Trust?

rust

uBBle

…e

xPlodes

…

By Omar Javaid, Sr. Editor,

Critic

MAGAZINE

rust is the name of the game, mistrust is the code

followed. Today digital currency is the fuel of nancial

system, and it extracts value from the paper currency(backed by nothing) in circulation. But on the contrary itdeems to have the power to purchase anything basedon its value derived from the trust in the economy of thenation it belongs to (demand of currency in internationalmarket: more economic strength, more demand, andmore value). The Economic Strength of the nation? Isonly a matter of perception, as proved many time in thehistory. In present times the economic strength standsover a bubble of debt in the economy. The bubbleexpands with the ever growing debt, with a fraction of real wealth to back. The ultimate result.... the Bubbles

are there to burst, leading to benet of the few, and

disaster for millions. Case in point: sub-prime mortgagecrises in America.Since the time Lehman brothers declared bankruptcy, a

plethora of articles with analysis of the entire asco, its

causes and impacts has been published but probably

none (at least I cannot nd one) has really disclosed or

talked about the real root cause of the entire disaster.When I look at the entire scene, the question that popsin my mind is how a debt of $11 trillion in 'mortgages',alone, is loaned out when there is only $1.3 Trillion of printed notes available? In addition to this Credit carddebts, other types of public and private loans mounting toa total of around $50 Trillion, only in American economy?(Total U.S. mortgage debt outstanding was $10.7 trillionat the end of the third quarter 2006. Source: http://www.freeratesearch.com/en/newsroom/mortgage_statistics/)

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A common man, uninformed of this jugglery, wouldeventually ask that how on earth can this ever bepossible. The answer is simple but seems like a joke, anasty one indeed. The Banks creates money out of thin

EU Internal Markets Commissioner CharlieMcCreevy comments came in a speech atthe opening of the European headquarters of US bank Wachovia in Dublin “Irresponsiblebehavior: Irresponsible lending, blind investing,bad liquidity management, excessive stretchingof rating agency brands, defective value at riskmodeling pose questions for a much wider audience,”

air when they have to loan out to someone? Magic? No!The process they use is called fractional reserve bankingand the effect is called Money Multiplier in economics.

"The study of money, above all other elds in

economics, is one in which complexity is usedto disguise truth or to evade truth, not to revealit (p15). The process by which banks createmoney is so simple that the mind is repelled."-

John Kenneth Galbraith, Money: Whence it came,where it went - 1975, p29.IndividualBankAmountDepositedLent OutReservesA1008020B806416C6451.2012.80D51.2040.9610.24E40.9632.778.19F32.7726.216.55G26.2120.975.24H20.9716.784.19I16.7813.423.36J13.4210.742.68K10.74TotalReserves:89.26Total AmountDeposited:Total AmountLent Out:TotalReserves +Last AmountDeposited:457.05357.05100CommercialBank MoneyCreated +Central BankMoney:CommercialBank MoneyCreated:Central BankMoney:457.05357.05100*http://en.wikipedia.org/wiki/Fractional-reserve_banking

This is the core of banking business and all the centralbank policies are directly or indirectly related withit. Paper Currency is printed in the quantity, desiredby Central Bank, is multiplied as it passes throughFractional Reserve Systems of Conventional banks. TheCB imposes a Cash Reserve Requirement i.e. CRR is 7~ 10% on commercial banks (even Islamic banks) whichdetermines the amount to be loaned out. A CRR of 20%means that a bank can lend 80 rupees if it has a depositof Rs. 100. The bank in fact transfers this amount to the

borrower’s bank account, i.e. the same bank (or any other bank) receives it, again making it a part of the deposits (of the banking system) ready to be loaned again. The cyclecontinues and the money printed or minted by centralbank is multiplied many times in the form of loans andthe commercial bank expects it back with interest.Check the chart above or for more details pleasevisit: (http://mises.org/story/1118,http://mises.org/ mysteryofbanking/mysteryofbanking.pdf ,www.lewrockwell.com/rothbard/frb.html)No surprise the amount of debt (increasing every year)is more or less the same as the amount of time anddemand deposit (demand deposits are saving and currentaccounts, and time deposits are long term deposits whichare not withdrawn at least for one year) during the sameperiod. Thus money is created continuously as debt.Today in US economy, only 3% is real money and theremaining is just ... Numbers!!! Same is the case with

*http://www.sbp.org.pk/reports/stat_reviews/Bulletin/2008/Sep_08/Money_and_Credit.pdf