Most Debt isn’t “Real” but You`re still Screwed

Everything you think you know about money is a lie.  Well, mostly.  What they teach you in school is a fairy tale about barter and gold and silver coins and how great it is that we now have the magical, rational system called the Federal Reserve which makes everything work!  No one explains how money is “created” and who benefits and who gets screwed.  Let’s just say that none of you reading this are likely to be getting any benefit.

Just as we imagine we know how money “works,” we typically think we understand what credit and debt mean.  Sadly, most people carry quite a bit of debt and so do most large institutions like our national government.  But who lends us this money and how come they never seem to run out?  Ever notice that?  It is always your credit score that determines whether there will be a loan, never whether they have the money to lend you in the first place.  Where is all this money coming from?

The simplest model of a loan is where person A has something of value and agrees to lend it to person B, if that person agrees to pay them back, typically with a little extra for their trouble, otherwise known as interest.  When we think about a bank lending money, we imagine it working the same way.  Because people deposit money in a bank, they are able to lend out a certain portion of those deposits, allowing them to earn an income, as well as paying their depositors some nominal interest.  But that`s where things get complicated.

It is true that banks are required to keep a small percentage of deposits “in reserve,” mostly for accounting purposes, but they lend out the vast majority of them.  And, when those funds are lent out, where do they go?  In almost all cases, they end up being deposited in another bank.  So guess what?  Now that the second bank has additional reserves on hand, they can now lend out more money,  And that money ends up in another bank.  And so on.  And so on.  So the money the individual depositor worked for has now been multiplied many times over by the banking system, even though nothing productive was done other various accountants entering figures in a ledger.

Not so surprising now that banks always seem to have money, is it?   And that’s not even the best part.  No, the real magic involves how the interaction between central banks and the Federal government ends up creating even more money out of thin air.  I will try to explain that process in part two of this article but, for now, recognize that all money is created from debt and particularly from US Bonds, almost just like the ones Grandma gave you. Again, that money comes into existence, not because some valuable resource was found or created but simply with the stroke of a pen.

Curiously enough, you and I may be receiving “funny money” when we take out a loan but the things we buy with that money are very real (usually) and the interest and principal you have to pay back are very real (always.)  But who are we actually paying back?   Why do certain people and institutions get a lien against our assets and future labor when they, in fact, didn’t lend us anything “real?”  It’s quite a racket and, yet, the structure and stability of our whole system is build on this racket.  

The old saying about the national debt was that it was no big deal because we owed it to ourselves.   Maybe so up to a point.  But isn’t it equally valid to say of all debt that it is no big deal because banks lend us resources they don’t actually have to lend in the first place?  And then expect us to pay it back with our blood, sweat and tears?  But that’s none of my business, right?

We`ll continue our fearless foray into speaking truth to power next time as we discuss the national debt and the Federal Reserve and who the wins and who loses in our current system.  Until then, thanks for reading and have a great week!

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