This is an attempt to describe how banks ”lend out” the banks own debt to customers accounts – the bank can’t ”lend out” dollar (or what ever currency that’s used in the specific country) to a customer account.
Balance sheets seems to frighten people so I’ve made some very simple drawings – trying to keep it next to trivially simple. We start we an extremely simple example and build our logic based on that.
Let say you are broke and have to borrow $100 from your friend Eric. I think the balance sheet in the drawing below is self explanatory.
It should also be obvios that you would be seen as a fool if you tried to lend out your own debt as shown in the next drawing:
It’s also obvious that your debt, e.g your electric bill, is denominated in dollar but you would be taken as a fool if you tried to convince someone that your electric bill ARE dollar.
All above is trivial but, as we shall see, the banks resorts to the reverse logic.
The banks balance sheet is exactly the same as yours. Let say you go to the bank and deposit a $100 bill. The banks balance sheet will then change as shown below:
If you check the above picture it’s basically the same as the first picture. The change on your balance sheet when you borrowed $100 from Eric is the same as on the banks balance sheet. The bank borrow the $100 from you when you make a deposit..
But here’s where the bank magic come into place. Let say that you want to buy a house for $400 000. You sign the ”loan” agreement stating that you borrowed $400 000 that never existed. The bank put the ”loan” agreement on it’s asset side of the balance sheet and make a direct lie stating that the $400 000 now is on your account. But as shown below – the only thing your account can contain is the banks own debt to you.
The bank employee lies to you (most likely without knowing it), by saying:
-”The $400 000 you borrowed is now on your account”
And you would be sen as an idiot if you questioned the validity of the lie.
I hope that it’s now completely clear that banks don’t lend out dollar (or what ever currency used in the country). Banks can’t ”lend out” anything else then it’s own debt to customer accounts. That’s why the whole financial system is so shaky – the banks are as indebted as all ”customers” the bank have put in debt with the banks own debt. In most countries 97% of the ”money” supply consists of the banks debt to account customers – only 3% consists of currency (dollar in the example given above). The only reason the system still is standing is the fact that politicians and central bankers pretend that it’s based on sound logic and that the emperor has cloves (money)
The obvious question is – why should we let anyone ”lend out” their own debt without seeing them as imposters? Why not make a system where we can have customer accounts capable of holding dollar (or what ever currency in the specific country)?