Understanding the Financial System

Many people do not know or care about how the financial system works as long as it does work in
their favour, however the sad truth is that it always works in favour of the banks. We will use the USA’s
financial system as an example of how money is created.

1. It starts when a government official gets elected and promises to add benefits or spend money,
this is called Deficit spending.

2. Treasury (is a government department in charge of managing all federal finances) issues a currency
(dollar) by issuing a bond the banks, the bond is nothing but a paper that says lend me dollar today
and we will pay it back in the future + interest (IOU). Those bonds are paid back by the people in the
form of taxes. Our future self needs to pay back for the bond and its interest.

3. The treasury holds a bond auction with the largest banks participating in it to buy the national
debt, the banks purchases it to make profit through earning interest.

4. The banks sell those bonds to the Federal reserve at a profit, the Federal reserve writes a cheque
while having 0$ in their account balance, this is how currency is created

To simplify the process, the treasury and federal reserve are exchanging Bonds and Cheques with the
banks being the middleman and making profit while creating currency. For now, The federal reserve
are loaded in bonds and the treasury is filled with dollars.

5. The treasury then takes the currency printed and gives it to the government to spend on public
health, social programs, and military.

6. Money being spent on contractors, soldiers, employees goes back to your bank account.
On a side note, once you put the money in the bank then the money is not being held safely for you.
Instead, the banks take your money, and they can do anything they please with it within certain limits.
For example, they invest in the stock market, which is not stable as we have seen, and can even lend
it to others at a profit.

Banks’ lending money is called “fractional reserve lending” in a financial term. The meaning it has is
literal; a bank can lend your money while keeping only a fraction of it in the bank. Even though ratios
can vary but we will use 1:10 in this example, if you deposit 100$ in your account, the bank can legally
keep 10$ in a “cash vault” and lend the rest to Mr. X without even telling you. At this point, your bank
account still says that you have a 100$ in your account on the computer. Simultaneously, Mr. X has
90$ in his account which means that there is 190$ on the computer. So Mr. X takes the 90$ and then
pays for his new TV, the tv shop owner puts the money back in the bank which repeats the process
with the same money till there is the 1:10 ratio. Finally, this 100$ creates 1000$ on account balances.
As mentioned before, these ratios can vary from 10% to even 3%

The result is an increased supply of dollars which the banks are benefiting from by expanding the
currency. In fact, other than economic crisis, 92-95% of the currency is created from the banking
system.

Once the 100$ becomes a 1000$ then people have more money to buy more things, the demand or
money in the markets increase which creates inflations. The rising prices is a symptom of inflation (we
can see the prices of real estate prior 2008 as an example).

This is simply the financial system that we live in, some money printed and most of it is not. That is
not even the crazy part, we work for those printed dollars, we trade our time and skill for those dollars
that have been printed out of thin air and then get taxed on it.

7. Taxes goes to the IRS which gives it back to the Treasury to pay the bond that the federal reserve
bought from an account that has nothing in it. So, most of the taxes doesn’t go to help society but to
pay the federal reserve debt.

In fact, till the creation of the federal reserve there was no need for the U.S government to have
income taxes. The Federal reserve was created in 1913 and in the same year an income tax was agreed
upon, a coincidence?

As we mentioned earlier, we need to pay taxes on each dollar in existence but how will we have
enough dollars to pay for it. The first 10$ taxed needed a repayment of 11$, but the system only has
10$. Thus, the government prints dollars for repayment purposes. Naturally, it must pay the newly
printed dollars back with interest and then we go in this cycle again and again.