Zeitgiest the Movie: Addendum

(Special contribution by "J")

Zeitgeist:

(Opening Quotes and comments)

(not researched)

Zeitgeist:

A number of years ago, the central bank of the United States, the Federal Reserve, produced a document entitled “Modern Money Mechanics”. This publication detailed the institutionalized practice of money creation as utilized by the federal reserve and the web of global commercial banks it supports.

On the opening page the document states its objective. The purpose of this booklet is to describe the basic process of money creation in a fractional reserve banking system. It then precedes to describe this fractional reserve process through various banking terminology.

A translation of which goes something like this:

The United States government decides it needs some money

So it calls up the Federal Reserve and requests say 10 billion dollars.

False When the U.S. Government needs money, it calls upon the Treasury.

The Treasury disburses funds from the general revenue fund (mostly from taxes).

If that is insufficient, it will then sell government bonds.

Zeitgeist:

The FED replies saying: “sure, we’ll buy ten billion in government bonds from you”…So the government takes some pieces of paper, paints some official looking designs on them, and calls them treasury bonds. Then it puts a value on these bonds to the sum of 10 billion dollars and sends them over to the FED.

False The Federal Reserve does not buy government bonds directly from the government. All the bonds that it owns are purchased on the open market, i.e. from the public.

Zeitgeist:

False The Treasury prints currency, not the Federal Reserve.

Zeitgeist:

The FED than takes these notes and trades them for the bonds. Once this exchange is complete, the government than takes the ten billion in Federal Reserve notes, and deposits it into an bank account. And, upon this deposit the paper notes officially become legal tender money.

False The Federal Reserve does not buy bonds directly from the Treasury. Depositing of currency has nothing to do with making it legal currency.

Zeitgeist:

… Adding ten billion to the US money supply.

True but only if the Fed buys the bonds from the investing public.

Zeitgeist:

… Now, government bonds are by design instruments of debt.

True If they weren’t debt, they wouldn’t be called bonds. When any government spends more than it earns, it is called a deficit. If a government spent LESS than it earned, it wouldn’t issue debt. So the problem is really about a government spending more than what it is earning.

Zeitgeist:

… And when the FED purchases these bonds with money it essentially created out of thin air…

True The Fed has such power

Zeitgeist:

… the government is actually promising to pay back that money to the FED.

True The government is committed to pay back all it's obligations.

Zeitgeist:

…In other words, the money was created out of debt.

False When the Fed buys bonds, it is previously issued debt. No new debt is incurred and there is no increase in money the government owns.

In fact, when the Fed buys government bonds, the Government ends up owing less because the Treasury is entitled to Fed profit (income after expenses)

Zeitgeist:

…This mind numbing paradox, of how money or value can be created out of debt, or a liability, will become more clear as we further this exercise.

Comment At this point you need to stop and ask yourself why the film makers have been so wrong about a simple concept that they have made a “documentary” about. How can they be so wrong about the basic facts that are easy for anyone to check? The answer is that they rely on a simple fact of human nature: people are too lazy to check the facts for themselves. (J)

Zeitgeist:

… So, the exchange has been made. And now, ten billion dollars sits in a commercial bank account. Here is where it gets really interesting. For, as based on the fractional reserve practice, that ten billion dollar deposit instantly becomes part of the banks reserves. Just as all deposits do. And, regarding reserve requirements as stated in “Modern Money Mechanics”: “A bank must maintain legally required reserves equal to a prescribed percentage of its deposits”. It then quantifies this by stating: “Under current regulations, the reserve requirement against most transaction accounts is ten percent”. This means that with a ten billion dollar deposit, ten percent, or one billion, is held as the required reserve. While the other nine billion is considered an excessive reserve, and can be used as the basis for new loans.

True Banks are required to keep a certain amount of money available so that depositors can withdraw money as needed. However, as a practical matter, banks usually maintain far in excess of the legal minimum.

Zeitgeist:

… Now, it is logical to assume, that this nine billion is literally coming out of the existing ten billion dollar deposit. However, this is actually not the case. What really happens, is that the nine billion is simply created out of thin air on top of the existing 10 billion dollar deposit. This is how the money supply is expanded.

Misleading There are difference ways to measure the money supply.

The most basic measure of the money supply is the monetary base or M0. This is what the Fed creates. Bank loans do not affect this measure.

An expanded measure of the money supply (M1 and M2) counts both bank deposits and currency in circulation. Because bank deposits can be loaned out and redeposited, the very action of loaning will increase this measure. This effect is known as the deposit multiplier and is more of a method of accounting that it is a physical account of currency.

Zeitgeist:

…Of course they” (the banks) “do not really pay out loans for the money, they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes” (loan contracts) “in exchange for credits” (money) “to the borrowers transaction accounts.”

False When you take out a loan and buy a house or car, that money is transferred from your bank to the sellers bank.

Zeitgeist:

… Now let’s assume that somebody walks into this bank and borrows the newly available nine billion dollars. They will then most likely take that money and deposit it into their own bank account. The process then repeats. For that deposit becomes part of the banks reserves. Ten percent is isolated and in turn 90 percent of the nine billion, or 8.1 billion is now available as newly created money for more loans. And, of course, that 8.1 can be loaned out and redeposited creating an additional 7.2 billion to 6.5 billion… to 5.9 billion… etc…This deposit money creation loan cycle can technically go on to infinity.

Misleading This does describe the deposit multiplier for increasing M1+M2. However, banks maintain reserves far in excess of the 10% mininum so the actual deposit multiplier is much less.

Zeitgeist:

The average mathematical result is that about 90 billion dollars can be created on top of the original 10 billion. In other words: For every deposit that ever occurs in the banking system, about nine times that amount can be created out of thin air.

False The theoretical maximum (not average) deposit multiplier would be 9 times. The actual deposit multipler is less than 2 for checking accounts and usually less than 6 for savings accounts. UPDATE: In these strained financial times, the deposit multiplier exceeded a record 7 over the last few years.

Zeitgeist:

So, now that we understand how money is created by this fractional reserve banking system. A logical yet illusive question might come to mind: What is actually giving this newly created money value? …

Answer What gives a fiat currency value? It is the willingness of others to exchange goods and services for that currency

Zeitgeist:

The new money essentially steals value from the existing money supply. For the total pool of money is being increased irrespective to demand for goods and services. And, as supply and demand defines equilibrium, prices rise, diminishing the purchasing power of each individual dollar.

Misleading

Generally it is true that an increasing base money supply (i.e. the government printing money).

However, an increased in the money supply (M1/M2) based on the deposit multiplier just shifts idle money from a bank account into a loan transaction. It does not increase the amount of spendable cash.

Zeitgeist:

This is generally referred to as inflation. And inflation is essentially a hidden tax on the public.

True that a money supply that increases in excess of available goods and services can and does lead to inflation.

Though it cannot be considered a 'tax' in the true sense, inflation does penalize idle money. Mild inflation is actually considered a stimulous for investors to invest their money rather than letting it sit idle.

Zeitgeist:

[Ron Paul]
“What is the advice that you generally get? And that is, inflate the currency. They don’t say: debase the currency. They don’t say: devalue the currency. They don’t say: cheat the people who are safe. They say: lower the interest rates. The real deception is when we distort the value of money. When we create money out of thin air, we have no savings. Yet there is so called “capital”. So, my question boils down to this: How in the world can we expect to solve the problems of inflation… That is: increase in the supply of money, with more inflation?” - Rep. of Texas, Ron Paul

True inflation does debase a currency, but most central banks around the world have the mandate to keep inflation to a manageable level unless there are economic circumstances that require inflation. When governments are highly indebted, inflation could be viewed as a positive by the government.

Zeitgeist:

The fractional reserve system of monetary expansion is inherently inflationary. For the act of expanding the money supply, without there being a proportional expansion of goods and services in the economy, will always debase a currency.

True In a perfect world money supply would exactly match the expansion of goods and services in the economy.

Zeitgeist:

In fact, the quick glance of the historical values of the US dollar, versus the money supply, reflects this point of definitively. For inverse relationship is obvious. One dollar in 1913 required $21.60 in 2007 to match value. That is a 96 percent devaluation since the Federal Reserve came into existence.

True but one of the primary functions of money is to facilitate economic activity to create wealth.

As an example, let's take a $100 gold coin and stick it in a drawer for 20 years. Why not? You know it will retain it's value.

Now let's take $100 in cash. Since inflation will eat at the value, you want to invest it. So you deposit it in a 20-year CD to get a modest return. But to get that return, the $100 is then loaned, spent, deposited, over and over again at the rate of over 5 times a year.

After 20 years, that CD returns a nomimal rate of return but it has generated over $10,000 in economic activity.

That $100 gold coin? It retained it's value but has generated $0 in economic activity sitting in that drawer.

(MORE COMING)

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