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Central banks, the financial system, and money creation (and Deficit)

Central banks, the financial system, and money creation (and Deficit)
"""In a market economy, the financial system transfers funds from positive savers (depositors) to negative savers (i.e. people with shortage of funds which need loans to buy property etc.). Furthermore, financial systems make non-cash payments from individuals or legal entities possible.

By law, the financial system has a monopoly on services. Only banks can accept deposits, only insurance companies can provide insurance services, and a large bank can manage mutual funds better than an individual investor.

How money is made

One of the reasons ancient Greek states were powerful was their ability to create their own currency. The silver Drachma was the era's reserve currency during Pericles' reign. The same was true for Philippe's golden currency from Macedonia. Each of these currencies was capable of being exchanged for a specific amount of gold.

Nowadays, the Fed creates USD and ECB Euro, which are both fiat money, that is, money with no intrinsic value that has been established as real money by government regulation, and we must accept it as such. In most countries, central banks circulate coins and paper money, accounting for only 5%-15% of the money supply; the rest is virtual money, an accounting data entry.

Depending on the amount of money created by central banks, we are either in a crisis or experiencing economic development. It should be noted that central banks are not public institutions, but rather private corporations. The countries have granted private bankers the authority to issue money. In turn, these private central banks lend interest to states, giving them economic and, of course, political power. The paper money circulated in a country is actually public debt, which means that countries owe money to private central bankers, and the payment of this debt is ensured by the issuance of bonds. Taxation is the guarantee given by the government to private central bankers for debt repayment. The greater the public debt, the higher the taxes, and the more common people suffer.

Presidents of these central banks are not fired by governments and do not report to them. In Europe, they report to the ECB, which determines the EU's monetary policy. The European Parliament or the European Commission have no say over the ECB.

The state or borrower issues bonds, which means it accepts an equal amount of debt to the central bank, which then creates money from zero and lends it with interest. This money is lent via an accounting entry, but the interest rate does not exist as money in any form; it only exists on the loan contract obligations. This is why global debt is greater than real or accounting debt. As a result, people become slaves because they must work to earn real money in order to pay off public or private debts. Few people manage to pay off their loans, while the rest go bankrupt and lose everything.

When a country has its own currency, as the United States and other countries do, it can """"oblige"""" its central bank to accept its state bonds and lend it money at interest. As a result, a country's bankruptcy is avoided because the central bank serves as a lender of last resort. Another example is the European Central Bank, which does not lend to Eurozone members. The lack of a Europe safe bond leaves Eurozone countries at the mercy of """"markets,"""" which impose high interest rates out of fear of not receiving their money back. However, despite differences in Europe policymakers, European safe bonds have recently gained ground, whereas the Germans are the main reason for not having this bond because they do not want national obligations to be merged into a single European one. Another reason (probably the most serious) is that by issuing this bond, the Euro as a currency would depreciate and Germany's borrowing interest rates would rise.

In the United States, things are different because the state borrows its own currency (USD) from the Fed, causing local currency to devalue and thus state debt to devalue. When a country's currency is devalued, its products become cheaper without lowering wages, but imported goods become more expensive. A country with a strong primary (agriculture) and secondary (industry) sector can become more competitive by having its own currency, as long as it has its own energy sources, i.e. it is energy self-sufficient. Banks with deposits ranging from $16 million to $122.3 million must maintain a 3% reserve requirement, while banks with deposits exceeding $122.3 million must maintain a 10% reserve requirement. As a result, if all depositors decide to withdraw their funds from the banks at the same time, the banks are unable to provide them, and a bankrun occurs. It should be noted at this point that for every USD, Euro, or other currency deposited in a bank, the banking system creates and lends ten. Banks create money every time they make a loan, and the money they create is money that appears on a computer screen rather than real money deposited in the bank's treasury that lends it. The bank, on the other hand, lends virtual money but receives real money plus interest from the borrower.

No one can avoid paying interest rates, as Professor Mark Joob stated. When someone borrows money from a bank, he or she must pay interest rates on the loan, but everyone who pays taxes and buys goods and services pays the initial borrower's interest rate because taxes must be collected in order to pay the public debt's interest rates. All businesses and individuals who sell goods and services must include the cost of loans in their prices, and thus the entire society subsidizes banks, though a portion of this subsidy is passed on to depositors in the form of interest rates. Professor Mark Joob continues, writing that the interest rate paid to banks is a subsidy to them because the fiat/accounting money they create is legal money. This is why bankers are paid so well and why the banking industry is so large; banks are subsidized by society. In terms of interest rates, poor people typically have more loans than savings, whereas wealthy people have more savings than loans. Interest rates transfer money from the poor to the rich; thus, interest rates are favorable for wealth accumulation. Commercial banks profit from investments as well as the difference between deposit and loan interest rates. When interest is added to an initial investment on a regular basis, it generates more interest because compound interest increases initial capital exponentially. Real money is not increased by itself because the interest rate is not derived from production. Only human labor can generate increasing interest rates, but there is downward pressure on salary costs while increasing productivity. This occurs because human labor is required to meet the demands of exponentially increasing compound interest.

Borrowers must work in order to obtain real money; in other words, banks lend virtual money in exchange for real money. Because lent money exceeds actual money, banks should create new money in the form of loans and credits. When they increase the quantity of money, there is growth (however, even in this case with the specific banking and monetary system, debt is also increased), but when they want to create a crisis, they stop giving loans, and a large number of people go bankrupt as a result of a lack of money, and depression begins.

This is a """"smart trick"""" devised by bankers who realized they could lend more money than they had because depositors would not withdraw their funds all at once from the banks. This is referred to as fractional reserve banking. Quickonomics' definition of fractional reserve banking is as follows: """"Fractional reserve banking is a banking system in which banks hold only a portion of the funds that their customers deposit as reserves. This enables them to use the remainder to make loans, essentially creating new money. This gives commercial banks the ability to directly influence the money supply. In fact, while central banks are in charge of controlling the money supply, commercial banks create the majority of money in modern economies through fractional reserve banking"""".

Are your savings safe?

In the case of Italian debt, as in the case of Greek debt, politicians (actually bankers' paid employees) have stated that they want to protect people's savings. Are these savings, however, safe in this monetary and banking system? The simple answer is NO. As previously stated, banks have low cash reserves. 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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"Central banks, the financial system, and money creation (and Deficit)" was written by Mark under the Finance category. It has been read 101 times and generated 0 comments. The article was created on and updated on 13 January 2023.
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