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HOW DO CENTRAL BANKS DO IT – CONT’D

Reserves

We have explained above that although Central Banks claim to have assets, in a fiat system, those assets are actually irrelevant. However, the power of the Central Bank resides in the fact that it and only it can create new money, or more precisely, it and only it can create new money and control the creation of new money.

As we have seen above, the Central Bank needs the assistance of Private Banks to fully exercise this power. However, it also needs a way to control these banks. The way Central Banks control Private Banks, is to require that they only create fiat money in a relation of roughly 10:1 with regards to their “reserves”. This ratio is technically called the Money Multiplier.

But what are Private Banks’ reserves? Money that the Central Bank issued and is located in a Private Bank’s account at the Central Bank. In other words, if a Private Bank has an account with 10 million Pesos in the Central Bank, through the lending process this and other Private Banks are allowed to create new 90 million Pesos out of thin air. Because only a fraction of reserves are required to create new money, it is called a Fractional Reserve System. The process works as indicated below (assuming a ratio of 10:1):

What are excess reserves? Excess reserves are those reserves that Private Banks have in the Central Bank over the ratio limit. For example, it a bank has a a reserve of 11 million at the Central Bank but it has lent out only 100 million, its ratio is 1.1:10 which is higher than the minimum of 1:10. This means that this Bank has “excess” reserves of 1 million.

The term Excess Reserves is yet another misnomer. It does not mean that Private Banks are cash-rich, it only means that they have slightly more money than the absolutely minimum they need to operate legally! Are you full of confidence yet?

The Central Bank can also modify the reserve requirements, let’s say from 1:10 (10% in 100%) to 5:100, this is to say, 1:20 times the reserve amount. This would double the amount of money that Private Banks would be allowed to create from 10 times the reserves to 20.

Symmetrically, Central Banks can increase the reserve requirements and therefore remove money from the market. For example, if they rise the reserve requirements from 10% to 20% then Private Banks would have to reduce the amounts of loans they have already made by 50% (20% in 100% = 5, this means that the new ratio is 1:5). Banks will have to move now from a ratio of 1:10 to 1:5, this is, they need to cut their loans in half. You can just imagine the chaos this would cause when all the banks will be demanding full immediate payment of half of their loans! An economic crash right? Well… this is not theory, it happened. When? In 1938 in US when the Fed did exactly that! And now you know why the 1929 crash was repeated almost 10 years after. Yes! It was manufactured by a Central Bank.

Why is this process so complex? Two reasons. The first one is obvious. To confuse and deceive. The second is more practical. The Power Elite is not interested in dealing with Central Banks since to a lesser degree they respond to a political authority, and that could be annoying. They want total independence. However, they cannot do so and maintain the illusion that money creation is done “for the good of society”.

So they developed a method whereby although theoretically speaking a Central Bank controls the creation of money, Private Banks control the creation of 9 times more money than the Central Bank does! The benefit are obvious. They receive unlimited amounts of free money and maintain the appearance of political control.

Officially un-payable loans

If you think that this bag of tricks is full, think again. Let’s say that a Central Bank goes through the process of Digital printing as described above. They end up owning Treasury bonds. Those bonds carry an interest, which is paid by the Treasury to the Central Bank. In addition, when the bond comes to maturity, the Treasury must pay the face value of that bond to the Central Bank.

However, the Central Bank being part of the government, it returns all the money to the Treasury! In other words, the Treasury can issue as many bonds for the Central Bank to purchase, safe in the knowledge that they will never, ever have to pay a cent for them!

Yet another way to finance government spending with new money.

Monetizing the debt

All these tricks and misdirection dealing with government debts are called “Monetizing the Debt”. You need to know this term because you will hear it often. It sounds innocuous enough, but what it really means is printing for the government. Whatever amount of money the government needs, it will be printed for it. The term simply means:

Converting debt into new money.

Does this sound like something trustworthy and common-sensical? Or does it sound more like cheating, conniving and exploiting suckers? (that would be you and us, by the way)

CONCLUSION

Central Banks are the engines of the evil empire that politicians and bureaucrats have set up and called government. In the same manner as tanks cannot operate without an engine, a government cannot enslave and exploit us effectively without a Central Bank. Money is what makes markets work, but fiat money is what makes the government system work…for them and their friends. Central Banks are the providers of such fiat money and we have showed you how they do it. Take Central Banks out of the equation, and a great deal of freedom and power return to your hands. It’s a beginning. It’s your choice. Choose wisely.

Note: please see the Glossary if you are unfamiliar with certain words.