Money are actually worthless when you need it.

"The Fed's action is yet another forceful move in its attempts to alleviate the liquidity crunch and to shore up a rapidly weakening economy, "
Arun Raha, senior economist at Swiss Re

This was a comment within an article on BBC News in regards to Feds slashing US rates.

I got me thinking, is it possible to have liquidity in a fractional reserve banking system?

The end result of fractional reserve banking is creation of wealth based on debt. The problem with wealth based on debt is that there is no liquidity. For example, when someone makes a loan at the bank, the interest that the borrower has to pay is the "probable profit" that is actually already considered "money/credits" and then those credits are reused for further loans. This means that money is basically piles of piles of I.O.U.s compounded to one another. To exacerbate the problem, in fractional reserve banking, thee bank actually loans more money the actually have. If you deposit $1000, the bank will loan $9000 out. I'm not sure, but I think the current ratio allowed is 1:9 in fractional banking system.

Anyways, so basically the bank has a lots of I.O.U.s from people and that is actually considered "money" with very little "reserve" money. If your money is all tied up in promise of debts, there is no liquidity for the people that deposited the money. If all the money is loaned out, when someone wants to withdrawal a huge chunk of, bank are unable to, because most of their money is all out on a loan. I'm not sure if you are familiar with the term "bank run", but what it means is that, when there is a panic, and all the clients starts withdrawing all the money from a particular bank, the bank don't have the money to pay up, because there is no liquidity, they can't pay up. This recently happened with Bear Stearns in US and Northern Rock bank in UK, and on a national level in Argentinian crisis a couple of years ago.

So the current credit crunch, isn't is a global "bank run"? Because of people defaulting on subprime mortgage, people are panicking to remove their asset from that type of investment, but people they don't actually have money, but a bunch of I.O.U.s, that is now worth nothing, they have nothing to pay up to the investors withdrawing. Isn't it clear that debt based fiat money under fractional reserve banking equates to no liquidity? And the Feds are slashing rates, won't it just make people borrow more money and add a whole more bunch of I.O.U.s?

Unlike many people think, bank does not lend only the money they have, they lend a much over than their actual reserve. There is the federal reserve to help with liquidity problems when when a bank suffers a "bank run", but can they bail on a national level or a global scale?

Have you wondered why the US Govt always have huge debts? Because "controlled" debts means that there are that much I.O.U.s/fake money circulating in the econony, which if you consider real money, its a lot of damn money circulating. I mean it makes sense, why the US Govt don't make their own money, but instead get a LOAN from Federeal Reserve? Because debt equals I.O.U.s which equals money.

Now, lending money is a necessary thing for the growth of a economy, it provides the means for people to create more business and thus generate more money, however I'm not too sure about using the fractional reserve banking system.

But on the other hand, if they drop the current fiat money for "hard money"(which eliminates fractional reserve system), there would be much less money to go around making the economy stagnant. And the stupid suggestion by Ron Paul to go back to gold standard is ludicrous. There is only a finite amount of gold, and the current worldwide gold reserve cannot equate to the current amount of fiat money in circulation. Not only that, with gold or such other commodities, it tends to be cornered by the market.

In order for the current system to work, they economy has to keep growing progressively to "repay" the debt, but is that possible in a closed environment, like earth, with finite resources? Won't this bubble burst someday? Everyday loans are made and money is created by fractional banking to repay these debt. To me, it seems like a vicious cycle that will eventually burst.

Some people thinks that this is not possible, because banks take collateral on loans, but the collateral might cover the principal, but what about the extra loans made from fictional money created during the loan process through fractional banking?

I'm sure many "economists" are aware of problems with fiat money and fractional banking, but do they have "good" solutions?

PS: I'm no expert, all I remember are from my classes years ago, so I could be wrong.