The American Dream: 21st Century Serfdom

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by Keoni Galt on July 24, 2010

Go to school.

Get good grades.

Go to college.

Get a career.

Buy a nice car.

Buy a big house.

Go on many luxury vacations.

It can all be yours for the taking…just sign your name on the dotted line at every step of the way, and you too can have your very own version of the American Dream.

This is supposedly the keys to happiness and success and achieving “a better standard of living than our parents.”

It’s a grand lie, designed to get the average person to pursue this dream so as to enslave themselves into the system…a benign, subversive system of hidden serfdom.

Welcome to debt slavery.

And who are our Feudal Overlords?

The bankers.

And how do they exactly trap us into forced servitude for their profit?

The twin tools of Fractional Reserve Banking and Fiat Currency.

Wanna start a business?

Take out a business start up loan!

How do you pay for the overhead of running your business? Here’s a business credit account!

Wanna buy a house?

Here’s a 30 year mortgage…and don’t forget your mortgage insurance plan, so in case you are injured or laid off, you won’t have to make your payments for up to one whole year! (Gee, you bankers are just SO generous!).

Wanna get an education?

Here’s a student loan that will take you 20 years to pay off after you’ve graduated and still can’t find a job during the current recession.

Understand that our modern economy is based not on MONEY…but on DEBT. An obligation to promise to paying the bankers – WHO DID NOTHING MORE THAN TYPE A NUMBER INTO A COMPUTER IN THEIR BANK LEDGER SHEET PROGRAM AND – VOILA! – you too can sign up for 21st century serfdom to achieve the “American Dream!”

But don’t look at the Bankers in your local neighborhood bank as your Feudal overlord…he’s just a mid-level overseer of the Lord’s vast estates.

See, his bank, in turn, has to borrow a fraction of their funds from the central banking system so that they can turn around and obligate YOU in your pursuit of the “American Dream.”

Does this sound outlandish or confusing to you?

Let’s analyze this in as simplified terms possible:

Fiat currency = money backed by nothing more than the value it has printed on it. Because it is not backed by a substantial commodity, it is in essence an agreed upon fiction…in which parties exchanging fiat currency for goods or services agree to the value of that currency. Now, because fiat currency is only worth what the issuing institution says it is, there is absolutely NO check on that institution arbitrarily printing up more of it whenever they feel like it. In essence, fiat currency allows unlimited “printing” power.

However, most people think that the Federal Reserve prints the nations money supply and distributes the currency to the banks to circulate throughout the economy. What the Fed prints and distributes is but a fraction of the so-called “money” supply. (More like the “credit enslavement ratio.”)

Fractional reserve lending means a bank need only hold approximately 10% of money in an account at any time. So if you deposit $100 into an account, the bank need only hold $10 in reserve and lend out $90. This doesn’t sound so bad, right? Except that’s not how they do it. The bank takes your $100 and puts it on their assets side of their ledger. They now have 10% of a $1000 reserve requirement. So now they can turn around and get your fellow debt slave to sign up for a used car loan of $1000. In this way, $900 of fiat currency is “created” by the click of a banker’s mouse and your signature on the loan forms dotted line.

Ahhh, but it doesn’t end their either. See, the bank calculates it’s “reserve” by including all promissory notes, all credit accounts as “assets” which allows them to “create” even more fiat currency at the click of a mouse.

That $1000 loan ( which originally came from that first $100 deposit) has paperwork in which the loan taker is obligated to repay at interest over a set period of time. For the sake of simplicity, let’s just say that at the end of the terms of agreement, after adding up the interest and the principal, the debtor will have ended up paying back $1500.

Before the $1000 debtor even issues a single payment, the bank now has $1500 promissory note…which they than account for as a $1500 asset…which is 10% of a $15,000 reserve level.

Along comes Joe Blow the entrepreneur, who wants to start an internet porn business. He needs 15 grand to start up, so he goes and gets a loan from the same bank.

After signing his name on the dotted line, he now has a loan that when all is said and done, will gain the bank $20,000…which of course, is now a bank “asset” that is now a 10% reserve level for $200,000.

Here comes the next guy, and he wants to buy a house for $200,000…so he signs up for a 30 year mortgage….

Are you starting to get the picture about how fiat currency and fractional reserve lending actually work? From an initial $100 of actual cash from a bank depositor, a bank was able to leverage a 6-month $1500 debt obligation from one worker; a 5-year, 20,000 start-up debt obligation from a wannabe Larry Flynt; and a 30 year, $200,000 obligation from would-be homeowner. What started out as 100 of cold, hard cash from a single depositor, turned into 235,000 of owed debt servitude over the course of years by three other people.

This is precisely why the credit card companies (i.e. the huge, National Banks) are so eager to sign everyone up for credit cards, and they really don’t care if you max them out and are unable to pay them back. Your $20,000 credit card bill, while it exists on their ledgers as current and not in default (it takes you not making any payments for months on end before it becomes “default”), that $20,000 figure is a potential $200,000 reserve loan to some other would be serf.

All of these people, pursuing some aspect of the American Dream, obligated to the bankers who did nothing more than click a mouse and get the unknowing Serfs to sign their name on the dotted line. Oh, and note what happens when a home-”owner” serf defaults on his home loan, and the bank forecloses. They’ve now turned their fictionally created “fiat currency” into a tangible, real asset – the seized home.

In this way, our Feudal overlords send fiat currency downwards, while the real wealth moves upwards to them – the class of people who have the power to “create” money.

Now some caveats here – this is a very very simplified explanation for how fractional reserve lending and fiat currency have ensnared the vast majority of the country into unwitting, financial serfdom. Of course there are many variations, and all sorts of complicating factors…but the general overview is a fairly accurate summation of the system’s basic function.

This is precisely why inflation has occurred, devaluing the US Dollar exponentially ever since the Federal Reserve system was instituted in 1913. 1929% inflation since 1913. As money continually gets “created” by the corrupt banking practice, it puts more and more “money” into circulation, devaluing the purchasing power over time.

99% of us in America are in some way, shape or form, a serf for the bankers, because they have the power to “create” money out of thin air…by creating a debt obligation for which you must labor to pay off over the course of your working life.

And all these bankers did was click on the mouse and get you to sign on the dotted line.

With fiat currency working in tandem with fractional reserve lending, and we now have the means of ensuring that almost ALL business endeavors, all personal consumption choices, and almost all manners of subsistence are essentially done via debt to the bankers.

Remember the old saying…”He who has the gold, makes the rules?”

The new one is “He who prints the fractional-reserve, fiat currency enslaves the fools!”

Now get back to work! You owe it to our Feudal Overlords!

{ 121 comments… read them below or add one }

BobbyL July 24, 2010 at 12:00

Well said Hawaiian Libertarian. This was spelled out in Carroll Quigleys books in the early 60′s (The anglo-american establishment). As long as the bankers are in charge we will remain Slaves.

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Paul Elam July 24, 2010 at 12:12

Exceptional and well articulated. I wish that more of these articles were in mainstream, but I fear the same forces that prevent Welmer from being featured in the NY Times are at play here.

You are writing against the people who own the system that is enslaving everyone.

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The Contrarian Expatriate July 24, 2010 at 12:21

True indeed. I talked about the same issue in my last video. Unfortunately, the forces of retail consumption are too powerful to convince Americans to save.

US dollars are not the worst way to save so long a smattering of gold, silver and other currencies are in the mix.

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Cloud July 24, 2010 at 12:49

If you lie to a woman and you have consensual sex with her, it is officially “rape”

“”It is terrible, but the law says very clearly that if someone has sexual intercourse using deception about his identity to conduct the act, it can be considered rape,” said Leah Samael, a lawyer specializing in civil rights and human rights cases.”

Similar laws exist in California and Massachusetts

http://www.cnn.com/2010/WORLD/meast/07/21/israel.rape.by.deception/index.html

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Epoche* July 24, 2010 at 13:01

here is a line about slavery/serfdom from a conservative theorist Dr Kenneth Minogue:

It is this element of dehumanization that has produced what I am calling “the servile mind.” The charge of servility or slavishness is a serious one. It emerges from the Classical view that slaves lacked the capacity for self-movement and had to be animated by the superior class of masters. They were creatures of impulse and passion rather than of reason. Aristotle thought that some people were “natural slaves.” In our democratic world, by contrast, we recognize at least some element of the “master” (which means, of course, self-managing autonomy) in everyone. Indeed, in our entirely justified hatred of slavery, we sometimes think that the passion for freedom is a constitutive drive of all human beings. Such a judgment can hardly survive the most elementary inspection of history. The experience of both traditional societies and totalitarian states in the twentieth century suggests that many people are, in most circumstances, happy to sink themselves in some collective enterprise that guides their lives and guarantees them security. It is the emergence of freedom rather than the extent of servility that needs explanation.

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Epoche* July 24, 2010 at 13:06

It is ironic that you mention serfdom, medieval serfs didnt pay as much taxes as a man does under a modern welfare state. (Not to mention men paying child support). If we are to believe numerous various writers it was understood that men under serfdom would pay a maximum of 30 percent of the agricultural product to the lord or they would kill the lord. Even the vassal knew of the law of diminishing returns and the importance of not “eating the seed corn”. Many ancient lessons have been unlearned.

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Chuck July 24, 2010 at 13:12

Not to detract from this very good article, but I find it ironic and hilarious that the Google Ad overlaying this piece is an ad for a FHA mortgage refinance program.

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Richard Brodie July 24, 2010 at 13:17

One of is is very confused about how money-supply multiplication works and I don’t think it’s me.

A bank can’t create $1000 from a $100 deposit. It creates $90, which can then be deposited in another bank and create $81, and so on.

There’s a decent Wikipedia article about fractional-reserve banking that seems to agree with me. What is your source for this information?

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trent13 July 24, 2010 at 14:13

interesting article – absolutely love the title

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trent13 July 24, 2010 at 14:14

oh, and damn, if all it takes is $100 we should all be bankers! ;P

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JohnJ July 24, 2010 at 14:22

It’s worth remembering that the Federal Reserve was created by the federal government in 1913, and they wouldn’t be able to do what they do without the government’s backing. The problem is worse than bankers; it’s government-owned bankers.

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James July 24, 2010 at 14:49

That’s why it’s called the ‘American Dream ™’;
Because you’d have to be asleep to believe it.

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Avenger July 24, 2010 at 15:09

Cloud wrote-Similar laws exist in California and Massachusetts

What are those laws? I’d be curious to know.

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Davidge July 24, 2010 at 15:15

You can only be a slave to the debt system if you buy into it.

It has taken some work, but I am debt free other than my mortgage and I am targetting that next. I think we need to think like our grandparents generation more. Their attitude was “If you need credit to buy something you want then you can’t afford it”.

1) Start by eliminating your credit card debt. They interest on those can be incredibly high!

2) If you are making large car payments, then sell it! Buy a beater. You can get a nicer vehicle with cash once you are debt free. Put the money you save on payments against the credit cards and other loans.

3) Kill of other loans and then go for that mortgage!

A man who is debt free is also free to make other life decisions!

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lynch July 24, 2010 at 15:23

This doesn’t make sense to me, could you please elaborate further?

The initial $100 deposit, which could then be used to lend out $90.. that makes sense. The bank makes interest off of what it loans out on the $90, eventually recouping the initial $90 and then some. That’s how I’ve always understood banking to work.

However, when you say the $100 deposit becomes the “reserve” for a $1000 loan.. how does that work? In the first case, the bank takes the $90 from the account. In this second case, where does the missing $900 come from? At some point the borrower gets $1000 (for their car, business, whatever) and spends it. Then they are on the hook for paying it back. The bank still has to give out $1000. How do they do that from someone else’s $100 deposit?

This goes on up the line of your explanation, as well. The entrepreneur needs actual money to buy his servers, connectivity, and eastern european cam sluts. The homebuyer needs to pay $200K to the seller before he actually gets the property.

Having money for a reserve is great, but the bank still has to have the other part of the money to actually give out to it borrowers, no?

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Quoyle July 24, 2010 at 16:13

“Fiat currency = money backed by nothing more than the value it has printed on it. Because it is not baaked by a substantial commodity, it is in essence an agreed upon fiction…”

Conspiracy theory crap. Your treasured ‘gold backed’ currency is just the same. Men agree gold has value, and hence it is so. So gold is an agreed upon fiction just as much as your fiat currency.

This whole federal reserve conspiracy is just a distraction. The Spearhead is harboring way too many kooks. Game, and now this.

This whole article has no point. It’s populist crap playing at our hate of work.

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Epoche* July 24, 2010 at 16:15

as von mises wrote in one of his earliest book, the function of banks is to serve as a intermediary using property rights and law to profit from the time value of money, between savings and profit from investment. In todays and age, there really is no such thing as accountability for banks in any way, shape or form. The new function of banks is to serve as a payment processing center this is because of fdic insurance. Citibank should have gone bankrupt but it will not, there are no limits to the moral hazards that banks can impose on us.

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Gx1080 July 24, 2010 at 16:18

So….basically, the credit card industry is a pyramid scheme designed to get as much money from people as possible by using overly drawn-out interests.

It wouldn’t bother me as much if it wasn’t for all the brainwashing done for the Lamestream media to get people to buy that scam.

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Jabberwocky July 24, 2010 at 16:40

He’s saying they illegally/unethically move the 100 dollars to the otherside of the ledger, not just loan out 90 of it, but say the whole 100 represents the 10% minimum assets vs loans, then they are able to borrow 1,000 from the federal reserve to loan out. Repeat. Rinse.

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Anti Idiocy July 24, 2010 at 16:42

I too question the accuracy of this analysis. I’m not saying it’s wrong, fractional reserve banking isn’t an area of great expertise for me. But it sounds fishy. My understanding is that if the bank receives a deposit of $100, it can loan out $90 of that. It doesn’t have to keep in reserve more than 10% of total deposits. Trouble can arise if borrowers can’t pay back their loans and too many people want their deposits back. Of course, the FDIC (read “the taxpayers”) guarantee what most people would consider fairly large deposits.

The money supply increases when the Federal Reserve creates money out of nothing and then loans it to banks, rather like a deposit is a loan to a bank. We haven’t yet had runaway inflation during the latest printing binge, because of deflationary pressures and the fact that money gotten at near zero interest rate from the Fed in many cases ends up loaned to the government through the purchase of bonds rather than being loaned to businesses or to individuals. If the treasuries are paying more than the interest paid to the Fed (plus any processing expenses), and they are the banks can’t lose, since the treasury bonds are guaranteed.

As far as avoiding debt-slavery, my wife and I have combined middle-class income, and for years we have saved about 30% of our pre-tax income. Right now that is all in cash and metal, and we’re ready to move quickly if necessary. For my birthday a few months ago, my wife offered to get me a Kindle, if I wanted. I thanked her and said I didn’t need a Kindle and actually was quite happy getting nothing material for my birthday. It turned out to be a great day.

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Jabberwocky July 24, 2010 at 16:43

I think. I’m pretty sure….sorta.

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Tim July 24, 2010 at 16:48

This is precisely why inflation has occurred, devaluing the US Dollar exponentially ever since the Federal Reserve system was instituted in 1913. 1929% inflation since 1913. As money continually gets “created” by the corrupt banking practice, it puts more and more “money” into circulation, devaluing the purchasing power over time.

This was a grand slam, Hawaiian Libertarian. Excellent article. I remember vacationing in Thailand back in 2000-2001. The U.S. dollar was equal to 50 Thai baht. Now the greenback is trading for 33 Thai baht. When will Americans wake up, when it goes down to 25 Thai baht? 20?

This isn’t just another recession we’re in. This is big time restructuring. There won’t be another economic boom for a very very long time. My guess is twenty years.

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Gunn July 24, 2010 at 17:08

Technically this analysis is all wrong.

The $100 deposit is actually a bank liability on its balance sheet, not an asset. Any loans made to customers are assets on its balance sheet, as these represent monies the bank is owed.

A bank however must hold capital reserves against the loans it has made, so its not free to lend money without having something in reserve. The reason for this is in theory it reduces default risk caused by a significant proportion of creditors (i.e. bank depositors) asking for their money at any single point in time. In simple terms, the capital reserve is intended to cushion against the time it takes the bank to free up its assets vs. the time in which it must pay its liabilities if called to do so.

The way capital reserves work is that banks hold capital in the form of shareholders funds, corporate bonds issued, and various other forms of capital instruments issued in its name, plus retained profits from previous years that have not been paid as dividends.

Some of these funds are classed as appropriate to count for reserve purposes. Technically you have different tiers of capital, with the highest tiers being money that is absolutely the bank’s (e.g. shareholders funds) and which is held in instruments that can be realised immediately (e.g. highly liquid treasury bonds or cash). The bank must hold enough capital in these tiers to meet i. any regulations for the territories it operates in and ii. market sentiment requirements (i.e. analysts might expect certain banks to hold more capital than mandated by governments in order to give the bank a AA rating or whatever).

In order for a bank to grow its loan book, it must acquire enough capital to do so. This is the natural check against banks expanding their P&L without limit, and its a very real limitation. Most retail and universal banks have to take strong account of their capital plan in order to realise their profit and loss plan.

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Venom Froggy July 24, 2010 at 18:04

Okay, I see some people asserting that this article is all bullshit. If that be the case, then can some of these fools explain all this hyperinflation goin’ on?

No? Then you’re just talking out your ass!

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Anonymous July 24, 2010 at 18:15

How about if you take out a mortgage and put down say 10% then they leverage up your deposit and loan it back to you and charge you interest.

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tweell July 24, 2010 at 18:32

Hawaiian Libertarian’s description of fractional-reserve banking is obviously not close to the textbook definition. However, I’d bet that what he has described is close to how many banks have been operating. Since having a 10% reserve is considered excellent by the Fed, lots of banks have engaged in accountant shenanigans in order to look like they’re in good shape. How else do you have banks that are listed at 10% and taken over just days later? Barring a run on the bank, the only possibility is that they were using Enron accounting.
Precious metals have been used for money because they are rare, look pretty and have an infinite shelf-life. Inflation was curbed because there’s only so much gold and silver around. Nowadays they have intrinsic value of their own – gold plated electronics are resistant to corrosion and silver is the most electrically conductive element, so both are used in industry.
Hawaiian Libertarian’s final point is quite valid. Go into debt only when you have to, and only as little as you have to. The only ‘good’ debt is when that borrowed money is making more than the interest that you are being charged. This does not hold true for cars, houses, vacations, appliances, fine dining, etc. It used to be true for education, but I’d want to run a cost/benefit analysis before going into debt for school. I have never owned a new car or a new house, but I don’t have car or mortgage payments. The credit cards get paid off every month. Don’t work for the banks, work for yourself!

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trent13 July 24, 2010 at 19:00

The idea that banks are keeping 10% of their deposits in reserves is a joke – theoretically, if they were actually doing that we might be doing better economically, but they weren’t.

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Anonymous July 24, 2010 at 19:48

From my understanding of the system that HL writes about the fractional reserve method looks something like this:
$100 can become $1000 by keeping the original $100 as a cash pile to back up $900 in new loans to others. The original $100 is a fractioned (1/10th) real amount held as a reserve to justify new loans of $900 to others. (Or bank keeps $10 and loans out $90. Same thing)
The other loaned $900 doesn’t actually exist as paper or cash but exists as fictional numbers to be paid back by money borrowers. The borrowers pay back real money (principal borrowed amount + interest) to the fictional bank created loan numbers. Pure exponential profits for a bank. Hard time for the borrower of fictional money.
Anyway, this isn’t based on science but how fractional reserve appears to me.
Furthermore, banks gamble on whether the borrowers of real and fictional bank money can pay the loan(s) back. If massive amounts of people default on their loans, banks go under because of the borrowed money banks owe other larger banks. And, if people, en masse’, decide to withdraw their money from their banks, there wouldn’t be enough money in reserve to pay back all people. Both instances can topple a bank and create a resounding ripple effect in the banking and financial system.
Again, just a view.

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the universe July 24, 2010 at 19:48

From my understanding of the system that HL writes about the fractional reserve method looks something like this:
$100 can become $1000 by keeping the original $100 as a cash pile to back up $900 in new loans to others. The original $100 is a fractioned (1/10th) real amount held as a reserve to justify new loans of $900 to others. (Or bank keeps $10 and loans out $90. Same thing)
The other loaned $900 doesn’t actually exist as paper or cash but exists as fictional numbers to be paid back by money borrowers. The borrowers pay back real money (principal borrowed amount + interest) to the fictional bank created loan numbers. Pure exponential profits for a bank. Hard time for the borrower of fictional money.
Anyway, this isn’t based on science but how fractional reserve appears to me.
Furthermore, banks gamble on whether the borrowers of real and fictional bank money can pay the loan(s) back. If massive amounts of people default on their loans, banks go under because of the borrowed money banks owe other larger banks. And, if people, en masse’, decide to withdraw their money from their banks, there wouldn’t be enough money in reserve to pay back all people. Both instances can topple a bank and create a resounding ripple effect in the banking and financial system.
Again, just a view.

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irlandes July 24, 2010 at 20:49

Sorry, sports fans, HL is exactly right at least at the first degree. If you want to learn more, it’s called something like, “Creating demand deposits.”

Back in the early 70′s, a man at work told me (using the 10% reserve example) that if I deposit $100 in the bank, they keep it as the 10% reserve, and simply create $900 out of thin air, and loan it out.

I told him he was crazy as a loon. I said with a 10% reserve they could only loan out $90. I didn’t eat loon, but after investigating, I did eat a lot of crow. That is EXACTLY how it works.

Those of you who said what I said nearly 40 years ago, need to get better informed as I did.

http://en.wikipedia.org/wiki/Deposit_account

Read carefully, and note the following statement:

“In this way, commercial banks are allowed to increase the money supply (without printing currency, or legal tender).”

See also: http://www.greatchange.org/sc-fractional_reserve_banking.html

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Dexter Morgan July 24, 2010 at 20:56

I’m a big fan of Spearhead and of men’s rights in general. But this article is terrible, nothing but resentment. One of the things i’ve always liked about Spearhead is that it wasn’t one of “those” websites where unhappy people said the equivalent of “let’s just cut our balls off and retreat from women and society”. The bitter resentment of those who should have a big “L” tattooed on their forehead marked those sites – and this post.

As someone who holds multiple advanced degrees in finance, I’m not sure which sordid falsehood to address first. How about the most obvious: Bankers aren’t at fault for some one borrowing too much money – THE INDIVIDUAL IS! I have a credit score of over 800. Not because I borrow a lot; it’s because I have very little debt compared to my earnings. I own my luxury car outright. I have no debt whatsoever. No evil “banker” held a gun to your or anyone else’s head and forced ANYONE to borrow. Lending has been going on since the earliest humans first produced more than they needed for the next winter; their is nothing sinister about it – or bankers. Are bankers more self-centered and money-focused than others? Probably. This simply makes them human; selfishness is in our genes. 99% of the bankers i’ve met and worked with were ethical, and followed the rules.

Now, onto fiat currency. I agree that fiat currency is only worth what we agree it is worth. You think gold is better? Why does gold have intrinsic value? Can’t eat it, unlike food. It can’t be used as clothing to keep you warm, or as a weapon to to defend you. Basically, it is pretty to look at. Full stop. That’s it. So where does it get its “value” from? Well, its pretty much because we all coalesce around an AGREED UPON (or at least a mean) value for Gold. Exactly. Like. Fiat. Currency. You moron…

The one advantage gold has over fiat currency is that there is a finite supply of it, i.e., socialist do-gooder governments (ahem, Obama, ahem) can’t print more of it and inflate away the value of your hard work and savings. NOTE: THIS IS A COMPLAINT YOU SHOULD DIRECT AT LIBERAL GOVERNMENTS — NOT BANKERS! Bankers prefer stability and, in fact, the majority of bankers i know support a gold standard. Just not for the reasons you do.

As for fractional reserve lending, you no-nothing types bang on about “fractional reserve” lending because, i suspect, you think it makes it sound more sinister. You know what fractional reserve lending is? It’s called “credit”. You think we shouldn’t be able to advance credit to people whom we think are safe bets, like the farmer who has worked the same land for 20 years and now wants to expand, or the would-be homehomer who secures the loan with his home on a 80% loan to value ratio? FINE! DON’T LEND TO HIM! But don’t tell the rest of us we can’t take a risk by extending credit to anyone.

Another hoary myth in your diatribe is that the bankers “DID NOTHING MORE THAN TYPE A NUMBER INTO A COMPUTER”. Did you forget the part about the bank risking it’s own capital?? Every bank (and indeed, every financial institution, such as broker dealers, etc) have capital requirements. This means, capital over and above the deposits on loan to them. I.e., their own money! You conveniently forget about that, or more likely don’t understand how the system works.

This isn’t to say credit didn’t get too loose in the real estate bubble, it surely did. FNMA, FMAC, socialist do-gooder programs to make sure every n’er-do-well on the planet owns a home he couldn’t afford, moral hazards created by gov’t bailouts of “too big to fail” financial institutions that do nothing but encourage recklessness – those government anti-free-market programs are blights that pervert the “invisible hand” of the market.

I have a confession to make: I work for a financial institution, and have gotten rich off it. Does this make me the “feudal overlord” you refer to above? I have an easy solution for you: SAVE YOUR MONEY AND LEAVE THE BORROWING TO SOMEONE WITH A BETTER UNDERSTANDING OF HOW THE SYSTEM WORKS! Who forced you – or anyone – to borrow copious amounts of this nasty “fiat currency” under this oppressive “fractional lending” system, anyway? You know the old saying – little boats should stay near the shore.

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Dexter Morgan July 24, 2010 at 21:07

“I deposit $100 in the bank, they keep it as the 10% reserve, and simply create $900 out of thin air, and loan it out.”

You’ve left out the part about “excess capital” reserves. If you put $100 in the bank, the bank has $100 in assets – and $100 in liabilities (the amount it owes you). The bank has, at that point, ZERO CAPITAL. So the reserves you speak of need to come from the bank’s own capital – the amount the founders of the bank put into it, and retained earnings (profits) from prior years. This is a great simplification, but hey – some of you are pretty simple! I just want to dispel the myth of the “evil” banker taking “no risk” and eating caviar while you “serfs” suffer. Oh, please.

Years ago in South Africa, when ATM’s first came out, certain groups used to foment hate of white people amongst uneducated blacks by saying “see, when the white person goes up to the bank, the machine gives him free money! But it won’t give us blacks any!”. It was of course a complete falsehood that served no other purpose than to rile people up. The story is in some ways analagous to what certain no-nothing posters are doing here. Pity; The Spearhead is my favorite site on most days.

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Dexter Morgan July 24, 2010 at 21:19

OMG! It’s Irlandes! Speaking of denizens of “those” websites with”whoa is me” posters. Google Irlandes on the now defunct “Don’t Get Married” forum (if archives exist) if you want more context. Bring a supply of anti-depressants.

Irlandes this isn’t a site for those who have capitulated. You need to keep looking if you want a forum like the “don’t get married” site. The men on this site also know we’re in a gender ware – the difference is, unlike the “men” on your favorite sites, we intend to WIN IT.

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Keyster July 24, 2010 at 21:40

It used to be financial institutions were compensated for RISK. Now they don’t even have that because (unprinted) tax dollars BAIL them out when they’re “too large to fail”.

The capitalist system is a very cold, unsympathetic beast. As it cycles through each boom and bust period it creates some winners and losers. Bubbles are inevititable by design because greed is blind. It’s when the system becomes so large and unwieldy on a global scale, that financial collapse can happen.

It could be that the Yen replaces the Dollar as the worldwide currency standard before the end of this century anyway. We don’t make stuff anymore, we just buy it…on credit.

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Toby July 24, 2010 at 22:11

You forgot to warn men about marriage and children, the biggest trump card this man hating society holds against you.
RIP the-spearhead
2009-2010

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tweell July 24, 2010 at 23:49

Hey, Dexter, what about ‘intangibles’? Goodwill, name recognition, these get dollar values and can be considered up to 25% of the bank’s capital, according to the FDIC. Actually, they say that banks at or above that ‘will be subject to close scrutiny’.

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Gunn July 25, 2010 at 00:17

For any business, including banks, the balance sheet can be expressed simply as:

assets = liabilities + shareholders funds & reserves

Shareholders funds + reserves includes various elements such as paid-up share capital, profits retained from prior years, certain long-term debt instruments issued by the bank (corporate bonds) and goodwill and other intangibles.

When a bank talks about risk capital, it refers to a subset of its overall reserves. Only some classes of reserve may be counted as risk capital (i.e. the capital held against loans made to customers). The risk capital is further categorised into tiers, with tier 1 capital being classed as ‘better’ for this purpose than the lower tiers. Typically the top tiers of capital are the most expensive to hold because they represent either share capital or things that are very similar to share capital.

The different tiers give rise to some potential confusion about how well capitalised the bank is. Basically, the equation is

capital ratio = risk capital / relevant assets

However, because of the different tiers of risk capital, you typically have two measures that are commonly referred to:

Tier 1 capital ratio = tier 1 risk capital / relevant assets
Capital ratio = all risk capital / relevant assets

For most universal banks that I’m aware of, at least 3-4 years ago, the Tier 1 ratio was usually about 5-8% whilst the capital ratio was a bit higher (10-15%).

My understanding is that intangibles and goodwill cannot be classed as risk capital for the simple reason that the bank cannot realise such funds in order to meet its short-term obligations as they become due.

Relevant assets in this case, for anyone interested, are the ‘weighted risk assets’. Risk assets are assets such as loans held by the bank on its balance sheet. The weighted part refers to the fact that certain borrowers are regarded as more risky than others. The weighting ranges from 0% (for sovereign debt) to 100% (unsecured short-term credit such as credit cards). Mortgages used to be weighted at either 20% or 50% (I can’t remember off-hand which it was).

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Gunn July 25, 2010 at 00:39

A quick primer on sub-prime mortgages:

Mortgages are usually a risk asset held by a bank on its balance sheet. As such, in order to lend money to customers, a bank must hold risk capital on any loans made. This naturally limits how much the bank can lend as mortgages, and how much it charges for the privilege.

In order to lend more to customers, banks needed a method to take the mortgages off their balance sheets. Doing this frees up the risk capital so that it can be allocated against new mortgage lending. This is where securitization comes in. Securitization, simply put, is a method of wrapping up assets into a tradeable security which is then sold on to other investors.

The banks started to securitize mortgage assets and these were then sold onto other investors. The interesting thing about securitization was that in theory it allowed you to create a different risk profile for the security vs. the underlying asset. I.e. an individual mortgage might have a default probility of 1%, i.e. 10 in 1000 such mortgages are expected to default. This would be quite risky at the individual level, making this a relatively poor asset from the bank’s point of view.

However, when you pack up 1000 of these mortgages into a combined asset, then you still believe that 990 of the mortgages in the combined asset will continue to perform even if the other 10 default as you expect. The combined asset therefore has a much more stable cashflow profile than the individual mortgage. The banks used this property to sell the best slices of the securitized mortgage as being AAA rated.

However, what happened during the sub-prime crisis was that certain classes of mortgage toppled like dominoes and the expected default rates were much lower than the actual default rates. This left the banks severely exposed because almost all securitizations require the issuing entity to retain some ‘skin in the game’ by them holding so-called equity tranches of the securitized asset, i.e. the riskiest elements of the securitized asset.

One of the biggest things to realise, and which is not well reported, is that the sub-prime mortgage crisis was driven by government policy rather than the banks themselves. Sub-prime mortgages by their nature are loans that the banks would rather not make, because there is a high risk of default. However, the democrat government during the 90s pushed hard for banks to make more of these loans to its core constituencies, and they provided incentives to the banks through such things as the repeal of glass-steagall. It would not surprise me if they also allowed regulators to turn a semi-blind eye to securitization as a process.

Glass-Steagall for those interested was a framework passed during the 1930s depression, which required investment banks to be separated from retail (deposit holding) banks.

The key to understanding that Act is that retail banks are typically low profit but highly capital generative areas of banking (because much of the P&L is generated by net interest income on deposits, which are not risk assets for the bank). Investment banking areas in contrast are very high profit but also big capital sinks (because much of their P&L is generated by risk assets). If you can combine the two, you can drive the investment bank with the proceeds of the retail bank. This results in higher profitability at the cost of increased risk of default on deposits.

The repeal of this Act was utterly stupid and was as much a driver of the banking crisis as anything else that was done.

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zel July 25, 2010 at 02:45
Asatru Heathen July 25, 2010 at 02:50

Thanks for this article, Dave. I’ve always been anti debt (which does not mean I have always been able to avoid it), but this paints a very clear picture.

It also explains a number of personal experiences with banks and the like that I could not quite understand before. They were HAPPY when I had difficulty making repayments, provided that I did not actually default – and ANY payment, no matter how small, was enough to prevent default.

-Asatru Heathen

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Deansdale July 25, 2010 at 03:23

Toby: “You forgot to warn men about marriage and children, the biggest trump card this man hating society holds against you.
RIP the-spearhead”
I don’t really get if this supposed to be ironic or not but it’s not working either way.
The Spearhead is not a one trick pony, so to say. It is good that we have many authors talking about many subjects.

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Migu July 25, 2010 at 03:52

Nit pic. Money even fiat money is not debt. It has interest attached, but the dollar in my pocket is a medium of exchange not a debt.

Perhaps we can make the money multiplier a bit easier to understand here.

When you deposit $10 this is not a $10 reserve for a $100 dollar loan. It is a $1 reserve for a $9 loan. The bank can now grant simultanious claims to $9 of ten dollars.

You have claim to the full 10, and the new borrow has the same claim to 9 of the ten. This borrow deposits his 9 in another bank. That bank now can issue another loan $8.10 and on down the line. Until the reserve ratio of the original 10 reaches equilibrium with the extended credit.

The main problem with this is it’s fraud. The banks grant title of the same 10 to two or more people without restriction. Here is the logic fail. How can I spend my 10 on lunch while at the same time five other people are also spending $9, $8.10 and on down the line.

If you do the math the original $10 turns into about $85. Jab you want to do the math (n-0.1x)

The OP did a good job the money multiplier was just explained backwards. If it worked the way explained we would have hyperinflation in a matter of days. Instead it’s taken almost 100 years to erode the currency by approx %100. Not bad for the banksters.

All in all, I say free banking, that way any bank that chose to back itself fractionally would have appropriately discounted notes in circulation. We would have to eliminate legal tender laws first though.

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Gunslingergregi July 25, 2010 at 04:45

Why ya say f the debt and just save money. Gonna raise my son to hopefully be retired by 30 more like 25 just by putting hours in and having him either get all ase certificates for mechanic or go master electrician on his summers while he is young. Then he can have nothing much to do with system at all if he doesn’t want to. Took me a year and a half to save a 100 g’s which is enough for me to retire. Life can just be simple numbers and easy to beat. Just that only certain people will do so. Write some months down on a pad or excel sheet. state a goal like 25k achieve it. State a goal like 50k achieve it. Then go 100k achieve it. Then done. At the end you are like are you fucking serious it was that easy. Yes it is actually that pathetic in life. It is easy. That is the secret to life simplify it down to just base numbers. Simple.
Just track it ever day. Of course then you also live simple just work eat shit and sleep. Keep your bills almost at nothing try to work 84 hours a week to take up all your time so you have no time to think. Keep it simple.
Then buy hard assetts that produce income. Next step is chill and enjoy your leisure time or whatever.

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Philip July 25, 2010 at 05:36

All you really need to know is, all money is issued by the banks, and banks always add INTEREST. So that means that almost every dollar and every pound (etc) in circulation is owed to the banks plus interest!
If the banks called in all the money they are owed there would not be enough money in the world to pay it off.
Watch the documentary ‘Secret of OZ’ a truly great watch about the issuance of currency and the battle to control money

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Epoetker July 25, 2010 at 06:23

Once again-I like libertarian ideas. I can see their applicability. I can even sympathize with them. But Destroy Feminism First. As long as the naggy voices of ‘concern’ infect our man clubs, banking would be corrupt with or without a gold standard.

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misterb July 25, 2010 at 09:28

Capitalism and free market are two different things. Don’t confuse the two as being one thing. ith capitalism, its about corporatism. With free market, you can basically buy and sell without restrictions.

Buying a house wasn’t that complicated, before my generation. Banks are so eager to squeeze every penny from one individual to the next.

There’s a good reason not to take out loans or use credit cards. Of the interest rate and fees that are levied on the user. With a credit card, never go over a debt of one thousand.

Personally I would continue using my prepaid MasterCard, over any credit card. With a prepaid MasterCard, I load how much what I need and use it.

With bank accounts, I’d be leery with them. It’s been confirmed many times that others can easily withdraw funds from there. Without the owner knowing about it. Whether from the inside or done by a hacker. So much for security.

Of course, with American banks, nothing is safe. The safety deposit boxes are nothing more than jokes. They would empty out the safety deposit boxes, and take what’s inside. A gold bar, a savings bond, a diamond ring, you name it, they’ll take it . regardless how well you keep an eye about it.

The American government will just take the money from your own account. To them, you’re just their piggy banks.

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misterb July 25, 2010 at 09:44

@James. “That’s why it’s called the ‘American Dream ™’;
Because you’d have to be asleep to believe it.”

I like how you put it. And it is true. why its called the American Dream. It only happens when you’re a sleep.

The saying goes, in order to avoid falling into debt, don’t go too deep into it. Avoid it much as you can. Pay quickly as you can possibly can.

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Gunn July 25, 2010 at 10:06

I was scratching my head about this thread, wondering why people keep stating that banks can just print whatever new money they like, and then I realised that HL is talking about banks’ role in the expansion of the money supply via fractional reserve banking.

The method by which this works is far less insidious than its made to sound. Basically, when central banks expand money supply, they factor in the multiplication that will then happen based on the fractional reserve ratio.

Simplest way I’ve seen to show whats happening is this:

i. bank gets $100 dollars as a deposit from customer A. This is received as cash (for simplicity’s sake). The deposit is recorded on its books as an IOU to the depositor for $100 (a liability), and the cash received is physically held (an asset).
ii. it lends out $90 of the cash to customer B. The loan is recorded on its book as an IOU from the customer, and the bank now has only $10 left in physical cash (the amount ‘reserved’ per federal regulation).

customer B goes out and spends money with person C.

iii. person C deposits $90 with the bank. The bank records this as an IOU to person C of $90, and holds the $90 as cash.
iv. the bank now lends 90% of the ‘new’ deposit, i.e. $81 to customer D. The bank records this an IOU from customer D to it. The remaining $9 is held as a reserve.

the cycle then repeats, and mathematically you end up with an expansion of the money supply by a factor of 1/R where R is the federally mandated reserve ratio. In this example, the $100 originally supplied becomes $1000. Without loss of generality, this money can be considered to be ‘new money’ introduced into the economy by the central bank, i.e. in the example given customer A is actually the central bank. This is because when you think about it, only the central bank is able to inject ‘new’ money into the system, so ultimately the total money supply is a function of the amount they have injected.

1/R x money supplied by the central bank is the maximum the money supply can expand to, and is theoretical. Why?

i. at some point, there may not be new customers wanting loans (this will depend on, amongst other things, the interest rate). thus, by changing the interest rate, the central bank can indirectly control the overall money supply.

ii. there are additional capital reserving requirements on banks, whereby equity capital must be held against all loans (and other ‘risk assets’) made by the bank. capital in this sense is restricted by shareholders willing to invest capital into banks, and/or historic profits generated by the bank and retained for future business activities.

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Firepower July 25, 2010 at 10:48

I support the serfdom concept.

What does it say about a culture where the welfare recipients and illegal aliens have the best freedoms reserved for the fun activities of drinking, partying, mating and fighting?

Wage slaves they are not.

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trent13 July 25, 2010 at 11:06

All you really need to know is, all money is issued by the banks, and banks always add INTEREST. So that means that almost every dollar and every pound (etc) in circulation is owed to the banks plus interest!
If the banks called in all the money they are owed there would not be enough money in the world to pay it off.
Watch the documentary ‘Secret of OZ’ a truly great watch about the issuance of currency and the battle to control money

Fundamentally that would be my problem with banking in general, that they are making money off of money.

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Epoche* July 25, 2010 at 11:14

the problem is not that banks are allowed to make money, it is that they are allowed to make money and are bailed out if they become insolvent. Without the fdic, people wouldnt necessarily store all of their money in a bank. The issuance of credit money is synonymous with the creation of wealth, a logical and semantic confusion that will lead to widespread moral hazard and adoption of corporatism.

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s32 July 25, 2010 at 13:10

I’ve lurked here for awhile but have never posted, so here I go….

This article is garbage. I have a problem with some of the Ron-Bot/gold-bug sentiment around here. There’s a conspiracy meme that runs through the gold-bug crowd that the Federal Reserve is some sort of diabolical villian that has caused all the problems that America faces…and if we just simply END THE FED all our problems would dissapear. There’s also an idiot-populism sentiment that bashes banks, bankers, and most financial institutions.

Money is simply a tool of exchange. Fiat currency is superior to a commodity based currency because it allows the Government or Central Bank to control the money supply and allow it to grow when needed. With a Commodity based currency the supply of money is whatever is pulled out of the ground. Say we had a gold-backed currency. The value of your gold-dollar would fluctuate whenever someone sets up a new gold mine. A Fiat Currency managed by a competent Central Bank (in our case the Federal Reserve) is hands down better than a commodity/barter system.

Credit is GOOD!!!!!!!!!!!!
If you want to live in a society any more advanced than that middle ages agrarian society pictured up top, you need a reliable financial system that provides loans and credits. Business can’t expand without loans. Advanced Industrialized countries need credit to exist. No new factory would ever be built if we didn’t have a system of credit and loans.

I think the Dexter Morgan guy should write the next spearhead article on anything financial related.

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Rob July 25, 2010 at 15:19

The introduction to this article sounds very much like the opening monologue in the film “Trainspotting” which goes like this:

“Choose life. Choose a job. Choose a career. Choose a family. Choose a fucking big television, Choose washing machines, cars, compact disc players, and electrical tin openers. Choose good health, low cholesterol and dental insurance. Choose fixed- interest mortgage repayments. Choose a starter home. Choose your friends. Choose leisure wear and matching luggage. Choose a three piece suite on hire purchase in a range of fucking fabrics. Choose DIY and wondering who the fuck you are on a Sunday morning. Choose sitting on that couch watching mind-numbing sprit- crushing game shows, stuffing fucking junk food into your mouth. Choose rotting away at the end of it all, pissing your last in a miserable home, nothing more than an embarrassment to the selfish, fucked-up brats you have spawned to replace yourself. Choose your future. Choose life… But why would I want to do a thing like that? ”

And that was a film about the bleakness of heroin addiction in Scotland. Funny how it sounds a lot like the American dream really.

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ABS July 25, 2010 at 16:56

The article is wrong, and much of it appears lifted from “debt elimination” scams, including one I civilly prosecuted, but what do I know? I only graduated with honors from Wharton with a concentration (major) in Finance, and have more than two decades of work experience in financial issues.

This in particular is a pearl, lifted perhaps word-for-word from the scammers’ marketing materials: “This is precisely why the credit card companies (i.e. the huge, National Banks) are so eager to sign everyone up for credit cards, and they really don’t care if you max them out and are unable to pay them back. ” One of the biggest players in the scheme we were not able to prosecute, due to jurisdiction, was from Hawaii. Is that you?

I’m sure HL means well, but this article really ought to be taken down – its not going to make The Spearhead look good, and really has nothing to do with MRA, guyinism, or whatever one wants to call it. Yes, money is created through the banking system, as some of the commenters have noted, but not in the way described by HL.

It is of course true that the availability of credit can raise prices. For instance, it is quite likely that the availability of student loans has raised the cost of tuition.

And yes, banks – and their shareholders, which for the most part of average people with pension plans, 401Ks and the like – care a lot whether you pay back credit cards.

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Bill Smith July 25, 2010 at 20:20

Let me make it real simple. The cash in your wallet, as well as the digits in your bank balance is ALL debt. The most sensible thing to do with it is to turn it into equity ASAP. Were I positioning myself to relocate, I’d give serious consideration to converting that paper DEBT into something like gold, which has proven itself historically. Otherwise, I’d be putting my money into things I could make things with, along with the materials. I will point people’s attention to how people coped during the Great Depression for inspiration. Clearly these involve very personal self-assessments, so I’ll comment no further.

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Dexter Morgan July 25, 2010 at 21:20

Tweel – you asked about goodwill and other intangibles. These are nothing more than the result of the peculiarities of accounting. We don’t completely have “fair value” accounting in the U.S.; most of the balance sheets reported under US GAAP (or IFRS) are at “historical cost”. That is, they don’t represent the value of the business.

Let me give you an example: Let’s say you had Buffet’s money and wanted to buy Intel. Intel has a market cap of $120B right now, so you’d expect to pay $120B to buy 100% of the company. That’s the value the market placed on it (as of Friday, anyway). But if you look at Intel’s balance sheet, it only has tangible assets (plants, equipment etc) of about $50B. Furthermore, it has Liabilities (debt, accounts payable, etc) of about $12B. That yields a book value of $38B. So why is the “real” value in the market $120B? Because Intel is worth more than the plants, inventory, etc on hand: It is worth the CASH IT CAN GENERATE. Conracts in the pipeline, etc. These don’t sit on the balance sheet under historical cost, but they DO have value. When you acquire Intel (or any company) you pay the market price, you record the assets at their value, and the REST GOES TO GOODWILL. There is nothing sinister about goodwill; it is simply a “plug” to get from book value to fair value. Now, if the value of a company DECLINES after you buy it, that “excess of fair value over book value” (goodwill) may have declined. In that regard, you are required to write it down. The Big 4 audit firms are pretty on top of that, although i’m sure soemtimes one slips through.

The point was, goodwill DOES represent a real asset, since the real value of a business is derived from the discounted value of its anticipated FUTURE cash flows, not the historical cost of its PREVIOUS cash flows, which is what sits on the balance sheet.

I hope this was helpful; finance concepts are a whole lot less “sinister” and conspiracy theories (“The illuminati are out to get us!!!!!!!!!!!”) a whole lot more laughable once you actually understand the reality of what these things represent.

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illness July 26, 2010 at 05:17

I’m a big fan of Spearhead and of men’s rights in general. But this article is terrible, nothing but resentment. One of the things i’ve always liked about Spearhead is that it wasn’t one of “those” websites where unhappy people said the equivalent of “let’s just cut our balls off and retreat from women and society”. The bitter resentment of those who should have a big “L” tattooed on their forehead marked those sites – and this post.

Hmm, except for the cutting of balls part, there is a huge retreat from women and society part in the spearhead. Not with a big “L”, but with waiving our flags. You’ve got Welmer who is creating a magazin outside of the grasp of the mainstream, Paul Elam, the creator of the zeta male and academic warrior for male studies, Ferdinand Bardamu, collector of ideas and GX1080 who has a sharp out-of-the-box look at the gaming industry and other “nerdy” entertainment issues, just to name a few contributors. None of those look at those issues from a mainstream, society embracing point of view.
And have a look at the comments. Non-mainstream scientific ideas are strong here. Mises is mentioned a lot, Evolutionary Psychology is a building block of game and I don’t have to mention that most people here think women’s studies are a scam.

As someone who holds multiple advanced degrees in finance, I’m not sure which sordid falsehood to address first.

Uh, you sound like the FED. You know, those people claiming that one should not listen to BoomBustBloggers without a Ph. d. This argument is false. Or do you actually believe that we are not qualified to speak our minds about every issue we like. It’s the ideas and your arguments that change our minds, not a piece of paper. Additionally, as we all know the bullshit some academics spit as soon as they open their mouth, the only thing a degree proves is that you can write down what your supervisor or peers think is right.
I’ll soon have an advanced degree in computer science and mathematics, so clearly every proof I can pull out of my sleeves is more valid than yours, with your puny finances degrees, right ?

How about the most obvious: Bankers aren’t at fault for some one borrowing too much money – THE INDIVIDUAL IS! I have a credit score of over 800. Not because I borrow a lot; it’s because I have very little debt compared to my earnings. I own my luxury car outright. I have no debt whatsoever. No evil “banker” held a gun to your or anyone else’s head and forced ANYONE to borrow. Lending has been going on since the earliest humans first produced more than they needed for the next winter; their is nothing sinister about it – or bankers. Are bankers more self-centered and money-focused than others? Probably. This simply makes them human; selfishness is in our genes. 99% of the bankers i’ve met and worked with were ethical, and followed the rules.

This is true, but nonetheless there is a severe moral hazard problem. If bankers are paid proportionally to the amout of credit they lended, they have the incentive to lend credits to people who shouldn’t get the credit in the first place. This problem will always exist, as long as the financial advisor and the salesman are the same person. Add government bail-outs to the mix and the average banker does not care about the people he has to deal with.
Also your personal credit score does not matter. It’s no argument and it contradicts your above statement. Having several financial degree you should perform better than average joe, because otherwise your degrees would be worthless.

Now, onto fiat currency. I agree that fiat currency is only worth what we agree it is worth. You think gold is better? Why does gold have intrinsic value? Can’t eat it, unlike food. It can’t be used as clothing to keep you warm, or as a weapon to to defend you. Basically, it is pretty to look at. Full stop. That’s it. So where does it get its “value” from? Well, its pretty much because we all coalesce around an AGREED UPON (or at least a mean) value for Gold. Exactly. Like. Fiat. Currency. You moron…

Nonesense. A fiat currency derives it’s worth from the ratio between the produced goods and the amount of money in an economy. If we would just agree on the worth of a dollar/euro/yen, their would be no inflation or deflation. We would fix a value and could pave the way to garden eden with fiat money. It does not work that way.
If one would agree on gold being accepted as money the worth of gold in terms of purchasing power would be determined in exactly the same way. The ratio of goods produced and available gold would determine the purchase power. The “worth” of gold as currency derives from it’s durability and it’s scarcity. This ensures that the monetary base cannot be inflated or deflated as easily as it is with fiat money.
So not exactly like fiat money.

The one advantage gold has over fiat currency is that there is a finite supply of it, i.e., socialist do-gooder governments (ahem, Obama, ahem) can’t print more of it and inflate away the value of your hard work and savings. NOTE: THIS IS A COMPLAINT YOU SHOULD DIRECT AT LIBERAL GOVERNMENTS — NOT BANKERS! Bankers prefer stability and, in fact, the majority of bankers i know support a gold standard. Just not for the reasons you do.

See, not exactly like fiat money. Keep on contradicting yourself.

As for fractional reserve lending, you no-nothing types bang on about “fractional reserve” lending because, i suspect, you think it makes it sound more sinister. You know what fractional reserve lending is? It’s called “credit”. You think we shouldn’t be able to advance credit to people whom we think are safe bets, like the farmer who has worked the same land for 20 years and now wants to expand, or the would-be homehomer who secures the loan with his home on a 80% loan to value ratio? FINE! DON’T LEND TO HIM! But don’t tell the rest of us we can’t take a risk by extending credit to anyone.

Sure, take any risk you want, but don’t socialize it. If you risk something, risk your own money and don’t take bail-out money.
WANT TO RISK SOMETHING, FINE. BUT DON’T CRY LIKE A BABY IF YOU ACTUALLY DO.

Another hoary myth in your diatribe is that the bankers “DID NOTHING MORE THAN TYPE A NUMBER INTO A COMPUTER”. Did you forget the part about the bank risking it’s own capital?? Every bank (and indeed, every financial institution, such as broker dealers, etc) have capital requirements. This means, capital over and above the deposits on loan to them. I.e., their own money! You conveniently forget about that, or more likely don’t understand how the system works.

Did you forget the part about bail-outs ? You conveniently forget about that, or more likely don’t understand how the system works

This isn’t to say credit didn’t get too loose in the real estate bubble, it surely did. FNMA, FMAC, socialist do-gooder programs to make sure every n’er-do-well on the planet owns a home he couldn’t afford, moral hazards created by gov’t bailouts of “too big to fail” financial institutions that do nothing but encourage recklessness – those government anti-free-market programs are blights that pervert the “invisible hand” of the market.

It’s fiat money that allows for the FED to inflate bubbles to the max. Here is the point of no return. You have to choose if you follow the austrians or the keynesians. I take the austrians point of view and state that a free market is impossible to function if the government or the central bank can deflate or inflate the money base.

I have a confession to make: I work for a financial institution, and have gotten rich off it. Does this make me the “feudal overlord” you refer to above? I have an easy solution for you: SAVE YOUR MONEY AND LEAVE THE BORROWING TO SOMEONE WITH A BETTER UNDERSTANDING OF HOW THE SYSTEM WORKS! Who forced you – or anyone – to borrow copious amounts of this nasty “fiat currency” under this oppressive “fractional lending” system, anyway? You know the old saying – little boats should stay near the shore.

Good for you. You could’ve done that with the gold standard. It’s neither an argument in favor nor against a gold standard.
You are right pointing out the personal responsibility of the people. You are right pointing out that most bankers are responsible and educated people. And you are right pointing out the role the government had in the financial crisis. I conclude that you are a conservative.
To actually really grasp the case for the gold standard there are several points you step over that I want to add:
- The hypocrisy of the too big too fails in pretending to act in a free market while taking bail out money as soon as the invisible hand touches their territory.
– The hypocrisy of keynesian economists who pretend to embrace a free market while writing out blanco excuses for government spending.
- The stupidity of beliving that any politician would pay back a loan, through raising taxes or cutting expenses, which could cost him a vote.
- The liberal undermining of the education system and the msm. Most people do not have a clue about economics, even at a basic level. Telling them that they are the ones to blame is a bit over the top.
- And, the most important point, the difference in understanding of business cycles in mainstream vs. austrian economics.
The last point is the core critic against central banks. While mainstream economists think that central banks can steer the economy and reduce the impact of business cycles, the austrians think that the business cycles are created or made worse by the policies of the central banks.
One of the austrian’s main points is that cheap money and government spending distort the distribution of capital in the economy. Cheap money is an incentive for riskier investments and gives the government the opportunity to spend even more, and government spending takes money away from business activities that would make money and puts it in activities that the government thinks are good. This behaviour inflates most bubbles and hides the real problems up to a point where extend and pretend does not work anymore.
Therefore those people, who are in favor of the gold standard, conclude that the gold standard would prevent the government and the central banks to distort the economy and is a fundamental pillar for a truly free market.
And, as Bernard pointed out in several of his videos on youtube and Paul Elam wrote in an article today, this is a mra issue, because there is no way there could ever be such a devaluation of men’s ability to actually do real work without the creation of numerous cosy government jobs for women.

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Migu July 26, 2010 at 05:17

Guys, if all the debt is paid all the money is gone/washed.

Assets=liabilities+owners equity. The system is fraud not flawed. It does exactly what it was designed to do. Prevent big commercial banks from going bankrupt. It has succeded in this mission since it’s inception.

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ABS July 26, 2010 at 05:41

If, say, a 65 year-old fireman or steelworker managed to save some money over the course of his lifetime and bought $50K worth of Citigroup stock five years ago at about $50/share, it would be worth less than $5/share now, so his investment would be worth less than $5K, and 95% loss.

Some feudal lord.

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NMH July 26, 2010 at 09:30

What I learned about banks shocked the hell out of me: lets say you borrow $100,000 from the bank to buy a house.

You would think that the bank is “lending” you the money–in other words, they take money from other deposits at the bank and give it to you, and you have to pay it back.

I have heard that is not the case; all the bank does is that it creates the $100,000 out of nothing to create more credit. So the $100,000 + interest is pure profit for the bank.

Someone correct me if I’m wrong.

No wonder the biggest, tallest buildings in my city belong to the banks.

I really hate banks.

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Jabberwocky July 26, 2010 at 10:24

“I have a confession to make: I work for a financial institution, and have gotten rich off it. Does this make me the “feudal overlord” you refer to above?”

Yes.

Some feudal overlords are benevolent however. Most aren’t. Let me ask you this, have you or anyone you’ve known done anything unethical, tweaked the books, bent a rule, etc. etc. in order to help them get rich, or even just improve the bottom line?

BTW: iff you say no, I won’t believe you.

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Jabberwocky July 26, 2010 at 10:26

Jabberwocky turns over the tables of the money changers in a fit of rage.

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Jabberwocky July 26, 2010 at 10:27

Jabberwocky sometimes speaks in third person for dramatic affect.

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Jabberwocky July 26, 2010 at 10:28

Jabberwocky likes to be silly.

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White Woman July 26, 2010 at 10:29

J@bberwocky is funny.

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Dexter Morgan July 26, 2010 at 12:44

s32 said: “I think the Dexter Morgan guy should write the next spearhead article on anything financial related.”

Thank you. That is far too kind.

Jabberwocky said: “Let me ask you this, have you or anyone you’ve known done anything unethical, tweaked the books, bent a rule, etc. etc. in order to help them get rich, or even just improve the bottom line?”

I can’t speak for “anyone i’ve ever known”, but as for me: No, no, no, no and no. This doesn’t make me a good person, but it does make me someone who believes in following the rules. What a magnificent German i would’ve made!

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Jabberwocky July 26, 2010 at 14:05

“What a magnificent German i would’ve made!”

Clever.

I try not to argue with clever people. You win this time Illuminati.

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Dexter Morgan July 26, 2010 at 14:25

“You win this time Illuminati.”

LOL. You’re amusing and in high spirits. Probably single…

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bruno July 26, 2010 at 16:06

@ Dexter Morgan

“it does make me someone who believes in following the rules. What a magnificent German i would’ve made!”

If you were a German, you would be magnificent?
What do you mean?

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Hawaiian Libertarian July 26, 2010 at 16:57

Just some quick comments:

1) Some of you need to work on your reading comprehension.

Note the following:

Now some caveats here – this is a very very simplified explanation for how fractional reserve lending and fiat currency have ensnared the vast majority of the country into unwitting, financial serfdom. Of course there are many variations, and all sorts of complicating factors…but the general overview is a fairly accurate summation of the system’s basic function.

I won’t even pretend to understand the complexities involved in the nuts and bolts level of finance industry transactions. My goal here was to simplify the overall picture so that more people can begin to understand exactly how the banking – debt system really works…so others can avoid the same financial traps I myself got stuck in.

I could definitely provide source material, as this post came from readings I’ve done from a wide variety of sources. Needless to say, if you really care to look into the topic further, I’ll refer you to mises.org to start with.

2) I myself have actually talked to a bankruptcy lawyer regarding the nature of our financial system. He verified the gist of it all based on his own knowledge of financial law…he told me that Fractional Reserve Banking, in essence, works exactly as I laid out here – banks use physical assets as their “reserve” to loan out fiat currency that is simply created into existence whenever a loan documentation is signed and a figure is typed into the computer by the banker. I too thought fractional reserve banking was simply loaning out $90 of a $100 deposit. Nope.

This is precisely how Banks “cook the books.” When a bank is audited, they merely have to show in their bookkeeping that they maintained the required “Reserve” in comparison to their loans. So in essence, $100 deposited in the bank, can definitely serve as a 10% required reserve for a $1000 loan.

3) It seems that whenever I submit an article to the Spearhead, invariably a number of you log in simply to say my contribution should be taken down, that I should not be a contributor to the Spearhead, or I’m not adhering to the supposed “script” of what the Spearhead is supposed to be all about. Hey folks, I average an article a week. I’m hardly steering the course of debate here, and I don’t think a single thing I’ve written here contributes to the continual ascendancy of Feminism and it’s war on men. I don’t submit that often here…so if you don’t like what I have to say, you’re free to scroll on and ignore anything with my name on it. It’s called personal discretion. Use it.

You want the Spearhead to ONLY have articles about Feminism, Men’s Rights, Misogyny, Misandry etc….than write your own article and submit it as a featured guest. Or ask Welmer if you can become a contributor to. But this shit about asking for me to be removed, or for my articles to be taken down – that’s straight out of the feminist censorship playbook. Some of you should know better than that. You disagree with me? Tell me why. But please spare us the recitation of your credentials as some sort of trump card so as to discount my basic assertions.

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Jabberwocky July 26, 2010 at 17:18

“This is precisely how Banks “cook the books.” When a bank is audited, they merely have to show in their bookkeeping that they maintained the required “Reserve” in comparison to their loans. So in essence, $100 deposited in the bank, can definitely serve as a 10% required reserve for a $1000 loan.”

I WAS right! I think…….

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Epoche* July 26, 2010 at 17:25

ABS July 26, 2010 at 05:41

If, say, a 65 year-old fireman or steelworker managed to save some money over the course of his lifetime and bought $50K worth of Citigroup stock five years ago at about $50/share, it would be worth less than $5/share now, so his investment would be worth less than $5K, and 95% loss.

Some feudal lord.
—————————————–
again the point is not that there is no losses or gains it is that citigroup will not be allowed to go under no matter what their books say because they are “too big to fail”. Lending is a necessary part of the economy at times but when the rate of interest is artificially lowered because the federal reserve wants to “maintain full employment” or some other social goal and banks are not allowed to fail that is the equivalent of an assault on savings. At almost any other point in time Citibank would have been considered an insolvent institution. Precisely how much of this is it wise to allow?

Lending in of itself is most certainly not a good thing when its purpose is to encourage present consumption at the expense of savings and investing in capital, and this is especially true when such lending is taxpayer backed. Ultimately where Keynesian economics fails is that it is both possible and moral to fine tune the economy by the proper timing of an increase in money printing.

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s32 July 26, 2010 at 17:26

@HL

You’re a very good contributer here and I like your blog.

I don’t mind articles about something other than “Feminism, Men’s Rights, Misogyny, Misandry etc….” but you heaped on some of that Ron-Bot/gold-bug no-nothing economics.

What could have been a good piece about avoiding personal debt became an “END THE FED” rant.

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Hawaiian Libertarian July 26, 2010 at 17:41

s32 – I purposely avoided “END THE FED” rants. I purposely avoided mentioning the fact that the central banking system is owned by elite banking cartels. I simply wanted to focus on the system as it is, so as to help raise awareness, especially about avoiding personal debt.

Nevertheless, can we all not agree that if you look at the way our entire economy is set up, we no longer are a society of wealth creation and prosperity – we are now a nation of perpetual debt and owing the bankers interest on every single economic endeavor in this country.

I suppose I could have tied in the political aspect of this…which is the fact that the U.S. Constitution ONLY gives the Congress the authority to issue currency, and that the way in which banks “create” money out of thin air is in fact a constitutional violation…

…but than, as I said, I wanted to avoid the “political” debates here and simply point out the present reality.

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Anonymous July 26, 2010 at 18:00

Migu – “The OP did a good job the money multiplier was just explained backwards. If it worked the way explained we would have hyperinflation in a matter of days. Instead it’s taken almost 100 years to erode the currency by approx %100. Not bad for the banksters.”

Did you see the link I provided? Inflation has not been approx. 100%…since 1913, inflation has eroded the value of the dollar by 1,929%!!!

This is precisely why inflation has occurred, devaluing the US Dollar exponentially ever since the Federal Reserve system was instituted in 1913. 1929% inflation since 1913. As money continually gets “created” by the corrupt banking practice, it puts more and more “money” into circulation, devaluing the purchasing power over time.

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Hawaiian Libertarian July 26, 2010 at 18:00

Migu – “The OP did a good job the money multiplier was just explained backwards. If it worked the way explained we would have hyperinflation in a matter of days. Instead it’s taken almost 100 years to erode the currency by approx %100. Not bad for the banksters.”

Did you see the link I provided? Inflation has not been approx. 100%…since 1913, inflation has eroded the value of the dollar by 1,929%!!!

This is precisely why inflation has occurred, devaluing the US Dollar exponentially ever since the Federal Reserve system was instituted in 1913. 1929% inflation since 1913. As money continually gets “created” by the corrupt banking practice, it puts more and more “money” into circulation, devaluing the purchasing power over time.

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ABS July 26, 2010 at 18:35

Nevertheless, can we all not agree that if you look at the way our entire economy is set up, we no longer are a society of wealth creation and prosperity – we are now a nation of perpetual debt and owing the bankers interest on every single economic endeavor in this country.

I suppose I could have tied in the political aspect of this…which is the fact that the U.S. Constitution ONLY gives the Congress the authority to issue currency, and that the way in which banks “create” money out of thin air is in fact a constitutional violation…

More or less yes to the first paragraph.

As to the second, Congress has the power to coin money. That just means they are the ones to make the freakin’ coins. The banks don’t make coins.

Thank goodness Welmer’s back from vaca.

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Gx1080 July 26, 2010 at 19:31

@Hawaiian

Most of your detractors(especifically those who say “this doesn’t belong to the spearhead) sound a lot like simple haters. Fuck them.

Even without fiat currency, which IS printing money from thin air, signing up for 20+ years of debt is a pants-on-head retarded idea and should never be considered in a healthy society that understand the value of saving.

Although burrowing cannot be avoided completely(initial capital has to come from somewhere), being a milking cow for the banks for TWO DECADES OR MORE is stuuupid.

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Gunn July 26, 2010 at 20:19

HL, I would say the one major objection I had to your explanation was the nature of the reserve. In reality, this reserve is a type of share capital, i.e. it is capital that is difficult for banks to get hold of because it represents the investment made by a shareholder in a company. This is the natural limiter on how much banks can write in loans.

The banks got into the financial mess that they did for essentially two reasons:
i. getting rid of Glass-Steagall made it much much easier for investment banks to get access to more of the capital described above,
ii. various accounting loopholes, in particular securitization, allowed banks to sweep risk off their balance sheets and allowed them to write more business than they should have done

On the main gist of your article, which I took to be don’t get into debt as far as possible, I agree completely.

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Migu July 27, 2010 at 03:01

Yep my bad inflation is at that god awful number.

Now I’ve read theory of money and credit and rothbard’s mystery of banking. I did not get $100 as basis for 1000. I understood what I explained. If I give one bank 100 on deposit, they can legally lend 90 of it. This keeps any goods over 90 from suffering the immediate effects of the monetary inflation i.e. Price inflation. Now at some point this new money will be re-accumulated and re-deposited, maybe even the entire 800 some odd dollars the initial 100 creates.

I use to think it worked as hl described, Rothbard and Gary North convinced me otherwise. Mises.org has all the great Austrian works available for free. From what I understand, austrians and keynesians both explain FRB the same way, it’s effects are what is disputed.

Now rothbard is difficult, but I do think I understood him correctly. The banks create new money, but they do it by giving double and triple claims to one depositer’s money. They are allowed to due this no law against it. The multiplier effect happens as a result of multiple legal claims to the same deposit.

As you said though, it’s a simplification. Commercial banks do create money, but they do not just multiply their deposits by 10.

Look since 2008 the monetary base has doubled, yet no inflation, why? Commercial banks have not lent their reserves. They will as soon as the fed starts charging a warehousing fee for those reserves, then we will see the price inflation.

Gettin off track. What do u think?

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Migu July 27, 2010 at 04:23

Am I on automod?????? Jeez I only prvoked one guy and it was mild at that.

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Big Jay July 27, 2010 at 10:44

This is why I support the monetary reform act in principle. I would really really like to see this subject gain some sort of mainstream exposure. I am not optimistic.

I am against the gold standard though. Its pointless. We need our currency to be backed by something, but it could be anything of value. It could be the collective rents like they did in Germany to end hyperinflation. It could be backed by coal, uranium, silver, gold, concrete, old growth forests, whatever. We need to decide what as a society to back our currency with. As long as it isn’t backed by debt the way it is now.

Good post HL.

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Dexter Morgan July 27, 2010 at 13:46

At Hawaiian:

“I myself have actually talked to a bankruptcy lawyer ”
- Shocker!

“he told me that Fractional Reserve Banking, in essence, works exactly as I laid out here”
- What if he also told you there was an Easter Bunny?

I’ve been polite thus far, but truth be told I think you are a simpleton and a rube. There are not one but several detailed discussions above as to why your view of the modern banking system is woefully naive. If you persist in believing that fractional reserve lending can happen without risk capital on the banks part, “because the nice man told me so”, more the fool you then. I have multiple advanced degrees in finance and work in the field, but unlike you I have ZERO experience with a bankruptcy attorney! Thank god…

On second thought, if you persist in insisting I am your feudal overlord, who am I to argue?? Go tend to my crops! And bring me ye wenches. The cute ones not the fat ones : /

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Ray Sawhill July 27, 2010 at 13:57

Some of you may enjoy exploring the work of Ellen Brown. Here’s her book on debt-based money:

http://tinyurl.com/3ygyw7m

There’s an interview with her at The Daily Bell that’s a good intro:

http://www.thedailybell.com/496/Ellen-Brown-Web-of-Debt.html

I suspect many of you might enjoy following The Daily Bell itself.

She’s an interesting alternative to the usual gold-bug-vs-Keynes debate. She cites goldbugs and Modern Monetary Theory people; populists, radicals and conservatives. She’s probably weak on some points, but then again where econ and finance go, who isn’t? Anyway, very worth a wrestle.

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Hawaiian Libertarian July 27, 2010 at 15:32

I’ve been polite thus far, but truth be told I think you are a simpleton and a rube. There are not one but several detailed discussions above as to why your view of the modern banking system is woefully naive. If you persist in believing that fractional reserve lending can happen without risk capital on the banks part, “because the nice man told me so”, more the fool you then.

My, my, you’re quite the asshole. Fuck off.

I never said “fractional reserve lending can happen without risk capital.”

As I said, this was a simplified, layman’s explanation of the system.

The main point here is that the dual tools of fractional reserve lending and fiat currency, give bankers money creation power. We can argue the finer points here, and perhaps the Bankruptcy lawyer I talked with (not for my own bankruptcy you pretentious douchenozzle, he is a colleague of my friend), he was explaining why people who go bankrupt shouldn’t feel that guilty for defaulting. Yes, they SHOULD strive to live up to their legal promises – but they aren’t REALLY putting the banks into major dire straits by defaulting, simply because most of the money they are defaulting on never existed in the first place…and the bank can and will simply “create more” the next time someone else signs up for a loan.

I have multiple advanced degrees in finance and work in the field, but unlike you I have ZERO experience with a bankruptcy attorney! Thank god…

Ooooh…we are all impressed.

Not.

I guess your multiple credentials means YOU WIN THE DEBATE, eh?

LMAO.

Hey Dexter, if Banks never cook the books and manipulate the reserve lending policy, we should all be shocked that the largest banks require TARP bailouts, eh? We’ll just take your word for it that all the wonderful Bankers are simply the wonderful, charitable philanthropists providing a beneficial service to the citizenry! Move along folks…nothing to see here! An insufferable, pompous ass with years of experience and a stack of credentials says so!

You should take note of the way Migu respectfully disagrees and debates Dexter. It’s far more persuasive than being a boastful asshat.

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Hawaiian Libertarian July 27, 2010 at 16:02

As for Migu, thank you sir, you disagree and debate like a gentlemen, and I will gladly oblige your courtesy and respond in kind!

Here’s Murray Rothbard’s lewrockwell.com article, on Fractional Reserve Banking –

Let’s see how the fractional reserve process works, in the absence of a central bank. I set up a Rothbard Bank, and invest $1,000 of cash (whether gold or government paper does not matter here). Then I “lend out” $10,000 to someone, either for consumer spending or to invest in his business. How can I “lend out” far more than I have? Ahh, that’s the magic of the “fraction” in the fractional reserve. I simply open up a checking account of $10,000 which I am happy to lend to Mr. Jones. Why does Jones borrow from me? Well, for one thing, I can charge a lower rate of interest than savers would. I don’t have to save up the money myself, but simply can counterfeit it out of thin air. (In the nineteenth century, I would have been able to issue bank notes, but the Federal Reserve now monopolizes note issues.) Since demand deposits at the Rothbard Bank function as equivalent to cash, the nation’s money supply has just, by magic, increased by $10,000. The inflationary, counterfeiting process is under way.

Some commenters here have questioned how the banks get away with this.

The idea is simple. At the end of a business day, the banks books merely need to reflect that they have kept the 10% ratio of reserves to back up their loans.

Hey Dexter Asshat, why don’t you email your objections and copies of your credentials to Murray Rothbard. Perhaps if your polite and respectful, he might deign to enlighten you.

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Hawaiian Libertarian July 27, 2010 at 16:09

Mea Culpa…lol

I forgot, Rothbard passed away in 1995.

Dexter is still an insufferable ass.

BTW – for those interested, I purposely left out any discussion of the Federal Reserve and Central Banking in this article to avoid what I easily knew would turn into the entirely predictable “goldbug” vs. moneylenders or Ron Pauls vs. Monetarists debate.

But the article I quoted in the previous post contains an in depth explanation of how Fractional Reserve Lending and Fiat Currency cause inflation under the Central Banking system.

Here’s the link: http://www.lewrockwell.com/rothbard/frb.html

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Dexter Morgan July 27, 2010 at 17:03

“As I said, this was a simplified, layman’s explanation of the system.”

What other kind might we expect from you?

“why don’t you email your objections and copies of your credentials to Murray Rothbard”

I’m quite familiar (and largley in agreement with) the orthodoxy of the Austrian school. If the late Mr. Rothbard, you and I were in a room, two of us could have an informed, intelligent chat on modern financial theory. One of us could make the sandwiches.

Turkey w/ just tomato on mine…

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Dexter Morgan July 27, 2010 at 17:07

BTW, there’s a GREAT forum I’d like to invite Hawaiian Lib, Irlandes, and similar folks to post on: It’s called the “Don’t Get Married” forum! I don’t think it is still active, but you could possibly restart it. LOTS of posts there about why no one can be successful in America, why PUA skills don’t work, and why men have no chance with women and should just cut their balls off and live in a cave, moaning “whoa until me” until death relieves them of their lot in life.

I invite you to spend lots of time on that website…

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Hawaiian Libertarian July 27, 2010 at 17:19

Wait…you challenge my assertions, you say I’m utterly mistaken, and that I do not have the credentials and experience like you do to have any credibility in writing this article….

…and than I post source material for which you admit you largely agree with the author…who describes fractional reserve banking more or less exactly as I did..

…and yet you claim I’m incapable of having a reasonable discussion on this topic matter, that I would be the one making sandwiches?

LMAO, you really are a grade A douche.

“As I said, this was a simplified, layman’s explanation of the system.”

What other kind might we expect from you?

That was the entire point, you imbecile.

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Dexter Morgan July 27, 2010 at 19:03

“who describes fractional reserve banking more or less exactly as I did..”

LOL. You fool, above you have a half dozen examples of the complexity of fractional reserve lending and where you got it wrong, and STILL you assert you got it right?? You’ve missed the main point: In your 7th grade level description it is only DEPOSITORS capital at risk – the $100 original deposit. In reality, it is the inital seed capital of the bank’s shareholders that are equally at risk, for the reasons noted above (that $100 represents both an asset and a liability, resulting in ZERO net capital). So, both depositors AND the owners of the bank have skin in the game, and can fail. Did you ever own, or even just check the stock price, of shares in a bank? Did you notice when a bank collapsed, it’s share price went to zero? But in modern America, depositors are largely insured – the equity holders are not! I.e., it is the OWNERS of the bank who took the bath (and taxpayers), NOT depositors.

Oh well. 8th grade starts in September…

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Hawaiian Libertarian July 27, 2010 at 19:25

In your 7th grade level description it is only DEPOSITORS capital at risk

For someone who thinks he’s so brilliant, you sure are struggle with basic reading comprehension.

Let’s go over this again, real easily so someone with his head so far up his ass like you have, can perhaps begin to pull it out:

You fool, above you have a half dozen examples of the complexity of fractional reserve lending and where you got it wrong,

My point in writing this article was to simplify a complex system so the basic mechanism could be easily understood by the layperson. This involved described the way in which an initial deposit can be treated as a reserve for which 10x the amount of that reserve can than be “created out of thin air” and loaned out.

I wrote nothing on risk capital or any of the other things you are trying to sidetrack the main point of discussion here.

Yet, when you and others say I’m wrong, I than cite one of the foremost authorities of Austrian economics, Murray Rothbard, who basically reiterates the exact same point I was making. You haven’t shown I was wrong AT ALL.

and STILL you assert you got it right?? You’ve missed the main point: In your 7th grade level description

7th grade level description? Than you must have a 6th grade level reading comprehension. Simplifying the process so as to promote understanding of the concept was the ENTIRE POINT YOU MORON.

In reality, it is the inital seed capital of the bank’s shareholders that are equally at risk, for the reasons noted above (that $100 represents both an asset and a liability, resulting in ZERO net capital). So, both depositors AND the owners of the bank have skin in the game, and can fail.

This has NOTHING TO DO with the main thrust of my article! It’s not about RISK. Where in my article did I mention anything about “risk” or “gold-standard?” You think you’re so impressive by attacking straw man arguments I NEVER MADE.

It’s about Banks having “money creation” power that drives inflation and makes almost all economic endeavors in this country beholden to the Bankers who “Create” this money out of thin air.

I get it Dexter…I really do. People like you don’t like it when someone like me rips the facade off of the scam you bankers have been running for so long. You can’t stand the idea that the common man should understand exactly how your racket has been enslaving the people for generations.

The gig is up Dexter.

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Dexter Morgan July 27, 2010 at 20:19

“Simplifying the process so as to promote understanding of the concept was the ENTIRE POINT YOU MORON”

Simplifying is one thing; getting it entirely wrong is the other: You gave the distinct impression that 10x depositors capital – and ONLY the depositors capital – was loaned out in what you called a “Ponzi scheme”. Your description is, in fact, a Ponzi scheme, as Ponzi schemes, like arbitrage, involve no risk of capital. Bank lending does, in fact, risk capital, something I and several other readers pointed out to you. You were either wrong or intentionally misleading and slanderous.

“People like you don’t like it when someone like me rips the facade off of the scam you bankers have been running for so long. You can’t stand the idea that the common man should understand exactly how your racket has been enslaving the people for generations.”

Oh, I forgot about the feudal lord and enslavement thing. That reminds me – I TOLD YOU TO GO MAKE ME A SANDWICH!!

p.s. – Re the “common man”, in my experience, the “common man” has “common” sense. There’s nothing “common” about you, Hawaiian. Do not confuse being envious and dim-witted with commonality…

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Gunn July 27, 2010 at 22:33

Not wishing to get sucked into the argument that HL and Dexter are having, but one thing to bear in mind:

The fractional reserve ratio is a complete red-herring when it comes to banks ability to write new loans (and therefore expand the money supply). Quite simply, even if this ratio was 0, the banks would still be constrained by their capital ratios per the Basel accords.

Also, from a pure accounting point of view, banks cannot put through the entries being described. The expansion of money comes in because the original money supply is circulating through the economy, and each time it goes through the bank it gets added to (up to the limit that the bank can lend based on its available risk capital), a bit like passing go on a monopoly board. If a banker tries to give himself more than his balance sheet would allow, he doesn’t collect $200, he goes straight to jail.

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Gunslingergregi July 28, 2010 at 04:38

On money.

It doesn’t matter what economic disipline you study or what math or what school you go to or who you are. If you save money up you will end up with saved money.
If you then buy something that generates money you get to chill out.
So really I am seeing no smart people.
he he he
I think the best thing I could have done would be to go to no college.
All I learned in the little college I had was about the stock market then I did it on paper and made a lot of money on paper.
The rest of my life I tried to duplicate it with real money with no success.
If I would have not went to college I would have just implemented my other plan I came up with at 18 just save money and buy houses cash and rent them out and hopefully have retired by 30 or so. As it was even with the college bullshit that fucked me up and I lost a bunch of time and money. I was still only 32 when I had the money to be able to retire.
So really all the college degrees do seem to be rather worthless if they don’t teach you how to beat the system. I guess if you enjoy it more power to you. I enjoy work occasionally but I wouldn’t want to be forced to do it when I don’t feel like it. But yea I did throw the money away on market at 32 but then I will hopefully make another push at 35 and then chill permanent at 37 or so. I don’t know I never talked really to anyone yet who could understand the most simple concept in the world form the us. People without education understand it perfectly. They are doing it now where I live and some who do it have a nice relaxing life. All ya got to do is save money and then you have money. It seems simple but apparently it is too complex for the edumacated he he he
I think it is really just the curse of the intelligent they want to believe it is because they are special that they make it and not because it is as simple as adding 1 +1 =2 then you add another 1 and get 3 then repeat second step over and over.
Life is funny.

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Migu July 28, 2010 at 05:55

Okay, I know what bugged me here.

100 will eventually turn to 1000, but it will not do so immedieatly. The reserve is multiplied through succesively smaller loans, and numerious claims to the same initial deposit. In otherwords, when I deposit my 100 it is not just multiplied by a whole number but a fraction, under the current rules 9/10. Bam the magic wand just created 90 new dollars for someone else to borrow and spend. This person spends the money. The merchant/s they spend it with, then deposit it in their banks. Whatever amount that is, the bank can then multiply it by 9/10 and lend that amount to a willing borrower.

It takes awhile for m1 tick up this way. The other way, where the bank just multiplies by 10, would increase the velocity of money so fast that hyperinflation would result in a matter of weeks. With the stepdown method we get a slow steady erosion of the currency.

Ever read about John law?? He ruined money in new Orleans this way when it was still a French colony. Then one of the French republics copied him with assignat. I can’t link it from here but the info is at mises.org.

Basically, the 100 is the basis for 1000, but it takes awhile (years) for it to happen. And it happens through counterfeiting by allowing multiple claims to the same money.

According to mises (and I agree). All fiat/frb systems will end in a hyperinflationary crack up boom. As of today not one single fiat/base metal/fractionally reserved money has escaped this fate.

As an aside money=debt is nothing more than crankism. The dollar in my pocket is a medium of exchange albiet one with a shaky value, what it is not is a bond. Money whatever form it takes is and only ever will be: The most marketable commodity. You can sell it to almost anyone. You can’t do that with debt i.e. Bonds, mortgages and any other note that derives it’s value from the prospect if it being repaid with money.

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fedrz July 28, 2010 at 07:34

I have lately been very much changing my mind about “censorship” within the MRM. I think more of it should be used, because the “Free Speech” policy within the MRM has served its purpose, and is now often being used to destroy rather than build.

Everyone used to support “Free Speech” so diligently because the MRM was basically Feminism-Lite and all about “egalitarianism” and other such PC bullshit, and every single MRM forum or site allowed absolutely zero talk that didn’t ultimately toe the PC line. There was no “defence” of Patriarchy, no discussion allowed of the damages of women’s suffrage to society, no discussion of innate differences between the sexes, and anyone talking of such things as “game” would have been instantly banned from 99% of any MRM sites.

“Free speech” got us out from underneath this garbage that was tripping us up – but not because people allowed assholes to say whatever they wanted in the comments section – even though they did – but, the “free speech” that freed the MRM from PC tyranny was the fact that people exercised said “right” by starting up their own goddamned blogs! Not neccessarily because of any fucktard boasting of his “degrees” commenting after an article has been written.

But now, as many people wanted, we are bigger – much bigger than we were five years ago. There are gazillions of MRM sites out there now, whereas 5 years ago, there were perhaps only 5 or 6 forums, and perhaps only 5 or 6 independent MRM websites, like Eternal Bachelor or Angry Harry. This has changed, and now there is no shortage of websites providing a plethora of different viewpoints and theories. The “free speech” policy that the MGTOWr’s (NOT the MRM) promoted has served its purpose – which was to free our minds, and start creating our own philosophies, independent from all the PC academic garbage that was out there.

Zed once told me that before I showed up – say ten years ago – the “thinkers” in the MRM basically used to do EVERYTHING by private e-mail, and while speaking on public forums, most often used to almost use a sort of “code” so as they would not get banned.

It is not like this anymore. And while free-speech was good for creating our own theories, it is not neccessarily good for “activism.”

Look at the effort HL needs to put in to refute a degree toting asshole like Dexter. Dexter can start his own fucking blog if he needs to express his views – like how much he despises people from the DGM board. I am tiring of fuckwit views like this. Everyone seems to think that all we have learned just plopped into people’s heads – and only guys like Roissy understand anything and everything. Well… Roissy is much different from most in the “game” community – which used to be just as full of PC bullshit as the MRM was – Roissy obviously also must have read quite a bit of MGTOW and other similar blogs and articles, because even though his main theme is “game” he speaks so closely about so many MGTOW memes, that I find it hard to believe he has not read a significant amount of our articles, and then married it to “game.”

However, he did not need “free speech” in the comments section to do this, nor did he need credentialed assholes dogging him the whole way to come to his conclusions.

“Activism” comes from the use of propaganda to alter people’s thoughts. Not from the free exchange of ideas used to water everything down to absolutely zero value.

The problem with the MRM is that we are in a big one room school – the internet. Some of us are in Grade 12, and some of us are in Grade 1. The people in Grade 12 have a lot of experience and knowledge under their belts, but, everytime they start talking in Grade 12 language, the Grade 1′s start to scream and fucking howl like the toddlers they are, until the Grade 12′s stop talking about what they know, and only speak in Grade 1 toddler language.

The fact is, the MRM could make significantly more gains TODAY by curtailing a certain amount of this “free speech.” Our “theories” are often undermined by people who have just shown up, and have not done the leg work yet.

Many of us are still forced to argue the same goddamn points we were arguing 5 years ago, because new people keep showing up and spewing the SAME fucking protests and arguments that have now been refuted about 10 Billion fucking times.

Such as: BASIC civil rights are MEN’s RIGHTS! This is why politics and constitutions and economic theories are essential to Men’s Rights. Men are the bottom of the totem pole in society. It is not the Queen of England that needs “rights,” nor women, nor children. They are already prefered people and thus get treated with kid gloves as it is – but, it is the lone MAN, surrounded by a lynch mob, staring at a rope from a branch that needs “rights.” So, basic rights are a MEN’S RIGHTS issue 100%.

I got pretty angry here a while back after arguing with a couple of ridiculous fucktards who completely don’t know what they are talking about by claiming that Communism is a great form of patriarchy. Such absurdity is bullshit, as the MRM has well and over proven the direct links between Socialism and female thought, and the direct links between Communism/Marxism and Feminism.

But rather than discuss the theories involved with Marxism, and what we can do to counter them, because of this “free speech” policy, any discussion or theorizing about solutions, is so often derailed by newbies showing up and arguing that even the basic PROVEN premises is false, causing others to spend the majority of effort to run around in circles, simply to counter an argument that has already been proven and ENDED decades ago!

Certainly SOME free speech is neccessary – but complete free speech is garbage. Start a blog then – that is free speech – the ability to start your own site or even newspaper out of your garage, and present your ideas to the public. But, just because there is a printing press in my garage, does not mean I have to let my neighbour use it so that he too may have “free” speech.

HL is right to discuss such things as this article does.

Going back to the Gold Standard would END feminism because it would end socialism.

Take a look at the underlying issues of the War of 1812. The reason why the war ended was because there was no federal reserve/banking system such as there is today. After two years, the government had run out of money to finance the war, did not have the ability to print money, and therefore were forced to go to the people and DIRECTLY raise taxes to perpetuate the war… the people would not stand for it, and the war ended soon after.

The war in the Middle East would likely end pretty soon if each and every person in the West recieved an annual DIRECT bill of $5,000/yr to pay for it.

And for the anti-gold bugs out there, do some research and ask yourself why the Founding Fathers decided to base the money system on precious metals rather than fiat currency.

Between 1780 and 1913, the rate of inflation was a mere 17%! In nearly a century and a half, prices only rose by 17% because of the gold standard. If your great grandaddy had a million in gold in 1800, and it got passed down through the generations, the person who inherited it 100 years later could still purchase nearly the same amount of goods with it.

Did you know that in the 60′s and 70′s, the lottery used to be a “windfall” of only $150,000 to $250,000? That was plenty to live off of for the rest of your life back then – when a house cost $30,000 and a new car was $4,000.

Qu’est qui ce passe?

Feminism would end if we went back to the gold standard, because feminism is pure socialism – a false market – and without the government’s ability to steal resources from the population and re-channel it where they wish, this whole house of cards would collapse in a matter of months – just like how the War of 1812 ended because people would not stand for being directly taxed to support an unpopular war.

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Anonymous July 28, 2010 at 09:35

What the hell is this. I replied again, and it is gone. I didn’t say a damn thing that was offensive.

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Migu July 28, 2010 at 09:36

Testing. Had three posts deleted now. WTF, I wasn’t offensive.

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Jake July 28, 2010 at 09:48

I reckon you are all missing the point – however interesting this debate may be.

The point, I think (and this is based on my experience as a lawyer who has been involved in the finance side), is that bankers have done tremendously well while banks have suffered. Or to put it more bluntly: the banker-goons (zionists) I have met are living it up like never before while my bank shares are worthless.

That’s the distinction you need to be looking into. It’s the classic agency problem. And it allows “managers” in banks (and big corporations) to profit at the expense of the true owners (i.e. the shareholders).

The socialist/marxist governments of the US and the UK have allowed this to happen because it’s effectively an attack on property owners (i.e. shareholders again).

The banks are run by the same kinds of skanky, feckless and predatory people who would have been Party members in pre-1989 Russia. They even have teams of apparatchiks at work inside them (i.e. as diversity managers etc.) to push socialist political agendas.

Until we grasp the true shape of modern Bolshevism/Zionism – i.e. that it is here with us now, right on our doorsteps and pushed up right against our faces – we will never get out of this mess.

And that was always their plan. They knew we would never vote for it and they knew we would fight against it if we knew it for what it was. That’s why they set out to subvert our institutions from the inside.

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Gunn July 28, 2010 at 10:29

Fedrz,

This topic is a valid one for this website, and HL’s overall stance is valid advice, to whit: don’t get into debt, avoid the pitfals of being ensared into being obligated into the system as if you do then your time and energies are naturally focused on the noose you’ve put around your neck rather than the wider problems you have as a man in today’s society.

However, in my view one needs to differentiate between the technical information in this article and the advice in this article. As stated, I think the ‘advice’ given is good for most people. On the matter of the technical analysis however, it is flawed, and in such a manner that anyone that knows about finance would immediately dismiss the entire thing. Just as you compare grade 1 to grade 12 learning, the technical points in this article are not even grade 1 because they send the reader down the wrong path entirely.

I have no idea why this Dexter guy is being so personal in his attacks, and nor do I agree with the appeal to authority part of his argument. In my view it would be simply easier to articulate the correct technical reasons that banks have been able to grow unchecked and leave it at that. The core advice in HL’s article is correct either way.

The article also misses that whilst banks are the most visible element of the financial collapse, there were a lot of other problem areas. In particular, hedge funds have become huge and they are able to operate in ways that banks could not because of lax regulation of their activities. Insurance companies also exposed themselves to huge unwarranted risks due to bad modeling and a herd mentality.

The key reasons for economic collapse include:
i. repeal of Glass-Steagall, giving investment banks access to much bigger capital reserves and therefore increasing systemic risk in the banking sector;
ii. excessive securitization of assets to remove them from banking balance sheets;
iii. ridiculous levels of activity in the credit risk derivatives market, giving holders the illusion that they were protected against default risk by their creditors;
iv. systemic instability caused by unchecked behaviour of hedge funds;
v. sustained balance of payments deficits that act to weaken currency values over the long term, and drive the expansion of the money supply in the short term;
vi. very lax credit environments, driven by leftist government policy that demanded that sub-prime borrowers not be ‘discriminated’ against

There are probably other factors in there, these are the ones off the top of my head. To understand what is happening to money and with personal debt levels, one has to understand the above factors as being on the supply side of the equation.

On the demand side, we have the common issues you allude to in your comment, namely the profligate spending by the Left in order to transfer wealth to its preferred groups (Feminists, minorities etc). The Right in the US (from what I understand as an outsider) is also responsible for profligate spending, particularly on the military-industrial complex, however I would see this as the slightly lesser of two evils (but only marginally) as at least its not going directly into feminist groups’ hands. In fact, I assume that the reason we hear of such spending by the Right through the MSM is because the feminist and Left-controlled media is livid that money that they see as ‘theirs’ is being squandered on military misadventures when it could be going to single mothers.

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Dexter Morgan July 28, 2010 at 11:35

Fedrz referred to me as “a degree toting asshole like Dexter”. I didn’t realize that having degrees made one an asshole. All it really did for me was allow me to spend years studying stuff i was interested in. If this makes one an asshole, then yes, I am a total asshole!

Fedrz then recommends censorship as a solution to people being assholes (how this will impact one’s educational status is unclear). For a brief second, I felt like i was on the feministing.com site. God save any MRM site that falls for that tripe. The founding fathers didn’t. Short of slander, threats, and yelling “fire” in a crowded movie theater, i think people can say whatever they want. Even if that means they call me names. What, are we 5 yr old girls, that we turn into sugar candy if someone calls us a name??

Gunn, a poster I admire, said: “I have no idea why this Dexter guy is being so personal in his attacks, and nor do I agree with the appeal to authority part of his argument. In my view it would be simply easier to articulate the correct technical reasons that banks have been able to grow unchecked and leave it at that. The core advice in HL’s article is correct either way”.

I agree if the “core advice” is do not borrow or that our government prints too much money. But i don’t think that this advice was the “core” of the article. I think the core of the article was class warfare and anti-capitalist. This gets to Gunn’s first point as to why I reacted negatively; i believe the OP is playing the class warfare, eat-the-rich card. Isn’t there enough of that going on w/ Obama/Pelosi/Reid/Barney Fwank et al? Do we really need it on our MRM sites? Besides, being male is (to me) all about free competition, not equal outcomes. This article struck me personally as being anti-thetical to me. IMO.

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Anonymous July 28, 2010 at 12:47

Fedrz referred to me as “a degree toting asshole like Dexter”. I didn’t realize that having degrees made one an asshole.

Being an asshole is what makes you an asshole.

Fedrz then recommends censorship as a solution to people being assholes (how this will impact one’s educational status is unclear). For a brief second, I felt like i was on the feministing.com site. God save any MRM site that falls for that tripe. The founding fathers didn’t. Short of slander, threats, and yelling “fire” in a crowded movie theater, i think people can say whatever they want. Even if that means they call me names. What, are we 5 yr old girls, that we turn into sugar candy if someone calls us a name??

The founding fathers did not write into the constitution that I must let you have unfettered access to the printing press in my garage. The founding fathers only enshrined your right to buy your own printing press and use it as you wish. Don’t be a simpleton.

And levels of censorship are essential in order to make progress. If you are a teacher in school, should there be unfettered free speech of the students, to the extent that History classes continually turn into gab sessions about nailpolish and the latest video games, or is it proper for the teacher or the school administrator to insist on a certain amount of curtailment upon free speech in order to accomplish their goals?

The DGM board which Dexter loves to criticize had a few excellent policies that made the place into a great resource for learning about the issues:

1). There were hardly any women allowed in, and even then, only after quite a bit of screening.

2). There was no Illuminati-Jew Conspiracy talk. This simply comes from experience after seeing so many boards blow to bits because of it. So, at DGM, there was not post after post about the Illuminati or the Jews. This is not to say that there was never any “conspiracy talk” there, but it was the RIGHT kind of conspiracy talk – such as discussions about Marxism and how its theories work, and have worked, at manipulating the masses over the years. (Btw, I have to laugh at all the conspiracy deniers who 5 minutes later go about asserting that Feminism is mired in Marxism… Marxism IS conspiracy – it is the intentional manipulation of the masses to achieve a hidden end goal that the masses are not aware of – and it involves multiple players… aka conspiracy.)

In other words, a certain amount of censorship actually made the DGM site better, not worse.

Many times ’round here we hear guys saying that there are no solutions, or that there is no Men’s Movement… it is only a “proto-movement.”

Well… that could change quite easily, if only a few key people could get together and come up with a game plan and then went after achieving that goal.

One of the things they would first do is sort out the facts from the bullshit, and then no longer refer to the bullshit in their conversations/propaganda to change the public’s minds.

The fact is, it takes quite a while to get ones head around all of the stuff that makes up the MM/the gender war. And just when you think you’ve figured it out, you discover the rabit hole goes deeper. Convincing people point by point is a waste of time. But concentrating on a few key ideas – that are “secretly” dialectically connected to a myriad of other issues? That is actually achievable!

So, for example, a bonafide goal of the MRM ought to be something like a return to Assumed Father Custody. This nullifies No Fault Divorce, Childsupport, Runaway Wives etc. etc. etc. and returns fathers to their rightful role in society.

There was a reason that the Suffragettes, in 1848, made one of their key issues the changing of custody from father to mother. They certainly didn’t get together in 1848 to agitate for universal suffrage, because in 1848 most men didn’t even have the vote. (That didn’t happen universally until the end of the civil war for white men, and around 1870 for black men).

At any rate, if the MRM ever wishes to accomplish things such as this, it is going to have to start censoring somewhat, in order to be able to accomplish such goals.

With a certain measure of censorship, Marxism itself could be used to undermine Marxism. But, that means that a few people would have to “top down” manipulate their websites, in an effort to use propaganda to change people’s minds. (Propaganda is both good and bad).

There is so much confusion, and so many subjects and issues to deal with out there, and by the time the MRM makes one small victory, the powers that be have added ten new ones to the pot in the meantime.

However, if one drills deeper and deeper, you will find there are actually only a few key foundational arguments which they have won, and all of the other bullshit is built upon these foundational arguments. Get rid of the bottom argument, and all the others built on it will disappear.

In order for something like this to be done, a certain amount of censorship would be needed in order to accomplish the desired goal.

Father Custody, for example, could be reasserted by using the Marxist Dialectic, by hitching a ride on the backs of gays using surrogacy to have children of their own, and then manipulating the argument towards single mothers being “equal” families, and then demand the right for men to reproduce, with 100% father custody, without the deathtrap of marriage. Surrogacy and Gay Marriage can easily re-assert a father-custody styled “equal” family, and the benefits would become extremely visible to men in only a short while, as a single father with children of his own will be much better off emotionally, financially, and so on, when compared to the chump that married to reproduce, and now must fund the highly innefficient incubator who is constantly threatening to leave with the children. Divorce laws, child support, “paper abortions”, and dozens of other directly and indirectly related things would suddenly appear (or disappear) if this one key argument was won.

But, in order to accomplish goals like this – which everyone complains we aren’t doing – a certain amount of censorship would be needed to move the argument in the right direction.

Christ, they have been using this system on us for ages now, and we refuse to use the same weapons back.

I’ll bet the allies wouldn’t have taken Normandy if they showed up with sling-shots instead of guns. And yet, while our enemies are will to kick us in the balls, we keep playing school yard rules and refuse to wind up the punting foot and kick hard enough for our opponent’s balls to pop out of his ears. Morally righteous losers are still… what’s the word… losers.

Why should we be expecting different results for us, despite how morally pure we are for letting loads of fuckwits have all the free speech they can handle at our expense?

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Fedrz July 28, 2010 at 13:32

That last comment was written by me, btw. Forgot to sign in first.

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Hawaiian Libertarian July 28, 2010 at 13:54

But i don’t think that this advice was the “core” of the article. I think the core of the article was class warfare and anti-capitalist. This gets to Gunn’s first point as to why I reacted negatively; i believe the OP is playing the class warfare, eat-the-rich card.

See, you read into my article things that were not there, than personally attacked me, and than held up your credentials as to a reason why others should value your opinion and agree with your personal attacks against me.

That is why you are an asshole, not because you have credentials.

I am the last guy to engage in class warfare. I believe in free market capitalism. The problems with our system today are precisely because the free markets have been subverted by large corporations and non-profit trust foundations that have bought out the Government to influence society and to gain cartelization of key industries (education, medicine, oil, etc.), and than when problems arise, all the useful idiots point to “GREEDY CAPITALISM” as the culprit to justify further Government intervention.

I have no problem with people who work hard and attain wealth honestly. I myself am working towards the same goal.

Migu – 100 will eventually turn to 1000, but it will not do so immedieatly. The reserve is multiplied through succesively smaller loans, and numerious claims to the same initial deposit.

I never said “immediately.” As I’ve re-iterated, the point was to offer a simplified overview of the dynamics of the system…how fiat currency and fractional reserve banking drive inflation and how it has changed our economic structure to the point for which everyone essentially pays banks interest for EVERY economic activity one wishes to engage in. In other words, we all work for the Bankers.

And for what? All they did was create fiat currency with the click of a mouse!

Did you read the Rothbard article I linked to?

Hence the drive by the bankers themselves to get the government to cartelize their industry by means of a central bank. Central Banking began with the Bank of England in the 1690s, spread to the rest of the Western world in the eighteenth and nineteenth centuries, and finally was imposed upon the United States by banking cartelists via the Federal Reserve System of 1913. Particularly enthusiastic about the Central Bank were the investment bankers, such as the Morgans, who pioneered the cartel idea, and who by this time had expanded into commercial banking.

In modern central banking, the Central Bank is granted the monopoly of the issue of bank notes (originally written or printed warehouse receipts as opposed to the intangible receipts of bank deposits), which are now identical to the government’s paper money and therefore the monetary “standard” in the country. People want to use physical cash as well as bank deposits. If, therefore, I wish to redeem $1,000 in cash from my checking bank, the bank has to go to the Federal Reserve, and draw down its own checking account with the Fed, “buying” $1,000 of Federal Reserve Notes (the cash in the United States today) from the Fed. The Fed, in other words, acts as a bankers’ bank. Banks keep checking deposits at the Fed and these deposits constitute their reserves, on which they can and do pyramid ten times the amount in checkbook money.

Here’s how the counterfeiting process works in today’s world. Let’s say that the Federal Reserve, as usual, decides that it wants to expand (i.e., inflate) the money supply. The Federal Reserve decides to go into the market (called the “open market”) and purchase an asset. It doesn’t really matter what asset it buys; the important point is that it writes out a check. The Fed could, if it wanted to, buy any asset it wished, including corporate stocks, buildings, or foreign currency. In practice, it almost always buys U.S. government securities.

Let’s assume that the Fed buys $10,000,000 of U.S. Treasury bills from some “approved” government bond dealer (a small group), say Shearson, Lehman on Wall Street. The Fed writes out a check for $10,000,000, which it gives to Shearson, Lehman in exchange for $10,000,000 in U.S. securities. Where does the Fed get the $10,000,000 to pay Shearson, Lehman? It creates the money out of thin air. Shearson, Lehman can do only one thing with the check: deposit it in its checking account at a commercial bank, say Chase Manhattan. The “money supply” of the country has already increased by $10,000,000; no one else’s checking account has decreased at all. There has been a net increase of $10,000,000.

But this is only the beginning of the inflationary, counterfeiting process. For Chase Manhattan is delighted to get a check on the Fed, and rushes down to deposit it in its own checking account at the Fed, which now increases by $10,000,000. But this checking account constitutes the “reserves” of the banks, which have now increased across the nation by $10,000,000. But this means that Chase Manhattan can create deposits based on these reserves, and that, as checks and reserves seep out to other banks (much as the Rothbard Bank deposits did), each one can add its inflationary mite, until the banking system as a whole has increased its demand deposits by $100,000,000, ten times the original purchase of assets by the Fed. The banking system is allowed to keep reserves amounting to 10 percent of its deposits, which means that the “money multiplier” – the amount of deposits the banks can expand on top of reserves – is 10. A purchase of assets of $10 million by the Fed has generated very quickly a tenfold, $100,000,000 increase in the money supply of the banking system as a whole.

Interestingly, all economists agree on the mechanics of this process even though they of course disagree sharply on the moral or economic evaluation of that process. But unfortunately, the general public, not inducted into the mysteries of banking, still persists in thinking that their money remains “in the bank.”

Thus, the Federal Reserve and other central banking systems act as giant government creators and enforcers of a banking cartel; the Fed bails out banks in trouble, and it centralizes and coordinates the banking system so that all the banks, whether the Chase Manhattan, or the Rothbard or Rockwell banks, can inflate together. Under free banking, one bank expanding beyond its fellows was in danger of imminent bankruptcy. Now, under the Fed, all banks can expand together and proportionately.

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Dexter Morgan July 28, 2010 at 13:56

“The founding fathers did not write into the constitution that I must let you have unfettered access to the printing press in my garage. The founding fathers only enshrined your right to buy your own printing press and use it as you wish. ”

Quite right, quite right. Nonetheless, I think suppressing views is not to our benefit; it makes for a more homegenous and less intellectually rigorous community of ideas, it gives the impression that we are thin-skinned, and it bears an uncomfortable resemblance to what the feminist sites do. I think only obvious trolling, that is, posting simply to be disruptive rather than persuasive, should be banned. But I agree with your point: whoever pays for the server gets to decide.

The DGM board which Dexter loves to criticize had a few excellent policies:

1). There were hardly any women allowed in

- Cause girls are icky? I am not afraid of arguing with women.

2). There was no Illuminati-Jew Conspiracy talk.

- While I agree this is favorable, I think this is an outcome, not a policy. the policy is banning certain speech, which means OTHER speech could be banned, too. Better to just show foolish ideas as being…foolish. that’s what I try to do.

In other words, a certain amount of censorship actually made the DGM site better, not worse.

- I found it to be a terrible, depressing site. As much as I like my fellow man in the MRM, I never saw a site that made me say “God, what a bunch of LOSERS!” like that site. I am so pleased The Spearhead is 180 degrees different; i think we have a vibrant community of diverse male views. I hope it stays that way.

“I’ll bet the allies wouldn’t have taken Normandy if they showed up with sling-shots instead of guns. And yet, while our enemies are will to kick us in the balls, we keep playing school yard rules and refuse to wind up the punting foot and kick hard enough for our opponent’s balls to pop out of his ears.”

Now you’re talkin’, man! Hear, hear!

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Gunn July 28, 2010 at 14:29

The problems with our system today are precisely because the free markets have been subverted by large corporations and non-profit trust foundations that have bought out the Government to influence society and to gain cartelization of key industries (education, medicine, oil, etc.), and than when problems arise, all the useful idiots point to “GREEDY CAPITALISM” as the culprit to justify further Government intervention.

This is precisely the problem, and the compelling reason why I believe in small government. As government expands, there is more and more waste and corruption, vested interests become entrenched, and property-theft and redistribution become easier to get away with.

Ultimately, every man must build the means to support himself and his family without looking to government to take on that responsibility or allow it the freedom to recklessly disburse the rewards of that work. Its because we have allowed government increasing power to spend money that we have the situation we are living in today, with bankrupt ideologies such as feminism being propped up by the very group that it sets out to victimise. Paring down government to the bare bones is a necessary step to dismantling the parasite of feminism.

The current drive to blame ‘bankers’ for everything is a diversionary tactic. It seems highly ‘coincidental’ to me that just as public sector money is running out to continue the egregious property-theft schemes that have been running for decades, suddenly we have a financial collapse and some nice easy targets to aim at. This is probably to buy some time for the spending to continue, as ‘justified’ smash and grab raids are made on private sector funds.

Thats not to say that banks are blameless. Governments that privatise profits and socialise losses on the one hand, greedy elites at the top of banking structures on the other, and you have recipes for disaster. Even worse, we seem to have lost sight of quasi-bankers in all of this, such as the heads of the huge hedge funds that are de facto investment banks carrying out huge proprietary trades without any controls or regulations to mitigate the worst of their excesses.

But the head here is corrupt big government, and thats the part that needs to be starved of funds first.

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Hawaiian libertarian July 28, 2010 at 15:17

The current drive to blame ‘bankers’ for everything is a diversionary tactic.

Which was not the point I was making either.

BTW – it was Banking Cartels that were able to lobby the Government to pass the Constitutional amendment to get the Federal Reserve system – with it’s fractional reserve and fiat currency features – enacted.

Which, again, is the point.

Look, I’m not trying to blame all bankers and finance workers here for anything. We all have to make a living, and plenty of bankers are moral, upstanding businessmen.

The problem is the system for which we all have to work with to try and do things like buy a house, a car or start up a business.

As Fedrz pointed out, prior to the advent of fiat currency, inflation was almost zero for well over a century, and you didn’t need a six figure, 30 year mortgage to buy a shoddily constructed track house, like you do nowadays.

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fedrz July 28, 2010 at 15:17

The line between free speech and censorship is a pretty difficult one.

Without free speech and the exchange of ideas, people will never learn. However, once people have learned, free-speech prevents them from accomplishing what they know must be done, no matter how unpopular it may seem.

The army, for example, doesn’t promote free speach nor free will – just the opposite – and yet, our Western armies exist within a free society where they are still protected by the same rights as the rest of us.

However, in order for the army to be effective, they must curtail some of their rights in order to accomplish their goals.

The MRM faces the same dilema.

We need to talk in order to educate, because this one-room school called the internet is all we’ve got… and on the other hand, we will need to utilize censorship in order to form a cohesive voice that will actually be able to accomplish the goals we want to acheive… and furthermore, anyone who understands Marxism also understands it works on a zig zag (because of the dialectic) rather than in a straight line. So, what might be the right move to make does not neccessarily mean it is automatically apparent that it is the right thing to do… that might not become apparent until much later down the road.

Think about the difference between feminism and the MRM.

Feminist “thinkers” (holy oxymoron), are educated in university. This means that they learn like a staircase. First year students do not get into second year classes until they have adequately learned the material, and so on and so on, until you get to the highest levels where the really twisted shit about their theories get revealed. First year students are not arguing with third year students over issues they have no understanding of.

We do not have this luxury on the internet, and it is a HUGE disadvantage of ours.

When I started my blog, I had this disadvantage of ours in mind. What I chose to do was to focus on the subject of Marxism and “how it worked” rather than who was behind it. Also, I made it a theme of my blog, rather than choosing any and all themes and just hodge-podging them all together. My thinking was to purposefully “build a dam” by presenting so much information of “how it works” that I figured once people got it, they would “spill over the dam” which I had built – where I didn’t offer much info beyond “how it works” – and once people were convinced we were dealing with Marxism and spilled over that point, they would go on and find the answers to the other questions themselves. (That’s why there isn’t a peep about things like the Illuminati anywhere on my blog).

It only partially worked, but that is how I attempted to deal with the one room school.

What I find depressing is the throwing up of the hands into the air of the MRM, convinced that we can’t “do” anything – we are just a bunch of talkers on the internet.

It is quite right, we are just a bunch of talkers on the internet. That’s our battlefield. This is a new medium, and we have access to control over it, and the propaganda it puts out. The internet does effectively change society’s attitudes – have a look at how unpopular the government and media have become since the internet began talking about them and exposing their hypocracy.

To suggest that “talking” on the internet cannot be effective for influencing society is to ignore the events of the past ten years. Also, feminism and Marxist thought did not begin with big movements of people with pickets in the streets, but rather, these movements began by propagandizing the public and manipulating them. We now have our own propaganda machine and we can use it similarly if we choose to.

But, if all we do is just blindly yammer away, with no game plan and no clear direction – because of complete free speech – then we truly will be just a bunch of idiots talking on the internet, allowing the biggest opportunity we’ve had ever in history to slip through our fingers.

It’s a tough problem without easy answers.

I don’t care about censorship to protect people’s feelings… I just wonder how much more we could accomplish if we utilized a bit of censorship to form cohesive arguments to put forth to society which will manipulate the dialectic into something beneficial for men. We need a new thesis vs. anti-thesis so we can create a situation that is suitable for men in society.

Like what I was saying about Father Custody earlier on. If the MRM – or certain select people within it – went about it in the right way, certainly the argument could be put forth to begin cracking open the door to assumed father custody, the way things were up until 1870, when divorce was minimal. After the changing of father custody to mother custody, the divorce rate rose 15X in the fifty years following, up till 1920.

We have arguments about all kinds of things that have resulted from this – paper abortions, shared custody, child support because of mutilated beggar syndrome, “oops” pregnancies, the loss of property rights to one’s home and money, the war on boys, etc. etc. etc. ETC.

But really, if the MRM wanted to, and argued for enshrined father-custody – even if all of the other forms of custody still remained in society, the father custody model would take off like a shot for men, and single-handedly wipe out all of those above mentioned problems. Make children who are supported by men “legitimate” again, and children men do not want to support “illegitmate” and the whole ball-game instantly changes. Feminists argue that women ought to have reproductive freedom from men, and if men argued for the same thing – the right to have children through different means than marriage, and for the right to have sole custody of a child without the interference of a woman… well, even if there were still other forms of “families” it would become quite evident that such an arrangement is enormously more beneficial for men who wish to reproduce than bringing a wife along for the sweetheart deal of her life. Get your own kids, without women, and simply date girls. Hell, let them live with you even – if she can’t take the kids from you during the break-up, she has no mutilated beggars with which to justify stealing your house and your paycheck. Without 100% control over male reproduction, women would be reduced to having only sex for pleasure to offer men, and there would be a direct price on the value of her reproductive abilities.

The implications would be astounding.

(Sorry, I know this isn’t a father-custody thread, but it is just such a good example of how to kill 15 birds with one stone).

But, to argue each and every single point along the way, to each and every person who shows up? Good grief!

Somehow, multiple “tiers” have to be set up. One to educate, and one to accomplish actual goals. Mixing the two has been a complete disaster for the MRM.

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Gunn July 28, 2010 at 15:53

As Fedrz pointed out, prior to the advent of fiat currency, inflation was almost zero for well over a century, and you didn’t need a six figure, 30 year mortgage to buy a shoddily constructed track house, like you do nowadays.

I agree that fiat currency is a bad move. In my view, the transition to fiat currency was driven by governments wanting greater freedom to spend, and to be free of a ‘hard’ limitation on their power to print money. Governments became addicted to the power to influence all aspects of life through spending. Banking exists as a mechanism to make the concept of ‘money’ work, so I’m sure that they were just as keen as the governments to move to fiat money, but they weren’t the cause of the move. Governments were.

The current drive to blame ‘bankers’ for everything is a diversionary tactic.

Which was not the point I was making either.

I am aware that you weren’t making the point, and on this particular area, I think Dexter Morgan was correct – your article assigns too much weight to the failings and venality of bankers, without looking at the wider picture. Top bankers are represented in the top levels of government (Goldman Sachs in particular is inextricably linked with the US government), but where some see this as bankers influencing government, I am not convinced by the direction of influence. At this level, the banker and the government official are pretty much identical, and you can’t differentiate the two.

However, the fallout and backlash that has happened against the banking sector (and which continues to happen) is not attacking the real causes of the problem. They are free to carry on doing what they have always done, because their connections to the government continue to shield them. The scapegoats being made to carry the can in the banking sector are just that, useful idiots who are being sacrificed instead of the elites in power.

The ‘cure’ to these problems is to make government smaller. Governments have no business creating huge welfare states that replace heads of families; they have no place mandating transfers of wealth so that old women are subsidized in health care by young men; they have no business guaranteeing public sector pensions for workers who produce nothing of real worth during their ‘careers’ and then retire into comfortable old age whilst the private sector has to work harder and harder to pay for them.

All the talk of bankers being the root of evil distracts attention from the real cause of the west’s economic problems.

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fedrz July 28, 2010 at 16:43

I read an interesting article today about inflation – scroll down to the menu from Woolworth’s in 1950.

A slice of apple pie for $0.15! 60 years later, the restaurant down the road from me is selling slices of apple pie for $5.95 – plus 12% harmonized sales tax, bringing it to $6.66 per slice. (666 heh, everything the government touches becomes evil!) That is an increase in expense of 44.4 times, or 4,443%!

Don’t forget, even though we had the fed since 1913, and during the thirties the rules of gold and money were changed by FDR, it wasn’t until the early 1970′s that Nixon took the US dollar completely off of gold (which had an artificially fixed price up until then – and was only fractionally attached to gold – but gold still influenced the dollar), and it was after this complete abandonment of attaching the dollar to gold by Nixon, that inflation REALLY took off and destroyed people’s lives. Since the 1970′s and 1980′s – aside from better technology making our lives easier – we are actually much poorer in purchasing power from our wages. The only thing that has hidden this from view is that interest rates have been falling since the early 1980′s in one steady decline, with never a real move upwards, making it easier and easier for people to borrow money to make up for the shortfalls in their earnings, which is exactly why we are in this fix today.

Have a look at the historical price of gold, and look what happened in the 1970′s http://no-maam-capital.blogspot.com/2010/05/what-is-historical-price-of-gold.html

Quite frankly, no one should hold any cash savings unless it beats the true inflation rate by at least 5%. A 3% inflation rate means you ought to be getting 8% interest for your money. Throughout most of history while on the gold standard with virtually zero interest, 5% was also considered the fair norm for interest on your savings.

During the 1980′s, when the world lost faith in the US dollar because of runaway inflation, Reagan brought in Paul Volcker to run the fed, and Volcker raised interest rates to, again, about 5% higher than inflation, which was at the time running around 14% or 15%, which is why so many people bought 10yr long bonds yielding 20% interest in the early 1980′s.

My brother bought a brand new car in 1975 for $4,000. He drove it for a few years and then my mom bought it from him… she sold it in 1985 for $5,000. Wouldn’t it have stunk to have won the lotto in 1975, worth maybe $250,000, quitting your job thinking you have it made for life, only to find yourself going back to work in 1985 – not because you foolishly blew your money, but because the government did it for you!

Yup, just like Carter, Obama will give us “change” alright, because pretty soon we’ll all be wearing $1,000 suits, driving $100,000 cars, and living in million dollar homes! And we’ll all make $150,000/yr too!

But, if you had a million dollars that you had retired on in today’s dollars, you will have to go back to work to get by.

If we had no inflation and were back on the gold standard, a goodly portion of us would be able to retire/semi-retire in our 40′s and live off of a fair 5% real interest rate on our savings.

Inflation makes us permanent wage slaves, never truly able to stop worrying about money. But, people used to be able to calculate almost exactly how much money they needed to survive to the end of their lives. Just like today, if I knew that inflation was not a threat, and I could get by on $36,000/yr in expenses… well, if I had a million dollars getting 5%, or $50,000/yr, I could retire and never ever worry about shit again. But, if I only had $750,000, I’d still retire, because I would know that is enough money.

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DirkJohanson July 28, 2010 at 18:59

“Women are at the root of all money”
-DirkJohanson, ~ 2005.

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Jay Hammers July 28, 2010 at 19:56

Okay, so Dexter Morgan, copying a name from a mainstream TV show, is a douchebag who thinks he’s omniscient and brilliant, a little worker bee in the hive of the financial sector.

Golly his penis must be so big, because that is really what his posts are about.

Wanna-be alpha male.

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Anonymous July 28, 2010 at 21:59

“Women are at the root of all money”
-DirkJohanson, ~ 2005.

Bingo!

And men are the root of all self-sustainablity!

The struggle comes from balance… of which men have been severely handicapped in recent decades.

Fuck ‘em then.

Starve.

Why should I care one bit?

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Migu July 29, 2010 at 05:15

I’ve read and own most of rothbard’s works, same with mises, hoppe, bastiat, Marx, Engels, Keynes, rozeff, basically the mises library and it’s detractors.

Mises Hayek and rothbard are my favorites.

Your money multiplier explanation is wrong, but the premise 100 becomes 1000 is right.

The article gave the impression that a bank just multiplies all deposits by 10 and lends away. I have no doubt you know what you are talking about. The money multiplier explanation even simplified was wrong. That and the money=debt thing. Those are my only contentions.

I read the linked article, I have read the entire rothbard archives. Looks like we understand him differently. Rothbard goes on to explain that banks do not just multiply their deposits by 10 .

Anyway keep em comin. I always like your articles.

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Dexter Morgan July 29, 2010 at 19:27

Jay Hammers said “Dexter Morgan…is a douchebag who thinks he’s omniscient and brilliant, a little worker bee in the hive of the financial sector…Wanna-be alpha male.”

ANd people wonder why i’m vicious in my posts.

Hey Jay, you’re last post on an MRM site was about “big pharma”. Now you’re banging on with the OP about the evil bankers. Your posts reek of class envy. Who’s the wanna be? It’s not my fault you haven’t been more successful in life; take more chances.

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Hawaiian Libertarian July 29, 2010 at 19:28

OK, I confess: I’m an Obama-loving socialist. It doesn’t make me a bad person.

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Hawaiian libertarian July 30, 2010 at 21:25

Ok…now someone is sock-puppeting me?

*yawn*

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Katie Flippin August 1, 2010 at 20:04

As long as we continue to be agreeable and polite about picking up the tab for every family in America that has come to realize that the easiest way to be a ‘capitalist’ is to work the American system for every supporting nickel they can get, then the American Dream will, and is, fast becoming just the dream to have enough income left to pay your own health insurance and dreaming that you’ll stay fit and employable until you die. We’ll see the day come when the net financial positive to a college degree and your dream job and making your own way — is merely your pride.

And, for certain, the financial collapse in this country can be laid equally to the fingers of the likes of Barney and Dodd and without a doubt Clinton — within 10 years of their last so-called financial overhaul under Clinton — we get this crap we live with now in this country and yet another great financial overhaul by the same cronies — go figure.

http://hubpages.com/_flip/t/17294f (The American Dream )

http://hubpages.com/_flip/t/1752c8 (Uncle Sam’s Sucking Yoke)

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Hawaiian Libertarian May 14, 2012 at 10:01

It’s been awhile, but I know people still read this article from time to time, so I’m going to put the proof of the disputed “money multiplier effect” here.

I’ve written to follow up posts at my blog here and here.

To be clear, here is a quote taken directly from the Dallas Federal Reserve Bank’s own website:

How Banks Create Money

Banks actually create money when they lend it. Here’s how it works: Most of a bank’s loans are made to its own customers and are deposited in their checking accounts. Because the loan becomes a new deposit, just like a paycheck does, the bank once again holds a small percentage of that new amount in reserve and again lends the remainder to someone else, repeating the money-creation process many times.”

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Peacemaker January 29, 2013 at 13:11

“Fiat currency = [...] agreed upon fiction”
Noice

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