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	<title>Dissolving Dollars &#187; Money University 101</title>
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	<description>Understanding the Debt-Based Insanity behind Modern Money</description>
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		<title>Money Creation 101: Government Debt, The Federal Reserve, Bank Lending</title>
		<link>http://dissolvingdollars.com/money-creation-101</link>
		<comments>http://dissolvingdollars.com/money-creation-101#comments</comments>
		<pubDate>Sat, 22 Nov 2008 03:55:39 +0000</pubDate>
		<dc:creator>Alex</dc:creator>
				<category><![CDATA[Money University 101]]></category>
		<category><![CDATA[Banks]]></category>
		<category><![CDATA[Credit]]></category>
		<category><![CDATA[Debt]]></category>
		<category><![CDATA[Federal Reserve]]></category>
		<category><![CDATA[Monetary System]]></category>

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		<description><![CDATA[The Federal Government basically makes two kinds of money: coins and treasuries. Coins are of course pieces of metal (many decades ago, coins were made of silver and also gold, but not anymore). Treasuries are credit; they are IOUs and they come with interest. Regular paper dollars are created by the Federal Reserve; that is why they say on them “Federal Reserve Note.” The process of creating dollars goes like this:
The government goes into debt so it can spend more money than it takes in through taxes.
This debt comes in the form of the U.S. Treasury issuing treasury securities.
All sorts of entities buy up treasuries with pre-existing money so they can earn interest and, on an international level, so they can get a hold of dollars to buy U.S. Assets.
The Federal Reserve buys Treasuries
If the Federal Reserve decides to buy some treasuries, it creates money out of thin air to buy those treasuries. Since most of the Federal Reserve’s profits are paid to the treasury each year, when the Federal Reserve buy treasuries it essentially gives the government a zero interest loan.
Once the government spends the newly created money, it inevitably gets deposited into the banking system. Once in the banking system, banks use this money to make loans. As long as banks keep a reserve of about 10% (reserve requirements can vary), they are allowed to loan out the other 90% of the deposited money at interest. Once loaned out, this money ends up back in the banking system, and, keeping a 10% reserve, it is loaned out again.  So this means, if the Federal Reserve creates $1000, the banking system ends up creating about $9000 through lending. 
The new money is deposited into banks and becomes the source of loans.

Alternately, the Federal Reserve makes loans directly to banks.
In addition, banks have access to borrowing money directly from the Federal Reserve using something called the discount window. The Federal Reserve creates money out of thin air to lend to banks at cheap interest rates.  Then that money is lent out by the banks at higher interest rates to turn a profit. 
So, most dollars are actually made by private banks, and those banks collect interest on the money they create. People always talk about the government printing money, but the government is just the tip of the iceberg; the government makes debt, the Federal Reserve creates the base of money, and banks create most of the money. Don’t you wish you could do that? The only problem to banks with this set up, besides too many people defaulting on their loans, is that banks can quickly become insolvent and ruined if people demand withdraw of their non-existent, imaginary money. 
And although basically none of the jackass politicians (besides the non-jackass Ron Paul) or mainstream news drones ever talk about the nature of the creation of money, tossing out this insane system is the only real, long-term, sustainable solution for fixing the current economic mess. The solution is not patching up and overhauling the regulation of insanity.
Find out much more! Get the new, simple, illustrated book, Dissolving Dollars: Exposing the Debt-Based Insanity Behind Modern Money. Available at Amazon
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<p><meta name="description" content="The Federal Government basically makes two kinds of money: coins and treasuries. Coins are of course pieces of metal (many decades ago, coins were made of silver and also gold, but not anymore). Treasuries are credit; they are IOUs and they come with interest. Regular paper dollars are created by the private, banking institution deceivingly known as the Federal Reserve; that is why the bills say on them "Federal Reserve Note." The process of creating dollars goes like this:All sorts of entities buy up treasuries with pre-existing money so they can earn interest and, on an international level, so they can get a hold of dollars to buy dollar denominated assets.If the Federal Reserve decides to buy some treasuries, it creates money out of thin air to buy those treasuries. Since most of the Federal Reserve's profits are paid to the treasury each year, when the Federal Reserve buys treasuries it essentially gives the government a zero interest loan. Once the government spends the newly created money, it inevitably gets deposited into the banking system. Once in the banking system, banks use the money to make loans. When the money is put into a checking account, the banks are allowed to loan out 90% of the deposited money at interest as long as they keep a reserve of about 10% (reserve requirements can vary). Once loaned out, this money ends up back in the banking system, and, keeping a 10% reserve, it is loaned out again. Interest bearing accounts, like savings accounts, require zero reserves. So, if that lent out money is put into a savings account it can be 100% lent out. However, deposit money itself is not technically used as loan money in modern banking. Loan money is instead fabricated out of thin air as book keeping entries. The main limit on the ability of banks to create loan money is imposed by the Bank for International Settlements (the central bank of central banks) in Basel, Switzerland. Banks must maintain total capital of at least 8% of total risk-weighted assets (loans). Total capital is the value of a bank’s total assets if they were liquidated. Of that 8%, 4% must be Tier 1 capital. Tier 1 capital is the value of a bank’s stock and retained earnings. Banks also lend and borrow money to and from the money market at the FED’s federal funds interest rate. The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend.  Money market money carries no reserve requirements when used for loans. In addition, banks have access to borrowing new money directly from the Federal Reserve using something called the discount window at the FED’s discount interest rate.  Banks borrow this money at cheap interest rates, lend it back out at higher rates, and thus use it to create more loan money. Overall, for every dollar the Federal Reserve creates, the banks create about 10 dollars through lending. So, most dollars are actually made by private banks as debt, and so most dollars don't exist physically. Banks collect interest on the money they create as debt. Don't you wish you could do that? People always talk about the government printing money, but the government is just the tip of the iceberg; the government makes debt, the Federal Reserve creates the base of money from debt, and banks create most of the money. The only problem to banks with this set up, besides too many people defaulting on their loans, is that banks can quickly become insolvent and ruined if too many people demand withdraw of their non-existent imaginary money or people start selling bank stock. And although basically none of the clueless politicians (besides the non-clueless Ron Paul, Dennis Kucinich) or mainstream news drones ever talk about the nature of the creation of money, tossing out this insane system is the only real, long-term, sustainable solution for fixing the current economic mess. The solution is not in patching up and overhauling the regulation of insanity. Find out much more! Get the new, simple, illustrated book, Dissolving Dollars: Exposing the Debt-Based Insanity Behind Modern Money. Available at Amazon." /></p>
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