“When you get in debt you become a slave.” – Andrew Jackson
Modern money is debt and debt is money. Almost all money in the Anglo-American system which predominates in the developed world is created as the result of private banks making loans. This blog will discuss issues and contemporary developments in our highly leveraged financial system. Banks today are the money creators. Not only do they create money even beyond the bounds of fractional reserve banking, but they also have participated and enabled a huge shadow banking system which has made the system even more unstable and more difficult to understand and regulate by the central banks and national authorities.
The wealth destruction since the onset of the financial crisis and the Great Recession has been massive due to this inherent instability and very high leverage. It is essential to understand clearly developments such as quantitative easing by central banks. Are they creating too much money which will lead to excessive inflation, or are they just trying to backstop the monetary destruction that occurs as defaults continue, as individuals increase savings, and as loans get paid down. Or is what they are doing ineffectual since creation of monetary reserves doesn’t in and of itself force the banks to expand the money supply through lending?