In this edition The Great Mogambo Guru tells us all about How Money is Made, Inflation, The Federal Reserve Bank ("after all, just a damn private bank that has been given pure monopoly power over the money, credit, and all the other banks in the USA") and the concepts of Fractionalized Banking.

Love him (few do), Hate him (like most every other economist) or remain simply CONFUSED by him, I present to you...

The Great Mogambo Guru - MONETARY INSANITY

Today I will be taking us on a little field trip, away from the hallowed halls of Mogambo Extreme University (MEU). So follow along in your Mogambo Guidebook Of Monetary Insanity (MGOMI) as we take you to where credit is created in that wonderful, magical place in Central Bank Fairy Tale Land. This spooky place is where the little magic fairies at the Federal Reserve come out and dance by the light of the moon, sit on toadstools, and literally increase the amount of potential credit in the banking system by waving a magic wand, or sacrificing babies, or pressing a button, or something. And this sudden supply of fresh credit drives down the interest rate as it swamps instantaneous demand for credit. Then, the next thing you know, total debt is up as people rush to borrow this new, cheap credit. Not surprisingly, all this increased demand for credit did NOT increase the interest rate, which you would expect, as the supply of credit expanded beforehand! And even better, in doing so - like magic! - borrowers create money at the very instant - poof! - that they sign the loan papers!

Standing up, groaning and moaning, to take a look out of the window at the banks, we see that, sure enough, the banks suddenly had another $22 billion in new loans and leases on their books last week. Peeking around the corner at the money supply, we see that the money supply blipped - blip! - up, too. And lookie there! Total debt went - blip! - up, too!

Predictably, the dollar went down, which means that the dollar now has less purchasing power , as befits the currency of a brain-dead country that produces nothing and consumes everything. Which means that (and you are going to really love this...

Simply AMAZING!

But wait! There's more! How about The Gullibility Factor Test? The Great Mogambo Guru does the math...

Another question was "When you deposit money in a savings account at a bank, that bank holds your money for you until you ask for it back." The answer, again, of course, is "FALSE. Banks do not hold your money, they use your money as a reserve and then lend out ten times as much money to other customers."

This is where I took points away for being hopelessly out of date. (The crowd shouts in unison "How far out of date, Mogambo?"). I answer, "To show you how far behind the times these guys are, the ratio is now almost a hundred to one! The banks have given themselves permission to loan out almost a hundred dollars for every dollar of deposits! Hahahaha! It's fractional reserve banking gone mad!"

Then they go on to explain fractional banking. "The entire U.S. banking system is a fractional reserve system, meaning only a fraction of your money is held in reserve. Banks are counting on the fact that only a small percentage of their customers will ever ask for their reserves on any given day." So, in "bank-think", this is "idle money".

So they loan out a hundred dollars for every dollar of deposits. The money supply is increased by $100. And when each of those newly-loaned dollars get spent and deposited in some bank somewhere, then THAT bank loans out a hundred dollars for each newly deposited dollar! Now the money supply has been expanded by $10,000. And then when THOSE new dollars are spent and deposited in some bank somewhere, then the bank loans out ANOTHER hundred dollars for each dollar deposited, and the money supply has expanded to $1,000,000! And around, and around, and around it goes, new money being created at each step! We started off with one lousy dollar, and after just three iterations of the system, we have a million dollars! A million! And after just three iterations, we are not even CLOSE to being done! Now you see why I am so insane about this thing? The economy hada money supply of one lousy dollar, and suddenly there are a million dollars in the money supply, all chasing the same amount of goods and services! It's inflation! Gahhhhhhhh!

Sep 06, 2005
Richard Daughty, The Mogambo Guru

Richard Daughty is general partner and C.O.O. for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise the better to heap disrespect on those who desperately deserve it.
Much more at
http://www.321gold.com/editorials/daughty/daughty090705.html

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