It’s “Money in Circulation” Stupid.
During the 1991 recession (if you can call it that) Bill Clinton made a campaign issue of “It’s the economy stupid.” It’s true, it is all about the economy. But it’s also a little more fundamental than that. It’s something that people have known intuitively for centuries. In a good economy, there was always “plenty of money” and in hard times it was “money is scarce”. Things haven’t changed, except that now those responsible for money creation are intentionally clouding the picture with all kinds of economic jawboning (dutifully reported daily by the media) to create a paranoia of both hyperinflation and deflation.
In our system of money, the private banking system is solely responsible for money creation. Their only means of getting money in circulation is by creating a debt or a loan and lending new money to a borrower. There is no other way. Consequently and conversely, money is destroyed when loans are defaulted, foreclosed or bankrupted. Virtually all of our money in circulation today is “owed” back to the banking system in the form of a loan from a bank.
Imagine what would happen to money in circulation and to our economy and our standard of living if people and companies simply didn’t want to be in debt at all anymore.
Recently, money in circulation boomed during the dot com craze of the late 1990′s when people borrowed massively to “leverage” and “margin” financial assets. They borrowed more money to buy more stuff. Conversely, Money in circulation collapsed when the value of the “stuff” became unsustainable. Values then fell. People then had margin calls on their debt and had to sell their stuff and payoff their margin loans. Others went bankrupt when unable to sell their assets or collateral for sufficient money to repay their loans. So why didn’t the economy fall off a cliff? In order to sustain our standard of living, people went in search of another asset class to “leverage” and they found it, real estate. Once again they began to borrow money to buy more. The economy survived, but only barely, we were able to keep sufficient money in circulation to sustain a moderate economy. But our money in circulation remained hostage to indebtedness. Only this time with real estate as the collateral, there was more debt than ever.
People used to know the hazards and dangers of a “too powerful” banking system. Call them the Jacksonians, disciples of Andrew Jackson. In the nineteenth century, banks were kept largely in check after Andrew Jackson singlehandedly closed our central bank because he viewed it as a threat to our sovereignty and economic freedom. For eighty years, from 1833 to 1913, we had no central bank and our economy boomed. We surged from a colonial outback to a world trading and military power. But the banks didn’t quit. They never do and never will. In the early part of the twentieth century J. P. Morgan and friends were largely responsible for the creation of our latest and greatest central bank, our beloved (and privately owned) Federal Reserve Bank.
One of the great misconceptions of our age is that the Federal Reserve controls the money supply. The truth is far from it. The Fed can only attempt at best, to induce people to borrow more by reducing interest rates on loans, or to deter people from borrowing by raising the amount of interest they will have to pay. In a weak economy, when “money is scarce”, the Fed is utterly powerless when people, fearing economic uncertainty, simply don’t want to be in debt, or when bankers and lenders, fearing economic uncertainty, don’t want to lend their precious capital. Economists call this a “liquidity trap”, “pushing on a string”, or what have you. It all means the same thing. Our money in circulation, our economy, our standard of living is held hostage to debt. However, it need not be so. (To be continued)
Please continue. So printing more money is creating more debt? Educate me. Love, Sally
Hi Sally:
Let me try to answer your question as succinctly as I can, however, it may result in another blog post.
“Printing money” is a term used today that nobody really knows what it means. Historically it meant the government physically printed little pieces of paper which were then spent into circulation by buying goods and services the government needs. For example, in the revolutionary war, the government printed continentals to pay the troops. Allegedly, British counterfieting rendered the currency eventually worthless. Again, when New York Bankers refused Abraham Lincoln additional financing during the Civil War, Lincoln then decided simply print “greenbacks” to pay the troops. It worked and merchants accepted greenbacks because Lincoln decreed that greenbacks would be accepted by the governments for the payment of taxes. “Greenbacks” remained in circulation for decades and largely contributed to subsequent economic growth.
Today, 98 percent of all money is electronic blips or signals recorded on the computerized ledgers of the banking system. Obviously printing money really doesn’t happen anymore. Money creation is a more apt term. Money is created when a bank makes a loan. Presto. That’s it. I already know that you’re going to ask how that creates money if they are just lending money that someone else deposited with them. The answer is that the banking system can create new loans of up to 10 times the amount of deposits (reserves) that they have on hand. At present, our banks are required to maintain cash reserves of 10% of its demand deposits. With a reserve requirement of 10%, the banking system may create new money of up to $1,000 from an initial deposit of only $100. It’s called fractional reserve lending. How does this work? The Federal Reserve explains it the best:
Nifty huh? The problem arises, as I wrote in my post, when people and companies fearing future uncertainty don’t want to borrow or be in debt and when banks fearing future economic uncertainty and loan defaults, don’t want to lend anymore. The reverse mutiplier effect kicks in and the money supply collapses as loans get paid off. Because we’ve abdicated control of our money supply to a private banking system, all of our money in circulation originated as a debt and vanishes when the debts vanish. We have no equity money, debt free money, such as Civil War era greenbacks, in circulation.
So in answer to your question, printing more money does not create more debt, it is debt that prints (creates) money. No more debt, no more money. The Fed and the administration are fit to be tied trying to create debt and money by keeping interest rates at zero and spending humongous deficits, but it ain’t happenin’ very fast. There’s ways to do it, but none that are considered morally acceptable by the corrupt banking system which, candidly, veritably owns the congress and the administration and is not likely to give up their power and control over the money supply regardless of how much harm they cause to people and the economy.
I hope this helps and didn’t confuse you more.
Thanks and love,
Joe