Creating Money Out of Thin Air
March 15, 2012 in Finance
I started my accounting practice almost twenty years. One of my first clients, I’ll call him Johnny, owned a transportation company. Johnny, for reasons that will soon be made obvious, is no longer my client. He hasn’t been my client for years.
Johnny was brilliant in a sneaky sort of way. He was also religious.
He had a religious charity and he constantly took money from his business and put it into the charity. This would not have been a problem if the business had lots of cash.
In fact, because of Johnny’s charitable interests, the business was always short on cash. Therefore, Johnny developed a practice.
Back then, the banks took several days to process checks. So, depending on how short Johnny was on cash on a given day, he would write as many hot checks to his employees as he needed to cover the shortage.
He knew the local grocery store would cash checks if they were under a thousand dollars. If he needed twenty-eight hundred dollars, he would write three checks for nine hundred and change to three employees. Each employee would go to the store, cash his or her check, and bring the cash back to Johnny so he could put it into his bank account and cover his shortage for the day.
Johnny didn’t do this occasionally.
He did this almost every day.
It worked for him and, because his checks never bounced, Johnny was never charged with kiting checks.
He attributed it to God blessing his creative way of thinking.
Of course, the practice eventually caught up with Johnny and his transportation company.
The New Mexico Public Regulation Commission regulates pricing for transportation companies. When Johnny went to the commission for a rate increase, they audited his bank account. The result was that the commission, in spite of explanations to the contrary, decided all of that cash deposited from cashing rubber checks was income. Therefore, Johnny’s company didn’t need a rate increase.
Johnny didn’t face criminal charges. However, he learned his lesson and he cut back on his charitable work for a couple of years until he could go back in front of the commission and present a clearer picture of his financial woes.
I tell the story today because I recognize Johnny’s old behavior in the actions of our banking and other financial institutions. Like Johnny, our institutions have figured out how to play the money game dishonestly while barely remaining within the law.
They use tomorrow’s promises to pay today’s obligations
This happens when The Fed purchases United States Treasury Bonds. This accounting trick implies a demand for bonds that really isn’t there.
This happens every time “fractional reserve” banking is practiced and money is created out of thin air. This creates more money and false evidence of increased wealth because the numbers are bigger.
These practices skew our society’s understanding of wealth, work ethic, and value.
The larger numbers hide the significance of the issues we face today.
Therefore, the practices continue.
At some point, the results of these practices will catch up with The Fed. They will catch up with the banking and financial industries – just like they caught up with Johnny.
Is it possible we are quickly approaching that point?
Is it possible we have reached that point?
It is and I’ll tell you why I think that tomorrow.