Topic: Basics of the Current Monetary System (Read 304 times)

There are a lot of basic misunderstandings which are widely held. Such as when you say printing money - most people believe the government or the Fed are responsible for the majority of new money being printed, when actually upwards of 90% is created by banks handing out loans. These loans are only indirectly controlled by the Fed, by them setting interest rates, reserve requirements, etc.

You also mention fractional lending. Most people believe that banks can only lend out x times the amount of money they have, depending on the reserve requirements set by the Fed. Not only are these reserve requirements 0% (and not 10%, as most people still think), but reserve requirements were never a restriction on how much banks can lend.

People talk about 1 or 2% pay rises, when really they should be talking about pay cuts, because they don't understand inflation. People don't understand the deficit, or the debt, or the debt ceiling.

The bottom line is easy to understand - your fiat is steadily worth less and less, your wages are steadily going down, your purchasing power is steadily eroding, all while bankers and politicians become richer. But the convoluted route that it takes to arrive at that conclusion is anything but simple.

Seriously, I do not think this is complex at all.

Seriously, I do not think this is complex at all. You have monopoly money that can be printed and a system to get it back when it suits you. Usually, that means nearly never gets called back.

Interest rates... what's difficult? It is the price of borrowing money, not that complex to understand right? An on regards to fractional lending, it means that the bank can lend more money than it really has - Is there anything I am missing.

You what is difficult for me? That after knowing all this facts, there is still people that argue that "bitcoin is not as good a money"

Seriously, I do not think this is complex at all.

Interest rates... what's difficult? It is the price of borrowing money, not that complex to understand right? An on regards to fractional lending, it means that the bank can lend more money than it really has - Is there anything I am missing.

Right now it is behind a bunch of paperwork, but with blockchain it would be easier to see what they are spending money on.

Plus, we get to see their wallets as well and how rich they are getting from stuff, if they hide it then it is illegal

we put them in jail or take all their money

Bitcoin is not a magic bullet which will instantly fix all the corruption and ridiculous monetary policy present in Washington. Theoretically, it would prevent the government (and banks) from lending money they don't have, but that's only if people hold their own bitcoin and don't rely on third parties. If I want to take out a loan and hold the bitcoin in my own wallet, then obviously the bank has to send me real bitcoin which they own. If I take out a loan and am happy to hold my bitcoin in a bank wallet or accept some fake wrapped bitcoin or pegged token, then there is nothing stopping them from continuing with the fractional reserve system.

Everything begins when the government starts creating bonds. These bonds are essentially meant to be sold with an interest. It's like saying “Hey, give me some trillions of dollars and I'll pay you back in a decade plus an interest”. These bonds are our national debt, because we're the ones who're going to pay them in the future.

The bond is then auctioned and the world's largest banks buy it to receive the sweet interests. The banks then swap those IOUs with the Federal Reserve's checks which brings money into existence. It looks like this:


So what's actually happening is that the FED and the treasury swap IOUs (checks & bonds) with banks as middlemen. This process continues repeatedly enriching the banks and indebting the public by increasing the national debt.

When you're depositing money in a bank, you shouldn't imagine that they're keeping those money in a safe closet. Instead, they loan it to other people, so you should consider that you're actually loaning them your money.

Now what's fractional reserve lending... It's exactly what it says. The banks are allowed to reserve only a fraction of your deposit and do whatever they want with the rest of it. According to Modern Money Mechanics the reserve ratio is 10%, so let's use this simple percentage in our example.

Let's assume you deposit $1000. The bank can now take $900 of those and lend them to someone. It is reasonable to think that these $900 come out from your $1000. However, that's not the case. What really happens is that these $900 are created out of thin air on top of the $1000. This is how the money supply is extended. Bare with me.

The bank creates a check (a liability) saying that you own $1000 even though, they have only kept $100 of your deposited dollars. The other $900 have been lent. Once the borrower deposits their $900 hard cash in their bank, the bank will give them a liability of $900, but will also keep only 10% of it. The bank can also lend those $810 and keep only the $90.

NOTE: The liability is an IOU. It's nothing more than that, but it is considered currency since it's used as medium of exchange instead of cash.

If we continue this further we can notice that there's always some liability which is 10 times greater the assets you deposited and your bank is keeping.

Seriously, the cash remains the same. It's $1000. But, they liability constantly rises; it's $1000 + $900 + $810 + + + ... = $10000.

As a conclusion, the currency supply expands. Specifically, around 92-96% of all the currency supply is created from this very procedure and not from the government.

Bitcoin is just the beginning of the differentiation between the government and the money. It won't lead to a better life judging with the current political behavior. Agreed?

I have read somewhere bitcoin for the currency and Bitcoin for the ecosystem / network?

what do you think about monero's potential?

Reserve requirements are (or were, before we moved to an "ample reserves" model) a way for the Fed to influence interest rates and liquidity by requiring banks to loan money from them at end of day to meet the stated requirements; they were never a method for the Feds to regulate banks' activities or dictate how much they were "allowed" to lend.

What does it mean when they say raising the debt ceiling? I have heard it on the news that Biden administration is planing to do.

Did this debt system started when Nixon take out gold in the equation or its already been there since the bank started?

Isn't bitcoin's usage suppose to discourage them due to this control loss?

At this point everyone can create money out of thin air as long as there's trust to this person. So, the root of the problem is the banks' policy. This 0% reserve requirement is disgrace. How's the things there in USA about this? Is there concern from the citizens?

I've no idea what's the proper way to spell it. Bitcoin or bitcoin? Capitalizing the first letter seems more like a licensed product rather than a scarce commodity. On the other hand, bitcoin is the unit we've agreed on and it may bring confusion.

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When the US dollar starts experiencing hyperinflation, where do they turn instead?

Kind of, but banks do not need deposits or a set amount of deposits before they hand out loans. Bank loans create new money out of thin air.

But, why would they legalize and enforce Bitcoin usage if they continued using a fractional reserve system?

Correct me if I'm wrong, but such system works only if there's demanding for new loans AND available reserve from the clients' deposits.

Amazon paid zero federal taxes so many years, or so that is what I have been told at least, which means there must be so much tax that is gone just because they do not pay federal taxes, not just amazon but god knows how many companies.

the only real outcome is the debt continues to increase. As a percentage of GDP, out debt is over 130%. During the Greek financial crisis back in 2010, their debt-to-GDP ratio was 150%. It will only be a couple of years before we surpass those levels. The question is how long will the rest of the world continue to have faith in a currency which, as you say, is turning in to monopoly money.

It could be a great lesson in fiscal responsibility, but more likely what would happen is that they would come up with some new fractional reserve system between various governments and central banks which would allow them to spend 100 BTC for everyone 1 they actually hold.