“Money is like an iron ring we've put through our noses. We've forgotten that we designed it, and now it is leading us around.”

~ Bernard Lietaer, Belgian currency expert

Introduction

Where does your money come from? You do favours for other people, and in return they give you money. They in turn got their money by doing favours for people in return for money.

But where did the money come from in the first place? In Canada, it comes from two sources:

1. The Bank of Canada, owned by the federal government.
2. The chartered banks, such as the Royal Bank of Canada and the Toronto Dominion Bank.

Both these groups have the legal right to create money out of thin air without doing anyone a favour in return.

You were probably aware the Bank of Canada can just print money or create it by entering a line in a ledger, but you might be surprised to learn the chartered banks can do so as well. This was not always the case. Prior to Prime Minister Mulroney, banks were required to maintain an 8% reserve. This allowed them to lend the same money out 12.5 times. Mulroney dropped the reserve rate to 0%. This means banks can lend out as much money as they please, even if they have nothing to back it. (In the USA, reserves are 3% for current accounts and 0% for savings accounts).

When you consider how serious a crime counterfeiting is, it is rather odd for the government to have effectively handed over the printing plates so that banks can create money too. Unlike the Bank of Canada, the banks don't literally print money; they create it out of thin air with a ledger entry any time they lend money.

It is a strangely generous act of the federal politicians to the Canadian banks who were Canada's most prosperous institutions even before this boon.

Inflation

Isn't creating money inflationary? Yes, of course. Further, it does not matter who does the creating; both kinds of money, Bank of Canada and chartered bank, are equally inflationary. Not all inflation is bad; you need a certain amount of expansion of the money supply to allow an expanded economy to function. However, out of corruption and kickbacks, the federal politicians have handed over control of the money supply to the private banks. When the Bank of Canada creates money, the federal government gets to spend it on programs like education, health and defense, or debt reduction or reduced taxes. When the banks create it, the money goes to the bank shareholders.

The Sneaky Flat Tax

When the Bank of Canada prints money, it lends it to the federal government at some nominal interest rate. But since the federal government owns the Bank of Canada, it gets dividends, so effectively it gets the money and interest free. Releasing new money into circulation slightly inflates the giant pool of money in circulation, so, in effect, everyone who owns Canadian dollars already, pays for this new money through inflation of their slightly less valuable holdings. Printing money can thus be looked on a sort of sneaky flat tax you can't wriggle out of no matter how clever your tax lawyer.

The Banks’ No-Win Game

When banks create money, they effectively tax everyone to pay for it with inflation, the same as the federal government. But when they create money to lend they simultaneously put a debt on their books with the interest owed. So eventually they get that money back plus interest. Now imagine this game played over and over millions of times. For every $100 the banks create, they create say $150 in debt. Where is the money to come from to pay the interest? The banks create debt at a much faster rate than they create money. There mathematically isn't enough money in total to pay off all the debt. Somebody has to default! The banks have designed the system so that defaults and bankruptcies are mathematically inevitable. They usually come in waves we call recessions.

It is amusing watching the banks so vigorously go after deadbeat creditors for principle and interest, when the money the bank lent cost them nothing in the first place, and when they set up the rules by which a certain percentage of people mathematically had to default. It is a bit like a game of musical chairs.

The banks have the cheek to create the money they lend out of thin air, but insist on being paid back the principal and interest in real money, earned with the sweat of the brow.

How Crooked Are They?

Paul Martin, the Liberal Leader, had yet another sweetheart deal with the banks. Instead of “borrowing” money from the Bank of Canada at effectively no cost principle and interest, he borrows it from the chartered banks at the going interest rate. Presumably Stephen Harper is continuing the practice. Both cause equal inflation. Why would he blow billions of the taxpayers' money so needlessly? Just look at the favours the banks do Martin at election time to repay his generosity with your money.

LETS

In Argentina, the major banks such as Citibank and the Bank of Nova Scotia simply fled the country with the deposits and left everyone high and dry. The people turned to a local-currency barter system when the government peso failed. With computers, it is possible to streamline barter, using local electronic currency. There are many ways to set up a LETS (Local Exchange Trading System).

In one scheme, scheme, LETS money can be created simply with a transaction. When A sells B a good or service, A's account in incremented and B's is decremented by the amount of the sale. The total balance of all accounts is still 0, just like a bookkeeping general ledger.

One big advantage of a LETS scheme is that it recirculates money in the local economy and encourages people to buy locally produced goods and services. It can function no matter what the IMF, crooked politicians and big banks have done to the national currency.

The Way Out

Part of the solution is to make the banks retain reserves as they did prior to the corrupt Mulroney administration. The government should remain in firm control of the money supply. The bonanza from printing money should accrue to the taxpayers, in the form of reduced taxes or improved services. It should not be handed over to the private banks. They are powerful and rich enough. They got this bonanza through crooked means and it should be taken away.

The savings would be so drastic, that Canada could abolish the hated GST or institute a guaranteed annual income.

Nature teaches us that the more diversity there is in an ecosystem, the more stable it is. Nature teaches that if you want something not to fail, you have to have a backup system, and a backup system to that. Putting all your eggs in one basket is a recipe for disaster. So it seems to me, the solution is to develop and use three parallel currency systems: local, national and international.

Learning More

• Money: the documentary by Isaac Isitan and desperate people in Turkey and Argentina banking vainly on the bank doors that no longer return deposits. Shows the horrendous suffering when currencies collapse, including a woman in Turkey who set herself on fire at losing her life savings. It also shows various working LETS system, including Ithaca Hours.
• A Fish out of Water Look at Money
• The Mandrake Mechanism
• Cindy L'Hirondelle's Essay on the Guaranteed Livable Income
• The End Of Work
• Comer: The Committee on Monetary and Economic Reform, a left wing economics think tank.
• Canadian Action Party: a fringe Canadian federal political party that has economic reforms of the banking system as planks.

Benson's
Economic & Market Trends

Money Created "Out of Thin Air"

We hope this brief essay stimulates your thoughts with respect to how money is created - a secret all investors should know.

Money is created in two ways: First, money creation comes from borrowing it and spending it. (Money is literally borrowed and spent into existence.) Second, it can simply be printed up "out of thin air" by a central bank. The U.S. economy and other modern economies have central banks and fiat currencies. Central banks have two major powers. They can 1) "peg" the nominal level of short-term interest rates, and 2) purchase assets such as government debt, with newly printed money. When the central bank pegs short-term interest rates at a low level, it greatly encourages corporate and individual borrowing and spending.

For the past decade, most money has been created through private sector borrowing and spending. However, the day is fast approaching when the private sector's new borrowing will not create enough new money to keep servicing the already massive level of old debt. Central banks will need to step up their efforts to "print money out of thin air". Central bank printing of new money is accomplished by purchasing government debt or other assets.

Clearly, there has been substantial money growth since 2000. Moreover, neither the crash of the NASDAQ stock market, or the last recession, has slowed down money growth. The fact that the Fed cut interest rates 13 times since 2000 - reducing them to a 46 year low - has a lot to do with the massive amount of borrowing that has taken place in the United States.

The amount of net borrowing in the United States is quite impressive, particularly when you consider the old economic model when borrowing was limited to simply recycling savings. In 2003, the savings rate was 2 percent of GDP, while net credit market borrowing was well in excess of 20 percent of GDP. There has been a whole lot of borrowing and spending of new money going on!

Certain asset classes, such as financial assets and housing, have benefited the most by this credit and money creation. For instance, because the mortgage market has been willing to finance any and all mortgages, the credit creation process has allowed both new mortgage debt and the ability to pay for higher housing prices. These higher housing prices have, in turn, allowed for the funding of larger mortgages. Money creation in the private sector tends to concentrate in certain asset classes that facilitate the creation of new credit. This new credit lends itself to new spending, leaving behind new money as the residual, and a growing mountain of debt. To say that this process has been left to run wild is an understatement.

Indeed, it's time to think "Bubble" in stocks, bonds and housing. A rational investor understanding the credit creation process would have played the resulting upward momentum in asset prices for all they were worth!

However, the world is changing. The central banks are already printing vast quantities of new money, making 2004 a "watershed" year. In the general price level, due to the creation of new money borrowed into existence, inflation is starting to leak through.

If one examines individual incomes and corporate cash flows, you will realize the U.S. economic system can not service the mountain of private debt that has already been created at higher nominal interest rates. This watershed year could turn into a cliff side waterfall unless money growth keeps increasing to encourage the growth in personal and corporate incomes. Inflation is needed to push up cash flows to service old debt.

Without inflation, there remains a massive risk of deflation. If old debt is paid down, or forgiven in bankruptcy, money that has been previously created will vanish from whence it came. If the money and debt goes, asset prices will crumble. Many intellectual writers have logically concluded that rising interest rates will cause a "deflationary debt collapse" as interest rates rise. Certainly, a rise in interest rates to more normal levels will be painful and will cause some financial distress. Moreover, a rise in interest rates tends to slow the private money creation process. So, some questions remain unanswered. Where will enough money come from to keep the U.S. economy liquid and solvent? Where will the massive amounts of new money come from to service the debt mountain?

Let's not forget that central banks can create new money with a few strokes at a computer keyboard to purchase whatever assets they wish. The Federal Reserve can create any volume of money it needs to keep the economy servicing both old and new debts. It seems virtually certain that the Fed, and other friendly central banks, will print as much new money as they need to because "inflation tomorrow is better than a collapse of the financial system today".

Since the U.S. Treasury is running a $450 Billion deficit and a 5 percent trade deficit, central banks have actually begun the "Great Money Printing". In the past 12 months, global central banks have created about $800 Billion worth of new money (as measured by the increase in world central bank reserves). This is what the Federal Reserve Governor, Ben S. Bernanke, lovingly calls "Helicopter Money".

Foreigners already hold almost 40 percent of marketable U.S. Treasury debt. The Asian central banks have increased their holdings of U.S. assets to about $1 Trillion. In the relay race of money creation, 2004 is the year when the baton of money creation has already been handed from the private sector to the world's central banks!

Wide open money spigots in the private economy have a habit of financing "asset price bubbles". Since the prices of bubble assets (stocks, bonds and housing) are not included in the price indexes that measure inflation, the inflationary consequences of new money growth can be ignored. As central banks inject money growth directly into their respective economies by buying assets such as United States treasury bonds with Helicopter Money, it is impossible to totally conceal the fact that there is more money chasing the same number of goods. Inflation happens!

The massive trade and budget deficits in our country have acted as an "excuse" for friendly foreign central banks to do much of the needed money printing that would normally be done by the Federal Reserve. Our trade deficit gives companies in foreign countries dollars in exchange for their exports. Our treasury deficit gives foreigners the opportunity to buy our U.S. treasury debt with the dollars. Any foreign central bank can then swap their local currency with companies holding dollars and buy U.S. treasury debt! It's all so simple! New money has been created, just not in our country!

For instance, the Central Bank of China is creating new money by buying U.S. treasuries with our trade deficit. This has helped to drive up their domestic inflation rate to 5 percent a year!

Until just recently, even the Japanese have been suffering from mild deflation and may not have the economic capacity to buy unlimited quantities of our treasuries. Japan is already flooding their economy with fresh Yen out of thin air, as they finance their own government deficit. Japan is currently running a 7-8 percent fiscal deficit and their savings rate has been dropping. Japan's national debt is 140% of GDP and is rising rapidly. The Japanese bond market faces a serious risk of price collapse as their interest rates start to rise. Therefore, Japan can not be counted on to finance both their government deficit and our deficit for much longer.

Very soon it will be incumbent on our Federal Reserve to crank up the domestic U.S. printing press. It is one thing when your neighbor's central bank floods their country with newly printed money buying U.S. Treasury debt. It is quite another when the Federal Reserve flood's America with Helicopter Money by buying massive amounts of U.S. Treasuries.

As inflation comes, interest rates will be forced up. Rising interest rates certainly hurt the owners of old low-coupon bonds. Moreover, rising interest rates have never been the stock market's friend. Rising interest rates are the declared enemy of housing prices. Indeed, rising inflation in the general price level is the enemy of all those wonderful bubble markets. Rising inflation and falling asset prices will turn the world of investing upside down!

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The New Market Bubble Theory

Michael Grebb 01.18.06 | 2:00 AM

So here's the good news: The next five years will bring us the biggest stock-market boom in history. The bad news? The party will end in late 2010, after which we'll face the worst economic decline since the Great Depression.

Welcome to the world of Harry S. Dent, an economist and demographic researcher whose 1992 book, The Great Boom Ahead, called the stock-market bubble of the late '90s when few saw it coming. In his 2004 book, The Next Great Bubble Boom, Dent predicts an even bigger bubble forming over the next few years. That is, before everything crashes down around us.

We caught up recently with Dent to talk about where the markets are heading, and where to park our spare cash.

Wired News: What's the current outlook for stocks?

Harry Dent: We think the market bottomed at 10,000 (in 2004). We're coming up, threatening to break out of this trading range, finally. We'll probably pull back one more time first. And then just come to the top of it again. Then we'll basically see a five-year rally from about late 2005 into mid- to late 2010.

WN: You've revised your projections before. How sure are you about the timing of the boom?

Dent: If we don't see a pretty substantial breakout in the next few months, we may reduce our targets. But so far we're following almost exactly the scenario of the Roaring '20s and very closely to what happened in the '90s -- right before we broke into a bubble that no one expected. Obviously, it's hard for stocks to take off with oil going straight up to $71 a barrel. It's hard for stocks to take off when the Fed keeps saying, "We're going to raise interest rates higher and higher, and we don't care what the bond markets say about inflation." And every day, people putting more money into housing speculation is more money not going into the stock market. Now that housing is deflating, there's no place for money to go. The money has to go back into stocks. We see the Dow at 32,000 to 40,000, and probably on the higher side. The Nasdaq around 13,000.

WN: Will tech stocks lead the rally?

Dent: We see a broader tech boom, including biotech, resuming now that we're over this crash. Businesses have cut costs and expanded their ability to grow with past investments. Now, businesses are going to have to catch up and reinvest to keep up with consumers, who never stop spending. Businesses will come back big time, and that money largely flows into information technology.

WN: But won't memories of the dot-com bust of 2000 temper investor enthusiasm for another tech bubble?

Dent: No it won't. People say, "Oh, how could we have another bull market with so many people pessimistic and hurting and wounded?" But the truth is that bull markets don't start with the everyday investor. It's an S curve like anything else. The smart money starts buying in. The markets start going up. The more the markets go up, the more people get drawn into it over time. And the bubble ends when everybody's in. So all of these people who got hurt the most and say, "I'll never buy stocks again" or "I'll never touch tech stocks" ... let the market go up 30 (percent) or 40 percent a year, year after year, and see how many change their minds. It's like the housing thing. Everybody says it's nuts. It doesn't make sense. But it just keeps going up and up. The next thing you know, everybody has bought a condo. Everybody has bought a second home because they think, "Hey, this is a good investment."

WN: You predict this new stock-market bubble will burst in late 2010, followed by a long decline. Are we talking about something like the 1970s or more of a cataclysmic downturn like the Great Depression?

Dent: I'd say it's going to be in between. It won't be as extreme as the Great Depression. But it will be worse than the '70s downturn, and I think it will be worse than what Japan saw from 1990 to 2003. Maybe we'll see unemployment at 15 percent, give or take. The worst part of it is you're going to see deflationary trends in prices from a shrinking work force. Deflation is the enemy of asset prices. You've got to remember that in the '70s, while the Bob Hope generation was declining in their spending, you had a bigger generation coming behind them entering the work force and picking up some of the slack. Now you've got a smaller generation following the largest generation in history. So it makes the downward trend even more pronounced.

WN: What are some defensive measures for the downturn you forecast?

Dent: For the first couple of years -- around the summer of 2010 -- you start moving out of stocks and equities and getting into very-high-quality corporate bonds in companies that are going to survive no matter what and maybe some short-term treasury bills. You let the crash unfold. These downturns usually take two to three years to play out. Once you see a major crash, then you can move into Asia; then you can move into health care and pharmaceuticals and biotech; and then you can move into retirement real estate. For people entering retirement, I'd say just buy an annuity for the rest of your life. Or just get into high-quality bonds and set yourself on automatic pilot.

WN: Is there anything the government or businesses will be able to do to stop or minimize the downturn you're predicting? Or is it just going to happen no matter what?

Dent: The best thing businesses and consumers can do is, not to over-expand at the end. I don't know what the government can do because no matter what they say, people won't listen. I mean, Alan Greenspan was warning about the stock market thing (before March 2000). People have been warning about this real-estate thing. But the dumb money comes in last. People buy because it's going up, and their friends are making money. Their neighbors are making money. Granny's making money.

WN: So what is the short-term outlook for real estate? Will current prices fall as money flows to stocks?

Dent: We're going to mainly see housing prices just kind of flatten -- maybe decline a teeny bit. We expect south Florida, the Northeast, California, Las Vegas and markets like that to actually decline, but most housing markets will simply just be at slightly negative or slightly positive or neutral. That doesn't cause a housing crisis.

WN: And what about in 2010?

Dent: You should sell your home -- particularly if you have a high-end home in a high-priced urban or suburban area. But in our next book that comes out around 2010, we'll also talk about ways to hedge real estate. You could borrow some money against a property that's got some equity in it and put the money in zero-coupon treasuries: something that would actually grow and create substantial capital gains if there was a slowdown. And, of course, if it doesn't happen -- the economy keeps booming and we're wrong -- well, your bonds go down a little bit but your real estate goes up. There are ways to hedge.

WN: Is there always a bubble somewhere?

Dent: Yes and no. We're in a whole bubble era. It started in the '70s with oil and gold and real estate, and then it spread to the stock market. And now it's back to oil and real estate. You have to go back to the early 1900s to see a similar bubble economy because that's when a lot of these economies were racing with much-higher-than-average productivity, all of these growth industries and all of this change. That's when you get bubbles. We didn't see bubbles in the (19)40s, '50s and '60s. This bubble boom will finally end around 2010 with the massive baby boom and the new technology trends.... I mean, by the end of this decade new technologies -- broadband, internet, wireless, home computing, all this stuff -- will have penetrated 90 percent of households in this country. The boom's over for a while. I mean, who are you going to sell this stuff to? You're down to West Virginia at that point.

I believe you learn a lot from this article and now on a way to create wealth in a near future.

Come back more often and you will find more great articles posted here.

Please feel free to leave a comment.

Alexander The Great Alperovich

Wealth Building Mastermind Group for Long Term Success

Napoleon Hill, in his seminal work, Think and Grow Rich, talks about the need for a Master Mind group to help you achieve your wealth building goals. Particularly, he mentions the need for a harmonious relationship with this group, allowing each member to freely express his or her point of view in an effort to move forward towards their end goal.

For a wealth builders, it may not often be easy to find such a harmonious group to work with. And yet, the company you keep has a direct effect on how you think, the ideas you generate and even on your ultimate success.

The following avenues are available here to be a part of such a Master Mind group:

1. Immediate friends, neighbors and colleagues
2. Internet Discussion Forums
3. Entrepreneurial Seminars
4. A pre-existing MasterMind Group

Let us examine each of them.

If you are fortunate enough to have, amongst your friends and colleagues, individuals with a similar mindset as yourself with regard to wealth creation and entrepreneurship, then use this towards your mutual advantage. By developing a mastermind group with someone you are already familiar with can prove quite helpful by allowing your interactions to occur at a deeper and more meaningful level much faster. Plus, knowing each other's working style and habits can help smooth over any initial potential frictions.

In such a situation however, make sure that you do not mix business with pleasure, and that you hold the other person in good esteem. Otherwise, ill will from previous interactions can easily seep into this mastermind group, which is not profitable to either.

Internet Discussion Forums can be quite useful in gaining ideas, sharing experiences and even in getting encouragement to maintain and move forward towards your goal. Discussion Forums are indispensable sources for interaction with a wide variety of people from across the globe. However, they are poor substitutes for your own MasterMind group - unless the sole purpose of the forum is to forward the goals of a small group of individuals committed to a common goal (We are yet to come across such an experiment, though it might be worth trying). Having said that, to get the most out of a discussion forum, it is best to be active and involved in yet. Remaining a passive observer rarely offers you the same benefits.

Entrepreneurial Seminars, whether on marketing, sales, product development or similar topic offer you the opportunity to meet and interact with like minded individuals. Participating in one such seminar a year is a great energizer and you will return with a bunch of ideas to immediately implement in your own wealth creation goals. More importantly though, you will find it easier to meet individuals with whom you can plan and develop a MasterMind group. It will take time to develop such a relationship but it will be worth many times over.

Another opportunity to participate in such MasterMind groups is if you get invited to a pre-existing group devoted to similar goals. Such chances appear almost out of nowhere, but once others observe your goals, discipline and determination to reach your targets - it is more likely than not to get invited to such groups. Accept such invitations - though be careful to participate only in those groups where you feel there is mutual benefit.

A MasterMind group is most useful to provide you with the right energy and guidance while working towards your final goal. Wealth Creation is just one goal towards which this technique maybe applied. In reality, this technique may be used towards almost any worthy goal you set your mind towards.

So join and becoming a part of our MasterMind group.