Here’s the thing I want you to watch for. I want you to watch for a sudden fall in the price of oil. If you see oil spike downward to about $70 a barrel, $80 a barrel, if it goes from $110 to $80 a barrel, look out. It’s counterintuitive but you have to remember that the price of oil is based on futures and so what could possibly happen, a bad sign. If it drifts back down slowly over a period of time, that’s good. But if it suddenly drops down, what that means is that the conventional wisdom for the people who buy oil futures, these are the big — you know, there’s a lot of money. These people who are buying oil futures, what they’re saying is the economy around the world is going to slow down so much that people won’t be able to drive or fly as much as they have had to. They won’t be able to afford the oil or the gasoline or the diesel. So demand will go way, way down for oil. That’s what they will be betting on.

If you read the whole transcript, there’s further exposition. I don’t necessarily agree that we need to be hoarding food and gasoline like Glenn Beck does, but let me just ask you this — anyone noticed a severe reduction in gas prices lately? How about the fact that oil, which passed the $100/barrel mark a long time back is now, all of the sudden, under $90/barrel?

Interesting.

I’m going to show these people what you don’t want them to see. I’m going to show them a world without you — a world without rules and controls, without borders or boundaries — a world where anything is possible. Where we go from there is a choice I leave to you. – Neo

If you’ve managed to stick with me thus far, congratulations. I expect this will be my last big “economy lecture” for some time. If you’re just tuning in, I suggest reading my previous posts on this subject. At the very least, please do yourself a favor and watch Money as Debt. The key is that you understand how money is created in the U.S. and how the fractional reserve lending system works. I will continue under the assumption that you have a grasp of those concepts. If you have any questions, feel free to leave them in the comments and I will address them.

After I condemned the bailout as a disastrous plan and flooded Facebook with Ron Paul videos, many of my intelligent friends asked me some important questions:

Matthew: “Do you think that shrinking credit is not a problem? … it is likely that most of you were only able to go to college b/c of the system of subsidized loans. Do you now oppose the existence of that system? I mean, do you realize that if the credit market fails, then one casualty might be school loans? … Do you think that an ad hoc bailout with little benefit to taxpayers is a better alternative to a systemic bailout where taxpayers may benefit?”

Daniel M: “Where do you go from here? Do we allow the stock market to continue to rise a little and then fall into a deeper downward spiral until most Americans have lost all of their savings, thereby depleting the economy even more? What is the solution? … I am not sure how the free market can make a course correction when it seems to be in a gradual (but ever growing) tailspin … credit is needed to buy these necessities of life … Lending/borrowing is a necessary part of our market economy.”

Daniel L: “I know that borrowing/lending is a necessary evil. The big issue isn’t as much the borrowing/lending itself, but the overuse/abuse of it. If this were something that could be fixed, it would’ve been already. I think we’ve gotten ourselves to the point where we have to “hit rock bottom” to reset this scenario.”

Jeana: “if everyone just stops freaking out, won’t the economy and market just gradually balance itself back out?”

Bryan: “who does this most directly affect? the constituents who are opposing this bill shout “WALL STREET,” thinking that these executives with their golden parachutes are the ones who will bear the brunt of this fall. they couldn’t be more wrong … the people who will pay for this will be baby boomers … now, at 65 years of age, they can either sell their homes (at record low home values) or find a new job.”

“on merely a tidbit of news that congress might actually reach an agreement before the apocalypse, the stock market rallied significantly. yes, $700B adds to our $10T national debt … i’m not saying that’s a good thing, but it’s better than a world-wide financial meltdown where my 401K becomes worth nothing at all.”

Philip: “In free market enterprise, folks have to be able to borrow money. What’s the alternative?”

The fact is undeniable… we live in an economy that is addicted to credit. Daniel was right; small businesses can hardly start up without either selling stock (borrowing from individuals) or getting a bank loan (borrowing from a corporation). You cannot purchase a house without credit. You need a loan. You cannot go to school without credit. You need a loan. Worse than that, you can’t obtain credit for those things or even rent a car unless you establish credit with something smaller.

Because we use fractional reserve lending, the banking industry literally can create unlimited amounts of credit, as long as those loans are mostly paid back. (It is mathematically impossible for all debt to be repaid; the amount of debt exceeds the money supply, and new money can only be created with more debt.) When loans are not paid back, it limits their ability to create money. Usually, interest from the rest of the loans being paid covers the loss, and they still earn a nice profit. When lots of loans default simultaneously, we run into the problem known as a credit crunch, and that is what we’re seeing today. When you have an economy addicted to credit and the source begins to dry up, there are withdrawals. When you take drugs away from an addict, they often feel as though they will die if they can’t have more. We are terrified that if our credit source dries up, our economy will die. While it is true that the loss of easy credit will cause us pain and discomfort, it will not kill us. More of the drug — more easy credit and inflation — will eventually do so.

The Federal Reserve and the government have been using credit to prop up this system for a long time. However, even they recognize that too much credit in the system will increase inflation beyond the point where people will continue to accept paper money as payment for anything. Hence, they have resorted to obtaining funds in a different way; not through taxing the American people, but through borrowing from the governments of other countries. We provide them with IOUs, and they provide us with oil, food, electronics, or whatever else we wish to buy. Those IOUs are denominated in U.S. dollars, and that is what constitutes the national debt you always hear about on the news. Most of it is currently held by Japan and China. This increasingly large bailout package will be paid for by borrowing even more from other countries.

Somehow, people forget that the consequences of debt are extrapolated even for a huge account like ours. However, there is no such thing as Chapter 13 on a national scale where we get to start over and keep our home. When a government goes bankrupt, other nations will simply stop lending it money. When our credit becomes so poor that other governments will no longer lend to us, an even greater consequence will accompany that move. They will no longer accept our dollars at all.

“We’ve had a huge debt for a long time,” some will undoubtedly argue. They’d be right. Why is our credit so good with other nations, exactly? There are several reasons, including our military influence. More important than that though is an agreement we struck up with world governments in 1941, near the end of World War II, called the Bretton Woods system. The world governments agreed to use the U.S. Dollar as the reserve currency, thereby guaranteeing that most trade would rely on our dollar. In return, we promised to allow foreign asset holders to convert their dollars into gold on demand at a fixed rate. This worked out very well until our dollar began to lose value due to our over-extension of credit. Many asset holders began to demand their dollars in gold, and we had what amounted to a run on the U.S. Treasury stores. In 1971, Richard Nixon disallowed this conversion to gold, thereby ending the Bretton Woods agreements and ensuring that the dollar was not backed by anything of inherent value. He staged this suspension as temporary, but it has not been lifted to this day, nearly 40 years later. Since then, the dollar has continued to lose value, despite Nixon’s promises. Because the system was already in place, other governments continued to use the dollar even without gold backing. That practice is coming to a close. Once we create enough money through credit extension that these foreign governments no longer see value in our huge debt to them, they will stop lending and begin to demand repayment.

Because of the bad debts in the system, many banks may no longer extend credit and some have faced runs on their deposit stores. The proposed bailout would authorize more borrowing for the purpose of extending more credit, which will further inflate our money supply. This will lead to other nations refusing to accept dollars as payment and refusing to lend to us any more. When that happens, our currency will be valueless, since most of the actual resources and goods in this country are coming from outside. Imagine what happens when China stops sending us all the cheap goods we buy from them. Can you think of many clothes, toys, household items, or nearly anything that is not made in China? And what happens when Japan and Korea cease sending us their vehicles and electronics? Now you can see the problem. Few real goods inside our nation and a huge monetary supply will translate into a worthless dollar, even within our own boarders. The greatest fears expressed above about the lack of credit will come to pass in a much harsher way if we consent to inflate the money supply as this bill requests. It will delay the current crisis for a short time, and then bring about an even more serious crisis from which there will be no quick escape.

One option at that point would be to accept a long-lasting depression in which America must begin to produce its own goods and services and severely reduce our standard of living. That could cause civil unrest and political radicalism, or it could pass peacefully, assuming other nations leave us alone during this time. There is no way to predict those factors. Another would be to look at a completely new currency system and attempt to start over at the bottom of the chain. If you think that unlikely, perhaps you should google the word, “Amero.”

Many of you have asked for alternatives. I would like to propose one here. Let us examine what would happen if we just allowed the unstable banks to fail and did not inject our system with additional credit. Banks would fail, yes. There would be a recession, yes. That is what we are already seeing now. People would not be able to get loans, and the assets (houses, cars, etc.) would have to be liquidated in some manner. They might be sold at a low price, destroyed, or used by the government to aid the poor and those on welfare. Either way, the banks lose out and many go out of business. Some jobs would disappear, while others would be created. Many more people would work in factories, industry, and farming. Less people would retire early. Less would go to college. More would sell their big screen televisions and pay off their debts so that they could begin saving for the future. Folks, someone has to do these jobs. We need clothing, food, and textiles. Long have we enjoyed other nations doing that for us while we borrowed from them to pay for it. That cannot last, nor should it. The people in charge of those countries sell their citizens into slavery for their own gain, and we are the buyers. Do you doubt the leaders of our own nation would do the same when it’s time to turn the tables? They are doing so already, and this bailout is merely moving that process along.

No one wants to face a serious recession, but the good news is that it wouldn’t last that long. After the government finally stopped attempting to spend more money to make jobs through projects like FDR’s Tennessee Valley Authority, the Great Depression ended within a year. Our own recession would not be so severe nor last so long if we allowed the market to correct itself now. So many are worried about the stock market and their 401K plans, but such changes are also temporary. Once companies have actual capital and are not experiencing major debt, they will be free to increase in value and once again, and investors will lend their money with confidence. Even after the House blocked the last bill, the market dropped less than 800 points. In percentage terms, this does not even make the top ten list of worst adjustments. The numerical figure is misleading because it has been inflated along with the monetary supply. The sky will not fall without this bailout.

Finally, for those willing to hear it, I’d like to propose a second option. Once this correction takes place (it will eventually, with or without the bailout), why would we want to become slaves to the bank again? Why should those who simply manage money be master over those who produce the goods and services that make our country wealthy? Do you really want to re-enter massive debt for a few comforts? Whether we are called slaves or not, we remain under the control of lenders until our debt is repaid. When you consider that they lend without even having the money to give us in the first place, this is even more sickening.

The first step toward freedom is to sever our relationship with central banks and fractional reserve lending. In our case, that means dismantling the Federal Reserve. They are not elected, they have no oversight, nothing stops them from creating unlimited credit, and they have vast wealth gained simply by manipulating symbols of value and enslaving others in debt. I cannot support that, and I doubt anyone would wish to do so. At this level of freedom, debt would still exist, but lenders could only lend money if they actually had it on deposit to lend. In this way, they risk their own assets first and then those of depositors if someone should default. They are thus encouraged to make responsible loans and to work with debtors to salvage the debt if there are problems in repayment.

The second step would be to abolish interest on loans, known by many people as usury. Most world religions condemned usury, some even ascribing the death penalty for those who took interest. What if private corporations, friends, or even the government, lent out money without interest? For one thing, far fewer loans would be held, and less people would be in debt, forced to use their income to pay back a lender. This is a good thing. Second, loans would not be given for frivolous entertainment or wasteful spending. Accountability keeps people out of debt. Of course the new American dream is to make lots of money and to “let your money work for you.” We need to re-examine whether this is even ethical.

The final step would be to do away with debt altogether, relying on the good will of people and the protection of the government to help care for the poor. In this way, no one is ever in debt, and hard work is rewarded.

The very rich will usually reject this proposition; it is not in their interest. The bankers and certainly the Federal Reserve owners will reject it. It relieves them of control and power.

A world without debt may not be likely, but we can certainly avoid allowing our lending institutions to control us and to lend out money that does not exist. With a vote on this bill planned for today, we are able to tell them how this will begin. We are also able to remain in our current position and march toward economic chaos.

Where we go from there is a choice I leave to you.

This section of the interview is occupied with the upcoming election rather than the financial crisis at hand. Nonetheless, I’d like to focus on a couple of statements before we move on. Clinton pointed out that many voters will support the candidate with whom they most identify. Staunch supporters are not really the audience here, but rather those who are either not committed or not voting at all. He was so right when he said that those people will “love” Obama if they think he loves them. I could write a sermon here, but I’ll save it for Sunday. Suffice it to say that Clinton has successfully described what motivates most humans to love, including Christians (and it’s not necessarily a bad thing).

Around the 2:00 mark, Stewart pointed out that our nation is divided culturally, with the “left demonizing the right for being narrow-minded and the right demonizing the left for elitism.” I’m seeing a fair amount of this, to some degree or another, even among the religious blogging community. You’ve got Obama viewed as a socialist and a proponent of abortion from the right, and McCain viewed as a harbinger of totalitarianism and a warmonger from the left. My only point here is that Stewart is right: we are a severely divided nation, ideologically. Unfortunately, neither of these candidates is addressing the important issues when it comes to power structures in our nation and fiscal policy. All the left/right debate is serving as a supreme distraction from these essential problems.

Last time, I promised we’d discuss how Congress is involved with the bailout situation. If you’ve been reading this blog recently, then you know that a bailout bill was negotiated between the Democrats and the Republicans and placed before the House of Representatives for a vote. It was expected, at least by President Bush, that this measure would pass. Amazingly, it ended up being blocked by a narrow margin. At this point a modified bill is being presented to the Senate for a vote today. At the moment, it seems the biggest change is to increase the FDIC insurance from $100K to $250K. I can’t seem to figure out what difference that makes in terms of the bill itself. I might be wrong, but do any of you have over $100K stored in a bank account somewhere that you’re really concerned about? I certainly don’t. No, friends, this is just smoke and mirrors — a sad attempt to divert attention from the American public’s massive opposition to this bill.

Just so we understand the role of Congress here, all they are doing is determining whether the U.S. Government will take financial responsibility for defaulted or risky debt in order to allow commercial banks to lend us more money. What Congress is unable to do, at the moment, is to keep the Federal Reserve from pumping more credit into the system on their own through pure inflation and international borrowing. Indeed, they have already done so to the tune of $630 billion and continue to do so on a regular basis. Let’s remember, the Federal Reserve IS NOT a branch of the U.S. Government, and they have no oversight whatsoever in terms of their own activities. The only reason Congress is voting is to determine whether these private banks that comprise the Federal Reserve will be on their own on this one, or whether Uncle Sam will underwrite the bill.

President Bush is convinced of the necessity for strong government intervention to “save” our ailing economy and the banks that are failing as a result. He was none too happy when the bailout bill failed in the House on Monday. It is my personal opinion that the Federal Reserve and those who benefit from it have fed him the notion that our economy will fail without this measure. They might even believe it themselves. Obviously, stock market investors do, because the NASDAQ dropped over 700 points in a single day as a result. That is the largest numerical drop (though not the largest percentage drop by a long shot). Even now, with the Senate poised to vote on a version of this bill today, informal polls are not indicating strong support by the public:

As you may have discerned by now, I disagree strongly that government intervention is necessary or wise in this case. Many intelligent friends (and others around the country) have been asking what we do in lieu of this bill, and how we can survive if something is not done. Most people recognize that there is a problem, but few know what we can do to ameliorate it. Even now, with the Senate poised to vote on a version of this bill today, informal polls are not indicating strong support by the public.

I am prepared to propose an alternative solution, and I plan to have it up later on today. Stay tuned, and as always, I’m looking forward to your comments and questions.

It matters little what path a bill takes to become law; what matters, is that we get a law.

I can’t believe we’ve been so silly as to subscribe to a legislative process… after all, it is complicated — and it can be contentious! Maybe we should just have a king instead. Then we could avoid this complicated process and bypass voting altogether!

Congressman Miller,

THANK YOU!!! I just want to take this opportunity to express my gratitude for the stand you made today with your constituents. You made the right call. I believe what you have done today prevented us from throwing gasoline on an already burning building. Please continue to stand your ground if this bill is recycled in some other form, and I will continue to support you however I can. Thank you again!

Sincerely,

Lloyd Taylor

2. CALL THEM. The Capitol Hill Switchboard is: (202) 224-3121.

3. If indeed you agree that we should not be bailing out these private companies and thereby severely inflate the money supply, then LET THEM KNOW!!!

I believe there is a lot riding on this. I’m calling my House Rep, you should too. They are likely to vote on this MONDAY. The Senate has already approved it for their half and sent it on to the President. The House has to approve it before it can be passed into law. Do whatever you can to encourage them to block it, if you agree that this is a bad plan.

You may find some aggregated links here.

I will be reviewing a segment on the Daily Show regarding the current bailout situation. Part two of this blog will cover the second half of Clinton’s interview.

Hopefully, by this point you’ve heard at least part of the outrageous legislature proposed by U.S. Treasury Secretary Henry Paulson.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Seriously??? This guy should be replaced and charged with treason for even proposing such a bill. Fortunately, many citizens have been calling their Senators and Representatives, demanding that they vote against it. What we’re seeing now is an upwelling of constituents and members of Congress who recognize that we’re in an untenable situation. Unfortunately, it seems most lack a fundamental understanding of how we arrived at this predicament in the first place.

Clinton says if we put up this $700 billion, we should have a moratorium on foreclosures, and then have each mortgage reviewed for possible write-downs. It sounds like a good plan, but let us examine just how it would work:

The moratorium would have to be very short term and the manual reviews completed quickly. On the surface, it seems like “homeowners” (I use that term loosely, because I would not consider someone who has a 0.5% stake in a house the owner) would get a break. They get a chance to have the bank write down their debt without losing their house. The bank only loses interest they would’ve earned with the larger debt, and it doesn’t become insolvent and risk a run — the federal government underwrites the loss (that means we pay for it). Even assuming that congress could find qualified reviewers and implement this plan quickly, there are fundamental flaws.

Foreclosure is simply a means of enforcing debt. If you can’t pay your mortgage, the bank is able to keep the interest you’ve paid them over time, and the property which was collateral for the loan. The borrower loses any money he or she has invested in the house, and is unlikely to secure another loan for some time, due to credit reporting. You might be asking yourself a few questions at this point. If the banks have been implementing so many foreclosures, and if they have gained both the property and the interest paid since the origination of the loan, then why are they failing? It would seem that they are now richer than they were when they started. That makes sense, but it is not the truth. If you read my post about creating money from debt, you’ll remember that when you obtain a mortgage, the bank is not actually loaning you their own money. Literally, they are just writing that amount into your account out of thin air. Our government allows that check to be treated as real currency and to be payable in real dollars at other financial institutions where the seller might deposit or cash it.

In order to keep their balance sheets straight, the banks keep two separate accounts. One says how much they have written on all those outstanding loan checks, and the other says how much they have been paid back. Just like they didn’t actually have that money to lend you in the first place, they don’t get to keep it when you pay it back. When you make a payment, part goes to principle and part goes to interest. The principle amount is deducted from your overall debt to the bank, and hence it is also deducted from the total amount the bank has lent out on those loan checks. In simpler terms, the money disappears back into nothing since it didn’t exist to begin with. The banks have a limit on how many of those loan checks they can lend out from thin air, and this is called fractional reserve banking. Typically, they can lend up to 9 times the amount they have on reserve at the central federal reserve bank. So, when they get principle payment back from you, they are free to lend out that money again to someone else and earn even more interest on it. The interest amount is the bank’s profit which goes to pay employees, stockholders, or it may even be deposited at the central bank to allow them to lend out even more money.

What happens when there is a foreclosure and you can’t pay it back? In that case, the overall amount the bank has lent out on those checks stays high. Therefore, the money is not freed up for them to lend out to others. They have lost both the interest you would have paid them and the interest they’d earn if they had freed up that money to lend out to others. On the upside, they do have the house and land as collateral. So… can’t they just sell that? Yes, but it will usually not cover the amount of unpaid principle, and it costs the bank money to take over the maintenance of the house. When someone loses their house due to foreclosure, they’re usually not a happy camper. When I was trained in mortgage lending, I was told that often people will destroy the house out of spite or take whatever materials can be sold for scrap (metal, wood, etc.). Even if the house is in good condition, there is another problem. Too many houses on the market drives the price down, which means the bank cannot recuperate their costs. As you can see, foreclosure isn’t going to make the bank richer.

You might also ask yourself why the Congress can’t just change the laws and allow the banks to lend out more money to gain interest. If the fractional reserve requirement allows nine dollars to be lent out for one dollar on reserve, why not make it ten? Or twenty? Or a hundred? What difference does it really make as long as we save the banks? Wouldn’t this be better than paying 700 billion dollars to bail them out? Absolutely not, and the reason is inflation. As the banks are creating money from debt, that money is being circulated in the economy. More money being moved around for the same amount of goods and services is called inflation. It means the money is worth less than it was before. Now you understand why a dollar doesn’t go as far as it used to; there are too many dollars in the system. Sometimes less really is more. The federal reserve wouldn’t want to increase the ratio because it would lead to hyper-inflation, a severe and rapid reduction in the value of money. This is one of the factors that caused the Great Depression, it is why counterfeit money is illegal, and it is the cause of economic turmoil in many other countries.

So then, what if Clinton’s moratorium on foreclosures becomes law? Consider this: why would someone worry about paying their mortgage if they can’t lose their house? They wouldn’t. You pay your mortgage before you pay your cell phone bill because you can’t live without your house. Once the threat of losing it is gone, you are free to use your money for other purposes. People won’t pay back their mortgages because foreclosure isn’t an option. The banks will have lent out the $700 billion from the government as new mortgages, which also won’t be paid back in a timely fashion because, once again, foreclosure isn’t an option. In this case, the banks are still out of money and back in the position they were, only now the government has invested stockpiles of money to stave off collapse for a short period of time. Not only this, but it exacerbates the inflation problem described above. The money out there from these bad loans is not being repaid so that it can disappear back into nothing. Also, $700 billion are being infused into banks allowing them to create even more money from debt. This will cause hyper-inflation and the complete collapse of the dollar much sooner than even the first scenario I described above.

In the second half I’ll discuss how Congress plays into all of this, President Bush’s plea for cooperation, and what it would look like if we just let the banks fail. See you then!

Apparently, Senator Jim Bunning from Kentucky feels the same way. Friday, he introduced Senate resolution 3510 in order to prevent the Fed from continuing this practice in the future. (The full text is not yet available because the bill is so new, but it should be very soon.) I’ll be writing my two senators to encourage them to co-sponsor this bill. I think you should consider writing or calling your senators as well.

By the way, this bill is being sent to the Senate Committee on Banking, Housing, and Urban Affairs. If you’re registered in AL, CT, CO, DE, FL, KY, HI, ID, IN, MT, NC, NE, NJ, NY, OH, PA, RI, SD, TN, UT, or WY, then you have a senator in that committee.

Even if you disagree with me, I encourage you to check out your own representatives in both the House and the Senate. Find out what bills they’re sponsoring. Look at how they’re voting. Take advantage of your right as a citizen to influence the direction of your country in the way you believe is best!

UPDATE, 9/24/08:

The full text of the bill is now available right here.

Write your congressmen and senators. Tell them to introduce legislature to dismantle the Federal Reserve.

Repeat after me:

THE FEDERAL RESERVE IS NOT A BRANCH OF THE U.S. GOVERNMENT.

It is a group of private bankers. Amazingly, the Federal Reserve Act of 1913 arranged for them to print our money, and the government borrows money for them… at interest! You can bet the Fed board (via Mr. Bernacke) is ‘advising’ the government which institutions merit these emergency loans.

My good friend Philip was wondering over at his blog how our leaders could be saying that the “fundamentals” of our economy are still strong amid this chaos? Simple answer: they’re lying.

I posted a response on that blog that I will copy here to inform those who are curious how banking works, and how it plays into this particular situation. Also, I encourage you again to watch Money As Debt in order to educate yourself.
——————————————-
Our current banking system works under a concept called fractional reserve lending. In the U.S., most banks are a part of the Federal Reserve System. It is not a part of the government, as is often thought. Rather, it is a private group of bankers who act as a central bank. If a bank wants to be a part of the Federal Reserve, they must make their initial deposit there. The bank is then allowed to lend out up to 9 times (sometimes more, depending on the account) the amount they have on deposit at the central bank. Banks may legally create money by simply writing funds into a debtor’s account upon initiation of a loan agreement. So for instance, if a bank has $1000 deposited at the central Federal Reserve Bank, then they may legally write a loan of $9000 based on that initial $1000 deposit at the Fed. Because of the Federal Reserve Act, our government allows this fictional money to be paid out in paper currency. (If you have any cash on you, take it out and look at the top of the note. There, you will see the words “Federal Reserve Note.” This means that the cash is actually lent from the private holders of the Federal Reserve bank to our government at interest. If you had a dollar before 1913, it would not say Federal Reserve, because the Fed did not exist yet.)

Due to the borrower’s agreement, he must pay this money PLUS interest back to the bank. Now the bank never had the money for the principle to begin with… they wrote it into the account from nothing. The borrower is allowed to redeem that bank loan check into actual currency which can be used to purchase items. However, the loan check does not include the interest amount. Where is the borrower supposed to get the money to pay back the interest? That money can ONLY come from the overall money pool. Most of that money was created the same way, by banks simply writing it into the account of borrowers. Only about 5% of our overall money supply in the U.S. is created at the Mint (printed or coins). The rest is this fictional money that never existed before the loans. That is what I mean by the fact that it is IMPOSSIBLE for everyone to pay their loans back. What I’m saying is that the amount of debt out there far exceeds the amount of money in circulation available to pay it back.

Just as money was created from nothing when someone takes out a loan, that PRINCIPLE amount also disappears back to nothing when the loan is paid back. Hence, the only gain the bank made in the process was the interest paid on the loan. The principle amount is now out in the economy being traded (increasing the overall money supply) or it is redeposited in another bank. Those deposits of currency from the overall money supply may be deposited back at the central bank and used as the basis for more loan-writing. However, in this case, proceeds directly derived from another loan may only be the basis of 8/9 of the loan amount instead of 9 * the loan amount. In a closed loop, an initial bank deposit could theoretically be multiplied nearly 100 times in terms of money going back into the overall money supply. Now you can see how we get inflation. It isn’t the government printing too much money, it is banks creating too much.

So how could a bank get in to trouble? There are two main ways. First, we talked about money being written from nothing and then going back to nothing when the principle is repaid. Basically the bank keeps 2 separate accounts. First, they have an account of real money deposited at the central Federal Reserve bank. The second account is the amount of money they have created from nothing due to new debt. The second account cannot become so large that it exceeds the required reserve ratio in comparison with the first account. When borrowers pay back their debts, this second account gets smaller. When they don’t, that account stays bigger, reducing the amount of loans the bank can make overall, and therefore reducing the potential interest income. If the debt money account gets too big, the bank can’t make loans, and then they can’t make income. The second way they can get into trouble is if the first account (real money deposited at the federal reserve) gets too small. How could that happen? If many depositors withdraw their money at one time, the first account becomes too small, and this is what is meant when a bank is called insoluble. It means they don’t have enough on reserve to support the debt they’ve lent out. If many depositors withdraw their deposits at one time, it’s called a ‘run on the bank’. In this case, the Federal Reserve may lend emergency cash to the bank to keep it from going under. However, if the bank is in bad enough trouble, the Federal Reserve may not believe that bank is a good risk, and hence the bank will go under, and the initial investors who footed the money for the bank to start with will lose out. The depositors themselves will not lose everything (in theory) because of insurance known as the FDIC. The idea is that they will protect up to $100K per account. The truth is that the FDIC itself does not have enough money to pay for all deposits at all banks. The primary reason the FDIC exists is to give the public a sense of security about their deposits, and this is designed to discourage bank runs which will undermine the system. The only way the FDIC can truly cover all outstanding deposits is to borrow from the Fed more printed money. In the event of a catastrophic collapse, this kind of printing would cause massive and devastating inflation.

Now, to deal with Lehman Brothers: they are an investment bank. Investments are essentially loans that individuals make to private companies, in hopes of recovering their loan amount with interest. The stock market system centralizes private investment. It provides security to investors by requiring the private companies to abide by guidelines regarding how much stock they sell, accountability of corporate assets, and truthful representation of certain financial decisions. The companies, in return, are provided with expanded access to investors, which usually translates into greater amounts of capital for them to use.

An investment bank trades securities, which are basically anything that can be given a price value. One commonly traded security is mortgage loans. If you obtain a mortgage with a bank, there is a good chance that loan will be sold to investors. They will pay back the bank the principle amount, plus some. The bank makes immediate profit, but does not acquire all the interest it would over time. The investor, in exchange, takes on the risk of the loan defaulting, but also takes on the added interest when the loan is paid back. However, investors are not allowed to write money into accounts like banks, they are actually paying for these loans. Therefore, when many mortgage loans fail, the investors are in deep trouble. This is part of what we are seeing today.

As you can imagine, these problems, when combined with bank insolvency, produce a snowball of financial chaos. So Lehman did go under because their debt turned out to be bad, and they did not have enough reserves to cover the losses. This is the risk part of investment lending. However, the initial situation that allowed them to be in that position is our Federal Reserve system.

This also explains another piece of the puzzle we are seeing. Who bails these companies out when they are in trouble? The Federal Reserve. Whenever they buy all of these bad loans from these companies, and the borrowers default, guess who gets the property? The collective private bankers who own the federal reserve.

So you can see 2 things. 1) There is no way everyone can pay their debts. There will be defaults. In this case, the real property defaulted will become the property of the central banks. 2) Eventually, all the money will be in the possession of the central banks as well, since they are owed more money than exists in the overall money pool to repay it. This is a complete transfer of wealth from the populace (and the government, who insanely chooses to borrow money from the Fed at interest, rather than printing its own money for free), and all of it goes to the banks.

Last week we had a seminar of sorts at my Church. This resulted in me being at Chris’ house pretty much every night of the week. In turn, that produced 1) a lot of ping pong, and 2) the discovery that I can record from an instrument onto my macbook without a preamp. (it’s not perfect, but it can be done.) I’m thinking of laying down some tracks. If I do, I’ll put them up for your listening pleasure. Me and Daniel are also planning to release some songs as the Pinney Taylor Experience. Prepare to be amazed.

Rosie is off the Spew (as Alison calls it). I think this is probably good for the viewers of that show and the country in general. However, it’s time to stop besmirching her on the news. Let’s get on with our lives.

Beulah introduced me to the music of Kristin Andreassen. I highly recommend that you check out her website — particularly you should listen to Crayola on her myspace page.

If you’re one of those people who has been thinking about trying soy-based foods, but has been scared because it just doesn’t seem natural, I’m here to tell you as a non-vegetarian that it’s okay. Try it out. Silk’s vanilla soy milk actually tastes better on cereal than regular milk. I’ve also been trying some of the soy hamburger and chicken variants. On the meat, I probably wouldn’t notice a difference unless someone pointed it out to me. That’s also true of the chicken patties. I’m not about to go vegetarian, but I think I will eat more soy-based foods just for health reasons. I get more than enough meat to keep me healthy.

I work at a credit union, in case any of you don’t know. What you are about to view is good, solid financial advice. Tim Gotkiewicz linked to this video from his myspace page. I love it. This is the best way to get your debt under control, people. Watch this video; save yourself some heartache.

Time to go get some O.J. Who needs antibiotics?