Money As Debt II: Promises Unleashed Page #5

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If one draws a diagram of the

situation it looks like this.

The interest, goverments and corporations

pay the banks on their bonds is paid by us.

We pay it as a portion of our taxes and we pay it in

the price of all the goods and services that we buy.

And there is another thing

passed on to us as well

And that's the risk that the bank will go broke

and not be able to honor its promises to pay.

Now you may wonder, how can a bank go broke if

it doesn't put any money up in the first place?

What have they got to lose?

The answer to that question is that

banks differ from counterfeiters...

in that the banks are legally allowed to create

new money but only by certain rules of accounting.

Banks can only create money by entering a

borrower's payments and collateral as an asset...

on the positive sign of the ledger

balanced on the negative side by the loan...

or what the banks call the deposit

liability created by the bank.

When the borrower defaults on the payments, the asset

pledged as collateral is siezed by the bank and sold.

In a declining market where

repossession is most common,

the new lower value of the asset

doesn't cover the bank's liabilities...

which were based on the

previous higher value.

This shows up as a

loss on the bank books.

When foreclosures are rampant as in

a collapsing real estate market...

much of the value of the banks collateral

simply evaporates as home prices drop...

exposing the bank to huge losses.

In truth it's all just numbers

created out of thin air.

But banks must adhere to the

dictates of these numbers...

and the coincequences of bank

arithmitic gone wrong can include:

economic standstill,

social disentegration...

total financial chaos,

lawlessness, starvation and war.

Those who live by numbers

can also perish by them...

and it is a terrifying thing to have

an adding machine write an epitaph.

George J.W. Goodman best-selling

author, The Money Game (1968)

However for the purposes of

understanding the anatomy of a loan,

we shall assume that the

system is still functional...

and all three of the loans we

were looking at will get paid.

The end result is that none one dollar

of existing money has changed hands...

but 30.000$ of new bank credit has been

created and spend into the money supply.

And each of the three banks gets to

collect interest on 10.000$ of it.

Is creation of this brand new 30.000$

really an act of fraud like counterfeiting?

The obvious difference is that

the banking system is legal...

regulated by goverment and disciplined by

the courts to follow the rules of accounting.

Another difference is that

there is no obvious victim...

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