There is a simple way to reduce the debt of our country. Take a little trip to your ATM machine, remove a few hundred dollars from your current. You'll reduces the debt of European States. I am currently delirious? No. This is our monetary system that is crazy, I just try to adapt. My goal is absolutely no call for a run on banks but to demonstrate that the foundations of our monetary system is so irrational and absurd that something as innocuous as a withdrawal to the distributor may have an impact on the debt of European states.
What does it with a withdrawal from current account? In our current monetary system, banks usually have very little cash. They hold just the 2% reserve requirement imposed by law European Central Bank. For example, a bank would have $ 1 billion deposit is required to maintain 20 million euro in a reserve account at the central bank. The remainder was invested in government bonds, corporate bonds or equities. When you withdraw money from the bank, your bank must dip into its meager reserves to provide you the tickets you are requesting.
minimal withdrawals can seriously affect the ratio of reserves a bank. Imagine that the bank customers who deposit $ 1 billion on current account and 20.5 million of reserves withdraw 1 million in cash. The bank then deposited 999 million and 19.5 million in reserves. Depositors have withdrawn a thousandth of their assets but withdrew twentieth of bank reserves. The ratio of bank reserves will increase from 2.05% to 1.95% and falls below the 2% mandatory. The bank is potentially bankruptcy under EU law.
To maintain its reserve ratio, the bank has to find cash. To do this, she turned naturally to the central bank. The central bank is going to exchange money against government bonds. Summing up, when the applicant applies for a withdrawal, the bank must sell bonds in order to be able to provide tickets for its depositors. The description above is extremely simplistic, but it works well for virtually the whole system.
We have highlighted a notable event. In a withdrawal, a government bond is transferred from private banks to the central bank. But even if the central bank is an independent organization, it remains a state institution whose revenues accrue entirely to the community. By removing a € 20 note, you have somehow erased € 20 public debt since the state resumed control of its own debt.
Demonstration crazy? Obviously. But so much the image of our monetary system. The most striking illustration of the process I just described is in Japan. For questions preferably for tickets that I can not explain, there are an equal amount of notes and coins in circulation in Japan and the Euro Zone (roughly the equivalent of 850 billion euro) while the GDP of the Euro Zone is 2.5 times that of Japan. Consequently, the Japanese central bank holds roughly 20% of GDP in Japanese government bonds is much higher amounts than those held by the European Central Bank in relation to GDP in the Euro Zone.
But how this hocus-pocus is it possible? In fact the mechanism is relatively simple. By sharing a portion of your credit account cons a ticket, you have exchanged 1 Euro created by the banking system against 1 euro created by the state. Or put another way, you destroyed a Euro currency bank in exchange for 1 euro freshly created by the state. Now every time the state created a euro is an additional income for the state. Please note, this demonstration is valid only with regard to current accounts and is not viable if we're talking about savings accounts or time deposits.
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