Fractional Reserve Banking and Business Cycles
Austrian School economists of the stature of Mises, Hayek, and Rothbard have explained how the Business Cycle is caused by an inflation of the money supply followed by a corresponding deflation. In my latest book EXPOSED, I believe I have added insight into the business cycle theory advanced by the Austrian School by describing how the FRB mechanism differs than debasement, and how these FRB differences are in fact the cause of the boom/bust cycle. I will let the readers and the Austrian economists be the judge if my efforts were successful.
Although systems are everywhere, there are only two main types of feedback loops. The first is reinforcing loops, where a change in the system serves as a signal for further change in the same direction. Reinforcing loops cause either runaway (1) exponential growth or (2) exponential decline, depending on whether they are positive or negative reinforcing loops. The other main feedback loop is balancing feedback, where a change in the system serves as a signal for change in the opposite direction as the goal seeking system seeks to restore the lost balance. The balanced feedback, in other words, is goal seeking, striving to maintain equilibrium by recalibrating toward a certain value or situation.
GRAPHIC: SYSTEM FEEDBACK LOOPS
The world’s economic system is a balanced feedback system loop whose components are constantly updating to balance the money supply with the supply and demand for every good and service within the marketplace. Thus, we must study the economy systematically because it has balanced feedback loops, and any intervention in one part of the economy interacts with every other part like a wave in a pool.
I share this architecture so people can see how the FRB system is a fraudulent intervention into the balanced economy. The artificial expansion of the money supply manipulates price signals, temporarily imbalancing the system, until the economic factors (price, supply, and demand) adjust to restore dynamic equilibrium at the new money-supply level.
FRB’s intervention into the balanced economy system is similar to a binge drinker’s alcoholic intervention into the balanced bodily system because both temporarily imbalance a naturally balanced system. The binge drinker’s amusing slogan, “One beer is too many and a million is not enough,” explains the systemic effect of alcohol intervention on the human body. It also illustrates the artificial debt-money intervention because “any expansion of the money supply is too many and a million is not enough.” The positive reinforcing cycles (beer leads to more beer and debt-money leads to more debt-money) continue until the balanced system can handle no more. Because balanced systems must recalibrate, the positive reinforcement loop cannot last forever and eventually must reverse to rebalance the system. When it reverses, the positive reinforcing loop transforms into a negative reinforcing loop because the overconsumption of beer and debt lead to the balanced systems counteracting it with sickness and sleep for too much beer and insolvency defaults for too much debt. In consequence, every intervention into the body or economy creates an artificial boom followed by a real bust as the system rebalances.
GRAPHIC: INFLATION/DEFLATION — INCREASE/DECREASE OF MONEY SUPPLY | INFLATION
Fractional Reserve Banking Is the Cause of the Boom/Bust Business Cycle
This is why the FRB systemic inflation is even more catastrophic than debasement. Whereas the debasement of coins merely expands the money supply by increasing the total number of coins, the FRB system inflation increases and decreases the money supply (through the positive and negative reinforcing loops). This introduces a new phenomenon — deflation, a decrease of the money supply — into the monetary equation. As if increasing the money supply (inflation) wasn’t bad enough (like getting run over by a van), the FRB system, unlike debasement, can also decrease the money supply (deflation) when loans are paid off or defaulted on (as if the van subsequently reverses and runs over us again). The Roman debasement was inflationary theft because it increased the money supply by the additional coinage mixed with base metals. Nonetheless, it did not have a deflation component (the decrease of the money supply) because the additional coins were a physical reality, not created out of thin air, and therefore, they could not vanish into thin air. In contrast, in the FRB system, debt-money is created out of thin air (causing inflation) and vanishes into thin air (causing deflation), which occurs with every loan opened and closed. Therefore, the boom/bust cycle that has plagued the modern economy is a direct result of the systemic inflation/deflation oscillation inherent within the FRB system.
GRAPHIC: INFLATION/DEFLATION — INCREASE/DECREASE OF MONEY SUPPLY | DEFLATION
The inherent oscillation within the FRB system is one of its defects; the other is its mathematical absurdity because total debts increase faster than the total money supply, which makes it an inherently unsustainable system. FRB loans must be procured this month (increasing the money supply) in order to pay the debts accrued in past months. And if new FRB debt-money is not created, the old debts become unpayable, and the wave of defaults begins. In other words, the boom expansion of the FRB debt-money loans (the positive reinforcing loop inflation) continues until the banks cannot loan any more money (from either the banks or the people reaching loan limits). Then, because there is not enough debt-money in existence to service all the loans, the bust contraction of the FRB debt-money begins (the negative reinforcing loop deflation) with the least solvent borrowers defaulting first. Once deflation begins, round after round of defaults occur, crashing the money supply (deflation) and exposing the FRB systems’ inherent lack of reserves.
The problem with FRB loans is debt-money must continue to expand (positive reinforcing loops) until the banks can no longer loan any more money. And as soon as this point is reached, the most insolvent debtors will begin defaulting, crescendoing throughout the banking system as the money supply seeks to return to its original level. Booms lead to bust (negative reinforcing loops) just as predictably as throwing balls up leads to balls coming back down. Moreover, even though the money supply has deflated, the prices of products and services are still inflated. The FRB system boom has caused an unnatural inflation of the money supply and prices, and now the bust is a period of deflation of the money supply and prices back to pre-inflation levels. Recessions and depressions are periods of stagnation caused by the supply of goods still being priced at the inflated money-supply levels while the money supply has been deflated to a lower money-supply level. The duration of the recession/depression stagnations depends on the time it takes for the market to recalibrate prices and wages to the now-deflated money supply. The mathematical imbalance between total debt-money and total debts is inherent within the FRB system. This is what causes the boom-cycle inflation and the bust-cycle deflation. As a result, the only way to end the boom/bust cycle is to end the FRB system that caused it.
To elaborate, consider the following example: If a person obtains a $250,000 mortgage at 5% interest for thirty years, the FRB system creates $250,000 of new debt-money, but no money is created to pay the interest on the debt. Thus, the borrower owes $250,000 in principal, plus another $233,000 in interest over the duration of the loan (a total of $488,000), even though only $250,000 of total money was created. The only way the borrower can raise the additional funds to pay the mortgage is to compete with other borrowers for the limited money supply when compared to the total debts. There is simply not enough money available to pay off all the debts. This is the systematic defect of the FRB fraud, that the interest owed was never created, so how, exactly, can something be paid back to the lender that does not exist? Moreover, with every additional FRB loan, the total debts increase faster than the total money supply.
FRB is nothing more than a game of musical chairs where every loan expands the gap between the total money supply and the total debts. And the only way to keep the music going is to continually expand the number of FRB loans. Since there are more dollars owed than created, if the music ever stops and all the money is demanded, we would discover there is not enough to pay back what is owed (because it was never created), and the economy would come crashing down. The game of musical chairs forces society to borrow from Peter to pay Paul until the unsustainable model leads to another global economic meltdown, as in 2008 and 2020.
The following chart illustrates the inherent problem: the US money supply is around $15 trillion, but total debts are over $50 trillion. It is impossible for $15 trillion to pay back $50 trillion, which indicates that the only way this can continue is for more debt-money to be created. This is a monetary game of musical chairs. There is no way every government, business, and person can pay off all of their debts because of the FRB system’s imbalance between the total debt-money supply and the total debts. If all bank loans were demanded to be paid back today, over two-thirds of the debts could not be paid and the world would discover it is completely insolvent due to the fractional reserve banking system. This fraudulent system has created an unnatural scarcity in the money supply compared to total debts and the game of musical chairs can only continue as long as more money can be borrowed from the Financial Matrix. When no more FRB loans are forthcoming, the music stops and the boom turns to bust.
GRAPHIC: US MONEY SUPPLY VERSUS DEBT JULY 2019
The FRB system can rise and fall, but because of its very architecture, it can never stabilize. The FRB system is wreaking havoc on the global economy because it is wholly incapable of providing the one thing the free market money system needs — namely, stability. A stable money supply is foundational for the free market (discussed further in Chapter 5) because it provides entrepreneurs with accurate, non-manipulated price signals, which end the dreaded boom/bust cycles and increase the wealth for everyone. From the people’s perspective, it is sheer lunacy to build the world’s money supply upon the most unstable of moneys: FRB debt-money. However, from the banking elites’ perspective, it is sheer genius because they have achieved absolute power and profits.