Fractional banking

Kia ora,

One of the things that are going to make the next few years difficult is the issue of fractional banking.

It is probably best explained in books like that to the left but will give it a go.

When you deposit money in a bank it gives the bank the right to then loan a number of that currency out. So for example each  $1 you deposit the bank can loan another $10 which it has created out of thin air. The numbers over the last few years have ranged from what I understand from $12 to $40 for each $1 deposited.

So the bank is paying you say 3% for your $1 in savings, but is loaning say $10 at up to 14% or more. Therefore they have multiplied your $1 but at least 10 then pay you a small amount of interest (usually less than real inflation) whilst charging a much greater amount of interest on that currency created out of thin air.

What this means is seen in this saying. A dollar today is worth more than a dollar tomorrow. Since 1971 when the US took their dollar off the gold standard (then it was only a quasi gold standard but it kept things in check) & therefore the worlds currencies for every dollar printed it made all the rest worth less. This causes inflation & in the end the fiat currency as it is now called becomes worthless.

Meanwhile commodiities such as gold & silver revalue themselves as they have done through out history each time this happens.

So for example as the US dollar becomes worth less other countries stop accepting it & then we get deflation which is what has being happening of late. Now to keep things going more money has to be printed or created. One way of creating money is for banks to loan, but they are not doing that at present.

In the US President Obama has just told the banks to start loaning to small businesses (jobs in the rich dad way of thinking) as this is the bread & butter for most economies.

When a bank loans or you use your credit card it creates money that wasn't there before.

For NZ a good example of this is when the couple took off to China with the money given wrongly to them as part of a loan, it was announced that the police will not be able to charge them with theft. There are other charges they can charge them with but not theft because the money wasn't the banks & didn't exist until the couple signed the papers for the loan.

So for the system to keep working it means that money or currency has to keep being created & each time that happens that $1 in your pocket becomes worth less. At some stage the $1 will be worth zero & on historical ecidence that will be 40 years after it became a fiat currency which is 2011 & what ever happens in the US happens between 12 to 18 months later in NZ.

Now at present there are a lot of smoke & mirrors in the US. Banks are going to be charged to ensure they pay back the bailouts.

First many have but they money they are saying is profit or are bailing out with is money from AIG which insured them & has received one of biggest bailouts so far & is now not paying back its bail outs. If AIG fails basically the worlds economies do.

But AIG have to pay back according to the proposed laws. Then comes the next part of the smoke & mirrors. Not covered in those bailouts are the car companies & even more importantly Freddie Mac & Fannie Mae who both just got US$ 200 billion in bail outs. In fact these two will not have to pay back at all. So the money going to them will mean bail outs are being paid back with more bailout money.

They don't even mention Ginnie Mae which has being racking up the debts Freddie Mac & Fannie Mae were stopped from taking on.

It is right now that Warren Buffet has being waiting for. Keeping an eye on good companies or those in industries that will keep going no matter what happens such as security. Here in NZ the richest family used to be the makers of toilet paper.

He will be looking to invest now in what everybody else is getting out off as long as the business is sound.

To invest the way Warren Buffet does you need to be able to read the figures (goes for any investing but his way in particular). He never invests in something he doesn't understand. So he bought into Wrigleys because he unsderstands chewing gum & its other products, but even though Bill Gates is a friend & on Buffets own board of directors he spent years before he bought any shares. He waited until he understood the product or the serivce. All the while though he recommended people buy into Microsoft because he found Gates to be a good person & trusted him. But only invest if you understand the investment.