Central Banks, Financial System and Money Creation (and Deficit)
In the market economy, the financial system delivers money from positive savers (ie, depositors) to negative savers (ie, cash-strapped people who need loans to buy property, etc.). In addition, financial systems facilitate non-cash payments. of natural or legal persons.
The financial system has by law the monopoly of services. Only banks can accept deposits, only insurance companies can provide insurance services, and mutual fund management may be better done by a large bank than by an individual investor.
How money is created
In the past, one of the reasons the ancient Greek states were strong was the ability to create their own currency. In the time of Pericles, the silver Drachma was the reserve currency of that time. The same applied to the gold coin of Philippe of Macedonia. Each of these coins could have been exchanged with a certain amount of gold.
Today, the Fed creates USD and ECB Euro, which are fiat money, that is, money with no intrinsic value that has been established as real money by government regulation and therefore we have to accept it as real money. Central banks circulate coins and paper money in most countries that represent only 5%-15% of the money supply, the rest is virtual money, an accounting data input.
Depending on the amount of money that central banks create, we live in a crisis or we have economic development. It should be noted that central banks are not state banks but private companies. Countries have ceded the right to issue money to private bankers. In turn, these private central banks lend to states at interest and therefore have economic and, of course, political power. The paper money that circulates in a country is actually public debt, that is, countries owe money to private central bankers and the payment of this debt is guaranteed by issuing bonds. The guarantee given by the government to the private central bankers for the payment of the debt is the taxes imposed on the people. The higher the public debt, the higher the taxes, the more ordinary people suffer.
The presidents of these central banks cannot be fired by governments and do not report to governments. In Europe, they report to the ECB, which sets the EU’s monetary policy. The ECB is not controlled by the European Parliament or the European Commission.
The state or borrower issues bonds, that is, it accepts that it has the same amount of debt with the central bank which, based on this acceptance, creates money from zero and lends it with interest. This money is slow through an accounting entry, however, the interest rate does not exist as money in any form, it is only in the obligations of the loan contract. This is the reason why the global debt is greater than the real or book debt. Therefore, people become slaves as they have to work for real money to pay off debts, whether public or individual. Very few manage to repay the loan, but the rest declare bankruptcy and lose everything.
When a country has its own currency, as is the case in the US and other countries, it can “force” the central bank to accept its government bonds and lend to the state at interest. Therefore, the bankruptcy of a country is avoided since the central bank acts as the lender of last resort. The ECB is another case, as it does not lend to eurozone member states. The non-existence of a safe European bond leaves the countries of the Eurozone at the mercy of the “markets” which, fearful of not recovering their money, impose high interest rates. However, recently European security bonds have gained ground despite differences in European politicians, while the Germans are the main cause of not having this bond, as they do not want national bonds to be uniquely European. There is also another reason (probably the most serious) which is that by having this bond, the euro as a currency would be devalued and the interest rates on loans from Germany would increase.
In the US things are different as the state borrows its own currency (USD) from the Federal Reserve, so the local currency is devalued and therefore the state debt is devalued. When a currency is devalued, a country’s products become cheaper without reducing wages, but imported products become more expensive. A country that has 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, that is, it must have enough energy. Banks with between $16 million and $122.3 million in deposits have a 3% reserve requirement, and banks with more than $122.3 million in deposits have a 10% reserve requirement. Therefore, if all the depositors decide to take their money from the banks at the same time, the banks cannot give it to them and a bankruptcy is created. At this point, it is worth mentioning that for every dollar, euro, etc. deposited in a bank, the banking system creates and lends ten. Banks create money every time they make loans, and the money they create is money that appears on a computer screen, not actual money deposited in the lending bank’s treasury. However, the bank lends virtual money but gets real money plus interest from the borrower.
As Professor Mark Joob said, no one can escape paying interest rates. When someone borrows money from the bank, they have to pay interest rates on the loan, but everyone who pays taxes and buys goods and services pays the interest rate of the initial borrower, since taxes must be collected to pay interest rates on government debt. All companies and individuals that sell goods and services have to include in their prices the cost of the loans and thus the whole society subsidizes the banks, although part of this subsidy is given as an interest rate to depositors. Professor Mark Joob goes on to write that the interest rate paid to banks is a subsidy to them, since the trust/ledger money they create is considered legal money. That’s why bankers have such high salaries and that’s why the banking sector is so big, it’s because society subsidizes the banks. As for interest rates, the poor tend to have more loans than savings, while the rich have more savings than loans. When interest rates are paid, money is transferred from the poor to the rich, therefore interest rates are favorable for wealth accumulation. Commercial banks profit from investments and from the difference between interest rates on deposits and interest rates on loans. When the interest rate is regularly added to the initial investment, it earns more interest since there is compound interest that increases the initial principal exponentially. Real money itself does not increase since this interest rate is not derived from production. Only human labor can create an interest rate of increasing value, but there is downward pressure for the cost of wages and, at the same time, an increase in productivity. This happens because human labor needs to meet the demands of exponentially higher compound interest.
The borrower has to work to get the real money, in other words, banks lend virtual money and get real money in return. Since slow money is more than real money, banks should create new money in the form of loans and credits. When they increase the amount of money there is growth (however, even in this case with the specific banking and monetary system the debt also increases) but when they want to create a crisis, they stop giving loans and due to lack of money many people go bankrupt and depression begins.
This is a “clever trick” created by bankers who have realized that they can lend more money than they have since depositors would not take their money, all at once, from the banks. This is called fractional reserve banking. The definition given by Quickonomics for fractional-reserve banking is as follows: “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 to make loans and therefore essentially create new money. This gives commercial banks the power to directly affect the money supply. In fact, although central banks are in charge of controlling the money supply, most of the money in modern economies is created by commercial banks at through fractional reserve banking.
Are savings protected?
In both the case of the Italian debt and the case of the Greek debt, we have heard of politicians (actually paid employees of the bankers) who 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, banks have low cash reserves. This is the reason why they need the trust of their customers. In the event of bankruptcy, they would face liquidity problems and go bankrupt. There are deposit guarantee schemes that repay, under EU rules, which protect depositors’ savings by guaranteeing deposits of up to €100,000, but in case of chain reactions, governments must bail out commercial banks and central banks act as lenders of last resort.
The economic system as it is shaped by the power of the banks is not viable and does not serve human values such as freedom, justice and democracy. It is irrational and must be changed immediately if humanity is to survive.