The current banking system allows the banks to lend out their money up to (approximately) ten times, while still allowing all deposits to be withdrawn upon demand. This is called fractional reserve banking (FRB). One consequence of FRB is that the money supply increases when people take up new loans. New money is printed out of thin air, since the banks only need to back up a fraction of the loans that they grant.i am not sure you understand what you think you are reading.
backing is with more fiat paper, not gold. in 2006/7 the ratio got to 30 to 1. $30 of fiat dollar loans secured by $1 in the bank vault, is the real meaing or 'frb'.
maui1,
Yes, but the banks around the world lack capital for BIS III and the new ratio for lending is 8 to 1 as capital for lending straight loans is now 12.5%.. vs zero for sovereign bonds like the Billions lent to the PIIGS.. My point was the USD is backed with Gold and the EURO is not.. Yes the Bundesbank has gold but it does not back the EURO. For the records, from Ron Paul etc...
Bi Metal Au Pt
Terminology
Critics of fractional reserve banking and the related fiat paper monetary system may refer to it by the term debt-based monetary system,[19][20] or credit-based monetary system.[21][22][23][24] They may also refer to money created in parallel with debt as debt money or endongenous money, reflecting the fact that virtually all new money is currently created by people or businesses or governments further indebting themselves to banks.[25][26] This monetary system is called "endogenous" because the money supply is flexible, expanding in parallel with the demand for debt and stalling or contracting when demand for debt declines.[27] Some consider this a perverse and dysfunctional way of introducing new money into the economy.[25]
The term, "debt-based monetary system," and related terms such as "debt money" are not used by conventional economists or academic mainstream economists. Mainstream economists often refer to "debt money" by its antonym "credit" and distinguish between types of money only after the money is created. The very definition of "money" and the distinction between "debt" and "money" (and their respective economic effects) are still sources of vigorous ongoing debate.[28][29][30] Mainstream economists rarely if ever discuss the origins of modern money and generally do not actively discuss or comment on the fact that virtually all money is now created through individuals, or businesses, or governments going into debt to government-sponsored commercial banks.[31][32] Discussion around the nature of "debt-based" money and the arguments over its effects on the economy are notably absent from most established mainstream academic economic publications[33] and most mainstream economists instead argue that the origin of different kinds of money (and the volume of their issuance) does not really matter, at least in the long run.[34] This mainstream idea is referred to as the theory of "money neutrality".[35][36] Some commentators have speculated that the unusual "silence" around the topics of fractional reserve banking and central banking (and the staunch refusal to consider alternative theories of money) is due to the simple fact that many economists are on the payroll of the major commerical or central banks of the world and are unprincipled or, at worst, corrupt.[37][38][39][40][41]
[edit] Typical criticisms
Norm Franz states in his Money and Wealth in the New Millennium:[42]
Gold is the money of kings, silver is the money of gentlemen, barter is the money of peasants – but debt is the money of slaves.
12th century Chinese scholar Hu Zhiyu stated:[43]
Paper money, the child, is dependent on precious metals, the mother. [Inconvertible paper notes are therefore] orphans who lost their mother in childbirth.
Robert H. Hemphill, credit manager of the Federal Reserve in Atlanta, stated in 1939:[44]
If all the bank loans were paid, no one would have a bank deposit and there would not be a dollar of coin or currency in circulation. This is a staggering thought. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. When one gets a complete grasp of the picture the tragic absurdity of our hopeless position is almost incredible, but there it is. It (the banking problem) is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.
British monetary reformer Michael Rowbotham states the following in his book, The Grip of Death (the title being derived from the literal origin of the word "mortgage"):[25]
It is actually not in the least surprising that nations are chronically in debt, governments have inadequate resources, public services are under-funded and people are beset by mortgages and overdrafts. The reason for all this monetary scarcity and insolvency is that the financial system used by all national economies worldwide is actually founded upon debt. To be direct and precise, modern money is created in parallel with debt. The reason for the failure of economists to question patently invalid monetary data becomes clear - there is a total acceptance by them of the most extraordinary method for supplying money to the modern economy.
The creation and supply of money is now left almost entirely to banks and other lending institutions. Most people imagine that if they borrow from a bank, they are borrowing other people's money. In fact, when banks and building societies make any loan, they create new money. Money loaned by a bank is not a loan of pre-existent money; money loaned by a bank is additional money created. The stream of money generated by people, businesses and governments constantly borrowing from banks and other lending institutions is relied upon to supply the economy as a whole. Thus the supply of money depends upon people going into debt, and the level of debt within an economy is no more than a measure of the amount of money that has been created...
All around us, the gross failure of modern economics screams out to be addressed. The towering indifference of those shining offices scraping the sky above the menacing ghettos of Brooklyn; the speculative channelling of billions of pounds of volatile international finance, which can leave a country prosperous one week and plunged into decline the next; the ludicrous production of cheap goods of poor durability, so that jobs are 'protected', and we can recycle the materials and make the goods all over again; the ridiculous export drives by which every country simultaneously attacks the economies of every other nation, under the pretence that such global free trade improves the general wellbeing; the staggering waste of a throwaway, quick-growth, all-new spiral of constant economic change; the outrageous financial debt which Third World countries have actually paid many times over, but which, due to interest, is now larger than ever before - a debt which forces those impoverished nations to compete to supply goods already in surplus; the cynical manipulation of human emotions into buying fashion-obsessed trivia; the burgeoning transport demands of escalating economic growth and centralisation, with identical goods crisscrossing the globe, regardless of environmental cost; the fact that despite the incredible productive capacity of the modern economy, people are obliged to work harder, with ever greater efficiency, forever forced to adapt and retrain or face a life of indignity and misery as one of the unemployed.
Both those in work and out must watch, as the world they know and understand changes almost in front of their eyes like some nightmarish Kafka-esque novel. This is the era of accelerating economic change. The benefits are highly dubious, and no-one even pretends that the economy is responding to what people actually want. The only justification offered for the changes is that this is 'the age of progress', and 'you can't stop progress', even if you are human and the progress you are discussing is supposed to be about people and the lives they might lead in the future. The world of economics has got mankind by the throat and everyone knows it, and no-one has a clue where we are going or why we are going there.
But is this surprising? If a monetary system is invalid or flawed, then the entire economy is based on the mathematics of error, and must be riddled with the effects. If the financial system upon which our economies are built is defective, and yet monetary considerations dominate our economic decisions, should we be surprised if the results are less than satisfactory?
The major role played by bank credit, which forms over 95% of the money stock in most developed nations, suggests that it cannot but be implicated in these trends. This is further suggested by the way that banking has literally become the focal point of modern economic management, through manipulating interest rates. The stargazers of Whitehall and the Federal Reserve hold their councils, trying to tread the non-existent tightrope between growth and recession by debating quarter percentage-points of interest rates. Alan Greenspan, the Chairman of the Federal Reserve, engagingly describes his task in controlling the American economy through adjusting interest rates as a matter of 'taking the champagne away once the party has started'. Businessmen around the world hold their breath, measuring his every word, wondering what he will decide. There could be no greater indictment of contemporary financial economics than this; that a fluctuating financial digit on a single computer system in a single street in a single country should have the ability to dominate the economies of an entire planet...
The past thirty years are almost unique by comparison with the previous three centuries in the lack of attention that has been directed at debt and the financial system. Throughout the eighteenth century, there were repeated calls for reform. During the nineteenth century, excessive banking was held by many to be directly responsible for the waves of appalling poverty that swept Europe and America during a period of increasing industrialisation and agricultural development. In this century, during the depression of the 1930s, the financial system effectively seized up and brought virtual collapse to the economies of the world in an age which was, perhaps for the first time, obviously wealthy, and in which technology offered people real freedom as well as material prosperity. One observer judged that over 2,000 schemes for monetary reform were put forward at that time - all with a common theme in their outright rejection of the debt-based financial system as it then operated. The same system continues to this day, modified in small details, but unchanged in principle; and the recent financial crisis in Asia shows the potential for collapse still exists.
However the issue of economic volatility through booms, slumps, crises, and collapses has never been the sole point of criticism. It is the long-term trends that a debt-based financial system fosters which are most destructive. The most obvious of these is declining personal solvency. Mortgages support over 60% (£420 billion) of the money stock in the UK and over 70% ($4.2 trillion) in the US. Housing-debt statistics for the UK and the US show that there has been a dramatic decline in true home ownership as mortgages become higher and ever more widespread. There can be little question that relying upon housing debt to supply money to an economy lacks economic and political justification. However, taken in conjunction with the marked rise in commercial debt, mortgages have a knock-on effect. In an economy where the price of goods is elevated by commercial debt and consumer incomes are deeply eroded by mortgage debt, there is a persistent and subtle advantage given to low-quality, mass-produced goods, and growth is fostered in this direction. The persistent decline in product durability and the growth-culture of a rapacious consumer society can be directly traced to the debt-based financial system.
The financial system has also generated a serious distortion of agriculture. Excessive farming debt has driven out the most efficient producers - small/medium sized farms. Meanwhile, the relentless pursuit of farming and processing methods oriented towards a low-price market now involves the production of foodstuffs of poor nutritional value, inferior to that which the land can provide and inferior to that which consumers actually desire.
The nature of growth within a debt economy affects not only the quality of output, but distribution and marketing. Intense competition for sales within a debt-based economy results in the use of transport as a competitive strategy by businesses. This has led to a progressive breakdown of local and regional supply networks, and marketing over ever-greater distances, leading to escalating commercial traffic demands.
At the international level, trade is deeply affected by the debt-based financial system. The aggressive pursuit of maximum export revenues, rather than seeking a simple balance of trade, is entirely due to the fact that even the wealthiest nations operate from a position of gross insolvency. International trade has degenerated into a competition between nations to alleviate their indebtedness, rather than a process involving a mutually beneficial exchange of goods and services.
Endemic Third World debt is also directly attributable to the reliance upon debt and banking to supply money. The theoretical model of borrowing from the World Bank/IMF, investing in development and repaying loans from export revenues, is one of the great failures of contemporary economics. The persistent inability on the part of debtor nations to repay these loans suggests strongly that the nature of the indebtedness suffered by the Third World has absolutely no actual legitimacy or validity...
The more one explores the broad impact of debt, the more apparent it becomes that bank-credit constitutes a dysfunctional form of money. An economy based almost entirely upon bank-credit and debt experiences an intense drive for growth, regardless of need or demand. Bank credit engenders financial dependence, injects instability and fosters growth-distortions, both within an economy and throughout the international arena.
Reform of the debt-based financial system is clearly not a minor issue. It is not a matter of fiddling around with taxes, incomes and allowances to make things apparently more equal, more efficient, or perhaps more straightforward. Changing the debt-based financial system involves gradually altering the very foundations upon which national and international economics is based. Monetary reform is concerned with attempting to determine a new principle for the supply of money to an economy - the purpose being to create a supportive financial environment in which more constructive economic trends are allowed to emerge, and in which more benign systems of overall economic management become possible. In view of the rapacious onslaught on the environment, the waste of natural resources and the social and political friction caused by de-regulated commerce and capital flows, this is at once a promising, but a sobering prospect.
Ron Paul states in his book End the Fed:[45]
American presidents actually worked to implement and defend the gold standard, which put a brake on the ability of the largest banks to expand credit without limit. The gold standard worked like a regulator in this way. Ultimately, banks had to function like every other business. They could expand and make risky loans up to a point, but when faced with bankruptcy, they had nowhere they could turn. They would have to contract loans and deal with extreme financial pressures. Risk bearing is a wonderful mechanism for regulating human decision making. This created a culture of lending discipline.
In the jargon of the day, the system lacked "elasticity." That's another way of saying that banks couldn't expand money and credit as much as they wanted. They couldn't inflate without limit and count on a centralized institution to bail them out...
The banking industry has always had trouble with the idea of a free market that provides opportunities for both profits and losses. The first part, the industry likes. The second part is another issue. That is the reason for the constant drive in American history towards the centralization of money and banking, a trend that not only benefits the largest banks with the most to lose from a sound money system, but also the government, which is able to use an elastic system as an alternative form of revenue support. The coalition of government and big bankers provides the essential backbone of support for the centralization of money and credit...
Consider the Soviet case: to my knowledge, no business ever went under with the Soviet system but society in general grew ever poorer. Think of that Soviet system applied to the banking industry and you have the Fed.
In the foreward to Fiat Money Inflation in France, Mr John McKay wrote the following:[46]
The story of "Fiat Money Inflation in France" is one of great interest to legislators, to economic students, and to all business and thinking men. It records the most gigantic attempt ever made in the history of the world by a government to create an inconvertible paper currency, and to maintain its circulation at various levels of value. It also records what is perhaps the greatest of all governmental efforts—with the possible exception of Diocletian's—to enact and enforce a legal limit of commodity prices. Every fetter that could hinder the will or thwart the wisdom of democracy had been shattered, and in consequence every device and expedient that untrammelled power and unrepressed optimism could conceive were brought to bear.
But the attempts failed. They left behind them a legacy of moral and material desolation and woe, from which one of the most intellectual and spirited races of Europe has suffered for a century and a quarter, and will continue to suffer until the end of time. There are limitations to the powers of governments and of peoples that inhere in the constitution of things, and that neither despotisms nor democracies can overcome.
Legislatures are as powerless to abrogate moral and economic laws as they are to abrogate physical laws. They cannot convert wrong into right nor divorce effect from cause, either by parliamentary majorities, or by unity of supporting public opinion. The penalties of such legislative folly will always be exacted by inexorable time. While these propositions may be regarded as mere commonplaces, and while they are acknowledged in a general way, they are in effect denied by many of the legislative experiments and the tendencies of public opinion of the present day. The story, therefore, of the colossal folly of France in the closing part of the eighteenth century and its terrible fruits, is full of instruction for all men who think upon the problems of our own time.
C.J. Maloney wrote of the desperation of Henry VIII of England to counterfeit gold by engaging charlatan-alchemists:[47]
Despite his formidable education and great historic reputation, the disastrous interventions into the economy, the lifelong dishonesty with the currency in his care and, most of all, his laughable attempts to bring a sorcerer into his court to conjure gold, mark the great King Henry VIII as a fool. Yet there is no reason, be warned, for anyone to feel superior to the King; one only needs to pick up a newspaper to see that though alchemy may be a dead science, it has merely taken up new forms.
This has always been and always will be, for its immortality is powered by economic man’s most dangerous, fondest wish, the one that will drive us to endless imbecilities and repeated destruction – the ardent desire to believe that you can get something for nothing. His adherence to that belief made King Henry VIII a man of his times – and ours.
In his treatise, The Ethics of Money Production, which was published by the Mises Institute in October 2008, Jörg Guido Hülsmann presents (at pages 238-239) the following description of the perverse rise of fiat money and fractional reserve banking:
There is no tenable economic, legal, moral, or spiritual rationale that could be adduced in justification of paper money and fractional-reserve banking. The prevailing ways of money production, relying as they do on a panoply of legal privileges, are alien elements in the capitalist [i.e., true free market] economy. They provide illicit incomes, encourage irresponsibility and dependence, stimulate the artificial centralization of political and economic decision-making, and constantly create fundamental disequilibria that threaten the life and welfare of millions of people. In short, paper money and fractional-reserve banking go a long way toward accounting for the excesses for which the capitalist economy is widely chided.
We have argued that these monetary institutions have not come into existence out of any economic necessity. They have been created because they allow an alliance of politicians and bankers to enrich themselves at the expense of all other strata of society. This alliance emerged rather spontaneously in the seventeenth century; it developed in multifarious ways up to the present day, and in the course of its development it created the current monetary institutions.
…The driving force that propelled the development of central banks and paper money was the reckless determination of governments, both aristocratic and democratic, to increase their revenue, if necessary in violation of good faith and of all established rules of commerce.
Many monetary reformers claim that a fiat money/fractional-reserve based banking system is inherently destructive and inevitably generates debasement of the currency, extreme inequality, the destruction of the middle class[45] and wrenching business crises.[48][45][49][50][51][25][52][53][54][55][56] Vladimir Z. Nuri has analyzed fractional reserve banking and considers it a form of economic parasitism.[57]
These views are not accepted by mainstream government-supported economists. For example David Andolfatto, Vice President in the Research Division of the Federal Reserve Bank of St. Louis, has openly called Dr. Ron Paul a "pinhead" for holding such views.[58] He later tried unsuccessfully to delete or retract his statements and expressed his regret over making the comments.[59]
Critics of fractional reserve banking frequently argue that since money creation requires loans from the banking system, people are required to go further into debt in order for any new money to be created. They theorize that this eventually causes credit cycles (or business cycles) and necessarily debases the means of exchange.[60]
Many critics find it problematic that banks "create money out of nothing" and consider this fundamentally immoral, akin to counterfeiting and/or embezzlement.[61][45][62]
Some also link the alleged negative effects of fractional reserve banking with central banking[63] and a government-enforced "paper" or fiat currency,[64] which they claim allows the practice of fractional reserve banking to continue without a "natural" limitation on the growth of the money supply, thereby causing inherently unsustainable "bubbles" in asset and capital markets, which are vulnerable to Ponzi-like speculation by highly leveraged hedge funds and other bank agents.[45][65][66][51][25][52][67][68][69][56][70]
Reformist economists such as Murray Rothbard support a "full reserve" banking system and criticize fractional reserve banking as inherently fraudulent.[71] Murray Rothbard held this view very strongly throughout his life.[45][72] Other reformist economists are more tolerant of fractional-reserve banking and support free banking instead of full reserve banking.[73]
[edit] Basic debate
The economic, environmental and social effects arising from money creation through fractional-reserve banking have been subject to much heated political debate for well over two centuries.[74][51][25][56][75][76]
Many Austrian economists and monetary reformers focus on the combined use of fiat currency, fractional-reserve banking and central banking as a negative feature of modern monetary systems.[77][78] These commentators use the term "debt-based monetary system" to refer to an economic system where money is created primarily through fractional-reserve banking techniques, using the banking system.[79][80][20] This form of money is called "debt-based" because as a condition of its creation someone must go into debt in order for the money to be created and it must be paid back plus interest at some time in the future.
To some commentators, this implies that as the money supply and the economy grows, the general populace becomes increasingly indebted at the same time due to the idea that debt grows in parallel with money supply growth, and increasing interest payments (from either taxpayers or indebted consumers) are needed to pay bondholders as the money supply grows.[25][56][74]
One argument posits that since debt and the interest on the debt can only be paid in the same form of money, the total debt (principal plus interest) can never be paid in a debt-based monetary system unless more money is created through the same process. For example: if 100 credits are created and loaned into the economy at 10% per year, at the end of the year 110 credits will be needed to pay the loan and extinguish the debt. However, since the additional 10 credits does not yet exist, it too must be borrowed. To some, this implies that debt must grow exponentially in order for the monetary system to remain solvent.[25][56][81]
Others argue that there is in fact no mathematical necessity for the stock of money in a debt-based system to grow, as the "turnover" or "flow" or "velocity" of money can increase to allow for compounding interest payments.[82][83][84] However this does imply that some consumers would increasingly have to consume and transact to expand the GDP sufficiently to allow the fixed stock of money to turnover sufficiently to pay for the interest compounding on top of the debt.[85][86][87][88] This may mean that Ponzi-like dynamics bubble up in "pockets" of the economy with interest payments being allowed in a fixed money economy, but these debt-fuelled bubbles of higher spending or speculation would pop and die out relatively quickly.[89][90]
Gold, silver and other precious metals have in the past been used as money. Because of the difficulty in increasing the supply of precious metals quickly, some monetary reformers believe a return to the gold standard, or a similar system of "hard" or "real" asset-backed currency, is the only way to stabilize the growth of the money supply. These monetary reformers often refer to the gold standard and silver standard as "sound money" or "honest money".[91]
[edit] Main criticisms
In a 2003 statement to the U.S. House of Representatives, Ron Paul stated "if unchecked, the economic and political chaos that comes from currency destruction inevitably leads to tyranny".[92]
Some economic thinkers (primarily members of the Austrian School) and political commentators believe that a debt-based monetary system amounts to a subtle form of monetary "fraud" in that it creates money "costlessly" through the use of fractional-reserve banking techniques.[93]
Michael Rowbotham is an active proponent of monetary reform, and argues that this system of money supply is perverse and inherently monopolistic and "anti-democratic", as it creates an inflationary exponential growth imperative in the economy which leads to over-centralization and environment ally damaging and unstable over-consumption. Critics such as Rowbotham argue that the indebted are forced to induce new consumers to spend their way into debt so existing loans can be repaid with new debt-created money. Failure to achieve this goal results in foreclosure for those businesses and insolvency in the banking system that leads to economic collapse due to the sudden contraction of the money supply.[25][94]
Mark Anielski as well as some political thinkers such as Rowbotham and some economists (such as Hyman Minsky, Steve Keen and Mike Shedlock) argue that this system of money supply has characteristics similar to a pyramid scheme, where the newly indebted are compelled to induce others into debt to pay off their own debts.[95][96] It is therefore argued by a number of monetary reformers that fractional-reserve banking and the associated exponential growth of money in the economy "forces" the economy towards indebted consumerism.[51]
Rowbotham argues that a major negative side-effect of the debt-based monetary system is its effect on agriculture, claiming that residential development produces by far the greatest continuous injection of debt money into Anglo-sphere economies. Therefore, significant super-normal profits can be generated by re-zoning agricultural land and replacing it with low-density housing.[25] If this is correct, this trend will lead to the destruction of fertile arable land, as farmers cannot compete to retain fertile arable land from property developers at the periphery of major population centers, and as this land is then progressively re-zoned for speculative new residential development. Rowbotham predicts that the global supply of fertile arable land will systematically and catastrophically decline as perverse incentives favor short-term speculative land development over long-term food security, leading to a broad decline in the quality and nutritional value of agricultural produce and, eventually, a dramatic increase in the prices of many "soft" commodities - which could then lead to actual food shortages for poorer segments of the world population.[97][98][99][25][100][101] This has been referred to as the problem of "Peak Everything".[102]
If for any reason the monetary system broke down, urban populations (nominally "rich" but poor in terms of direct access to food supply) could find basic foodstuffs either rationed or unavailable at any price, ultimately resulting in food security becoming a major public policy issue - particularly if combined with oil supply shortages or an oil price spike,[103][104] as major population centers worldwide are almost entirely reliant on mass transportation of food from distant (or even foreign) locations to survive day-to-day.[105][25][106][107][108][109][110][111][112]
[edit] Effects on economic health: Ponzi Scheme Dynamics
According to Michael Rowbotham the expansion of money through debt is unsustainable and necessarily fuels and creates economic bubbles. This concentrates wealth in the hands of private banks as the populace is forced into debt simply to own a home and educate their children, hoping that the loans can be repaid by others going into debt in greater amounts later to purchase the assets they themselves have purchased through incurring large amounts of personal debt.[25] However, debt expansion leads to price appreciation of assets through speculation as the financial market becomes riskier and this process is unsustainable in the long run, with the last cycle of indebted being wiped out when they cannot find anyone to buy the assets they themselves have purchased by going into massive debt. Doug Noland, Steve Keen, Edward Chancellor, Bill Bonner and many others have compared this type of market to an enormous State-sponsored global monetary Ponzi scheme.[113][114][115][116][117][118]
The bust phase of this business cycle where "debt-based" money growth slows or contracts catches newly indebted businesses and consumers who are left out of the growth cycle.[25][94]
[edit] Effects on the environment
There are also critics in the left-wing and environmentalist camps who contend fractional reserve banking (by creating a necessity for indefinite economic growth) leads to environmental destruction and a sudden, catastrophic depletion of natural resources as the unsustainable, exponential consumption of the world's scarce natural resources reaches its inevitable limits.[119][120]
[edit] Inherent problems with the system
Some monetary reformers predict that there will be an increased incidence of financial crises in the developed world, as economic and population growth inevitably slow and as the success of financial sector lobbying results in a reduction in redistributive tax policies which, combined with the debt-legacy of the welfare state, allows an intense and unsustainable concentration of wealth and political power in the financial services sector.[25][121]
Some monetary reformers argue that perverse incentives in the financial services industry lead to a collusive relationships between governments and bankers which are economically and socially destablizing in the long run.[122]
Given that the financial system requires ever higher levels of indebtness from the general populace for its solvency, it is vital that the indebted "victims" who must sink deeper into debt for the system to survive do so voluntarily and willingly and are not made aware of the consequences of purchasing consumables with debt money.[25] Some isolated politicians have previously highlighted the fact that mainstream media organizations appear to downplay or minimize the seriousness of deficit spending by government and debt-sourced spending of all kinds.[123] Euphemisms for debt and personal and national bankruptcy associated with debt have been developed to delay a mass panic away from government bonds or debt. For example, the associated growth of debt-based derivatives during the upward phase of the debt money cycle was referred to as "innovation" in financial markets.[124]
Bankruptcy laws differ to a small degree in different jurisdictions but in all developed economies unpaid debt results in legal penalties, property confiscation on behalf of the creditor and income sequestration. Although in Christian, Jewish and Muslim religious practice there have been traditions of debt relief or laws against usury, in no modern Western jurisdiction are any debts periodically forgiven or cancelled in recognition of the inherent impossibility of repaying debts in circumstances where the debt-based monetary cycle has inevitably resulted in too little new debt money being injected into the money supply to pay for the currently outstanding debts.[125]
On a national level, if the issuance of government bonds becomes unsustainable, sovereign bankruptcy can occur - and has occurred many times in history.[126][127][128] Sovereign debt crises due to the inability of nations to pay interest on government bonds have occurred frequently and regularly in the third wor and less frequently (every 30 years or so) in the first world as a result of high levels of unsustainable public debt - often because private debts are assumed by a corrupt government through large private bank bailouts.[129][130] The Latin American debt crisis is an example of sovereign debt levels becoming unsustainable, resulting in a currency crisis and economic collapse, as interest rates rise precipitously due to the inability of the national government to attract financiers to purchase new government bonds to inject new debt money into the ailing economy.[130]
At such times, it is the responsibility of the IMF to come in as a kind of supranational central bank to mediate between the national government and international financiers. The role of the IMF as central bank to the world has similar responsibilities and risks inherent in central banking which are described below in relation to the role of the Federal Reserve. If the IMF repeatedly intervenes to save financiers from loss when sovereign bankruptcy occurs, this has a tendency to induce moral hazard and can encourage the financing of reckless government spending and borrowing.[131][132][130]
A single currency regime such as the Euro can mask national liquidity or solvency crises, by ensuring that a national currency is not quickly exchangeable for another, thereby restricting the ability of national governments to depreciate their currencies and cutting off the possibility that the real value of government bond interest repayments could decline relative to other currencies.[133][134][130][135][136] This may however increase the risk of bond default where indebted national governments cannot pay back the interest payments in the denominated common currency.[137][138]
The deficit will have to be cut to 4.5 per cent in 2012 and 3 per cent in 2013. 
to be replaced with new legislation making it easier to hire and fire workers.
I you.. ;D 
