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Money is Debt; Debt is Money

Updated on September 27, 2017
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Trading the Forex and Binary Options Markets, for the enjoyment and profits, experienced some downsides but it's all part of the course.

So you think you know where money comes from, I bet if you were to reach into your wallet or purse and took out a £5 or £10 note, even £20 or £50 if you’re flus

Or you think that money is produced by depositors putting their money in the bank who then lend that money out to people via a loan.

Well that’s what we are led to believe, however the Banks have been playing a clever game, so clever in fact that not many people know the real way money is created and the banks get rich from creating money from thin air.

No really, Banks create money from thin air, however all money is produced as debt.

Let me try and explain this:

Imagine a land with no money or bank, so I create the lands first bank to create money to use as a way of exchanging for goods, I the bank of Gaz create with the flick of a pen on some paper £100, the first £100 of money into existence, I then give that £100 to a shopkeeper or farmer to use, straight forward so far.

But this is where it gets interesting, when I gave the £100 to the farmer or the shopkeeper I asked for the £100 to be paid back with interest, in fact let’s say 10% interest to keep things simple, so in total I want £110 paid back to me. But where is that extra £10 going to come from, because I’ve only created £100 not £110?

This means I’m going to have to create another £10 to put into circulation; but I now want 10% interest on that £10 also. So now the original £100 can be paid back with interest, this still leaves £10 to be paid back including £1 interest, but again we end up in the same situation, more money will now have to be put into circulation, thus creating more debt.

You see the £5 or £10 you have hold of, yes it’s money to you, however that money is somebody else’s debt , someone somewhere is paying interest on the very note you have in your hand.

It would be impossible for everyone in the world to pay off their debts as there is not enough money in the world to pay it off, someone has to default , and the debt would remain, it’s impossible for the debt to be cleared.

So the bank lent you the money to buy your house, you may want to rethink that meaning of money lent to you bit.

When you go to the bank for a mortgage (or any loan) the bank agrees to “lend” you the money to buy the house, except it doesn’t lend you any money, it creates debt in your name.

Another example:

Mr Smith wants to buy a house and decides to ask the bank for a mortgage to buy Mr Jones’ house, the asking price Mr Jones wants is £100,000 (let’s keep it simple)

The bank has agreed to “lend” Mr Smith the £100,000 to buy the house, except the bank doesn’t lend him anything, they don’t go into a vault and count out £100,000 to give to Mr Smith, instead what they do is once everything has been agreed and Mr Smith has signed on the dotted line, the debt is created, the bank will go into Mr Jones’ account and credit his account with +£100,000 then at the same time will also go into Mr Smith’s account and type minus -£100,000 and so £100,000 has been created as debt.

No doubt that £100,000 will have come with an agreement that states Mr Smith will have to pay that £100,000 back to the bank plus interest of 10% (keep it simple again), so Mr Smith will have to pay back a total of £110,000 over a period of say 25 years which is the usual time period for a mortgage.

So now Mr Smith has to go out and spend the next 25 years working to earn money from the money supply as mentioned earlier to repay the bank £110,000.

For Mr Jones, he now has £100,000 to spend into the economy (perhaps Mr Smith will receive some of that money through work and use it to repay the £110,000). But now this is where the banks create more money and turn £100,000 in to £1 Million using Fractional Reserve Lending

How Banks use Fractional Reserve Lending

The Banks are allowed to reserve only a fraction of your deposit and can loan out the rest

  • Mr Jones has the £100,000 in his account or savings account
  • The bank can lend £90,000 of that out in the form of car loan/credit card loans and keep the remaining £10,000 (10% of the £100,000 in the vault) Mr Jones’ account will still say £100,000
  • So now there is £190,000 in the money supply
  • The borrower of the £90,000 takes the money and pays the seller of the item (a £90,000 car) and the seller of the car pays £90,000 into his account
  • His bank then lends out 90% of the £90,000 leaving 10% (£9,000) in the vault and so now there is £271,000 in the money supply.
  • The borrower of the £81,000 then takes the money and pays the seller of the item and the seller pays the £81,000 into her account.
  • And her bank then keeps 10% (£8,100) in the vault and lends out the remaining £72,900 so now the is £343,900 in the money supply,
  • The process keeps going and going until £1Million is created from £100,000.

And don’t forget, the banks are earning interest on the £1 Million.

£1 Million which can’t all be paid back without the bank creating more debt from other people taking out loans and putting more money in to the money supply.

© 2017 Gaz Trader

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