Something not right with the financial system ?
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The document explains the complexities of the U.S. economic system, particularly focusing on how money is created through government deficit spending and the role of the Federal Reserve Bank. It discusses the cycle of bond issuance, fractional reserve lending, and taxation, highlighting that a majority of currency supply results from lending, which leads to inflation and increasing debt. Ultimately, it critiques the system as a scam that disproportionately benefits the wealthy and poses risks of eventual economic collapse due to unsustainable debt levels.
Something not right with the financial system ?
- 2. This is a well kept secret for years . Most people feel there is something wrong with their national economy and even the world economy . Things don’t seem to be as simple as they are in academics . Learning this would definitely impact you for the choices you make and if enough people learn it , it will actually change the entire system , a system that is a scam . Everyday things are going out of control and only one in a million know why ?
- 3. I will try to break it down for you in the simplest way possible . Lets take USA as our example for me to explain this system . Most people don’t understand how money is created . Economists and Bankers make it sound very complex and so we don’t bother to understand .
- 4. It all starts with politics . A politician to win the election promises about more services and developments in the country . All the services and developments come at a cost . So now the Government has to make deficit spending ( spending more than your income ) . For this excess spending the Government asks the US Treasury to issue bonds .
- 5. Bonds are nothing but glorified IOU ( I Owe You ). Bonds are debt instruments . The Government raises money by issuing bonds . Bonds are a promise made by the Government to its creditor to repay interest and principal amounts at a specified date or at the end of the tenure of the bond . Treasury Bonds are nothing but national debt . Issuing a bond is nothing but stealing prosperity from the future and spending it today .
- 6. The Treasury bonds are sold at an open auction where the biggest banks bid for the bonds . They are actually buying our national debt and make profits out of it by receiving interest . Things are pretty reasonable till here but now the actual complexities begin .
- 7. The Federal Reserve Bank is the central bank of USA. Through open market operations the Banks get to sell some bonds to the FRB at a profit. The FRB buys these bonds by writing a cheque which is another IOU .
- 8. Technically the cheque should 100% bounce because the cash balance at FRB is ‘0’ . There is not one single penny in its account. Right here with that cheque, currency is created and banks with that money again buys the US Treasury bonds . The same process repeats every single time and currency is created in every process . The end result is that there is a pile of bonds with the FRB and ample cash with the US Treasury .
- 10. Initially every currency was backed by gold . So if you go to the bank you could get proportionate amount of gold for say $20 bill. So the $20 bill had a store of value and currency cant be printed whenever we like. These norms have changed and there is no gold backing required to print more currency. This will prove to be devastating in the long term .
- 12. Now the currency that the US Treasury has is transferred to the Government and it starts its deficit spending on infrastructure , social projects and most importantly War. This then creates employment which seems very well for a while. The people of the country then deposit the money they earn in the banks.
- 13. Banks follow a system called Fractional Reserve Lending which states that a specific % of people’s deposits must be kept with themselves and they can legally do whatever they want with the rest of the deposits. Most people don’t understand the consequences of this process.
- 14. For eg. Lets assume the FRL rate to be 5% for simplicity, however for some deposits its lower than this. If you deposit $100 , the bank keeps $5 as vault cash and lends $95. So in this process there are only $100 involved. But if you see the money supply it will be $195 ( $100+ $95 ) because $95 is not kept with the bank but given as a loan, so that money will be circulating in the economy. This increases the velocity of circulation of money. Velocity of circulation of money is the number of times money changes hands in the economy.
- 15. The person who took the loan would purchase something with those $95. Lets say he purchases a car. The seller of the car now deposits those $95 with his bank. The bank again keeps $4.75 as vault cash and lends $90.25. So now the money supply is $285.25 ( $195+$90.25 ). This process gets repeated until under a 5% reserve ratio, an initial deposit of just $100 can create up to $2000 worth of bank credit all backed by $95 of vault cash.
- 16. In fact 95% of all the currency in the economy is created here in this process and not by the government. Such supply of money in the economy may sound as prosperity but it isn’t. It gives birth to Inflation which is the biggest problem that an economy might have to face. Inflation is rightly defined as an expansion of the currency supply. Rising prices are merely the symptoms.
- 18. So all of this starts with the transfer of bonds and currency between the banks US Treasury and FRB and ends with the Fractional Reserve Lending process. Well broadly this is the entire currency supply of an economy
- 19. What we are forgetting is that our income is taxed. We contribute to a fraction of that currency supply. We invest our time and effort for contributing to the currency supply. We are the working force so we are what gives the currency its value.
- 20. We earn and save our money for the very reason of paying taxes. In USA the Internal Revenue Service collects the taxes and transfers it to the US Treasury so the Treasury can pay the interest and the principal on the bonds that the FRB owns which they purchased with a cheque drawn on an account that has no balance in it. This is exactly where the system starts robbing us.
- 21. As a matter of fact , before the establishment of the FRB there was no need of paying personal income tax. The FRB was created in 1913 and that very same year the constitution allowed the collection of personal income tax. This couldn’t be a co-incidence.
- 22. There was interest due on the bonds and there is interest due on the loans that were given by the banks. We understood earlier where currency is created in the process which includes FRB , US Treasury and Banks. So practically there is interest due on every dollar in existence.
- 23. Borrowing only leads to more borrowing. For eg. If you borrow the only dollar in existence and promise to repay it with interest you will eventually have to borrow more. Say you borrowed $1 and promised to pay $2 i.e principal + interest, how exactly are you planning to return the interest i.e $1 ? The answer is you borrow more and this process never ends.
- 24. The repayment of just the principal amount of the borrowing would deplete all the currency. The system works like this. The people in the system every year just rise the debt ceiling. This is finite and will end someday but the political figures don’t want it to end on their watch.
- 25. Now here’s the biggest con job of all , the FRB is not federal but has owners or stockholders. There is no federal agency that can have a stockholder. On top of it the FRB pays its stockholders a 6% dividend, this is insane. The stock in the FRB was originally issued to the largest banks in the USA but overtime due to a lot of mergers and acquisitions it is very hard to trace the real owners of the FRB. It is very likely that the banks that purchase bonds from the US Treasury and sell it to FRB could be the real stockholders of the FRB.
- 30. The primary dealers or the big banks make a profit by selling our national debt ( bonds ) to the FRB , they make profit by receiving interest on the reserves with the FRB and the FRB pays the stockholders a 6% dividend for its ownership.
- 32. This system fundamentally doesn’t make sense. All the currency in the economy rotates around the rich and this creates unequal distribution of wealth. Well the Government decides the tax rates and the tax rates have been increasing ever since. How are these tax rates decided ? Maybe these tax rates are calculated in a way to pay off the principal and interest on the bonds as discussed earlier.
- 33. How are these tax rates decided ? Maybe these tax rates are calculated in a way to pay off the principal and interest on the bonds as discussed earlier.
- 34. The Debt to Tax Revenue Ratio of USA is roughly between 406 % - 408%. Portion of Tax Revenue used to pay off the interest and principal on the bonds increased from 17% to 26%.
- 35. Now either USA has to increase the taxes or use more and more of its tax revenues to pay out the debt. Not very soon though but theoretically USA would eventually default if it continues this same practice.