Currency, A House of Cards

“…economies move on debt..” economist James Grant, editor Grant’s Interest Rate Observer, quote on 31 August, 2007, on The Nightly Business Report.

All growth in the economies with money rationing is built on debt. Fractional reserve banking (F.R.B.) creates money “out of thin air” and is severely criticized by supporters of the “gold standard”. As argued on the Yahoo user group,, in February, 2007, debt creates more claims on all money in circulation, regardless of the money media is gold, printed paper money, specie or any other money form. Even without FRB, money creation continues and the only way to stop creating money “out of thin air” is by prohibiting borrowing as argued on the Yahoo User Group.

FRB creates money “out of thin air” by the central bank purchasing government securities. This money goes into the economy and ends up in a bank as it works through the economy. The bank keeps the set “reserve ratio” as determined by the central bank and then loans the rest of the money. The money, again, works through the economy ends up in a bank. The whole process occurs over and over again and increases the money supply by the reciprocal of the reserve ratio. For example a reserve ratio of 5% (is 1/20th) and creates 20 times the value of the purchased government securities. So, if one billion in government securities is purchased, 20 billion in money is created.

If a central bank is eliminated, a person may loan money. The money ends up in the hands of someone else who will loan the money. The people don’t loan all of money received and this fraction of the whole amount is the individual “reserve ratio”. Again, the whole process occurs over and over again and increases the money supply by the reciprocal of the “aggregate reserve ratio” that is determined by all the people who loan the money for enterprising purposes.

Then the bubble bursts. A can’t pay B, then B can’t pay C, and C can’t pay D, and it works its way through the economy. The economy is a “house of cards” of debt.

Central banks work at making sure this doesn’t happen by watching economic indicators and “tightening” or “loosening” money as situations arise. This causes reducing or increasing the money supply. Before the Federal Reserve Bank was established in 1914, economic “panics” happened less than every ten years. The last crisis was during the “Depression” and a “mini banking crisis” that happened in 1983. None before or since then have occurred in the United States.

Whatever way to describe the system, example a “blank check, check card system”, there is no “house of cards” of debt. An enterprise is based firm, tangible, resources of personnel, machinery, brain planning software assets of business plans, program and project management, policies, planning and other hard and soft capital.

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