Saturday, November 12, 2011

Weakest Borrowers Will Go Bankrupt

Greece is having trouble again and it seems Italy is about to join the party. Greece economy is small enough that it can be saved. But can the same be said for Italy? Why are these countries having trouble? Why are home owners having trouble paying their mortage? Let me explain.

In an interest based economy with fractional reserve banking, weakest borrowers will go bankrupt when deflation hits! Why?

Banks create money when we borrow. Google for "How do banks create money" to understand how it happens if you don't know. Entire money supply is debt. It is the principal we borrowed. But banks demand that it is paid with interest. It is not possible for every borrower to be employed at levels that enables them to earn principal + interest. Because the interest portion is not created yet. It is only created with more borrowing. The inflation created by money creation of banks punishes savers and forces more people to borrow. New money is used to pay old debt. When we run out of borrowers, it crashes. Here is how deflationary crash happens:

http://www.kondratieffwavecycle.com/economy/deflationary-crash/

New money that is created in a society should belong to the society. It should not belong to private bankers. Thus, if any interest is to be paid, it should be paid to the people, not to the private bankers. A solution is to require 100% fractional reserve. Let treasury print principal + interest when a loan is made. Principal is loaned out to the borrower. Interest portion is spent in place of taxes. principal + interest is available to earn. When interest is paid back, destroy it. Web of Debt by Ellen Brown explains it well.

http://www.kondratieffwavecycle.com/web-of-debt/

Current system requires perpetual debt since existing debt cannot be paid without further borrowing. Banks can at will withold loans and create a depression. Then they will make loans to their friends and withold loans from competitors. When competitors who cannot access loans go bankrupt, they are bought by the friends pennies on the dollar. This way the banking cartel gains control of the media and other industries. This is a ponzi scheme but when it goes bust, they get bailed out.

Last but not least, if banks did not create money out of nothing when they made loans, then home prices would be lower and savers would afford them cash down. This is because when 30% of the population works in financial services, the other 70% has to work harder to feed the 30%. If financial services is reduced to 1% just like farming, then they will be employed at more productive tasks (building homes?) and the burden on the 70% will be reduced.