Banks Cause Inflation

“How Changes in Interest Rates Affect Inflation”

Austin L Garner
3 min readJan 25, 2023

Investopedia wrote an article titled Inflation & Interest Rates Relationship Explained. I am not necessarily a fan of Investopedia, but many people may read their content to help understand financial matters, so I wanted to use their explanation to provide further clarity on the cause of inflation.

In the 3rd section of the article titled How Changes in Interest Rates Affect Inflation the writer explains (parenthesis added):

When the Federal Reserve responds to elevated inflation risks by raising its benchmark federal funds rate (the rate banks use to lend to each other) it effectively increases the level of risk-free reserves in the financial system (banks must increase their reserves and lend less), limiting the money supply available for purchases of riskier assets (not just riskier assets, but all assets typically financed by bank debt).

Conversely, when a central bank reduces its target interest rate it effectively increases the money supply available to purchase riskier assets (again, not just riskier assets but all assets dependent upon bank debt).

By increasing borrowing costs, rising interest rates discourage consumer and business spending (I argue that it isn’t spending that is discouraged but debt used to finance spending), especially on commonly financed big-ticket items like housing and capital equipment. Rising interest rates also tend to weigh on asset prices (due to decreased demand), reversing the wealth effect for individuals and making banks more cautious in lending decisions.

Yes, you read correctly: lower interest rates increase the money supply (monetary inflation = price inflation), and higher interest rates decrease the money supply, or at least increases it slower in attempt to reduce the effects of price inflation. Banks do not lend depositors money like many have believed. Deposits count as reserves for the bank, and they lend on top of those reserves.

As a simplified example, if the reserve ratio is 10%, this does not mean that the bank can lend out 90% of their deposits. If this were true, the outstanding loans of a bank would be limited to 90% of their total deposits. Is this true? Absolutely not! Their outstanding loans far exceed their total deposits. Also, if they actually lent depositors money, wouldn’t that mean we would not have access to all of our deposits at any given time? The 10% reserve ratio actually means that deposits, while a liability to the bank also count as their reserves for their outstanding loans. So, a deposit of $1,000 increases their reserves by $1,000, allowing the bank to lend out $9,000. Where did this additional $10,000 ($1,000 new bank reserves + $9,000 in loans) come from?

If the money supply is increasing because of increasing debt, this means that the money being lent did not exist prior to the loan being approved. Therefore, “money printing” is not only accomplished by the Federal Reserve alone, but also by the commercial banks who are a part of the Fed’s fractional reserve banking system. Also, they can only do this if they have willing borrowers like you and me.

So, when interest rates increase, consumers and businesses have less access to someone else’s capital, the demand for assets reduces and consequently so do the prices of those assets, and individual wealth built on this system of shifting sand begins to diminish.

“Banks lend money that doesn’t exist and that is evil.” — R. Nelson Nash

We do not have to participate in this nonsense!

If the problem is dependency on the fractional reserve banking system, owned and controlled by someone else, the solution must be independence from it by individuals owning and controlling their very own privatized “banking” system.

“Economic problems are best solved by people freely contracting with one another and with government limited to the function of enforcing those contracts. The absolute best way to do so is through the magnificent idea of dividend-paying whole life insurance… [&] life insurance cannot inflate the money supply.” — R. Nelson Nash

Manipulation of the currency hinders the progress of productive people.

Wealth Problem: Hindering the Progress of Others | by Austin L Garner | Medium

--

--

Austin L Garner

Founder of Disciple Wealth Strategies (DiscipleWealthStrategies.com). Helping People Serve God & Master Money (Luke 16:13)