Run on cash closes U.S. bank. And so it begins.

Run on cash closes U.S. bank. And so it begins.

Running on empty

You may not have heard about it but a so-called 'liquidity crisis' caused the second-largest bank failure in U.S. history last Friday. This means that they ran out of money to repay their depositors. Frankly, this is not surprising–it's only surprising that it doesn't happened more often.

The global economy is structured in such a way that infinite inflation and exponential credit is absolutely essential to its stability, if you can call such institutionalised insanity stable.

Here at Natural Selections we've highlighted the absurd Federal Reserve system many times, but a great many people still have no idea where actual 'money' comes from. They may have an image of their National Mint printing out sheets of paper currency, and it is true that they do print a lot of physical cash, but that isn't where money is actually created.

Money is debt.

When you want to buy a house, you visit the bank to get a mortgage. Now, you might think that the idea of the bank is quite simple: some people store their money with the bank, and then the bank loans that money to others. Not exactly.

The banks figured out early on that they could loan out more than they had on deposit without people noticing; people rarely withdraw all their cash at the same time. That's called fractional reserve banking (a nice name for over-extending yourself).

Historically the rules for this type of banking set the ratio of loans to deposits at a sensible 2-to-1. This rose to 9-to-1 in more modern times. Nowadays because of labyrinthine legislation and creative accounting practices there is essentially no limit to the amount a bank can lend.

So banks have a magical ability to create money from nothing. The source of this power is your signature. Simply put, your promise to pay becomes the money itself. What kind of a crazy banking system is that?

The problem comes when it's time to pay back the interest. The existing money pool must be increased to include the notional interest amount, so more money is created. Don't forget that money is debt, so the new money will require interest payments too. And so on ad infinitum.

This is why we are encouraged with the tacit approval of the government, to spend and borrow as much as humanly possible, the money bubble must be inflated. This is also the reason why we are no longer considered citizens but consumers.

Expect more banks to hit the wall before this is over.

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