Common Cents Matters

Its important before we go further to understand the source of all wealth.

All wealth, all value, has two creations.

First it is created in the mind, then and only then, is it created in reality.  Nothing of value has every been brought into this world without first being brought into mind.

Take some time to think about that and its implications.  Everything of value you see on this earth, at one time came from the thoughts of a person’s mind.

All wealth and creation of value flows from the mind.  The mind is the key to creating wealth and prosperity.

What does this mean?  Well first lets look at what it doesn’t mean.  Does it mean I can sit back in my chair, check out in life, and use my mind to think myself into wealth?  The answer is no.  Remember there are two creations.  Creations in the mind are meaningless until manifested in reality.  Think about it.  If you’re a farmer and you think of a tool that can be made with common resources readily available, but you don’t take the time to build that tool, will you ever reap the efficiencies of that tool?

No of course not.  So, now we know that to create wealth, we must first use our minds to create something of value, and second we must then actually create the thing we thought of.  The vast majority of people stop at the idea stage.  They have an idea, but don’t bother to follow through on its creation.  Actually, that lack of follow through means a great opportunity for those who are willing to follow through.  It also means that you don’t even have to come up with your own idea.  If someone else creates an idea in their mind, but isn’t willing to bring it into reality, you can capitalize on it and do it yourself. Excellent!

A couple caveats.  In order to truly create one must create something that has a net gain in value.  For instance, the furniture maker can take a bunch of pieces of wood, which are available in abundance and build a piece of furniture whose value is much greater than the sum of its parts individually.

This concept is called synergy.  When the whole is greater than the sum of its parts.  The math looks like: 1+1+1=20!?  Yes, 20 is quite possible.

In the case of our new internet age, one can literally take electrons, which are one of the most abundant resources of all time, and create things with billions of dollars of value.  A website at its core is just electrons moving around.  There are basically no costs in raw materials.  The biggest cost is only the time it takes to actually build it.  This has huge implications.  It means 0+0+0+time can = 20, 100, or 10,000,000,000.

Wealth is only limited by our imaginations.  Raw materials appear limited, but they can be reorganized in a numbers of ways approaching infinity to create all the wealth and value we’ll ever need.

Ok, ok, that sounds great.  The theory seems sound, but what practical application does this have to life??

I’m glad you asked.  I’ll tell you.

It has vast implications for life.  Today’s economy is rough right?  I won’t get into all the details, but one of the basic problems is in the money system itself.   But what our previous conclusions tell us is that wealth is not limited by money.  Wealth is not bound by money.  Wealth is attached to the infinite.

If I had an economy of 10 dollars, which created 10 widgets, then each widget is worth 1 dollar.  If I was able to produce 10,000,000 widgets with the same 10 dollars, then each widget would simply represent a much smaller fraction of the whole.

Wealth and dollars are unrelated.  Dollars simply help to compare relative values, they are not the values themselves.  The value substance that money represents is unlimited.  So while dollars and other means of exchange must by definition have a limit, the underlying value that it represents is limitless.  No lack or abundance of money can limit the ability of man to create value.

While the money supply contracts and credit is being denied, prices are in flux adjusting to the new total money supply level.  However, no matter what the economy is doing we can still create, we still have the ability to tap into the infinite and manifest value in the finite.

Yes, the economy is not as free flowing as it has been recently, but opportunity abounds, and that much more so for those who can see it when everyone else is discouraged.  Take heart, seek the opportunity, and seize it!

Creating value is like rolling down a hill.  The hills represents how easy it is to create net gains.  Maybe the hill isn’t as steep as it was in the past, meaning you don’t accelerate as fast, but the overall hill is still severely downward.

Opportunity abounds, Opportunity abounds!  Learn to see it, train yourself to see it.  It’s only as difficult as one chooses to make it.  Cast aside all negativity, wish the best for all, and for yourself.  Find that thing that fuels you, that excites you and pursue it.

You want to make more money?  Think of the area that you can deliver the most value to others.  Find that area, and simply give it.  All things being equal, you will be compensated in direct proportion to the value you deliver.  Go create/deliver that value!

My brother asked the following insightful question in response to my last post.  Here it is,

“I wonder if there is enough money provided by individuals to cover the loans that banks give out. It seems like everyone is in debt. The banks then would need to have loans in order to create loans. How could you or anyone be risking money when everyone is in debt?

I don’t know a single adult person over the age of twenty two that is with out debt.

Who’s money is being risked then, when in all actuality we have less than none?”

This is a great question, one in which I was leaving for another time, but today is as good as any.  :)  What you’ve basically pointed out is another fraud in the system.  It is an important fraud, but one in which if I had elaborated on in the previous post would have taken up even more space and potentially confused the issue.  But now let us isolate this issue and discuss its implications.

What you are referring to in this question I believe, is society’s overall equity.  If everyone is in debt to a bank, how can there be any equity?  First, just because someone has debt doesn’t mean they have a negative net worth.  What I mean is that if you have 30k in student loans and a mortgage for 150k, but a house worth 200k, then you have a net worth of 20k.  Net worth is important to understand, but there is a deeper issue here.

To understand it, let us consider another thought experiment.  Let’s say we had a small society of 10 people, and there was by some arbitrary decision, 10 dollars in the economy.  All trade was facilated with these 10 dollars.  You might say there is 10 dollars of equity in the economy, since there is no debt as yet.  Enter fractional reserve banking.  Instead of keeping their dollars in their pockets or at home, the people decide to give it to one of the townspeople for safe keeping, and more importantly, for some reason, allow him to lend out 90% of the money to others.

So for arguments sake, lets say this does happen, and the banker lends out 9 dollars from the 10 he has on deposit.  Not only does he lend out the 9 but he also tells the depositors that they still have full access and ownership of their dollars on deposit.  This is the first fraud.  It is impossible for the depositor to own his deposits and have them lent out at the same time.  What I mean is, if I have 100 dollars and I choose to lend out 90 of them, I can only spend 10 of them myself.  THe rest are lent out to another person, sure they owe them to me at a later time, but I cannot spend those 90 dollars if I have lent them out to another.  Forget interest in this, this is just basic logic.  If I have a car, and lend it out to a friend, by default I cannot drive the same car at the same time, it is simple logic.

So in the scenario above, if the banker lent out 9 of the 10 dollars on deposit.  THat would mean there is only 1 dollar available for the entire town to use in their economy, but wait, that’s not right you say, what about the 9 dollars lent out?  Aren’t they now in the economy?  Yes, you’re abosolutely right, they are.  In dollar terms then, there is now still 10 total dollars in circulation.  If the banker had operated this way, the money supply wouldn’t be affected at all, 10 bucks deposited, 9 lent out, still a total of 10 bucks floating around.  Ah, but wait, what is going on here.  Who benefits from this?  All this is, is a giant redistribution of wealth.  Now, 1 dollar in the economy is “owned/controlled” by the people.  The other 9 dollars are being controlled by the banker, and potentially being charged interest on.  What does this mean, well the banker basically now has control over 90% of the purchasing power of the society and is charging interest on it.  If he shares that interest equitably with teh rest of the townspeople, it all works out, but if he keeps it for himself, which is how our banks work in the US, he can charge interst on 90% of the money in circulation, which in this case would require a 90 cents of interest paid to the banker after just one year of loaning.  That 90 cents represents almost 10% of the entire economy in just one year!  Not only does the banker earn interest off the money, but he also has control.  He can decide who “qualifies” for a loan.  If the people are smart, no one will borrow, thus short circuiting the whole thing.  In this way, though, he can control the rates and terms of all the loans, thus having incredible influence over the economy.

Now, let us back up.  What I described above, is not how our fractional reserve system actually works.  If 10 dollars are deposited, 9 can be lent out, but in our system, the 10 dollars deposited are still considered fully the depositors.  This means that at any time, the depositors can demand their full 10 dollars back, and receive them, while at the same time, 9 of them can be lent out.  As I said earlier this is a logical impossibility, made physically possible only through the fraudulent counterfeiting of additional dollar notes.  If the dollars were gold nuggets, and everyone demaned the actual nugget in any given trade/exchange, then this fraud would be impossible.  If there are 10 nuggets, it is impossible to keep them, and lend 9 of them out at the same time.  One must choose, either keep them or lend them.  Can’t do both.  However, if paper receipts are accepted instead of the nuggets themselves, then an unscrupulous person can print more receipts then what is actually on deposit.  This is exactly how our current system works.  (Why I was saying FDIC insurance is needed to make it all work)

So, through this fraud, the money supply of this small 10 dollar economy is increased from 10 total dollars to 19 total dollars, when the fraudulently loaned dollars are included.   What does this mean?  It means a lot, but first of all it means that the money supply has been increased 90%, so all things being equal, prices of everything will increase by 90%.  Again, very simply logic.  To illustrate, again to simplify, lets assume that the only good in this econmoy traded was a special book ( it has magical powers to provide all food, shelter, entertainment etc, and it does this all in abundance so you just need to own it once in a year).  Ok, its not a perfect example but bear with me.  If the only good was this special book and there was 10 dollars in the economy.  The good would naturally cost 10 dollars, because it represents the entire value of the economy.  If the money supply increased to 19 dollars, how much would the book be worht?  19 dollars of course, because again, the book represents 100% of the economy.  So whateer the money supply is in dollar terms, it will be worth all of them.

All that to show that the money supply in an economy doesn’t matter.  Whatever arbitrary size the money supply is, all goods and services will be priced out relative to the total supply.

I’m now going to fast forward a few steps, so hang with me.  I’m going to accelerate this example to its fullest without explaining along the way.  Now, lets also assume that this banker is the only banker in town.  10 dollars deposited, 9 loaned out.  Now where are those 9 dollars going to end up?  They are given to the individuals as loans, but where do they end up?  Well, they end up back at the bank right?  Whether they are spent or held, they would be in a checking account of sorts on deposit at the bank, right?  So now those 9 dollars are held at the bank.  How does this look on the books?  Now the bank has 19 dollars in deposits, 9 dollars in loans.  According to the 10% fractional system, they only need 10% in reserves.  This means a total of 17.1 dollars can be lent out, because of the fresh deposits added.  9 dollars are already lent out, so an additional 8.1 new dollars can be lent.

This process continues almost to infinity, until the eventual loan amounts are too small to matter.  When you add it all up and do the math, 10 dollars of deposits can turned into 100 dollars in an economy, through a 10% fractional reserve system.  If its a 1% fractional reserve system, 10 dollars can turn into 1000 dollars.

What does this mean?  Well, in terms of the question asked earlier.  Yes, I am tying this all back to a point.  There is still equity in the system, meaning that after all debts are paid there is still some left over.  However, as a percentage of the total money supply, at the beginning it was 100% equity.  10 dollars were owned and 10 dollars was the entire money supply.  Thus 100% equity, no debt of any kind.

In the final scenario, there are 10 dollars of equity, and 100 total dollars in the money supply.  So, this means there is 10% equity, 90% debt.

Here’s the kicker, if interest is charged on that debt, no matter how much is charged, it must be paid from equity.  You can’t pay debt with debt, you need equity.  If just 5% was charged on the 90 dollars, that would mean 4.5 dollars of equity would go to pay the interest. This means that of the 10 dollars of equity, 4.5 dollars are not destroyed, but rather transferred to those who receive the interest.  So 4.5 dollars of equity go to the bankers and everyone else must fight over the remaining 5.5 dollars of equity.

More or less, this is how our current system works.  This is why there seems to be so much debt today, because there is.  Our individuals, corporations, local governments, state government and most especially our federal government is complemeting awash in debt, completely saturated and literally enslaved by it.  For every dollar owned free and clear there are 9 dollars that must be paid back.

So, now that I think about it, you’re absolutely right Jordan, on average, we are in debt 9 times over.  For every dollar of equity there are 9 dollars of debt.  Each with its own interest payment attached to it.

Wow, of course there is inflation, without it, our debts after just two years, could completely transfer all the equity in the economy from the workers to the lenders.  A certain amount of inflation is required to devalue the money or else people would catch on and reject the system.

So to answer your question in short.  You’re absolutely correct.  There is not enough original equity money to cover the loans that are made.  Effectively, for every dollar of original equity money, 9 dollars are being created fraudulently out of nothing, lent out and then interest is being charged on them.

Let me be clear about something though.  While the debt system seems overwhelming and all encompassing, we do have options.  We don’t have to accept debt into our personal lives.  It is not easy, but it is possible to live debt free.  One has to work longer and put off consumption until they can truly afford something with cash, but it is possible.  And for those that venture this path, while potentially more difficult there is great financial reward in avoiding the enslaving nature of interest payments.

I myself, having more recently studied the matter and understanding its nature on a deeper level am even more averse to borrowing at interest than ever before.  I knew it was to be avoided before, but hadn’t considered the thought of eliminating it entirely (as much as possible) from my life.  That is where I am right now though.  Knowing the insidious nature of interest and in this case more importantly fractional reserve banking, how can I knowingly participate in it?

This gets back to my original question.  It appears that interest in this case is most definately being abused, and is having dire consequences for our society, however is interest itself to be rejected or simply the abuse of it.  I am working on a proof for that too, but for now I think we can conclude most definately, that the way interest is being used today is economically unjust.

I will have more thoughts on interest itself in upcoming posts.  Stay tuned!

PS:  Again, the challenge remains.  Please poke and prod at the material above for any logical fallacies or incorrect facts.  My goal is truth, help me cut out even the smallest semblance of deceit and leave the immovable bedrock of truth.

Hi there again.  This is my first post in a while.  I got a bit to feeling like I was a broken record talking about the same things over and over again,  but with a little encouragement from my brother and some new inspiration, I’m ready to get back into things, maybe not 3 entries a week, but enough to keep some consistent new material on here.

One of the subjects that has been on my mind recently is that of interest and its effects on an economy.

I’ve really been thinking about it and have several different areas of the matter that I’d like to elaborate on, but for now I’d like to propose a thought experiment.

Thought experiment?  Yes, thought experiment.  I love thought experiments!  We all do them, probably unconsciously.  What I love to do with thought experiments is to take big and seemingly complex problems and break them down into smaller pieces so that I can more easily examine them and get my head fully around the subject, whatever that may be.  Then I test it, poke it, prod it from all different angles, asking whatever questions I can think of to help me better understand.

Based on my thought experiments I can usually draw insights and valuable models that can be applied to real life and actually help predict the future by finding that model which best describes reality.  That is fun!  At least fun for me. 

The issue I’ve been trying to get to the bottom of lately is whether or not interest is inherently bad for an economy.  If so, why?  I can’t get into all the details right now of how I’ve arrived at my conclusions today, but suffice it to say, I believe that the facts point, at the very least, to interest being quite susceptible to abuse.  However, being susceptible to abuse is not the same as entirely wrong.  Alcohol is susceptible to abuse, but can conceivably be consumed responsibly.   Can the same be said for interest?

I’m still looking for a definitive answer to that and may never find one, however this brings me to today’s thought experiment.  Let us look deeper into this concept of lending upon increase, upon interest, upon usury or riba.

The thought experiment will deal specifically with the way interest charging has been implemented in today’s society through fractional reserve banking.  Let me say, this is potentially quite different from an economy that simply permits the charging of interest.  In our system today, whatever evils may be inherent in an interest/credit based economy, they are compounded many times over in our Federal reserve system.

Let us begin our thought experiment now.  One of the arguments against banking/lending at interest, is that the banker/lender is not risking anything.  They have no skin in the game so to speak, yet they are profiting from the transaction.  This point argues that the banker then acts as a leach/parasite to society, sucking resources from the economy without providing an equally valuable service to it.  For there is no free lunch.  Profits given to those unearned, are profits not given to those who earned them.

So to look deeper into this concept and hopefully find insight, let us consider a standard mortgage issued through a US bank.  If anyone is not familiar with fractional reserve banking, let me give a quick refresher.  A bank gets a charter from either the state or the federal government.  This allows them to take deposits.  Whatever deposits they receive, they are allowed to lend up to 90% of the deposits, keeping 10% in reserve to meet any day to day cash obligations of the depositors.  Make sense?  Hence the 10% reserve banking system.

You and I as regular Joes cannot do this.  We cannot take our friends money, tell him he has full access to all of it, and then lend out 90% of it.  We as individuals cannot do this, only banks with a state issued license/charter may.

So if I put $1,000,000 into a bank account, that bank can lend out 900,000 of it, keeping 100,000 in its reserves if I were to demand a portion or all of it back.  While 900k may be lent out, I still have access to the $1MM.  Mutually exclusive you may say.  Well that topic/issue is for another day, for now we’re just concerned with how the system currently works.  If you’re wondering if this is true, look it up if you like to verify, but that is the nuts and bolts of it.

For our experiment instead of a million dollars, lets say we have a bank with just 200,000 in deposits.  This means they can lend up to 180,000, keeping 20,000 in reserves.  So the bank opens its doors and accepts 200k in deposits.  So far, what has happened?  A banker got a charter from the state, found a building and is now accepting deposits.  Work done?  Removing the one time expenses that approach zero when distributed over time, the banker could have done all this work in a week or so’s time.  So the banker has invested a week of his time.  The depositor has deposited 200,000, which is worth 4 years wages for someone working at 50k a year, not accounting for taxes.  So the depositor has brought 4 years wages to the table.

Now the banker, being a “good” banker knows he needs to put this money to work within the law so that he can make his way.  He finds someone qualified to take out a mortgage.  The proposed mortgage is for a 200k dollar house.  The buyer has 40,000 to put down, so he’ll need a 160k loan.  That’s no problem says the banker, I can legally loan out 180,000 of my 200k in deposits.

So the loan is done and the house is purchased at 200k, 40k down and a 160k loan.

Before we go further lets take a look at a few things.  Of the total 200k used to buy the loan, where did it come from, or in other words, whose money is it being used or more importantly “risked”?  Whose money is being risked in the case that the house falls in value?  Who would lose out?

We know that the homeowner put down 40k, so that 40k is his risk exposure so to speak.  What about the 160k?  Whose risk exposure is that?  The bank right?  Well, let’s think about that.  Is it really the bank?  It is, in that the bank has borrowed, in a way, the money from the depositor, paying him sometimes a tiny amount in interest, but whose money is it really?  Not the banks money, its the depositors money.  If the house’s value fell in half, and the property were foreclosed on and sold, the banker won’t have the cash to pay back the depositor, the bank would go bust and the depositor would be the one taking the loss.  It is important to establish up front that it is the depositors money at risk, not the bankers, because the banker has none of his personal capital involved in the deal.

In reality, the bank is acting as a middleman, simply matching up someone’s savings to an investment.  So in this transaction, who is at risk?  It is the homeowner, who has 40k at risk, and the depositor who has 160k at risk.  The banker has nothing at risk.  He matches those who want to save, with those who wants to borrow.  He is a broker of sorts, making his money by matching investors and borrowers.  He makes money on the deal on an upfront fee regardless of what happens to the house in the long run.  The banker took the risk to start his banking/broker business, but in regards to this specific transaction he has no personal capital that he worked for at risk.

Ok, so far there is no judgment we are merely looking at whose money is at risk in the transaction.

In a just society, those who venture should share equally in the benefit based on their risk exposure.  We intuitively know that if we’re taking a risk, we deserve to be compensated right?   If someone asked to borrow our car and crashed it, at least we knew and gave permission to use it.  But if someone borrows our car and crashes it without us knowing, that is stealing.

The depositor worked 4 years to save his 200k, and the borrower worked almost a year to save his down-payment.  They have worked and earned their capital.  In this particular transaction, the borrower shares 20% of the monetary risk, and the depositor shares 80% of the monetary risk.

Now that we know the risk, it should follow that whatever reward there is, should be split 80/20 between the depositor and the borrower respectively.

In a normal mortgage transaction, the depositor is not the one considered to have lent the money.  The bank has lent the money for the depositor in exchange for paying him a small percentage on his account balance and the guarantee that he can get his full deposits back on demand.

For simplicity’s sake, lets assume the house has a 30 year mortgage at 6.5% and is kept to its full term and then the house is sold for 300k (low inflation).

Rewards/benefits:

Depositor: Lets assume he had a no interest checking account and kept the same balance in it for the full 30 years.  He receives nothing for his deposits, other then access to them.  No monetary gain though is given.  Overall, he loses nothing (if the house doesn’t fall in value and then into foreclosure), but gains nothing as well.

Borrower: After 30 years of payments, he owns the house outright and receives 300k cash for the house, 40k of which was his down payment, he nets 260k.  If the value of his house had gone up more he would receive that much more of a benefit.

Banker: For his efforts, after the loan is paid off, he puts the depositors money back into the account, and after all this time he has received on the 6.5% interest charge a total of $204,071.18 in interest payments over the 30 years.  If those had been reinvested, the total benefit would be even higher.

Let us recap what has happened.  The depositor, who fronted the 160k for the borrower to buy the house, and shares 80% of the monetary risk, receives nada/zilch for his risk.  The borrower who put up 40k and took on 20% of the monetary risk, nets 260k after 30 years.  All things considered, not bad for him, not amazing if you annualize that return, but he has gained, not lost.  Now let us look at the banker, he receives over 200k in interest payments over the 30 years.  You may say, well that is not as much as the borrower received, but remember what did the banker risk?  How much of his own money?  None! Nada.  If the house payments stop at any point, he simply forecloses, sells the house, takes the proceeds and finds someone else to lend it to.  The banker risks none of his own capital.  Not only does he receive all that interest he also receives fees on the front end to create the mortgage in the first place.

Let me ask you.  Which person would you like to be in this scenario?

The banker of course, because, adjusting for risk, he receives by far the greatest reward of the three parties.  BY FAR.  He riskes nothing, and gains much.  The depositor worked hard for his 200k in deposits, the borrower worked hard for his 40k down payment. The banker did a couple days worth of paperwork and credit worthy checking and received a steady monthly income stream for 30 years. What benefit does that have to society?  What value did the banker provide?  He matched a borrower and a lender, and that has value, but not as much as the 200k the depositor worked and saved for, not and as much as the 40k that the borrower worked and saved for.  The banker is paid in full for his brokering services from the loan origination fees, the rest of the risk/reward of the transaction should be shared between the depositor and the borrower, based on their contributions.

Now let me ask you.  Does that seem right?  Does that seem equitable?

It sure doesn’t to me.  If my funds are at risk as a depositor, I sure would like to know that, and be compensated for it.  But somehow when the bank says to us as depositors that we have full access to our checking funds, when a full 90% of them are lent out, we somehow settle for a small interest rate if any, and rest in the fact that we’re FDIC insured.  Ever wonder why we need FDIC insurance in the first place?  If the money is in the bank that we deposited, why do we need insurance on it?  Its there in a safe protected, right?  Insurance must be only in case it gets robbed right?  The amount of money actually robbed is quite small, and that is paid for under a separate insurance policy.  That is not what FDIC insurance is for.

The reason we need FDIC insurance, is because 90% of the money isn’t there, its loaned out.  The only money the banks have to pay back depositors, should they all demand their money at once, is from the mortgage payments coming in, or they can call their loans due to be paid in full.  This is what happened in the Great Depression but is not allowed today.  FDIC insurance is there to help provide security for those that would rather keep their money at home then have a bank lend it out for them without compensation.

If my bank lends my money out and that loan goes bad, then my money is at risk.  I’d rather keep it at home, or lend it directly then to have a banker risk my capital for me, paying me a tiny amount and pocketing the rest of the profit.   Keeping ones money at home is one of a bankers greatest fears.  They want your money so they can loan it out.  It wouldn’t be so bad if they acted as a broker, took their fee for matching up lenders and borrowers and let the participants split the risk/reward, but they’re not satisfied with just a broker fee.  They want all the interest payments over time too, which rightfully should go to the person who actually has capital at risk, in the case of this thought experiment is the depositor.

The depositor is paid some minimal interest payment, or nothing at all, when in actuality they have their money being lent out to other.

In conclusion, in a just society its members do not reap where they do not sow.  To do so is, at its core stealing from someone who rightfully earned the gain.  Can interest be a part of a healthy and equitable economy?  Possibly.

Is the fractional reserve system we have today that rewards those who do not risk, equitable?  I would argue, most definitely not.  So, I can say with a high degree of confidence that interest, as used in the US banking system and other countries worldwide, is unjust.

Outlawing interest would fix the problem fairly quickly.  However, this thought experiment can only go so far.  I believe it fairly clearly illustrates the iniquity of this system as its built, but it can’t prove that interest itself has no place in a healthy economy.  All we can conclude from this thought experiment, is that interest as implemented in today’s system most definitely creates economic injustice, redirecting financial reward from those who risk, to those who do not risk.

Finding out if interest itself is inherently negative for a society will require additional thought experiments for another day.  Stay tuned!

For now, I challenge anyone to find a flaw in my facts or logic.  I challenge you! I am open and gracious, willing to entertain any new information that invalidates my conclusions.  I do not care where truth leads me, I simply pursue it at all costs.  Show me truth!

ADDENDUM: In the analysis of the benefits, I forgot to include all the payments that the borrower made to offset his gain.  If you include the interest as well as the payments he made, in all he paid over $361k for the house, which after adding the 40k down payment, means he spent over $401k on an asset he sold for $300k.  In actuality he lost $101k on the deal.   You may say, well he got 30 years of rent in the deal, isn’t that worht something?  Sure it is, and that could actually be quantified, but for time’s sake, I wish to point out how much further this proves that the banker is by far the greatest benefactor in this scenario.  If it was equitably earned I would have no issue, but since the risk and rewards are not equitably shared, the whole transaction is unequitable and thus economically unjust.

I haven’t written too much in the last few weeks.  Really, I’ve just been watching in awe.  I felt that any attempts to sum up the goings on in the financial realm would be foolish and simplistic given the historic proportions of events.

Today I must write though.  Today, or rather yesterday afternoon when markets closed, treasury secretary Hank Paulson, announced that the government of the US and governments around the world will be injecting “liquidity” or “capital” into banks in the US and across the world.

A couple questions come to mind right away.  ARE THEY FR%&KING  CRAZY!!!!!  Whew, got that out of my system.

No, but really, I don’t get it.  What capital are they going to inject?  Honestly, who has the capital?  The US government has no assets, no savings, no war chest.  The only assets they have are printing presses and the ability to issue debt backed by taxpayers.  Let’s take the printing presses first.  Sure they can print up the money and buy preferred shares, but is that really injecting capital?  Of course not, that’s Weimar Republican, hyperinflationary.  Now, how about offering debt.  They can do this too, but isn’t debt or rather bad debt the cause of much of this debacle in the first place?  Who’s going to pay it back when everyone is broke?  Seriously, who is going to pay?

Maybe I’m missing something here, but these are somewhat basic questions that deserve real answers.  I’m not holding my breath that I’ll get any real solid answers from Washington.

The best thing to do, is to educate ourselves and then take the action which will maximize our welfare.  All this is highly inflationary.  One of the best things to do is to buy real assets.  Buy things that have the ability to keep up with inflation.   Real estate can be good, depending on what is bought and how.  For simple preservation of purchasing power, gold and silver can be good for cash holdings.  Some stocks can be good too if they have the ability to raise prices and are products and services that everyone needs regardless of the economy.  In the end though, these types of monetary caused bubbles don’t end well for most everyone.

Again, my hope is that if things get bad enough and enough people are educated, that maybe we can get back to sound money and banking system, with 100% reserve banking and a gold/silver standard.

But its mostly out of my control.  I will write and educate as much as I can, but ultimately my hope and trust lie in a power much higher.  As painful as the process may become, I believe that we will come out stronger as people and as a nation.  The greed and lust for power which has fueled this mess, will be laid to waste like it always is.  God Bless Us All.

I feel like everything has been talked to death already.  Everyone has their opinions.

However, I would like to sum things up at least in my own mind as I personally process and make decisions moving forward.

Credit crisis.  What is a credit crisis again?  Here’s what has happened.  Think of your money as a real good.  Say a chair.  You put the chair into storage, a warehouse or a “bank” if you will.  For some reason, that warehouse has the ability to lend out your chair to others and charge rent on it.  The warehouse not only rents out your chair, but it is given credit by government enforcement for 9 more chairs.  It doesn’t physically have those chairs but it can rent them out nonetheless.  So now, not only is your chair at risk, but 9 additional chairs that do not exist and are backed by your single chair.  If anyone of those chairs is damaged during rental, your chair is at risk. As long as everyone pays rent on their chairs and returns them in whole, there are no problems.  However, if one person breaks their chair and no longer pays rent, that puts all the other chairs at risk.

This analogy is obviously not perfect because first of all, chairs cannot be manufactured out of thin air like money can, and in addition the “rent” paid on the chairs is not paid in chairs, like the rent on money is paid in money.   But as you can see, the whole thing is one pyramid scheme.  Banks are lending out money they don’t really have.  In the very best case, if good loans are made, the system functions and people maintain confidence in the system.  All this is true except for one fact.  The interest or rent charged on the money created is not created.  There is never enough money in the system to pay for the interest.  More credit money must be created to pay for past credit money.  Over time this causes a transfer of wealth from those who produce real goods to those that create credit, plain and simple.

This is called usury and is why all religious texts banned it.  Usury is simply interest, not excessive interest, just interest.

The system is flawed.  It is one big house of cards, and rightfully so.  If anything stops more credit from being created, there is a squeeze of the money supply, which sets off a cascade that could destroy the monetary system.  Which in my opinion wouldn’t be the worst thing.   The problem is not our economy, we are the most productive work force to ever walk the face of the earth.  The problem is the money system itself.  Maybe, if we let it fail as it rightfully should, being the house of cards it is, not to mention an insidious immoral wealth transferring machine.  Maybe if we let it fail, it will force real discussion on a better alternative, maybe one that doesn’t allow bankers and the government to create money credits out of thin air, with little to no accountability from the people, obligating us to debt payments for generations.

Here’s to a cleansing.  May the fractional reserve banking system, filled with valueless fiat currency perish and with it the interests of all those who unnaturally benefit from its propogation.  The idea that we as taxpayers, should foot the bill to maintain the very system that quite literally enslaves us is an affront to all humanity.

Economic freedom for all!

http://home.iae.nl/users/lightnet/messenger/report/billions.htm

I challenge anyone to read the above article and find one single fact out of place.  Find one thing wrong with the analysis.

If you or anyone you know is wondering about our current economic crisis.  Read and forward the above article.  It explains how it all works.

by Murray N. Rothbard

One of the best articles on the subject.  Explains exactly what is going on right now and was written 13 years ago.