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Heather can you explain fractional reserve banking and equity trading...the quick and dirty version? And why do so many people hate the Fed? Is this just conspiracy theory paranoia? I don't know what sources to trust when it comes to critiques of our financial system...in college I took macro economics and globalization but when I questioned the fact that America doesn't seem to be generating anything of value, but instead just relying on financing to "create wealth," I was pretty much told to STFU. That was 2007. I'm a layperson when it comes to economics, but I think part of the issue is we're not meant to understand...no one wants you to know that their fancy derivative is spun out of invisible yarn.
Sorry, first post was backwards. Fractional reserve banking: The government prints a million dollars and puts it in the bank. The bank is allowed to loan out 900 thousand of that money, because they only need to keep a fraction (10%) in reserve. But the government goes ahead and writes cheques on the full balance, while the bank is also writing checks on 90% of the balance, meaning there is now 1.9 million new currency in circulation.
This works because no one actually wants the cash - everyone is writing cheques to everyone else. The bank won't give you 10k for that new car, but they will deposit it into the car dealers account. The road paving company never cashes the government cheque, they just deposit it and write cheques to employees. In point of fact this cycle ensure the bank never has to cough up that 1 million that the government deposited.
This inflates the amount of currency perceived to be in circulation - and increased supply means decreased demand. So by inflating the currency, they devalue it. In this way, when the bank loans out that new currency, they are essentially reducing the value of the money that people have saved.
So the government prints an extra million, and that reduces the value of the money you have saved (increased supply means less demand). The bank inflates the amount of that new currency through loans, further reducing the value of the money you have saved (supply/demand). So every new dollar printed winds up being a heavy tax on anyone who is saving money.
The problem with equity trading: To start, when you buy shares in a company you are not buying the company - you are just buying equity in the company. Think of it as buying 20% of the value of my house. You don't own my house, can't use it, and won't even get any rental revenue from it. So why buy it? Well, because if you leave your money in the bank, then currency inflation is going to devalue your savings.
My house is worth 100K though, and you buy 20K of that value for 20k, but we'll put you down for owning 20% of the market value. Now, after 15 years the value of my house is 200K, and your equity is worth 40K. In reality currency has dropped in value and it now takes twice as many dollars to purchase a house, and that makes an investor, like you, feel as though you've earned money. In reality you still own 20% of the same house which isn't really any better than it used to be, but since dollars are now only worth half of what they used to be your equity is worth twice as many of them - but that 40K today is only worth what 20K was worth 15 years ago.
Take this concept and throw it on the free market with people speculating the future value of companies, who continue to sell more equity (wait, I thought the shareholders already had 100% equity, how can you sell more equity!?) and you end up with a system where people's greed has them counting their profits when in reality most of them are barely recovering the value stolen from their saving by fractional reserve banking.
When artificially generated currency from fractional reserve banking enters the equity trading markets, though, you get a mix that is sort of like taking uppers and steroids together - and somewhere down the line a lot of investors will be shitting out their kidneys.
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