Sunday, July 19, 2009


In our previous blog we declared that Henry Ford spent his life protecting his company from bankers and stated, “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” He was speaking about the US system but what the hell was he on about?

What Ford was talking about is the much excepted and misunderstood magic of fractional reserve banking and central banks setting of interest rates. One may think that for each loan made there is a saver to match it but that is not the case. One may also think that inflation is all the same but we have “monetary inflation” which is manipulated by the banking system to have an every increasing amount of money in the system. We then have commodity inflation/deflation which is a natural oscillation of prices based on supply and demand. The banking and monetary system legally robs people of much of the productivity gains achieved by society. Now, that is a good enough reason to revolt if one reflected and understood it.

Savings are diluted by an ever increasing supply of money forcing this wealth to be mal-invested. Prices continue to rise forcing society to borrow more and of course each time a bank makes a loan this value is added to the money supply. More money goes into the system allowing others to earn it and pay off the principle and interest on their loans. The ECB tries to manage this increase with interest rates so we have a smooth level of “monetary inflation”. This has gone on successfully for years and now people see it as a part of life i.e. “we always have this curse of inflation but the central bank is trying its best to deal with it and the last thing we want is deflation.”

Now all that may be true but what happens when thing go wrong? For this system to work it needs an every increasing supply of money. So banks must continue to make new loans, adding more money to the system which allows other borrowers the opportunity to earn some of it and pay off their loans. If it comes to a halt (borrowers get tapped out) the money in circulation begins to dry up as each time a borrower makes a payment on a loan, that money is taken out of the system. It goes from a situation where if you borrowed it was always easier and easier to make the payments as time went on due to “monetary inflation” to a situation where it gets harder and harder to earn the money to pay off the loan due to “monetary deflation”.
Monetary deflation is the situation we currently find ourselves in and the ECB seem to be taking a different approach in this situation than the US. Both have dropped interest rates trying to get the monetary inflation back on track but when zero interest rates will not work to get society to borrow more the USA are choosing to dilute the money supply themselves while the ECB are allowing it to contract. Both approaches have pros and cons in what they wish to achieve but as with all pyramid schemes this banking and monetary system will end in tears and probably in revolt and war as well. Savers and borrowers are the big losers and the ones that make the magic loans get to keep all the securities in the end.

For most it may be enough to get from this article that there is something seriously fishy about banking and all the clichés about fat bankers are clichés for a reason.

However, it would be leaving the reader up in the air if we didn’t explore some of the below topics and ask some further questions that we need to reflect on.
How much fiat money is in the ECB system?
How much gold reserves are in the Euro Zone Central Banks?
If gold is outdated why are central banks still holding it?
Is there an alternative, better system?

These magic tricks of bankers are around a long time and by just having a gold standard to back currencies will not prevent against fractional reserves banking. However, the reserves would be backed by gold (which is a store of value) and not just a promise of a printed piece of paper which can be produced at little cost.

Money supply is measured by M0, M1, M2 and M3

The Euro money supply from 1998-2007 has doubled (See graph). Has the released CPI and Eurozone Harmonised Price Index doubled in this period? At most it is up about 40%????????
The European Central Bank's definition of euro area monetary aggregates.
M1: Currency in circulation + overnight deposits
M2: M1 + Deposits with an agreed maturity up to 2 years + Deposits redeemable at a period of notice up to 3 months
M3: M2 + Repurchase agreements + Money market fund (MMF) shares/units + Debt securities up to 2 years

As of June, Euro Zone M0, (paper and coins) was €784 billion or about €2400 per capita. Below is the ECB report of M1 M2 and M3 in billions.

How much gold reserves are in Euro Zone Central Banks?
Euro zone gold reserves = 11,065 tonnes @ €21million a tonne = €235 billion and about 1oz per capita.
Euro paper and coins (M0) = €784 billion or 3.3 times more than the gold value. So gold is worth €2191 an OZ or they need about 35,000 tonnes of gold to back M0.
M1 is €4,190 billion or 17.8 times their gold reserves. So gold is worth €11,819oz or they need 200,000 tonne of gold to back M1 and only 158,000 tonnes of gold have ever been mined?
M2 is €8126 billion or 34.5 times gold reserves (gold €22,908oz)
M3 is €9408 billion or 40 times gold reserves (gold €26,560)

If gold is outdated why are central banks holding it?
I think many believe in the system that is in place and of course it’s instigators and people that understand it will do well to the loss of those who don’t (most savers and borrowers). It is likely that these instigators hold most of the gold as well as the securities that back all the loans as they know the basic difference between money and wealth. So in the case of the ECB, when less and less money is in the system and you can’t pay your loan, you will lose your assets. In the USA they just print more money diluting more, the $ value to the determent of savers. By the time this money reaches borrowers prices have gone up as well as market interest rates, making it more difficult to pay off their loan. They also lose the asset securing the loan.

Is there an alternative better system?
Almost any system would be better for the majority of society than the system in place today. It will collapse, if not in this year sometime in the near future. The majority of real money and assets will be legally in the hands of a few. Capitalism and free markets will likely get the blame for the mess and not the real culprits, banking and the monetary system. To spell it out this system is not capitalism. It is up to citizens to discover how society progresses, what causes stagnation as well as cycles of boom and bust. While people keep listening to the vested interest groups and those who haven’t a clue they will get poorer and poorer without even knowing it. Free market capitalism is how all of society progresses most. However it is a system that once established will continuously be attacked from all angles and especially from within. It is worthwhile getting to understand it for one’s self.

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