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Sunday, July 22, 2007

Open secrets about banks, credit and inflation

There are things about money that are well-known to some, but not known and understood by all.
  • In the USA (and the UK, I understand), notes and coins represent only 3% of all money; the rest is, in effect, various types of IOU.
  • Most money is simply created out of nothing, by private banks, as bookkeeping entries.
  • Banks lend out money, and also charge interest.
  • Since the banks haven't created enough money to cover the interest, they demand it from the borrowers.
  • If the total amount of money in the economy stays the same, and banks always charge enough interest to make a profit, then someday banks will own all the money in the world.
  • So banks create and lend even more money. Some of this new money is to provide for the interest they have charged on earlier loans.
  • Therefore, banks have caused inflation, and as long as they create new money, they will create more inflation.
This is so simple, but so hard to believe. It's like standing up from a game of Monopoly to find that you've been playing for real. And when you read others who explain the money system in these terms, you get the same emotional sequence:
  1. amused, complacent toleration
  2. a growing sense of unease
  3. dawning, half-incredulous understanding
  4. appalled outrage
So it is with one of the latest of these explainers, Ellen Hodgson Brown. But there is a world of difference between diagnosis and prescription. Here is hers, and halfway into here is a riposte from Richard Daughty, aka The Mogambo Guru.
Please note that Daughty is not contradicting the diagnosis, only the proposed solution. He is permanently at stage (4) in the above sequence.
Now, what do we do about it? Daughty's usual response "We're freakin' doomed!" reflects his pessimism about attempts to save the system as a whole, but is generally accompanied by recommendations for individual financial survival, namely, investment in commodities such as gold, silver and oil, merely to protect against end-stage inflation.

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