If We Don’t Change the Way Money Is Created, Rising Inequality and Social Disorder Are Inevitable, by Charles Hugh Smith

Charles Hugh Smith points out some of the many problems that render central banking unsustainable. From Smith at oftwominds.com:

Centrally issued money optimizes inequality, monopoly, cronyism, stagnation and systemic instability.
Everyone who wants to reduce wealth and income inequality with more regulations and taxes is missing the key dynamic: central banks’ monopoly on creating and issuing money widens wealth inequality, as those with access to newly issued money can always outbid the rest of us to buy the engines of wealth creation.
History informs us that rising wealth and income inequality generate social disorder.
Access to low-cost credit issued by central banks creates financial and political power. Those with access to low-cost credit have a monopoly as valuable as the one to create money.
Compare the limited power of an individual with cash and the enormous power of unlimited cheap credit.
Let’s say an individual has saved $100,000 in cash. He keeps the money in the bank, which pays him less than 1% interest. Rather than earn this low rate, he decides to loan the cash to an individual who wants to buy a rental home at 4% interest.
There’s a tradeoff to earn this higher rate of interest: the saver has to accept the risk that the borrower might default on the loan, and that the home will not be worth the $100,000 the borrower owes.
The bank, on the other hand, can perform magic with the $100,000 they obtain from the central bank. The bank can issue 19 times this amount in new loans—in effect, creating $1,900,000 in new money out of thin air.
This is the magic of fractional reserve lending. The bank is only required to hold a small percentage of outstanding loans as reserves against losses. If the reserve requirement is 5%, the bank can issue $1,900,000 in new loans based on the $100,000 in cash: the bank holds assets of $2,000,000, of which 5% ($100,000) is held in cash reserves.
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One response to “If We Don’t Change the Way Money Is Created, Rising Inequality and Social Disorder Are Inevitable, by Charles Hugh Smith

  1. “The status quo “solution” is Universal Basic Income (UBI), a form of subsistence designed to quell the righteous urge to throw off the monetary yoke of the privileged financial Elites.”
    It is nice to know that something positive will be available to get away from the $15/hr minimum wage guarantee. With the UBI, no one will be laid off/hours cut, although lots of people may choose to retire/do supplemental work if the UBI is high enough. Once again, the elite are looking out to help the less able. Am I missing something?

    Like

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