Friday, January 28, 2011

Your Dollar Savings is Another's Debt

The way most modern banking systems are setup, it is impossible for someone to save money without somebody else going into debt.  That's because, as I described in a previous post, all money is created as a debt.  Therefore, for anyone to get a dollar, they must either have borrowed it, or gotten it from someone (who got it from someone who got it from someone... etc) who borrowed it.

So how does this work in practice?  Let's say we have in our country 300 million people exactly.  Let's also say that everyone, but one person, wants to save a dollar.  That is, they want to spend one less dollar than they make.  The only way that is possible is if the remaining person goes an extra 299,999,999 dollars in debt - 1 dollar for every other person who wants to save an extra dollar.

Think about what that means.  It means it is impossible for anyone to have more dollars than they owe, without at least one other person or entity(company, non-profit, government, etc...) owing more dollars than they have.  At first this conclusion may be hard to accept, but once you accept that all money is created as a debt you'll realize that it has to be true.  Let's take a look at a few more examples to better illustrate.

If you buy something from the Dollar Store, you are 1$ poorer and the Dollar store is 1$ richer.  No money was created and the Dollar store is richer at your expense.
Dollar Store +1
You - 1
Net = 0
Now let's say you buy a 25 thousand dollar car from a dealership, but have to borrow the money from Fifth Third bank. Fifth third lends you the money so they're now 25 thousand less dollar, but have your loan as an asset.  You have a car and a 25 thousand dollar debt.  The car dealership is now 25 thousand dollars richer.
Fifth Third - $25,000 cash
Auto Dealership + $25,000 cash
Fifth Third + $25,000 asset(your loan)
You - $25,000 debt to Fifth Third
Net = 0

As before, let's say you buy a 25 thousand dollar car from a dealership, but have to borrow the money from Fifth Third bank. This time, however, let's say that Fifth third doesn't have the cash on hand and has to borrow it from the federal reserve.  This changes things a little bit, but still no one getting ahead.  Instead of being out $25,000 cash, they take on a $25,000 debt to the federal reserve.  Also, there is extra cash in the system now too.

Federal Reserve + $25,000 asset(Fifth Third Loan)
Federal Reserve - $25,000 cash (which it creates)
Fifth Third -$25,000 debt to federal reserve
Auto Dealership +25,000 cash
Fifth Third + $25,000 asset (your loan)
You - $25,000 debt to Fifth Third
Net = 0

Everything still nets to zero.  The only difference is that the federal reserve had to create 25,000 in cash to fulfill Fifth Third's requested loan.  The federal reserve didn't have to borrow that cash since it creates cash at will.

Now let's take this even further.  The auto dealership isn't just going to hang on to the cash it just received.  They're going to take that money and put it in their own bank.  Let's say Chase Bank.  Chase, is going to then take that money and lend it to somebody else.  Let's say to your neighbor as a home improvement loan.  Now all that's happened is that the auto dealership exchanges cash for an asset, and your neighbor gets cash in exchange for a debt to Chase.

Federal Reserve + $25,000 asset(Fifth Third Loan)
Federal Reserve - $25,000 cash (which it creates)
Fifth Third -$25,000 debt to federal reserve
Auto Dealership +25,000 cash (you gave them)
Fifth Third + $25,000 asset (your loan)
You - $25,000 debt to Fifth Third
Auto Dealership - $25,000 cash (deposited to Chase)
Chase + $25,000 cash (from Auto Deposit)
Chase - $25,000 debt to Auto Dealership
Auto Dealership + $25,000 asset (Bank Deposit)
Chase - $25,000 cash (loan to neighbor)
Neighbor + $25,000 cash
Chase + $25,000 asset (loan to neighbor)
Neighbor - $25,000 debt to Chase
Net = 0

I suppose I could keep going by having your neighbor go to home depot to buy supplies, but I think the point is made.  No where was cash or some other dollar asset created without a corresponding debt.  Granted, non-dollar assets (the car) changed hands, which is a good thing and is what actually makes the economy work, but the net amount of savings never changed.

One more case before I leave this topic.  Let's look at the effect of someone defaulting on their loan.  Let's say you default on your auto loan before even making your first payment and declare bankruptcy.  In the example where you borrowed from Fifth Third and didn't involve the federal reserve, what would happen is that Fifth Third would lose their $25,000 asset and you would lose your $25,000 debt.  After your bankruptcy, it would look like this:
Fifth Third - $25,000 cash
Auto Dealership + $25,000 cash
Net = 0

In the case where Fifth Third had to borrow money from the federal reserve, it would look like this after your bankruptcy:
Federal Reserve + $25,000 asset(Fifth Third Loan)
Federal Reserve - $25,000 cash (which it creates)
Fifth Third -$25,000 debt to federal reserve
Auto Dealership +25,000 cash
Net = 0

Fifth Third still owes the federal reserve $25,000 dollars.  That money will have to come from more profitable loans.  So no matter what, no money was created without a debt, and nobody made any money without themselves or someone else going into debt.  As you can see from these examples and the explanations, any dollars you manage to save, must be at the expense of someone else going into debt.
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