It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.
Henry Ford. (motorcar manufacturer)
But then …. not understanding and suffering from it’s failure, has caused revolution and world war in the past! Therefore a simple explanation in a few words of our monetary and banking system at youtube:
http://www.youtube.com/watch?v=n_bKjVwS_0g and
http://www.youtube.com/watch?v=7kk6fplyLTI and
http://www.youtube.com/watch?v=UG5luKfGjU0 and below:
My great-great-great grandfather had a farm with one farmhand. He paid the man every month 100 Dollars and during the next month, the farmhand paid the rent for the cottage he hired from my great-great-great grandfather and bought from him his wheat, vegetables, meat, eggs, etc. paying back the 100 Dollar, so that he could get his wages again at the end of the month. But then somebody started a little bank in their village. The banker advised both my great-great-great grandfather and his farmhand to put their money in the bank and pay each other with cheques. So they did. But then the banker told my grandfather that he could give him a loan of 100 Dollars (that he had in cash now) to hire a second farmhand and expand the business. So did my great-great-great grandfather and now there were 200 Dollars in circulation instead of 100. And if the second farmhand would also put his money in the bank, the banker could give my great-great-great grandfather again a loan of 100 Dollars to hire a third farmhand and expand his business further. Every time the bank lends out money, new money is created! Good for the growth of the economy! But this system has 2 problems:
Problem 1. When people come to hand in their cheques and collect the money, they will find out that the money isn’t there!
Problem 2. Every time the bank lends out 100 Dollar, it creates 100 Dollars new money in circulation. But the bank also wants interest! And that money is NOT created! At 10 % interest a year, the 200 new Dollar in circulation, increase the debt by 20 Dollar a year. Total debt 220 Dollar. Total money available 200 Dollar. And as time progresses, it gets worse and worse. As long as there is strong growth and more and more new money is created all the time, the shortage can be paid from new loans. But when growth slows down and creation of new money stops, it suddenly becomes clear that there is not enough money to pay all the accumulated interest. We see a debt crisis and failing banks. Governments and Central Banks bail them out and pump more money into the economy to avoid a total breakdown of the financial system. But the accumulated debt is so enormous that governments soon find out that they cannot carry the burden of the total debt of the society. Government bonds become suspect and we have worldwide government debt crisis. Not just
Please also read Willem Buiter's article 'The wonderful world of negative nominal interest rates' at: http://www.webklik.nl/webbuilder-page/edit/459295