Peter Schiff makes a great point in his article today–credit does not come from thin air!
What everyone seems to have forgotten at this point is that credit does not come from thin air. Even in a system in which bank reserves are leveraged many times, someone has to put savings in a bank for the bank to turn around and make a loan. As a result, the bedrock is the savings, which allows for the credit to flow. Credit extended without adequate savings inevitably leads an economy into disaster.
Savings are the foundation of capitalism–look at the root word of capitalism, it’s “capital”. Where does the capital come from? We usually hear people say that capital is a line of credit, or perhaps the physical machines–yes, it can be that, but in an undiluted form both of those forms of “capital” came from someone saving at some point. Everything that extends the factors of production and makes us more “wealthy” comes from humans saving and not consuming. To get the economy going again, we should not try to consume wildly–we should save.
A man on a desert island can know how to catch fish, but if he does not save extra fish over time, he will always be fishing and never have enough time to cut trees to build leantos or make larger fires. By saving a bit here and there, he is able to “consume” his savings as he makes life more efficient by doing something else. I suppose I’m not giving the best analogy, but I hope it makes some sense.
Basic economics and one apparently lost on some in government.
What Peter Schiff has seemed to omit in his “great point”. is that the savings in the bank must only be enough to cover a fraction of what is being loaned out, the total amount that is being loaned out is created out of thin air.
its called fractional banking.