How Does Inflation Happen? Part 2: Fractional Reserve Lending
The banking system in America and most other prominent countries is hurting the economy, both on a national and global level.
Most people would probably agree that our political system is broken and corrupt, and the banking system is no different.
In Part 1 of this series, we saw how the Federal Reserve is committing open fraud and creating currency out of their Magical Bank Account. In this article, we’re going to see how the banks multiply this currency creation through a deceitful concept called “fractional reserve lending”.
This concept is very important to understand, because it underlies the reasons why banks control the entire economy, and how they rob you of your purchasing power and lead our countries to a major collapse of the economic system.
Again, while this may come across as a little grim, this series is not meant to be fear-mongering, and the last thing we want is to bring more fear into this world.
View this series as simply gaining the knowledge that will help you make smarter financial decisions in order to protect your future - decisions like investing more of your wealth into real money like precious metals and good cryptocurrencies.
If you missed Part 1 of this series, then be sure to read that here.
What Is Fractional Reserve Lending?
The concept itself is not outright known by many people, but information on it is widely available and the implications of it are unnerving to say the least.
At its core, fractional reserve lending states that when you deposit your money into a bank account, they are allowed to lend out a large percentage of that money (making profit on the interest from those loans of course), while only holding a very small portion of your money in their vault.
In many banks, this is around 10%, but in some cases can even be as low as zero, meaning they don’t have to hold onto any of your money, and can loan all of it out.
They then replace the money they loaned out to you as “bank credit”, signifying that you still have this money and giving you the ability to “cash out” this bank credit for currency when you need it.
At face value, this concept may not seem too bad - who cares if they loan out your money? You can always go get your money if you need it.
Or can you?
For most banks, if you hold a larger amount, they won’t be able to get you your money within a short time-period, because they don’t actually hold that money for you (the scene from the Netflix show Ozark comes to mind, when Jason Bateman’s character needs $500k in 24 hours, and his bank is telling him they don’t have it).
In our everyday life, this might not seem like anything more than a minor inconvenience. After all, none of us are being pressured by a drug lord to get an inordinate amount of money in such a short time (or at least I hope not).
But there’s actually something much deeper going on, that is truly degrading our economic system.
How Fractional Reserve Lending Creates Currency Out Of Thin Air
When banks create this “bank credit”, it adds to our currency supply, just like the Federal Reserve does when it creates money from its Magical Bank Account.
The difference is that this is happening at an exponential (meaning accelerating) scale across the entire nation, and it’s happening with your money when you deposit it in the banks.
Here’s where this multiplication factor comes in:
Whenever someone takes a loan from a bank, they are wanting to buy something big, like a house.
So they use that money to buy the house, and the companies receiving that money then go and put that money into a bank account.
…and then 90%+ of that money gets loaned out again, because the banks only have to keep a small percentage and can loan out the rest.
And of course when they loan that money out a second time, those people are buying things, and the people they are buying things from put their money into another bank account, and on it goes.
So now the initial amount of currency you put into your bank account has been multiplied over and over again in the form of “bank credit”, adding more and more currency to our supply, inflating the prices of what we buy, and taking away our purchasing power.
That’s why while what the Federal Reserve is doing is open fraud, it’s still relatively minor compared to what’s happening to our currency through the banks.
In fact, 92-96% of our currency comes from the banking system, as numbers typed into a computer as this “bank credit”.
When The Banks Fail, You Fail
While this is clearly toxic to our economic system and is multiplying the rate at which we inflate our currency, the truly scary thing about this is what happens when the bank fails or the system starts to collapse.
This is what happened in Venezuela and Zimbabwe and countless other fiat-using countries who had to close their banks and not allow anyone to take out their funds - all while the trillion dollar Zimbabwe dollars couldn’t even buy a loaf of bread.
These sort of things sound separate from us, as something that could never happen to us.
But the only reason we feel this way is because we’ve become comfortable.
We’ve forgotten that this is an actual reality and that we’ve actually been making significant steps towards a huge collapse, especially in the recent years, as many countries have begun denouncing their use of the US dollar, bringing all of those extra printed dollars back home to America, where they will flood our economic system and hyperinflate the markets.
The founding fathers of America warned us against exactly what is happening now, which is why they put in the Constitution that all currency needed to be backed by gold and silver - real money.
Is Fractional Reserve Lending Ever A Good Thing?
Fractional Reserve Lending can be helpful in certain situations to increase liquidity of loans and allow greater flow of money within an economic system.
However, it would still need to be something that is publicly agreed upon and acknowledged by those participating, so that they would know that the bank might not always have their money on hand.
On top of this, you would need to make sure that it’s all backed by real money, making bank credit only valuable if you could actually get that real money at some point, and not able to become a usable form of currency on its own like it does in the current fiat currency system.
And the final point is that the percentages would need to be more reasonable.
The fact that some banks today are allowed to loan out all of your investment is discerning, since they could theoretically get into a situation where they don’t have any money available for anyone.
Protect Your Purchasing Power
Between the Federal Reserve’s Magical Bank Account and the banks’ fractional reserve lending machine, our currency supply is exponentially increasing, providing power to those who can spend it first, before it affects our economy - the government and the banks (and of course those shady figures who own the Federal Reserve behind closed curtains).
But you do have an option to protect yourself - holding real money.
Real money is money that is scarce and not reproducible like fiat currency is.
It has public consensus on its value, rather than value decreed by an organization in power, and therefore is truly “power to the people” (which those at the top certainly do not like).
Precious metals and good cryptocurrencies fit these criteria, and will step in as our major monies when this current version of fiat fails, just as every one of the thousands of fiat currencies throughout history have failed.
But there’s more to the story here.
Not only is your purchasing power - the value you create through hard work and service - being siphoned away from you, but then you are taxed on top of that.
But what actually is tax? If we look into it, we see that we never had personal income tax until 1913 - suspiciously the exact same year that the Federal Reserve was created.
Taxes aren’t what you think, and as we’ll see in Part 3 of this series, it’s simply another form of “inefficiencies” in the system (read: theft).
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Posted from my blog with SteemPress : https://globalcryptoacademy.com/how-does-inflation-happen-fractional-reserve-lending/