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The creation of money, the financial system, and central banks (and Deficit)

The creation of money, the financial system, and central banks (and Deficit)
"""The financial system transfers funds from depositors—the positive savers—to the negative savers in a market economy (i.e. people with shortage of funds which need loans to buy property etc.). The financial systems also make it possible for people or businesses to make non-cash payments.

The legal monopoly of services in the financial sector exists. Only banks are permitted to accept deposits, only insurance companies are permitted to offer insurance services, and a major bank is better able to administer mutual funds than a single investor.

How currency is produced

The capacity to mint their own money allowed the ancient Greek states to be powerful in the past. The silver Drachma served as the nation's reserve currency throughout Pericles' reign. The same was true with Philippe's golden Macedonian currency. Each of these currencies was capable of being exchanged for a specific quantity of gold.

Today, the Fed issues the USD and the ECB Euro, both of which are fiat currencies—money with no inherent worth that has been recognized as real money by government regulation and that we must therefore accept as such. In the majority of nations, central banks only print and distribute 5%–15% of the total amount of money in circulation; the remainder is virtual money created through accounting data entry.

We either live in a time of crisis or economic growth, depending on how much money central banks print. It should be remembered that central banks are private businesses rather than state-owned institutions. Private bankers now have the authority to issue currency on behalf of the nations. These private central banks have economic and, obviously, political power since they lend money to the states at interest. A nation's paper currency is essentially its public debt, which it owes to private central bankers. The repayment of this obligation is assured by the issuance of bonds. Taxes placed on citizens serve as the government's guarantee to private central bankers for debt repayment. The greater the national debt, the higher the taxes, and the worse off the average person is.

Governments cannot remove the presidents of these central banks and they are not subject to government oversight. They answer to the ECB in Europe, which determines the EU's monetary policy. The European Commission or the European Parliament do not have any control over the ECB.

By issuing bonds, the state or borrower acknowledges that it owes the central bank the same amount of money. The central bank, in turn, generates money out of nothing and loans it to the public at interest. Although this money is lent through an accounting entry, the interest rate does not exist as money itself; rather, it only applies to the duties of the loan contract. Due to this, global debt is more than real debt or accounting debt. People thus become slaves since they must work to earn actual money to pay off either public or private obligations. Few people are able to repay the debt; the majority file for bankruptcy and lose everything.

When a country, like the USA and other nations, has its own currency, it can """"oblige"""" the central bank to accept its state bonds and lend the state money at interest. As a result, as the central bank serves as a lender of last resort, a national bankruptcy is prevented. Another example is the ECB, which does not lend to Eurozone member nations. The lack of a safe bond for Europe puts the nations of the Eurozone at the mercy of the ""markets,"" who impose high interest rates out of fear of not getting their money back. The Germans are the primary reason for the lack of this bond since they do not want national duties to be combined into a single European duty. However, relatively lately the European safe bonds have gained popularity despite the differences in Europe's policies. Another, more severe justification is that if this bond were issued, the value of the euro would decline, increasing the cost of borrowing for Germany.

In the USA, things are different since the state borrows its own money (the USD) from the Fed, devaluing the local currency and consequently the state debt. When a country's currency devalues, its own products become less expensive without lowering wages, but imported goods increase in price. If a nation has its own energy sources, or is energy adequate, it can become more competitive by having its own currency. This is true for nations with strong primary (agricultural) and secondary (industrial) sectors. A 3% reserve requirement applies to banks with deposits under $16 million, and a 10% reserve requirement applies to banks with deposits over $122.3 million. As a result, bankrun results if all depositors decide to withdraw their funds from the banks at the same moment since the banks are unable to do so. It should be noted at this point that the banking system creates and lends 10 dollars, euros, or other units for every one that is placed in a bank. Every time they make a loan, banks create money; this created money is money that appears on a computer screen rather than actual money that is deposited in the bank's treasury. The borrower pays the bank real money plus interest while the bank lends virtual money.

No one can avoid paying interest rates, as Professor Mark Joob noted. When someone borrows money from a bank, they must pay interest on the loan, but since taxes must be collected in order to pay the interest on the public debt, everyone who pays taxes and purchases goods and services also pays the initial borrower's interest rate. The cost of loans must be included in the pricing of all businesses and persons that provide products and services; in this way, the entire community helps to subsidize banks, even though some of this assistance is provided to depositors in the form of interest rates. Professor Mark Joob continues by stating that because the fiat/accounting money that banks produce is regarded as legal tender, the interest rate paid to them is a subsidy to them. Banks are subsidized by society, which explains why bankers earn such high salaries and why the financial industry is so vast. In terms of interest rates, impoverished individuals typically have more debt than savings, whereas wealthy people have more savings than debt. Interest rates are advantageous for accumulating wealth since they transfer money from the poor to the rich when they are paid. Commercial banks profit from investments and from the distinction in interest rates between loans and deposits. Since compound interest raises initial capital exponentially, when interest rate is consistently applied to the initial investment, additional interest is generated. Since this interest rate is not based on productivity, real money does not grow on its own. Only human labor can generate an interest rate that rises in value, but there is pressure for wages to fall while productivity rises. This occurs as a result of the requirement for labor to meet the demands of compound interest that has expanded exponentially.

In other words, banks lend virtual money and receive real money in return; the borrower must labor to obtain the real money. The banks should issue fresh money in the form of loans and credits since the amount lent exceeds the amount of real money. Growth occurs when the amount of money is increased (though even in this case, with the particular banking and monetary system, debt is also increased), but when they want to start a crisis, they stop making loans, which causes many people to go bankrupt and depression to set in because there isn't enough money to go around.

This is a """"smart technique"""" that the bankers came up with after realizing they could lend more money than they actually had because depositors wouldn't withdraw their funds all at once from the banks. Fractional reserve banking is what this is. The following is how Quickonomics defines fractional reserve banking: """"Fractional reserve banking is a banking system in which banks only hold a fraction of the money their customers deposit as reserves. This allows them to use the rest of it to make loans and thereby essentially create new money. Commercial banks now have the ability to directly influence the money supply. In fact, even though central banks are in charge of controlling money supply, most of the money in modern economies is created by commercial banks through fractional reserve banking"""".

Are savings protected?

In the case of Italian debt as in the case of Greek debt, we have heard from politicians (actually paid employees by the bankers) that they want to protect people's savings. However, are these savings protected in this monetary and banking system? The answer is a simple NO. As mentioned, the banks have low reserves in cash. This is the reason that they need their customers' trust. In case of a bankrun there would face liquidity problems and they would bankrupt. There are deposit guarantee schemes that reimburse, under EU rules, that protect depositors' savings by guaranteeing deposits of up to €100,000 but in case of chain reactions, commercial banks need to be saved by the governments and central banks act as lenders' of last resort.

What next?

The economic system as it is shaped by the power of banks is not viable and it does not serve human values such as freedom, justice and democracy. It is irrational and should be immediately changed if we want humanity to survive."""
 

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"The creation of money, the financial system, and central banks (and Deficit)" was written by Mary under the Business category. It has been read 42 times and generated 0 comments. The article was created on and updated on 16 November 2022.
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