The Myth of Inflation

People who are not debt-burdened have perpetuated a ongoing myth that saving in dollars is a negative process because of the value lost through monetary inflation (which causes prices to rise as the value in dollars fall). This is more myth than fact, because of an underlying fact that is always ignored: saving dollars can actually CAUSE inflation. It isn’t the act of monetary inflation that makes saving a negative process, it is the act of saving that can create additional inflation, which puts a burden on the value of saved dollars.

To understand the effect of savings and inflation, one has to understand a term called the money multiplier effect. It is often thought that banks borrow money from the Federal Reserve to immediately loan it out to borrowers — this is untrue. Banks often borrow money from the Federal Reserve, or other banks, in order to create a higher value in their reserve accounts. Loans are made against these reserve accounts. The Federal Reserve has the power to set a percentage of how many reserves a bank must have against their loans. It is thought that the current reserve ratio is 8-10%, but the actual figure is unknown to me. If the Federal Reserve sets the reserve ratio at 10%, a lending bank must keep 10% in reserves of dollars loaned out. If a borrower gets a $100,000 loan, the bank must have $10,000 in reserves. The problem with the low reserve ratio scenario is that it ignores how loans have the effect of creating more loans based on a VERY low reserve amount.

Let’s say bank A receives deposits from savers in the amount of $100,000. If the reserve ratio is set to $10,000, the bank can loan out $90,000 of the deposited dollars to others, while saving $10,000 in their reserve accoumt. Out of the $100,000 deposited, the bank owes the saver $100,000, but also writes a check for $90,000 to the borrowing, thereby creating $190,000 in money out of $100,000 deposited originally. Now, the $90,000 check written to the borrower gets deposited in another bank, or used to pay for assets or services to a third party. This third party deposits that check into Bank B ($90,000), which the bank can now use 10% of as their own reserve. This means that Bank B can now furnish a loan to yet another borrower for up to $81,000. Bank A owes $100,000 to the original depositor, created a loan for $90,000 to the original borrower, while bank B creates a loan for the second borrower in the amount of $81,000. In just 3 simple steps, the $100,000 saver has created $271,000 in total liquidity. If Bank B’s borrower deposits that $81,000 loan into Bank C and writes a check for other assets or services, that $81,000 becomes yet another amount that can be loaned up at up to 90% value (if the reserve ratio is 10%). This is called the money multiplier effect, and it is the way that banks profit from a single deposit.

As you can see, the act of saving is also the act of creating inflation, which devalues the dollars saved, making them worth less over time. With a reserve ratio of 10%, the money multiplier effect can take that $100,000 loan and turn it into $800,000 worth of liquidity in the market, devaluing the value of the initial deposit significantly over time. The act of saving is the act of allowing the bank to inflate your currency to being worth nothing.

If you have cash assets that you wish to protect, the best option is to stop providing reserve capital to banks by hoarding your money. Hoarding is the act of saving money outside the banking system, a.k.a. under the mattress. Hoarding is FAR DIFFERENT from saving in a bank instrument, because hoarding does NOT inflate the currency. Instead, hoarding creates deflation, as the money is literally removed from the economy, which increases demand for money, which causes prices to fall. If enough people hoard their savings rather than use bank savings instruments, they will be part of a deflationary system that will reduce banking profits, reduce the fraud of the fractional reserve banking system, and increase demand for the dollars they are hoarding.

Will you join us on this saver strike?