Why we need to keep printing money

Part I

**** This is something you should know. Nobody should be allowed to graduate from
Highschool, unless they know how most of this works, and unless they can do the simple math of
the multiplier effect in the banking system.

NO, this is not boring. Read on. You’ll see.

I wrote the following after meeting far too many people who are completely oblivious when it
comes to the financial system. Sometimes I am embarrassed for the grown adults who are so highly
educated, with doctor titles, PhDs, and what not, when they turn out to be
completely underinformed.

Most developed country’s Governments are NOT allowed to print money, by law. They gave up
that right; they relinquished that right to a Central Bank, which is not owned or operated by their
government. Most people in the top 40 economies voted representatives into parliament, congress,
senate or as Chancellors or rulers or the likes, who all wanted it that way. If our governments need
money, they have to ask their Central Banks to lend it to them, and they have to pay back more
than they received, with interest. Except for China, Russia and few others.

This holds true for Canada, the United States, Germany, England, Australia, the whole of the
European Union, most of Asia, etc.. Governments do NOT own their Central Bank.. If they did,
then the government wouldn’t have any debt, they wouldn’t owe themselves the money, would
they? When you read the actual laws and mandates of most Central Banks, you will find that they
are all very similar, England, Canada, European Union, the United States, they all have the same
basic system, which is why they frequently meet and discuss the creation of new money.

Money does NOT circulate freely or forever in any modern economy, only silly Clowns believe
that. Almost all loans, made by a bank, are newly created money. It was created out of thin air,
money that didn’t exist until it was printed. All credit is created money, printed, electronically, but
created out of thin air. Without money creation there would not be any modern economy. Central
banks do not print profits, they only create debt. All money ever issued, was printed as debt.
Somebody, somewhere has to pay interest on every Dollar, Yen or Euro that was ever created.

If a person never borrows any money, why can’t a Government live without borrowing money?
Why can’t we live without creating new money? Think about it: If money is never created, where
do people live, where do they work, do they have a car, are there any roads, where does the money
for their salary come from..?

If they just rent an apartment, never buy a house with borrowed money, that should be OK, right?
NOT.

Their apartment is in a building with 10 other apartments. Where did that building come from?
Somebody had to build that building. And that builder took out a loan, a credit, which was created
money, in order to finance the construction of that building. And the company where this person
works, and where they receive their salary, that company has taken on loans, mortgages, it
probably has a revolving line of credit, and their clients, who do business with this company, those
clients have a revolving line of credit.. and on and on .. NO credit means no money creation.. no
money creation means no economy.. You have to create more and new money, all the time, or
there won’t be any money left. I will explain.

No credit, no money creation, means no cars..- even a lease agreement is a credit (created money).
And the entire auto industry lives on credit. Without those credits, loans and corporate bonds, there
would be no General Motors, or BMW, or Audi, or Chrysler.. they all exist because they received
loans from their banks.. Without money creation they would not have a place to live and they could
not have a car, because cars would not exist without credit, without money creation. There would
be no supermarkets, no ships, no airplanes, no clean water, no cities, no civilized societies….it all
requires credits, it all requires more printed money, created out of thin air.

The entire financial structure and banking system can only function with newly created money –
even the person who never borrows any money, even they are getting paid with money that other
people borrowed from a bank who created it.

Without new money there would be no roads to drive a car on.. the roads are paid for by the county,
municipality, state governments etc.. they NEVER have the money to pay for all of that. They
borrow that money. They issue government bonds, which get bought by investors, who borrow the
money to buy the bonds.. and they borrow the money from their banks, who in turn borrow the
money from the central bank. The banks use the deposits and down-payments from the depositors,
as reserves, then use those reserves to borrow more money from the central bank.

Government taxes are never enough to pay for any of the things they need, they are just barely
enough to pay the interest on the money that they borrowed with their bonds.. and when the bonds
come due to pay out, they issue more bonds and refinance the previous batch.. that’s why
government debt keeps going up and up. (I am not saying that I agree with the fact that it is all
debt, I’m just showing you how the system works)

Without money creation there is no financial structure and no banking system. Banks never have
enough money to pay back all their depositors all at once. Confused? Good.

Let’s do some easy math:

Let’s start with 100 Crystal Coins.. our own imaginary currency, on a deserted island… Without
any money creation….what happens if we never create any additional money?

A Hobbit finds 100 Crystal coins in a magical cavern, and makes a deposit in the only bank on the
island. Then the bank lends those 100 coins to a borrower, who buys a property on our island. The
borrower, Bob, now has the 100 coins. How much money is in our island economy? 100 coins.

How much money does our bank have? NONE.

They lent it to Bob, remember? Bob now uses 80 coins to buy the land and 20 coins to bribe the
major. The major now says that the land that Bob bought can be turned into commercial property,
and thus the value of the land has increased to 500 coins. How much money is on the island? 100
coins. How much money does our bank have? None. How much money does Bob have? None, he
spent it all. How much equity does Bob have? Equity?? Of course, that is the amount of his net
worth. It means that Bob has a property that is valued at 500 coins, he has a mortgage from the
bank for 100 coins, ergo, he has a value of 500 minus a debt of 100, and therefore Bob has an
equity of 400. Can he now go and borrow 200 coins from the bank to develop this land? He could,
if we had money creation. But we don’t. The bank has no money to lend, not anymore.

Now imagine our Hobbit goes to the bank to get his 100 coins back!? What is the bank going to
tell him? “We can’t give you your money back, we lent it to Bob, on a 30year mortgage, we have
no money left.. there is no more money.“ It doesn’t work that way.

The Multiplier Effect:

Let’s use the island and 100 coins, with the real multiplier effect as it functions in today’s banking
system. The Hobbit makes a deposit in Bank1 for 100 coins. Bank1 has to keep reserves of 10%
(banking regulations, Basel 3), and it can lend out the rest. That means that Bank1 can lend out 90
coins, and keeps 10 coins as reserves. The 90 coins are lent to Bob, who buys a property. The
property owner receives the 90 coins and makes a deposit at his bank (Bank2), with 90 coins.
Bank2 now has these 90 coins, keeps 9 coins as reserves, and makes a loan for 81 coins to their
client, John. John buys a car from Mrs. Jones, who has an account with Bank3. Those 81 coins end
up in Bank3, as a deposit in Mrs. Jones’ account. Bank3 then keeps 7 coins as reserve, spends 4
coins on furniture, and then lends out 70 coins to one of their customers. This goes on for a few
more turns.

Do you see the problem? Each bank has very little reserves. Each bank has less money than the
bank before it. NONE of the depositors will be able to get their money back, because NONE of
the banks have enough reserves to pay back their depositors. And what happens in the next year?
Without money creation, none of these banks will have any money to lend out in the next year.
There is no more money. The entire 100 Chrystal Coins …all the money we ever had, has ended
up as reserves.

Through the multiplier effect we have created numerous depositors who all have a savings account,
for 100, 90, 81, 70, then 63, then 57, then 52, then 47 etc etc.. We multiplied the money, to almost
10times the original amount, but nobody can get their money back.. because it was all lent out and
then turned into reserves.….This is the end of the “circulating money”.. Each step in the circulation
has to keep a fraction, 10% (they actually have less), of the total that they received, as reserves.

Money does NOT circulate forever. In each step a portion of the money has to be kept as reserves..
thus reducing the total amount left in the economy. Unless more additional money is created,
printed, as credit, this scenario will run out of money.

There is no functioning economy without the creation of new and additional money.

Central Banks are owned by the banks in their system. Each bank owns shares in the Central Bank,
the larger banks own the largest shares in the Central Bank. Central Banks issue newly created
money to the banks in their system. That created money is lent to their member banks, against the
reserves that the member banks have on hold. But what are those reserves, really?
Read on…

Part II

Welcome to Part II of why we need to keep printing money. As you now know, reserves are not
based on the money that a bank has to lend.. a bank cannot lend the money it has from its
depositors, otherwise all the depositor’s money would be gone…. so, now what?

How does it work?:

Read Part II and you’ll never look at your bank the same way…

Bank1 receives 100 Chrystal Coins from the Hobbit, right? Now what happens? Bank1, if it wants
to, can take the entire amount, 100 Chrystal Coins, and designate them, in their own bank, as
‘Reserves’. Now the Central Bank can see on its computers, that Bank1 has 100 coins as designated
reserves. Then the Central Bank allows Bank1 to create up to 10times that amount, 1,000 Chrystal
Notes, as newly printed money. Now Bank1 can issue loans of up to 1,000 Chrystal Money in
loans, mortgages, car loans, bond purchases etc..

What just happened? Where did the 1,000 Chrystal Notes come from?

Very simple: Bank1 has 10% reserves. Yes, it does! 10% of WHAT? 10% of 1,000 Chrystal
Notes.. 10% of 1,000 = 100.

Bank1 does have 100 coins, from the Hobbit. Those are the reserves against which Bank1 borrows
10times that amount from their central bank. Then Bank1 lends out that money that they borrowed
from their Central Bank, the 1,000 Crystal Notes, in newly created money.

Banks need to have reserves for the money that they borrow from their central bank, and the
Central Bank “prints” the money that they ‘lend’ to their member banks. “Reserves” (related to
loans) are money that the bank has as liquidity against the money that the bank borrows from their
central bank. ‘Stress tests’ in the banking system test how much liquidity a bank can create, in
order for a bank to pay back their central bank.

Clowns have this foolish fantasy where banks can only lend the money they have on deposit and
that we don’t need any money creation. That doesn’t work. If a bank would lend out the money
that other people paid into the bank, then the bank wouldn’t have any money left, and the people
that made a deposit would never be able to get their money back. That scenario would never create
new money, ergo they would run out of money real fast.

Banks lend newly created money, and banks receive this newly created money from their Central
Bank. That’s why Central Banks were created, by the banks, in the first place. One central point
where all reserves are counted and newly printed money is issued, which the banks then lend to
their clients.

All money ever created is created as debt. Because the banks ‘owe’ that money back to their
Central Bank, and the bank’s clients owe the money back to their banks.
Do banks ever lend some of the deposits that they received? Yes, of course. Most banks only use
about 10-40% of deposits as ‘reserves’. Then look at the official financial statements and graphs
– where banks lent out as much money as they took in, and in many cases where they lent out more
money than they took in as deposits. HOW could they do that unless the bank itself borrowed more
money from the Central Bank, than it had on deposits?

And how did all their customers ever get their money back, or wrote checks to pay their rent or
buy groceries, paid for gas, etc.. unless the bank had the money to give back to them? Over 96%
of every deposit made into a bank, will leave the bank’s vault in the next 30 days. People have to
pay their bills!! If you lent their money to someone else, on a 30 year mortgage, how could you let
people write checks to pay their monthly bills?? How could a bank lend out as much money as
they took in? The banking system has to create new money, all the time, or there would not be any
money.

Once you understand this, just once, you will not have to listen to silly fools who never learned
how any of this works.

Most of the money that a bank lends out is newly created money that the bank received from their
Central Bank, and it is all money that never existed until that moment.

In this case, Bank1 has 100 Chrystal Coins, then the Central Bank will lend Bank1 up to 1,000
Chrystal Notes, freshly printed money, created out of thin air. And if the Hobbit ever comes back
to get his 100 coins back, no problem – his 100 coins were never lent out, they are perfectly save
in the bank’s vault.

The 1,000 Chrystal Notes will be turned into home mortgages, bond loans etc.. but they will all
end up in other banks as deposits, where portions of it will be used as reserves. Even these 1,000
Chrystal Notes will not circulate for more than 10 steps. New money will have to be created to
keep the economy humming along. New money has to be created before someone can earn it or
borrow it.

In the banking regulations of Basel 1 and Basel 2, banks could borrow 50times the amount they
had as reserves. The president of the German BundesBank has an official document on their
website, where he states that any member bank with 2 Million Euros can borrow up to 100 Million
Euros from the ECB.. (European Central Bank).

In reality the money supply is NOT related to economic growth, deposits are reserves linked to
loans and most every credit and mortgage is newly created money, and money creation does not
equal inflation.

A little insight on Basel 3, from Finance-Watch.org.

Risk weight / risk weighted asset: financial regulators require banks, when calculating how much
capital they are required to have, to apply a weight percentage to each of their assets, which is
supposed to reflect the degree of risk of the assets. Let’s take as a fictional example a bank that
lends 100 euros to a start-up company and another 100 euros for an individual mortgage. The total
assets of the bank are 100 +100 = 200 euros.
Let’s imagine that the regulator has decided that mortgages have a higher probability of being
repaid than loans to start-up companies and therefore attributed risk weights of 50% to mortgages
and 90% to start-up loans. The risk weighted assets of the bank are 100*50% + 100*90% = 140
euros.

The risk weighted assets are the basis used for calculating how much capital banks need to have
under Basel regulation. If banks need for example to have 8% of their risk weighted assets in
capital, that means in our example that the bank needs to have 8%*140=11.2 euros in capital.

That means that out of the 200 euros that the bank lent, 11.2 must be funded with
capital(deposits/reserves), and the rest, i.e. 188.8 euros can be money that the bank borrowed. (end
quote)

WHERE does a bank borrow money? From their Central Bank, of course. That means that this
bank will borrow 188 Euros/Dollars, at a very low Prime Rate of less than 0.25%.. and charge the
mortgage interest of 7.5% and maybe charge the start up company a rate of 9.5%. That is the reason
why there is a “Prime Interest Rate”, or “Leit Zins Rate”, the rate at which banks borrow money
from their central bank. That’s where banks get the money they lend.

The bank only had 11.2Euros/Dollars. The bank now has more than 15times the amount it has on
deposit/reserves in outstanding loans. And where did this 15times money come from? Their central
bank printed it for them. It is newly created money. This is called “Leverage”. It is the same
concept that allowed Lehman Brothers to leverage their assets by a factor of 44:1..

they had borrowed 44times more money than they had on hand, bought all kinds of assets with it,
real estate, hedge funds etc.. and when their assets all lost value, they couldn’t pay back their
lenders, banks, who in turn could not pay back their central bank, because they did not have any
cash reserves. Then the government steps in and borrows more money, to bail out the banks, and
the taxpayers have to pay back the government. I know, it sounds crazy, but that’s what we got.

That is also why the “leveraged super senior synthetic CDO” was such a toxic instrument, it was
all leverage and no cash. Money does not circulate freely and forever, debt circulates. New money
has to be added to the system, all the time.

Most politicians, Governors, Lawyers, Doctors or Presidents could not explain this to you or show
you the math on the multiplier effect. How did they get elected? Why did anyone vote for those
clowns?

Most financial instruments, government bonds, corporate bonds, bank guarantees, collateralized
mortgage obligations, collateralized debt obligation, all those capital instruments, have value. They
have value because their issuer owes the money back. They are all debt instruments that are tied
to the future revenue of the company that issued the bond. Their pay-back is legally regulated and
enforceable in court.

They have to be paid back before any shareholders ever receive any dividends… Stocks, on the
other hand, are just bets, and the company whose stock you bought does not owe you any money
back. Bonds are legal debts that have to be paid back.
These debt instruments become deposits against which the banks borrow more money from their
central bank. But the instrument has to be genuine, it has to be from a reputable bank, and it has to
be acceptable to the receiving bank. Never mind that the process through which such an instrument
is send to the bank has to be properly functioning as well. You will find out in the book how
difficult that could be.

Here is an excerpt from Bloomberg.com, March 9th, 2014

QUOE:

The amount of debt globally has soared more than 40 percent to $100 trillion since the first signs
of the financial crisis as governments borrowed to pull their economies out of recession and
companies took advantage of record low interest rates, according to the Bank for International
Settlements.

The $30 trillion increase from $70 trillion between mid-2007 and mid-2013 compares with a $3.86
trillion decline in the value of equities to $53.8 trillion in the same period, according to data
compiled by Bloomberg. The jump in debt as measured by the Basel, Switzerland-based BIS in its
quarterly review is almost twice the U.S.’s gross domestic product.

Borrowing has soared as central banks suppress benchmark interest rates to spur growth ……(and
print more money)

“Given the significant expansion in government spending in recent years, governments (including
central, state and local governments) have been the largest debt issuers,” according to Branimir
Gruic, an analyst, and Andreas Schrimpf, an economist at the BIS. The organization is owned
by 60 central banks and hosts the Basel Committee on Banking Supervision, a group of
regulators and central bankers that sets global capital standards. End Quote. (yes, those are
the guys that print all the money…)

Where do you think that $100 Trillion Dollars came from? Remember: you can’t earn or borrow
money that doesn’t exist… and these $100Trillion came into existence because governments had
to borrow them, and their central banks were glad to print it for them. Now the governments have
to pay that back, plus interest. The debt cycle continues.

Most people working in a US bank can not explain this, at all.

NEWS FLASH.. from Bloomberg:

The biggest U.S. bank holding companies will need to round up as much as $68 billion more in
loss-absorbing capital under supplemental leverage ratio rules adopted by regulators in
Washington today. Eight lenders, including JPMorgan Chase & Co. (JPM) and Bank of America
Corp., face greater restrictions on borrowing power than their overseas competitors as they meet a
demand to hold capital equal to at least 5 percent of total assets.

The rules designed to curtail financial-system risk surpass the 3 percent minimum set in a global
agreement by the Basel Committee on Banking Supervision. “The leverage ratio serves as a critical
backstop to the risk-based capital requirements — particularly for the most systemic banking
firms,” Daniel Tarullo, the Federal Reserve governor responsible for financial regulation, said in
a statement.

This was April 8th, 2014…. they just can’t get to agree that banks should have some cash, at least
a little bit, just in case.. but I guess 5% is better than nothing at all?

Please, do not comment on this section. I will not respond to it. I am not discussing monetary
policy, the nationalization of the Federal Reserve or any other central bank, I’m not getting into a
discussion about government bond printing etc..

I wrote this for all the people who don’t know the first thing about money and where it comes
from. If anyone wants to learn more about it, great, go ahead, the world is wide open with free
information available to almost anyone who wants to find out more.

If you want to have some fun, ask your friends: “by the way, what is the multiplier effect in the
banking system?”…. most of the time you will encounter a blank stare and hear crickets…..
- Frank Beathe
In the Shadow of Billions
http://www.plutonas.com