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Living in a House of Cards

Updated: Aug 7, 2023

In one of the 2016 Presidential debates, Donald Trump was once accused of not paying any income tax. "That makes me smart!" he replied. The audience's reaction ranged from shocked to impressed to angry. Love him or hate him, either way you have to admit that Donald Trump is a savvy businessman who works the system to his greatest financial advantage.

Banks operate much the same way. They enjoy privileges in business practices that would, frankly, land a normal person in jail. That doesn't make them evil, that makes them smart. The purpose of this post is not to lament the unleveled playing field or rail against the special treatment the banks receive, but rather to pull back the curtain and inform you, the bank customer, of how things actually work. Why should you care, you ask? I mean, you probably have a lot more pressing issues to worry about than the inner workings of the banking system. But contrary to the common cliche, what you don't know can hurt you.

When you go to take out a loan at the bank, did you know that the money you jump through all of those hoops to acquire, doesn't really exist? Well, most of it, anyway. You see, banks are allowed to loan out money that they don't actually have. It's called "fractional reserve banking", which means that they are only required to keep a fraction of their reserves on hand, allowing them to lend out the rest. This practice is building, in effect, a house of cards.

Here's the way Investopedia describes the practice: "Fractional reserve banking is a system in which only a fraction of bank deposits are required to be available for withdrawal. Banks only need to keep a specific amount of cash on hand and can create loans from the money you deposit."

As an example, if someone deposited $30,000 into a bank and you needed a car loan for $27,000, the bank only needs to keep $3,000, or 10%, of deposit reserves to back up that $30,000 deposit and is free to lend out $27,000. Then, if the depositor checks their account online, they’ll see $ 30,000, and if the borrower checks their account online they’ll see that they owe the bank $27,000. That’s a total of $57,000. Where did that extra $27,000 come from?

Take that a step further, the bank is paying the depositor a very low interest rate, and charging you a much higher one to borrow. Let's say the bank pays the depositor 1% annually on the $30,000, or $300. They charge you 7% on your car loan, or $1,890 in the first year. Besides creating an impressive profit margin, the money the borrower is paying interest on was created out of thin air. If the normal person does this, they land in a jail cell for counterfeiting. The banks call it working the system.

It's actually worse than what it sounds. As of 2020, the banks' legal reserve requirements went to ZERO...with no plans of re-instating them.

Now there are a several problems with this set-up.

  • The bank is charging you interest to borrow money that never existed before the loan was approved. That seems a little off, doesn't it?

  • By doing this (which again, is all very legal for a chartered member bank), they are inflating the money supply. By creating money out of thin air, they are flooding the system with more and more dollars, thus making the ones in circulation less and less valuable. This is known as inflation. So the people that are printing the money are making everyone else’s money less valuable. That doesn’t seem fair, doesn’t it?

  • By doing this, it makes banking institutions very fragile. If depositors start withdrawing their deposits, banks are susceptible to collapse. Need a modern example? Loop up the collapse of Silicon Valley Bank.

So, what's a person to do? Shake their fist at the sky and curse the system, or find a way to create a new system to their advantage? You see, you don't actually have to participate in this "fractional reserve" banking system (A.K.A. "house of cards"). You do have a choice. There's a way to migrate to a functioning banking system that operates with real, sound money that is backed up by real, tangible assets. It's called becoming your own banker. I'd love to show you how.

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