what I call debt money, by effectively just creating money i.e. debt out of thin air. If a bank makes lends you money for a mortgage you likely over the course of 30 years, will pay more than 100% of your principal over the life of the loan. Except for coin all money is debt, the creation of debt increases the money supply and the payment or liquidation of debt reduces the money supply. If banks lend at interest that loan must be repaid so to oversimplify, if the total money debt in an economy is $100.00 and the interest rate is 5% you are required to repay 105 dollars. Where does the extra 5% come from. The answer is by creating more debt and then there is interest on that debt which must be paid and requires the interest of more debt, this goes on until we reach a point where the amount of debt is unsustainable and defaults start to occur. There are two ways debt can be eliminated, either debtor pays it off, or the creditor is stiffed resulting in a liquidation of the debt. If either of those happens the money supply is reduced and we have the reverse of what occurred during the debt accumulation period. That is why we have had never ending inflation. If we stop creating the money the whole system collapses at some point. While the FED , not the FDIC, did allow the reduction in the quality of loans, and decreased the reserve rates, it did so largely to avoid economic collapse. If the FED had stopped or reduced credit creation in a meaningful way this would have occurred sooner but been a much milder depression, maybe just a recession. While you pointed out the advantages of the fractional reserve system, there are many disadvantages in addition to those noted above. Another consequence of the system is that an inordinate amount of money is redistributed to banks and other financial entities as interest payments begin to consume more and more of the economy. This is exactly what we are experiencing today. We aint getting out of this without a lot more pain. We need a monetary system that rewards producers not rent seeking banks that are licensed to profit from people who do produce. lj