November 06, 2011

Dick & Jane Encounter the Fractional Reserve Loan System

True, what he said, you know:

All money is debt because we have allowed banks and the fed to create all our money through interest-bearing loans by using the fractional reserve system. The details are unimportant, the main point is that our money supply is created by interest-bearing loans of banks and the fed. Therefore, the economy must always grow in order to pay back the interest. When the economy can't grow anymore...collapse. -Dmitry Orlov, from a presentation at ASPO 2011 (Peak Oil Conference in Washington, D.C.)
See Dick. See Jane. They are riding in the back of the green 1948 Chevrolet. Father is driving. Mother is in the front seat. Spot is home with Grandfather.

They are on the way to the Bank, to see Mr. Smith, the Banker. Father wants a new loan to buy a new house. He will sell the present house, probably with Grandfather & Grandmother still in it.

Father has a bank account at Town Bank. Many of the neighbors also have accounts there. See all the money. See it all pile up. The Bank has one million dollars in deposits! The Bank has loaned money to many of the neighbors, too. All of its loans add up to ten million dollars!

"WTF?" exclaims Dick.

"Watch your mouth, Dick-face," says Jane.

"The Bank makes many loans," says Father. "The Bank must have one dollar for every ten dollars it loans out."

"Where does the Bank get the rest of the money?" asks Jane.

"It creates it when it makes the loan. It is called fractional reserve lending," answers Father.

"We do fractions in school," says Jane.

"Big whup, brown-nose," says Dick.

"We will pay the money back," says Father. "With interest of 6%."

"Why do they call it interest?" asks Dick.

"It's what makes it interesting to the Bank," answers Father. "We will pay it back over 30 years. We can use the rule of 72 to see how much the Bank will get from us. We use the rule of 72 at the Company, where I work. We can divide 6 percent into 72 and get 12. That means every 12 years the money will double. We can divide 12 into 30 years. That tells us that the money will double two and a half times. That means we will pay the Bank $250,000."

"That's a buttload," exclaims Dick.

"Fuckin' A," agrees Father.

Father and Mother get the loan. They make payments on the new house. Grandfather and Grandmother still live in the old house, wondering where everyone went. Father gets into a thing with Miss Jones, his secretary at the Company. Father gets canned. Uh-oh, he doesn't have any money anymore!

Soon many of the neighbors also have trouble making payments on their loans to the Bank. There is a Recession. This is bad news for the Bank, too. Oh, oh, see the Bank become a financial zombie. We can do another fraction to see what kind of trouble the Bank is in now. The Bank has only 10% equity for all of its loans. If 10% of the loans go bad, the Bank is bust-o. Uh oh! Thirty percent of the loans went bad. Tits up for the Bank!

Mother meets Jack the Milkman at the back door. Mother is wearing only a pink nightie. Oh, oh, see Mother leave and go to live with Jack the Milkman. Jack is now a pimp. Lots of Mothers now live at his house and turn tricks for Jack.

"Where is Mother?" asks Jane.

"She is with Jack the Milkman," answers Father between hits on Dick's bong pipe. "She a ho now."

"Oh oh," says Jane.

"Oh oh is right," answers Father.

"Where is the money for our loan?" asks Dick.

"Gone," says Father. "It disappeared, along with the Bank. Along with the country."