Banks are in the money business. It’s not just the Reserve Bank who prints money: government banking laws allow them to “print” money electronically -– in the words of Charles Holt Carroll, “organising debt into currency,” on the back of reserves they don’t actually have.
Banks create this currency electronically, backed only by lender’s promises to pay, at a ratio of up to twenty, forty, even fifty times the actual reserves that are held by the bank. Among bankers and professional economists, this is called “fractional reserve banking.” It is a system that allows the bankers to grow very rich very quickly, and the economists to inflate the economy beyond what is sustainable. From boom to bust at the behest of those who’ve been allowed to pretend they can create something out of nothing.
You can see the problem with banks lending out much, much more than they actually have. In fact, you’ve seen one primary problem in the news for most of the last year.
Which is this: What happens if every depositor wants their money out all at once. If you want to know whether your friendly local bank is "sound," then just ask yourself what happens when queues of depositors start forming outside, for whatever reason, insisting they be given their money back. What happens isn’t difficult to predict, especially since you’ve seen it happen with increasing frequency. Once you identify that modern banks are inherently bankrupt, and it is on the back of this inherent bankruptcy that our money supply system is based, then you realise that the whole system is as far from sound as it’s possible to be – and it’s no wonder that modern economies are racked by such violent booms and busts.
And you can see the problem too with a huge component of the money supply being backed only be debt that’s been organised into currency – and in fact, you’ve seen that in the news for most of the last year as well.
Which is this: when the value of loans drop, as they have precipitously over the last year, then so too does the amount of “currency” in the system. So too does the amount of “credit” available in the system. So when the value of existing loans takes a big dive, so too does the money supply.
Which means this system of supplying money is as far from sound money as it’s possible to be.
And you can assess how far from sound it is -– and how big a dive the money supply and the credit available for the loan markets has taken -– from the picture below showing the market caps of some of the world’s biggest banks, and how big a dive they’ve taken over the last year.
It’s not just a big dive, it’s a swallow dive off a cliff.
If you want to get a visual idea of how big the world’s economic problem is, then here it is right here, courtesy of the Financial Times (click to enlarge):