well obviously many of the institutions that are built around the specifics of our current financial system would not necessarily fit into this new paradigm seamlessly.
Well, under the new paradigm you would have monumental difficulties encouraging new investment at reasonable risk.
Everybody is under inflation (or deflation), no matter what paradigm you're under. Once they know that inflation is going to be at 5-10% every year, no one is going to expect anything less than a 12-18% return on their investments, and many will expect more than that.
Trust me, people have tried this in the past and it didn't work: that's why we don't do it now.
So basically, our currencies are phallic competition devices on a national scale? Great. 
Dry humor aside, I find some sort of atomic error with basing currency off of trust. I'd rather go with a system that was material based (hey, it's worked for eons) or energy based (in the sense that goods are priced by the amount of energy it too to produce them).
Thinking a bit more on the energy-based system, I can see how that's going to be really tricky seeing as the biggest producers of energy are oil, natural gas, nuclear, and renewable energy, with that last one being "free" for the next thousand millennia or so...
As far as the banks go, I have no problem with the banks taking a small cut to pay their own bills, but for some reason I get the feeling that you're pointing at bank's interest rates as the source of inflation (unless I read that wrong). 
I'm not really comfortable with the system as it is right now either, but there are problems with instituting a material standard. Running out of the materials is the main reason we went off the gold standard, if I remember right.
Bank interest rates aren't the source of inflation, that would be weird. It's more how often they loan out their money and how much money they are required to hold by law.
Bobboau: that's the end result. We already borrow a large portion of our expenditures--our debt will increase far faster than our taxable GDP. We've got two options--either cut at least a quarter of our spending (preferably half of it) or print more money. The former is a good idea; the latter isn't.
All throughout the year, the government issues sovereign debt--bonds with maturities between 30 days and 30 years. By borrowing money, they can fund activities without taxpayers. The only real concern is that eliminating income taxes will erase one check on inflation--making hyperinflation all the more likely as confidence evaporates. Of course, you want to be holding real, tangible assets long before hyperinflation hits. Gold & silver have held their values far better than our coinage or notes. Before 1965, our dimes contained 90% silver (10% copper) and weighed 2.5g; those coins are intrinsically worth about $2.50 today. The Peace Dollar (last minted in 1935) also contained 90% silver and weighed 26.73g; the intrinsic value of those is $27.90.
Remember gold & silver are valuable for two reasons. The first is both must be mined and smelted prior to entering circulation--you can hold them in reserve but you cannot create them out of nothing. The second is that both have uses outside of trade: both are useful in manufacturing. If all else fails, gold doesn't oxidize and silver, though it does tarnish, is less resistive than an equal quantity of copper.
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Anything and everything can be overvalued from Land to commodities to Gold to chia pets. I don't care what it is. Back in September Gold dropped about $200 in
three days http://money.cnn.com/2011/09/23/markets/gold_prices/index.htm. I'm convinced that Gold is being highly over-valued right now by flight-to-quality investors. If you don't believe me, look at the 6 month average for Gold. It's gone down 8%.
I'm not saying gold is worthless, but it's probably not the best investment right now. If and when you want to invest in anything, make sure you look at the recent performance and long-term performance of those things.
Right now, Gold is dropping in value, and in the recent past it has far surpassed it's long term growth performance. It's overvalued, and it probably will be until it goes back to about $1400/oz. give or take. Same thing happened to gas prices a few years ago, and housing in the years before that.
The financial situation in the USA seems to have a lot to do with the Federal Reserve, having a fiat paper currency instead of something supported by the gold - or other rare mineral standard. Fractional reserve banking is another issue as well, where banks loan out more money than they actually have deposited. Nonetheless this is a very complex and diverse case in my opinion, so there's a lot of reasons and causes to be considered.
If you have banks that don't loan out anything, then banks are useless institutions. If you have banks that loan out everything, then money can infinitely multiply. What's the problem with fractional reserve banking itself?
I know it sounds weird and it's counter-intuitive, but that's the mechanism that allows you to get a car loan or a mortgage from a bank. The only real alternative is that we would start lending each other money instead of the banks doing it, and their expertise in knowing who to loan money at what interest rate would be lost to the majority of citizens. Plus our reserve ratio is way above the world average and can only increase the money supply 10 dollars for every dollar injected at the absolute maximum (which can take years). The Euro can increase its money supply by
100 euros for every euro injected. I'd much rather live here.
Guys, the Economy sucks. It's weird, few people understand it, companies and consumers don't know how to react to it, the way we study it depends on perfect rationality, and no one knows what's going to happen for sure. I know you are wishing for a better system, but until you're willing to loan out money yourself to others, then you're going to have to depend on banks.
