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A History of Inflationary Money: From 1844 to Nixon

A History of Inflationary Money: From 1844 to Nixon

So that we can understand the financial and banking challenges ahead of us, this article provides an historical and technical background. But we must first get an important definition right, and that is the cause of the periodic cycle of boom and bust. The cycle of economic activity is not a trade or business cycle, but a credit cycle. It is caused by fractional reserve banking and by banks loaning money into existence. The effect on business is then observed but is not the underlying cause.

Modern banking has its roots in England’s Bank Charter Act of 1844, which led to the practice of loaning money into existence, commonly described as fractional reserve banking. Fractional reserve banking is defined as making loans and taking in customer deposits in quantities that are multiples of the bank’s own capital. Case law in the wake of the 1844 act, having more regard for the status quo as established precedent than for the fundamentals of property law, ruled that irregular deposits (deposits for safekeeping) were no different from a loan. Judge Lord Cottenham’s ruling in Foley v. Hill (1848) 2 HLC 28 is a judicial decision relating to the fundamental nature of a bank which held in effect that

The money placed in the custody of the banker is to all intents and purposes, the money of the banker, to do with it as he pleases. He is guilty of no breach of trust in employing it. He is not answerable to the principal if he puts it into jeopardy, if he engages in haphazardous speculation.

This was undoubtedly the most important ruling of the last two centuries on money. Today, we know of nothing else other than legally confirmed fractional reserve banking. However, sound or honest banking, with banks acting as custodians, had existed in the centuries before the 1844 act and any corruption of the custody status was regarded as fraudulent.

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How Fractional Reserve Banking Contributes to Increases in Money Supply


Some commentators consider fractional reserve banking as a major vehicle for the expansion in the money supply growth rate. What is the nature of this vehicle?

We suggest that fractional reserve banking arises because banks legally are permitted to use money placed with them in demand deposits. Banks treat this type of money as if it was loaned to them.  However, is this really the case?

When John places $100 in a safe deposit box with Bank One he does not relinquish his claim over the $100. He has an unlimited claim against his money. Likewise, when he places $100 in a demand deposit at Bank One he also does not relinquish his claim over the deposited $100. Also in this case John has an unlimited claim against his $100.

Now let’s assume that Bank One takes $50 out of John’s demand deposit without getting any consent from John in this regard and lends this to Mike. By lending Mike $50, the bank creates a deposit for $50 that Mike can now use.

Remember that John still has an unlimited claim against the $100 while Mike has now a claim against $50. What we have here that the Bank One has generated an extra spendable power to the tune of $50. We can also say that Bank One has $150 deposits that are Bank’s One liabilities, which are supported by $100 cash, which are Bank’s One reserves. Note that the reserves comprise 66.7% of Bank’s One deposit liabilities. This example indicates that Bank One is practicing fractional reserve banking.

Although the law allows for this type of practice, from an economic point of view, this results in money out of “thin air” which leads to consumption that is not supported by production, i.e., to the dilution of the pool of real wealth.

 …click on the above link to read the rest of the article…

Don’t Get Distracted By The Trump/Fed Soap Opera – The Crash Will Continue

Don’t Get Distracted By The Trump/Fed Soap Opera – The Crash Will Continue

At the beginning of 2018 I wrote extensively on what was likely to happen under the administration of Jerome Powell, the new Federal Reserve Chairman. In my article ‘New Fed Chairman Will Trigger A Historic Stock Market Crash In 2018‘, published in February, I predicted that the Fed would continue interest rate increases and balance sheet cuts throughout the year and they would knowingly initiate a crash in equities.

To be clear, this was not a very popular sentiment at the time, just as it wasn’t popular when I predicted in 2015 that the Fed would launch interest rate hikes instead of going to negative rates in order to start a catalyst for economic crisis. The problem some people have with this concept is that they just can’t fathom that the central bank would deliberately crash the system. They desperately cling to the notion that the Fed and other central banks want to keep the machine rolling forward at any cost. This is simply not true.

The claim is that the banking elites are “required” to keep the system propped up in a state of reanimation because they are reliant on the system to provide capital and thus “influence.” The people that assert this argument don’t seem to understand how central banks operate.

As most liberty activists should know by now, central banks are essentially a legally protected counterfeiting scheme. Using fractional reserve banking at a ratio that is secret, central banks create their own capital from thin air, and they can infuse capital into international banks at will when it suits their purposes. There is no “profit motive” for the banking syndicate.

…click on the above link to read the rest of the article…

Warren Buffett Explains Bubbles: But He Doesn’t Know We Are In One

Buffet explains bubbles: “People see neighbors ‘dumber than they are’ getting rich.”

Warren Buffett explains Why Bubbles Happen

Buffett was asked by CNBC’s Andrew Ross Sorkin if he is worried another crisis will happen again.

“Well there will be one sometime,” Buffett said in an interview for CNBC’s “Crisis on Wall Street: The Week That Shook the World” documentary. The documentary airs Wednesday night at 10 p.m. ET/PT.

“People start being interested in something because it’s going up, not because they understand it or anything else. But the guy next door, who they know is dumber than they are, is getting rich and they aren’t,” he said. “And their spouse is saying can’t you figure it out, too? It is so contagious. So that’s a permanent part of the system.”

That last paragraph perfectly explains Bitcoin. Most of those investing in cryptos have little idea how they work, or what they are even buying.

Buffet made no mention of the corporate bond bubble, the equities bubble, or even the crypto bubble. He does not see any bubbles now, at least that he mentioned.

Symptom or Cause?

Buffett confuses a symptom (rampant speculation) with the true cause

  • The Fed (central banks in general), keep interest rates too low, too long
  • Fractional reserve lending
  • Moral hazards like bank bailouts
  • Poor fiscal policies and massive government debt

In short, there is no free market in anything and thus no valid price discovery. There would always be speculation, but Fed policies and fractional reserve lending are the root cause of bubbles.

The Degrading Facts of a Fake Money Hole in the Head

The Degrading Facts of a Fake Money Hole in the Head

Squishy Fact Finding Mission

Today we begin with the facts.  But not just the facts; the facts of the facts.  We want to better understand just what it is that is provoking today’s ludicrous world. To clarify, we are not after the cold hard facts; those with no opinions, like the commutative property of addition. Rather, we are after the warm squishy facts; the type of facts that depend on what the meaning of ‘is’ is.

Fact-related pleas… [PT]

The facts, as far as we can tell, are that we are presently living in a land of extreme confusion.  The genesis of this extreme confusion is today’s fake money system.  And the destructive effects of this fake money system have spread out like a virus into nearly all aspects of daily life.

Plain and simple, central bank fiat money creation, multiplied by commercial banks through fractional-reserve banking, propagates financial and economic chaos.  The experience of long periods of money supply expansion punctuated by abrupt, episodic contractions, has the effect of whipsawing the working stiff’s efforts to get ahead. This trifecta of offenses has debased the rewards of hard work, saving money, and paying one’s way.

Quite frankly, these facts are insulting. In particular, they are insulting for those running in the rat race for their family’s daily bread. These facts are also insulting for retirees, who worked for four decades only to have their life savings extracted by the depredations of the fake money system.


Early rat race conditioning [PT]

Short-Sighted Decisions

The facts are that on August 15, 1971, Tricky Dick Nixon stiffed the world unconditionally.  He defaulted on the Bretton Woods system, and terminated the agreement that allowed member nations to redeem their paper dollars, acquired through trade, for gold.  But that’s not the half of it…

…click on the above link to read the rest of the article…

Can an Economy Advance Without Savings?

Can an Economy Advance Without Savings?

According to Frank Decker, Honorary Associate at the University of Sydney Law School, it certainly can. Not only that, but eschewing savings in favor of “monetisation of assets” will yield better results! I refer to his article in Economic Affairs–Volume 37, Number 3, October 2017–, a publication of the Institute of Economic Affairs, London.

Mr. Decker purports to answer the question “Central Bank or Monetary Authority? Three Views on Money and Monetary Reform.” The three views examined are commodity money, state money, and money as a derivative of property. All three views are explained very well, and a beginner to the study of the role of money will learn a lot in a short period of time.

Commodity money is the name Decker aptly gives to money backed by gold or some other widely accepted medium of indirect exchange. Commodity money’s proponents see two major advantages–that it ends inflation and the business cycle. He quotes Mises and Rothbard to good effect.

State money, or money as a state liability, is fiat money that all the world knows today. Its two most famous proponents are Keynes and Friedman. State money’s main advantages, as seen by Decker, are that the state can engage in countercyclical spending and the state can fund itself by printing all the money that it needs for current expenditures.

Decker’s third type of money–money as a derivative of property–sounds no different than fractional reserve banking, except that the fraction of reserves required to be held by the lending banks is so low that it is not a factor of lending restraint. Decker gives the example of a business that uses its assets as loan collateral. According to Decker, the money that the bank creates is NOT created out of thin air, because it is backed by private property; i.e., the loan collateral.

…click on the above link to read the rest of the article…

The Economic Benefits of Ending the Fraud of Fractional Reserve Banking

The Economic Benefits of Ending the Fraud of Fractional Reserve Banking

Fractional reserve banking (FRB) is fraudulent. It should be prosecuted as a crime rather than accepted as normal practice under current banking laws. Any society that respects property rights and the rule of law would not allow it. For those unfamiliar with the term fractional reserve banking or not quite confident of its complete meaning, let’s cover some basics.

What Is Fractional Reserve Banking?

All financial transactions must be settled ultimately by an exchange of standard money, otherwise known as “reserves”. Reserves in the US are composed of federal reserve notes (good old paper money in your wallet, piggy bank, retailers’ cash register tills, or bank vaults) plus reserve account balances held by banks at their local Federal Reserve Bank that may be exchanged for federal reserve notes on demand. The important point is that reserves are not the same thing as the money supply. The money supply is composed of cash outside bank vaults plus demand (checking) accounts at banks. A financial transaction is not complete until reserves are exchanged. For example, accepting a check from your neighbor for selling him your used car is not final settlement, because reserves have not yet been exchanged. The check might bounce. Or the bank upon which the check is drawn might become insolvent ; i.e., it does not have and cannot raise the reserves with which to pay you, the check’s payee, even though the bank balance of the payor, your neighbor, was at least as large as the check.

Most people assume that their money held at banks can always be exchanged for reserves, but such is not the case. Under a fractional reserve banking system banks are not required to keep one hundred percent reserves.

…click on the above link to read the rest of the article…

The Downright Sinister Rearrangement of Riches

Simple Classifications

Let’s begin with facts.  Cold hard unadorned facts. Water boils at 212 degrees Fahrenheit at standard atmospheric pressure.  Squaring the circle using a compass and straightedge is impossible.  The sun is a star.

The sun is not just a star, it is a benevolent star. Look, it is smiling…  sort of. [PT]

Facts, of course, must not be confused with opinions, which are based upon observations.  Barack Obama throws like a girl.  The Federal Register is for idiots.  Two slices of chocolate cake are one too many.  Are these opinions right or wrong?

The answer depends on who you ask.  What’s certain about opinions, however, is that like bellybuttons, everybody has one.  Moreover, unlike free drugs from the government, everyone is in fact entitled to their own opinion.

Moving on from facts and opinions, the next classification we encounter is the wholly asinine.  This broadly contains the absurd and ridiculous.  Take most university teachers, barring natural science professors, for instance.  They’re wholly asinine.  The wholly asinine also extends to editors at the New York Times, Washington Post, circus hunchbacks, and the like.

Lastly, we want to mention the downright sinister.  This includes sociopaths like Hillary Rodham Clinton, John McCain, nearly all of Congress, the Federal Reserve, fractional reserve banking, Washington lobbyists, a good part of Wall Street, and much, much more.  Clearly, such people and professions don’t represent honest work.  Rather, they epitomize less than honest work that’s performed by less than honest people.
Sinister mafia boss from Arkansas, possibly checking classified material on private phone… [PT]     Photo credit: AP

Nixon Casts the Die

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Stabbing With Their Steely Knives, They Just Can’t Kill the Beast

Stabbing With Their Steely Knives, They Just Can’t Kill the Beast

 You were blameless in your ways from the day you were created till wickedness was found in you. Through your widespread trade you were filled with violence, and you sinned. So I drove you in disgrace from the mount of God, and I expelled you, guardian cherub, from among the fiery stones. Your heart became proud on account of your beauty, and you corrupted your wisdom because of your splendor…

– Ezekiel 28: 15-17

In horror stories originating from the times of the first songs there have always been common enemies.  Creatures of sinister intelligence, blind violence, disingenuity, clever crafters of schemes, or often containing the capacity for all of these; lurking in the dark, or hidden in plain sight, but always waiting and watching.  Little Red Riding Hood and the Three Little Pigs suffered through the antics of wily wolves. Rapunzel and Hansel and Gretel agonized before the wicked wills of warted witches; and with Jack of Beanstalk fame it was jeering giants who longed to grind his bones for bread, alive or dead.  Star Wars had Darth Vader and the Lords of the Sith, whereas it was the evil eye of Sauron that ruled over J.R.R Tolkien’s shadowy land of Mordor.  And for most of the world’s religions today it remains Lucifer, the morning star, who fell from heaven by the weight of a prideful heart and now reigns as the Prince and Power of the Air; tempting, taunting, and tantalizing, all of mankind.

In every story, there are heroes and villains introduced and funneled into the friction of rising action that results in a climax followed by the falling action which precedes any resolution.  Also known as the Five Elements of a Plot, these components are the sine qua non of universal story telling across any genre or medium.

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A History of Fractional Reserve Banking–Or Why Interest Rates Are the Most Important Influence on Stock Market Valuations? Part 1

William Hogarth – The South Sea Bubble

The South Sea Company was founded in 1711. The company was part of the treaty during the War of Spanish Succession, which was traded in return for the company’s assumption of debt run up by England during the war. The South Sea Company collapsed in 1720.

  • Central banks appear more powerful than at any time in their history – has something changed?
  • Not really – because of their role in government debt management and fractional reserve banking, central banks have always possessed this power

The main driver of stock market performance, since the 1980’s, has been interest rates. It will continue for the foreseeable future. Its influence has increased inexorably over the past thirty years but the mispricing of the market rate of interest has been a distorting and destabilising factor for much longer, in fact, since the invention of the central bank.

In the first part of this article I will look at the development of central banking with specific reference to the Bank of England. In part 2, I go on to suggest that the long run effect of government borrowing, at lower rates than corporate borrowers, increases pro-cyclicality, crowds out more economically productive private investment and, even as it reduces absolute interest rates for all borrowers, drives rates further below the “natural rate” leading to malinvestment.

Part 1, however, is predominantly an attempt to learn from history. You may detect the occasional “inverse déjà vu” – the unconventional monetary policies of the last few years have even more egregious precedents.

A brief history of central banking

Medieval Banking

The Bardi, Peruzzi and Acciaiuoli companies of Florence were the first true banks of the modern era.

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You are currently living through the dumbest monetary experimental end game in history (including Havenstein and Gono’s)

You are currently living through the dumbest monetary experimental end game in history (including Havenstein and Gono’s)

We have seen several explanations for the financial crisis and its lingering effects depressing our global economy in its aftermath. Some are plain stupid, such as greed for some reason suddenly overwhelmed people working within finance, as if people in finance were not greedy before 2007. Others try to explain it through “liberalisation” which is almost just as nonsensical as government regulators never liberalised anything, but rather allowed fraud, in polite company called fractional reserve banking, to grow unrestrained. Some point to excess savings in exporting countries as the culprit behind our misery. Excess saving forces less frugal countries reluctantly to run deficits, or so the argument goes.

While some theories are pure folly, others are partial right, but none seem to grasp the fundamental factor that pulled and keep pulling the world into such unsustainable constellations witnessed in global finance, trade and capital allocation.

Whenever we try to explain the reasons behind the crisis, such as the build-up in non-productive and counterproductive debt (see herehere and here for more details) people ask us why did this happened now, and not earlier? It is a fair question that we have thought about and believe have one simple answer. Bottom line, the world economy is running on a system with no natural correcting mechanisms.

As we are never tired of pointing out, the Soviet Union only had one recession, the one in 1989. The system was stable, until it was not. A system that does not correct internal imbalances grows just like a parasitic cancer, eventually killing its host. If unsustainable capital allocations are allowed to continue unchecked, the pool of real savings will at some point be depleted. At that point recession hits because the structure of production is too capital intensive relative to the level of real saving available.

…click on the above link to read the rest of the article…

Economics Is Like A Religion – Just Faith In Theory

Economics Is Like A Religion – Just Faith In Theory

Everyone is missing the serious problem that ultra-low interest rates have created for retirees.

Pension funds are still assuming that future returns will be in the 7½–8% range. And as people get older and have no practical way to go back to work, pension funds that are forced to reduce payments in 10 or 15 years (and some even sooner) will destroy the lifestyles of many.

So what made Europe and Japan agree that negative rates-with all their known and unknown consequences—are a solution to our current economic malaise?

I have been trying to explain this by comparing economic theories to a religion.

Everyone understands that there is an element of faith in their own religious views, and I am going to suggest that a similar act of faith is required if one believes in academic economics.

Economics and religion are actually quite similar. They are belief systems that try to optimize outcomes. For the religious, that outcome is getting to heaven, and for economists, it is achieving robust economic growth-heaven on earth.

I fully recognize that I’m treading on delicate ground here, with the potential to offend pretty much everyone. My intention is to not to belittle either religion or economics, but to help you understand why central bankers take the actions they do.

The No. 1 Commandment of a Central Bank

Central bankers are always-and everywhere-opposed to inflation. It’s as if they are taken into a back room and given gene therapy. Actually, this visceral aversion is also imparted during academic training in the elite schools from which central bankers are chosen.

This is our heritage; it’s learning derived not only from the Great Depression but also from all of the other deflationary crashes in our history (not just in the US but globally).

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Never Go Full-Kuroda: NIRP Plus QE Will Be Contractionary Disaster In Japan, CS Warns

Never Go Full-Kuroda: NIRP Plus QE Will Be Contractionary Disaster In Japan, CS Warns

In late January, when Haruhiko Kuroda took Japan into NIRP, he made it official.

He was full-everything. Full-Krugman. Full-Keynes. Full-post-crisis-central-banker-retard.

In fact, with the BoJ monetizing the entirety of JGB gross issuance as well as buying up more than half of all Japanese ETFs and now plunging headlong into the NIRP twilight zone, one might be tempted to say that Kuroda has transcended comparison to become the standard for monetary policy insanity. 

The message to DM central bank chiefs is clear: You’re either “full-Kuroda” or you’re not trying hard enough.

But as we’ve seen, the confluence of easy money policies are beginning to have unintended consequences. For instance, it’s hard to pass on NIRP to depositors without damaging client relationships so banks may paradoxically raise mortgage rates to preserve margins, the exact opposite of what central banks intend.

And then there’s the NIRP consumption paradox, which we outlined on Monday: if households believe that negative rates are likely to crimp their long-term wealth accumulation, they may well stop spending in the present and save more. Again, the exact opposite of what central bankers intend.

In the same vein, Credit Suisse is out with a new piece that explains why simultaneously pursuing NIRP and QE is likely to be contractionary rather than expansionary for the real economy in Japan.

In its entirety, the note is an interesting study on the interaction between BoJ policy evolution and private bank profitability, but the overall point is quite simple: pursuing QE and NIRP at the same time will almost certainly prove to be contractionary for the Japanese.

Here’s how the chain reaction works.

…click on the above link to read the rest of the article…

The Global Run On Physical Cash Has Begun: Why It Pays To Panic First

The Global Run On Physical Cash Has Begun: Why It Pays To Panic First

Back in August 2012, when negative interest rates were still merely viewed as sheer monetary lunacy instead of pervasive global monetary reality that has pushed over $6 trillion in global bonds into negative yield territory, the NY Fed mused hypothetically about negative rates and wrote “Be Careful What You Wish For” saying that “if rates go negative, the U.S. Treasury Department’s Bureau of Engraving and Printing will likely be called upon to print a lot more currency as individuals and small businesses substitute cash for at least some of their bank balances.”

Well, maybe not… especially if physical currency is gradually phased out in favor of some digital currency “equivalent” as so many “erudite economists” and corporate media have suggested recently, for the simple reason that in a world of negative rates, physical currency – just like physical gold – provides a convenient loophole to the financial repression of keeping one’s savings in digital form in a bank where said savings are taxed at -0.1%, or -1% or -10% or more per year by a central bank and government both hoping to force consumers to spend instead of save.

For now cash is still legal, and NIRP – while a reality for the banks – has yet to be fully passed on to depositors.

The bigger problem is that in all countries that have launched NIRP, instead of forcing spending precisely the opposite has happened: as we showed last October, when Bank of America looked at savings patterns in European nations with NIRP, instead of facilitating spending, what has happened is precisely the opposite: “as the BIS have highlighted, ultra-low rates may perversely be driving a greater propensity for consumers to save as retirement income becomes more uncertain.”

…click on the above link to read the rest of the article…

Deranged Central Bankers Blowing Up the World


It is now self-evident to any sentient being (excludes CNBC shills, Wall Street shyster economists, and Keynesian loving politicians) the mountainous level of unpayable global debt is about to crash down like an avalanche upon hundreds of millions of willfully ignorant citizens who trusted their politician leaders and the central bankers who created the debt out of thin air. McKinsey produced a report last year showing the world had added $57 trillion of debt between 2008 and the 2nd quarter of 2014, with global debt to GDP reaching 286%.

The global economy has only deteriorated since mid-2014, with politicians and central bankers accelerating the issuance of debt. These deranged psychopaths have added in excess of $70 trillion of debt in the last eight years, a 50% increase. With $142 trillion of global debt enough to collapse the global economy in 2008, only a lunatic would implement a “solution” that increased global debt to $212 trillion over the next seven years thinking that would solve a problem created by too much debt.

The truth is, these central bankers and captured politicians knew this massive issuance of more unpayable debt wouldn’t solve anything. Their goal was to keep the global economy afloat so their banker owners and corporate masters would not have to accept the consequences of their criminal actions and could keep their pillaging of global wealth going unabated.

The issuance of debt and easy money policies of the Fed and their foreign central banker co-conspirators functioned to drive equity prices to all-time highs in 2015, but the debt issuance and money printing needs to increase exponentially in order keep stock markets rising. Once the QE spigot was shut off markets have flattened and are now falling hard. You can sense the desperation among the financial elite. The desperation is borne out by the frantic reckless measures taken by central bankers and politicians since 2008.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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