Understanding Fractional Banking and the Financial Crisis: Part 2

Last week, I gave a brief intro into why the world is in the financial state it’s currently in. People typically have short attention spans and whatever the crisis the world faces at any particular moment naturally takes center stage.

The thing to remember is that every moment in history has a role to play. Sub-prime mortgages were one of many things that made the world fall apart. Despite all this happening around us, I personally haven’t really felt much of an impact. My life goes on as usual and it’s the same for most of the people around me. So, what’s really happening and how does it really affect us?

You’d Think People Would Learn By Now

Since almost all governments were born out of debt (bonds), they need to make exponentially more money to pay off that debt as it comes with interest. Because of this and the seemingly increased need for debt, the financial health of virtually every country in the world depends on a perpetually growing economy.

Even more so, since the industrial revolution, this growing economy has built a symbiotic relationship with the use of fossil fuels. The more we use, the more expensive it becomes and this drives up the cost of everything!

Our Governments Have A Plan

In order to save the day from a spiraling need for money to pay off debt, governments will work to increase the money people spend. This increases tax revenue and then they can lend out even more money to drive up a short-term spike in debt income (the money people make from the interest on debt). This is like lighting your house on fire to keep warm!

This is essentially what happened when governments starting issuing stimulus packages. Money is injected into the economy so corporations could hire people and create jobs. People could work and start spending again, and this is supposed to heal the economy. The money being spent would have to be exponentially larger, though, and we’re right back at square one.

What People Are So Worried About?

If you’re an outside observer looking into the situation, it might be hard to see what the problem is. How many of our lives have been hugely impacted? Stimulus packages have done a great job of temporarily patching up and making it seem like things are better than they are. When this eventually comes full circle, it ultimately comes back to the banks.

If the banks are the ones who lent this money at interest and it’s the banks that control the supply of money, what happens when the banks default? A complete collapse of the monetary system isn’t unheard of. It’s not even in the realm of the impossible anymore. Some have speculated that perhaps we’ll go back to the gold standard. Don’t count out the old system of barter.

The one thing you can count on is that a wallet full of $100s or a huge bank account could count for very little, if anything at all.