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Money as Debt 2 - Promises Unleashed
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1 hour, 17 minutes and 29 seconds
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Posted by:
pscigulinsky on Apr 23, 2010
Bailouts, stimulus packages, debt piled upon debt, where will it all end? How did we get into a situation where there has never been more material wealth & productivity and yet everyone is in debt...
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- Start
- If two parties instead of being a bank and an individual were an individual and an individual,
- they could not inflate the circulating medium by a loan transaction,
- for the simple reason that the lender could not lend what he didn't have, as banks can do...
- Only commercial banks and trust companies can lend money that they manufacture by lending it.
- Professor Irving Fisher, economist in his book "100% Money" (1935)
- The study of money, above all other fields in economics,
- is one in which complexity is used to disguise or to evade truth not to reveal it.
- John Kenneth Galbraith economist, author
- The issue which has swept down the centuries
- and which will have to be fought sooner or later, is the people versus the banks.
- Lord Acton (1834-1902), English historian
- Money as Debt II
- Promises Unleashed
- Anybody here want lemonade?
- For a job well done!
- You kids are real go-getters!
- It's time we opened some bank accounts...
- so you can put your money to work for you!
- We'd like to open bank accounts please.
- We're just like grownups!
- Yeah, we have our money in the bank!
- Maybe your first experience of putting money in the bank wasn't quite as hard warming as this...
- but odds are years later, you still refer to the balance showing on your bank account...
- is being your money in the bank, but it isn't.
- If we had a deposit box in the bank, the valuables we put in it are still ours.
- We're just renting secure space to store them.
- In common usage, the word "deposit" means to set something down.
- But the use of the word "deposit" to refer to a bank account is misleading.
- The bank deposit is in reality a loan.
- With the amount in our bank account really indicates is how much money the bank owes us.
- It's a record of the bank's promise to pay us money not the money we deposited itself.
- The difference is important.
- The truth is when we hand the contents of piggy bank to the bank teller...
- our money becomes the bank's money to do with it as it pleases.
- All the money in the bank is the bank's money, none of it is ours.
- That's why the bank pay us interest, we have loaned the bank our money.
- This may seem to be a semantic distinction.
- We know, we can go to the bank at any time and take our money out in cash if we want to.
- But the distinction is not semantic nor is a trivia.
- The distinction is crucial.
- What happens if banking affects everyone and yet few of us know anything at all...
- about how banking really works?
- The entire world economy now runs on a system of credit provided by banks...
- and when that credit system breaks down, everyone suffers.
- Defaults, foreclosures, bankruptcies, bank failures, gov't bailouts.
- To make things worse, the explanations for these break downs offered by the experts...
- never look at the root cause.
- Namely that other than cash and coins which make up just 1-5% of money in circulation...
- all the money in existence today was created as the principal of a bank loan
- with the banks requiring principal+interest as so called repayment.
- Not only does this make the existence of money entirely dependant on the existence of bank credit.
- It makes the system as a whole bankrupted by design as total debets (principal+interest) exceed total assets
- from the moment the first loan document is signed.
- As the global banking system staggers towards worldwide collapse...
- more and more people are realising they can no longer ignore the realities behind banking as it is practiced today.
- Many have lost their homes and jobs due entirely unastainable practises of money lenders.
- It's time people understood money and the pressing need to fundamentaly change the way it works.
- Clarifying what the words used in banking really mean, is the first step.
- Now that we know that a deposit is in truth a loan to a bank
- the next question is what is a loan that we take out from a bank.
- When we sign for a loan, we give the bank a pledge to pay the amount of the loan plus interest.
- In return the bank credits our account in the same amount as the so-called loan.
- When we speak of the bank is having put the loan money into our account...
- in reality the only thing the bank puts into our account is its promise to pay the money.
- What has actually happened is an exchange of promises.
- Neither party has delivered anything to the other except matching pledges of debt.
- So who's the borrower and who's the lender?
- The terms loan, lender and borrower are all misleading.
- The truth is, the two parties have traded promises to pay and...
- in the process created something called bank credit or checkbook money...
- that can be legally spent as money.
- Bank credit can be spent because we in our innocence notice that each time we deposit into our account...
- it increases our balance by the same amount.
- In fact, unless we put something in our account would be empty.
- Thus, it's a natural assumption that money in an account is money someone put in.
- The account is a promise to pay not the money itself.
- In fact, a promise always indicates the absence of the item promised.
- Otherwise why does it need to be promised?
- Now, because all bank accounts are promises to pay...
- the bank and the borrower can simply exchange promises and...
- in the flash of few key strokes a positive balance appears to the borrower's bank account...
- with no anyone putting an existing money in.
- Now, you know the real source of what we called a bank loan.
- Commercial banks create checkbook money whenever they grant a loan,
- simply by adding new deposit dollars in accounts on their books in exchange for a borrower's IOU.
- Federal Reserve Bank of New York, I Bet You Thought, p.19
- How different would it be if two parties just got together in a basement with a printing press...
- and created new money that way?
- We intuitively understand the act of fraud called counterfeiting.
- In printing fake hundred dollar bills, the counterfeiters also create new money out of thin air.
- Money give us the ability to purchase the real goods and services of the world.
- It's clear that the counterfeiters have created new ability to purchase real goods and services...
- without giving anything in exchange except the fancy piece of paper
- Counterfeiters get something for nothing...
- directly at the expense of whoever gets caught with the counterfeit money.
- And if the counterfeit money is not discovered, it dilutes the money supply, stealing from everyone.
- Counterfeiting is a serious crime and it is easy to understand why.
- It's cheating on a basic social agreement, "Thou shalt not steal".
- But taking a loan from a bank also creates new purchasing power...
- however instead of being considered a form of theft, it is the very basis of our monetary system.
- Banks lend by creating credit. They create the means of payment out of nothing.
- Ralph M. Hawtrey 1879-1975 former secretary of the British Treasury
- How do one form of creating new money out of thin air become a crime...
- and the other becomes standar business practise and the source of almost all our money?
- For this is what it happened.
- To understand how, we need to look at the history of the laws governing commerce.
- Before that we need to understand the logic of the loan process itself.
- Anatomy of a Loan
- The Motive
- The borrower wants to purchase an item but doesn't have the funds to do so at the present time.
- However the borrower does have confidence in having sufficient funds over time...
- to pay both the original price of the item and the interest on the loan.
- So he goes to a bank to arrange a loan.
- The borrower is capable of making a credible promise of money in the future.
- But otherwise at this moment he comes with empty pockets, that's why he needs the loan.
- The Method
- We propably all familiar with what happens next.
- The bank gets the borrower to sign an agreement...
- in which the borrower promises to pay the bank the ammount of the loan + interest
- or in default surrender to the bank the object that it is to be purchased with the loan.
- This is done countless times every day all over the world.
- But there is a problem.
- How can the borrower pledges collateral something the borrower does not yet own?
- If I wanted to borrow 10.000$ from you to go on a luxury cruise to Europe...
- would you accept my neighbour´s car as collateral?
- Of course not, because you know very well that I have no legal right to give you my neighboor's car...
- ...no matter how much I owe you.
- But if instead, I promised to buy my neighboor's car with the 10.000$ you lend me...
- ...the situation is different.
- You might agree to lend me the 10.000$ believing that I would buy the car...
- and will pledge it as collateral for the loan, once I obtain legal title to it.
- However, until the transaction is completed your 10.000$ loan cannot be secured by title to a car.
- The sequence of event's problem could be very simply avoid it.
- You could buy the car and then sell it to me.
- The bank can do it this way too.
- If the borrower commits to the bank to buy the item why doesn't the bank just buy it with its own money...
- and then sell it to the borrower on time payments and interest.
- Well, the answer to that question is also very simple.
- It´s because the bank, like the borrower, has come to the transaction with empty pockets.
- The bank fulfills its part of the so-called loan transaction by creating an account for the borrower.
- The truth is the so-called borrower has funded his own account by fraudulently pledging a car,
- he does not yet own as collateral.
- And the bank, the so-called lender hasn't put up any existing money at all.
- And if all goes well, it never will.
- Acceptance of the Fraud
- The borrower believes the new numbers in his account now represent his money in the bank.
- He like the rest of us doesn't understand the difference between existing money and a promise of money.
- If you gonna spend it, what does it matter?
- So now, the question is: Will the seller of the item accept the bank's promise to pay?
- Well, some people may hold out for cash. Most will say yes to a check or an electronic funds transfer from the buyer's bank.
- Why? Because the seller knows from experience...
- that she can deposit the check at her bank and it will increase her account accordingly.
- So, what happens next?
- Balancing the Promises
- Well obviously the buyer's bank now owes the seller's bank the amount of the loan.
- So, you might be thinking isn't this where the money comes out of deposit.
- The bank's promise to pay the borrower has just been transformed by the transaction...
- into a promise to pay the seller's bank instead.
- So now the buyer's bank has to transfer some of its existing money to the seller's bank, correct?
- Yes, but probably only a small proportion.
- In over the long term, as long as the bank gets its fair share of deposits...
- the net amount of existing money, the bank needs to cover its loans can theoretically be zero.
- How?
- Well, imagine first that the seller has her account at the same bank as the buyer.
- She deposits the buyer's check into her account.
- All the bank has to do to complete the transaction...
- is reduce the buyer's account by the same amount and increases the seller's account.
- As both accounts are just promises no existing money is involved in doing this.
- What is the end result?
- The bank has created bank credit for the borrower to the sum of 10.000$.
- The borrower has bought the car that it existed in the world of real things...
- and the seller now has that bank credit of 10.000$.
- Thus, a brand new claim upon 10.000$ worth of real goods of value...
- was accomplished with absolutely zero dollars of the bank's or anybody else's money.
- On top of that, the bank gets to have all the so-called money paid back...
- by the borrower's on his toil plus interest or the bank gets the car.
- Magic like this is usually seen on stage.
- So now let's examine what happens if the seller deposits her check in a different bank.
- Won't that require a transfer of existing bank funds from the buyer's bank to the seller's bank?
- Perhaps.
- But it will almost certainly never be anywhere near the whole amount...
- because in effect, the banking system functions as one bank.
- To illustrate let's add another transaction to this senario.
- That same day, the seller's bank made a similar loan to a little old lady...
- who bought a mega home theatre system.
- The electronic store deposited her check at their bank.
- The electronic store's bank made a similar loan that was deposited at the original borrower's bank.
- And when all the various balances were settled the banks didn't owe each other anything.
- And even if there were differences, they would have been just a small portion of the total credit created.
- So, at this point we can say that although banks don´t actually lend their depositors money as most of imagine
- they still need deposits to make loans.
- This is because banks need incoming credit from other banks...
- to asset their own credit being deposited at those banks.
- As long as banks keep their outgoing credit balanced with incoming credit,
- they're free to make new loans and thereby keep creating brand new credit money.
- None of it will ever have to come out of the bank's pockets.
- The bank is free to invest its own funds in corporate and goverment bonds...
- and whatever other instruments the charger allows.
- If one draws a diagram of the situation it looks like this.
- The interest, goverments and corporations pay the banks on their bonds is paid by us.
- We pay it as a portion of our taxes and we pay it in the price of all the goods and services that we buy.
- And there is another thing passed on to us as well
- And that's the risk that the bank will go broke and not be able to honor its promises to pay.
- Now you may wonder, how can a bank go broke if it doesn't put any money up in the first place?
- What have they got to lose?
- The answer to that question is that banks differ from counterfeiters...
- in that the banks are legally allowed to create new money but only by certain rules of accounting.
- Banks can only create money by entering a borrower's payments and collateral as an asset...
- on the positive sign of the ledger balanced on the negative side by the loan...
- or what the banks call the deposit liability created by the bank.
- When the borrower defaults on the payments, the asset pledged as collateral is siezed by the bank and sold.
- In a declining market where repossession is most common,
- the new lower value of the asset doesn't cover the bank's liabilities...
- which were based on the previous higher value.
- This shows up as a loss on the bank books.
- When foreclosures are rampant as in a collapsing real estate market...
- much of the value of the banks collateral simply evaporates as home prices drop...
- exposing the bank to huge losses.
- In truth it's all just numbers created out of thin air.
- But banks must adhere to the dictates of these numbers...
- and the coincequences of bank arithmitic gone wrong can include:
- economic standstill, social disentegration...
- total financial chaos, lawlessness, starvation and war.
- Those who live by numbers can also perish by them...
- and it is a terrifying thing to have an adding machine write an epitaph.
- George J.W. Goodman best-selling author, The Money Game (1968)
- However for the purposes of understanding the anatomy of a loan,
- we shall assume that the system is still functional...
- and all three of the loans we were looking at will get paid.
- The end result is that none one dollar of existing money has changed hands...
- but 30.000$ of new bank credit has been created and spend into the money supply.
- And each of the three banks gets to collect interest on 10.000$ of it.
- Is creation of this brand new 30.000$ really an act of fraud like counterfeiting?
- The obvious difference is that the banking system is legal...
- regulated by goverment and disciplined by the courts to follow the rules of accounting.
- Another difference is that there is no obvious victim...
- like the person getting caught with a counterfeit bill.
- Banks argue that the buyer and the seller both got what they wanted and agreed to, so where's the fraud?
- And if there was a fraud, who lost out?
- To detertant that let us list who got what out of the deal.
- The borrower got the item he desired on terms he willingly agreed to.
- He may curses decision later as he strungles to make the interest payments
- or he may live happily ever after thankfully got the loan.
- The seller got an increase in bank credit...
- which she's been conditioned since childhood to think of as her money in the bank.
- She's confident that she'll able to spend it in turn and she will.
- So as far as the seller is concerned she's been paid in full.
- She's happy.
- So who if anyone suffered as a result of the deal?
- Is there another party to this transaction, we've overlooked?
- Well, there is also the bank that gets to collect interest on promise to pay money.
- That's the business there're in and usually do very well by.
- And anyone else?
- Well where did the car come from?
- It came from the world of real things.
- Natural resources, energy and labor were expended to produce it.
- What if we consider the hidden party to be society at large...
- and the natural world from which all things ultimately come.
- Because the brand new bank credit money didn't just sit there.
- It got spend into the general circulation in the real world.
- It's the real world that ultimately gets the new money in exchange for its car.
- This new money might stimulate new production,
- temporarely enlarging the economy, making lots of people happy.
- In fact it often does, as most bank credit comes into being as a home mortgage,
- stimulus for the residential construction industry, a big provider of good-paying jobs.
- However after its initial productive use, this newly created money,
- more basically just dilute the money supply,
- reducing money's purchasing power by a very small amount.
- So in contrast to counterfeiting where the loss occurs to specific victims
- here the loss is born by us all...
- because the real substance of the loan (car) was extracted from the economy at large
- by a slight loss in the value of everyone's money.
- "The decrease in purchasing power incurred by holders of money...
- due to infation imparts gains to the issuers of money."
- St. Louis Federal Reserve Bank, Review, Noov 1975, p 22
- To continue our comparison of bank credit with counterfeiting,
- counterfeit cash eventually gets detected and removed from circulation,
- causing a direct loss to whoever accepted it.
- There is of course no guarantee of how much will be detected,
- nor any prescribed schedule for its removal.
- Bank credit is also removed from circulation over time...
- because as bank credit is paid back, the principal part of every payment is extinqueshed.
- Now remember that almost all the money in existence today is bank credit.
- Therefore almost every dollar that passes through our bank accounts has a schedule appointment...
- to one day be paid as a principal payment on a bank loan and siezed to exist.
- On top of the principal are the interest payments...
- which will become bank income much of which will be recycled...
- into the economy as interest to depositors and other bank expenses.
- So it's not immediately apparent that...
- that there is a loss to someone as a result of bank credit being withdrawn from circulation
- the way there is with counterfeit cash.
- But if we look closer, we find an interesting situation.
- We don't need anything more than fundamental arithmetic...
- to understand the power that lies in controling the money supply.
- And the way it is currently designed total debt must constantly expand or the system collapses.
- Whenever the rate of debt money creation falls behind the rate of debt money destruction...
- the total amount of money in use will shrink.
- This is called deflation because the money supply is shrinking, like a deflating balloon.
- The result is less money relevant to the goods and services available.
- With less money around to pay for them the prices of goods and services go down.
- At first this sounds like a good thing and it could be...
- if money were not created as debt at interest.
- For anyone not in debt, deflation would be like a general divident on money...
- paid in good and services of our choice.
- It would be as if money were the people's stock in their own prosperous company, their nation.
- People wouldn't have to demand a pay raise.
- If a nation were more productive as a whole thus deserving of a raise,
- everyone would benefit automatically by having their money buy more.
- However this is definitely not the effect, deflation has in a system...
- where money comes in the form of interest pairing debt.
- More than 95% of all money currently in existence is in the form of debt to banks.
- Promises to pay with interest added.
- And as we have seen the principal is created but not the interest.
- Due to the time delay between money's creation and its repayment...
- and the recycling of interest turnings as bank operating expenses,
- most of us can keep our part payments while the money supply is increasing.
- However if the money supply or total debt is decreasing,
- money becomes harder to earn due to its scarcity...
- and fixed payments become harder to meet.
- For those heavilly in debt, the money shortage can become catastrophic.
- The entire world economy rests on the consumer;
- if he ever stops spending money he doesn't have on things he doesn't need we're done for.
- Bill Bonner, author, publisher and columnist on economics and money
- Unfortunately the psychological effects of falling wages and prices rapidly accelerate the process...
- as borrowers, including large businesses, lose confidence in being able to repay loans.
- So they don't sign up for any.
- Without new loans to replace old loans,
- the money shortage rapidly gets worse resulting in a decrease in jobs and purchasing power...
- even in the midst of the abundant resources and productive capacity.
- This disastrous spiral in math makes mass foreclosures inevitable.
- Prices plumet as noone wants to spend their money.
- Shrinking values destroy the value of loan collateral...
- causing banks to ride off huge losses.
- Some even close their doors.
- Consumer and business confidences is lost.
- Rampant economical and social disfunction follows.
- "With the monetary system we have now,
- the careful saving of a lifetime can be wiped out in an eyeblink."
- Larry Parks, Executive Director, FAME
- This disastrous spiral cannot be turned around...
- unless the goverment creates new money itself or goes deeply in debt to private banks
- in order to create enough new money to reorganise and rejuvenate the economy.
- The most familiar example of this is the stock market crush of 1929.
- The psychological follow of the stock market collapse resulted in less borrowing...
- and thus less new money.
- The Federal Reserve did nothing to correct the resulting deflation...
- and by 1932 the money supply had been reduced by a third.
- Countless people were evicted from their homes...
- because the money to make their mortgage payments simply siezed to exist.
- Then in 1932, Franklin Roosevelt became the US President.
- Roosevelt's "New Deal" set out to restore the economy by restoring the money supply.
- To counter the money shortage, Roosevelt borrowed from the private banking system.
- Factories started hiring again.
- But only when the war arrived,
- there´s suddently no shortage of jobs and funds available to do what was necessary for the war effort.
- It was the money expended on WWII that ended the great depression.
- The war also resulted in 50 million deaths worldwide...
- and led to a new hostile international balance of power...
- with its intended arm's races, mounting debts
- and sweeping social and technological transformations.
- When a goverment is dependent upon bankers for money,
- they and not the leaders of the goverment control the situation,
- since the hand that gives is above the hand that takes.
- Money has no motherland; financiers are without patriotism
- and without decency; their sole object is gain.
- Napoleon Bonaparte
- I wouldn't go to war again as I have done to protect some lousy investment of the bankers.
- There are only two things we should fight for.
- One is the defence of our homes and the other is the Bill of Rights.
- War for any other reason is simply a racket.
- Major General Smedley Darlington Butler USA (1881-1940)
- There is nothing left now for us but to get ever deeper and deeper
- into debt to the banking system in order to provide
- the increasing amounts of money the nation requires for its expansion and growth.
- Our money system is nothing better than a confidence trick...
- The "money power" which has been able to overshadow
- ostensibly responsible government is not the power of the merely ultra-rich
- but is nothing more or less than a new technique to destoy money
- by adding and withdrawing figures in bank ledges,
- without the slightest concern for the interests of the community
- or the real role money ought to perform therein...
- to allow it to become a source of revenue to private issuers is to create,
- first, a secret and illicit arm of government and, last, a rival power strong enough
- to ultimately overthrow all other forms of government
- ...an honest money system is the only alternative.
- Dr. Frederick Soddy. Nober Prize winner (1921) author of Wealth, Virtual Wealth and Debt
- The cycle of economic boom and bust is commonly called the business cycle.
- As if were a natural occurence like the hydrological or carbon cycle.
- These natural cycles are ultimately driven by the sun.
- But what is it that drives the business cycle?
- One answer is the supply of money...
- and as we've seen, the supply of money is dependent on loans.
- So let's look at what happens during the lifetime of an individual loan.
- We've seen how bank credit is nothing more than the bank's promise to pay,
- which the bank is created on its books to balance the borrower's promise to pay...
- ...that it has received.
- The bank's promise to pay is usually spent on some real good or service...
- and allowed to circulate,
- making the efficient exchange of goods and services easier to accomplish.
- As a medium of exchange today's promise to pay money...
- is unsurpassed in its usefullness and flexibility.
- However, because no money is created to pay the interest...
- a seemingly impossible situation is created.
- On the face of it, if borrowers had to pay the interest they owe all at once,
- they would have to fight it out for a limited sum of existing money...
- that was very much less than the total owned.
- The percentage that would be unable to pay off their loans would be simple to calculate.
- However, interest is usually paid over time not all at once.
- If this interest incomes recycled into the general economy as spending,
- it can be available to be earned repeatedly.
- Once we understand this, the question of whether interest is actually unpayble becomes more perplexing.
- Is there such a thing as a sustainable system of lending...
- that does not produce mathematically inevitable defaults?
- In the middle ages, usury meaning charging interest...
- or any form of making gain solely from having money was condemned as a sin.
- While the justification was moral, the reason was practical.
- In a fixed money supply like gold,
- anyone systematically rolling over all of their loan money at interest...
- would soon end up with all the money.
- This problem was a big factor in the ruining of Rome.
- Private accumulations of gold forced the government to make coins,
- made of base metals instead of the real thing.
- Debased currency led to failing confidence and ultimately decline.
- The lesson was well learned.
- For the next 1.000 years, the Roman catholic church declared collecting interest on a loan to be a sin,
- punishable by excommunication.
- In some countries, the penalty for practising usury was death.
- Is charging interest really a sin?
- Well today it seems very reasonable to charge for the use of money.
- There is a simple and unavoidable problem with doing so.
- Unless money lenders spend every penny of interest they receive...
- in such a way that the borrowers can earn it again, the borrowers are going to come up short...
- regardless of their hard work and personal virtues.
- Someone will default simply as a result of the arithmetic.
- This is easy to picture where there is a fixed money supply like gold coin.
- As long as all of the coins taking in as interest are spent so that the borrowers can earn them
- the same coins can be used to pay the interest over and over.
- The lender can profit by buying real things with this coin
- but the coin itself must be spent, not lend or removed from circulation.
- Leaving aside any moral considerations, this arrangement would be sustainable.
- However if the interest coins are relend at interest...
- or removed from circulation by hoarding,
- there would be an inherit shortage of coins with which to pay off the aggregate debt.
- The situation is escentially no different in our current debt based system.
- As we have seen, nowadays virtually every dollar comes into existence as debt...
- with a scheduled appointment to be extinqushed as a principal payment on a loan that created it.
- Thus, for all borrowers to be able to make their payments of principal plus interest...
- ...two things must be true.
- The dollar created as the principal of the loan must be available to be earned by the borrower...
- in order to make the principal payment that extinqushes that dollar.
- And every dollar the borrower pays to the bank as interest...
- must also be available to be repeatedly earned by the borrower,
- so that it can be paid as interest again and again.
- There is a common theory undoubtebly popular with lenders...
- that because the bank spend the interest turnings as operating expenses,
- interest to depositors and shareholders dividends,
- There is in fact enough money released back to the community to make all payments.
- However like the idea of absolute shortage this is an over simplification.
- Picture what happens if someone else such as you or I or an institutional non bank lender...
- obtains this dollar and then lends it out at interest.
- Well, now that same dollar is simultaneously owed to two lenders...
- and there´s two simultaneous interest charges attached to it.
- In addition, if this dollar is loaned, repaid and reloaned by the secondary lender...
- it is not available to pay off the principal of the loan that created it,
- except as an other loan.
- So, can we borrow from Peter to pay Paul and borrow from Paul to pay Peter?
- This gets interesting.
- We can, however each time money is borrowed there is an interest charge added it, that also must be paid.
- If all added interest charges can be earned, all payments can be made.
- On this basis many economists and defenders of the current system...
- claim there can never be a shortage of money and all payments can be made.
- But this seems to be a false assurance.
- For instance, if secondary lenders capture some of the money...
- needed to retire the loan that created that money the original loan can never be retired.
- The deficiency will have to be borrowed over and over for ever, each time at interest.
- Each deficiency would be cumulative, adding to an ever building total of debt that can never be paid off.
- And it stands to reason that for each added interest charge in the system as a whole,
- something extra is demanded of the system as whole to pay for it.
- This affects everyone: producers, governments and consumers.
- For producers that something extra must be raised through higher prices or more sales.
- However, competition for more sales usually requires lowering prices necessitating even more sales...
- and leads to over production and saturation of the market.
- The end result can be job losses, plant closures and bankrupcies.
- For governments that something extra is raised by increasing taxes.
- But increasing taxes drains money for the productive economy,
- resulting in reduction in the collective ability to pay taxes...
- which then necessiates increase government borrowing and additional interest charges.
- For consumers, something extra can mean getting an additional job...
- or borrowing to pay past debts or paying off debt over longer periods of time.
- However, competition for jobs tends to lower wages and paying over the longer periods of time...
- adds enormously to the amount of interest owned.
- And of course borrowing to pay off past debts is like trying to fill a hole with more hole.
- And that is the situation, we find ourselves in today.
- Producers can't sell more because consumers can't afford to buy.
- Governments are cutting taxes not raising them, hoping to stimulate consumer demand...
- and consumer´s real incomes are limited and even falling due to competition for a limited number of jobs.
- Therefore any increase in the total amount of interest charges within the monetary system as a whole...
- will result in a genuine shortage of money.
- This is because the real productive economy is limited by the availability of nature's resources.
- The productive economy exists to serve actuall needs
- It simply cannot keep pace with the demands of the artificial financial economy...
- which is an unlimited appetite for profit...
- and which operates with no regard for the natural limitations of the real world.
- Endless growth will take care of it...
- The theory that there is always enough money to pay the interest has a certain elegant simplicity.
- However by the very nature of the assertion to be true,
- it has to be a 100% true. This is impossible.
- For one thing secondary lenders who are not banks
- do comprise a significant proportion of lenders.
- And they add their interest charges to money that already bears an interest burden.
- Beyond that, we have a cultural expectation: everyone with money expects it to generate more.
- Money that needs to be spent to made available to be earned by its original borrower...
- is instead lended at interest or invested for gain.
- Therefore, we can conclude that the two conditions that must be true...
- for all borrowers to be able to make their payments of principal plus interest...
- and thus permenately discharged their debt, those conditions are not met by the current system.
- Nowhere in the current system is there any restriction or relending money that was created as a loan.
- Nor is there any obligation upon banks to make their profits from interest available
- to be earned by borrowers enabling them to extinqushed their debts.
- Quite the opposite, banks invest these profits to make further profits.
- And it's not just the banks that cause the problem.
- Anyone who takes their ball of money and starts rolling it like a snowball to make it bigger,
- does so with the expence of borrowers who will not find that money available...
- to pay their debts except as more debt.
- And of course, those rolling the biggest snowballs pick up the more snow.
- As the same goes, the rich get richer and the poor get poorer.
- Money needed by borrowers in the lower realms of working and productive economics,
- moves upstairs to play in the casino world of abstract financial profit...
- and that's a world where transactions are little more than gabling on numbers...
- in an effort to achieve higher numbers.
- They've little or nothing to do with providing the necessities of life.
- Today the largest volume of money by far is changing hands...
- in where as best described as the gabling economy.
- The foreign exchange markets, the derivatives market and the rest of the financial instruments...
- being played by banks and investment funds for as much profit as possible.
- For example the volume of trade on the world's foreign exchange markets...
- In just one week exceeds the total volume of world trade in real goods and services during an entire year.
- This money is in continous play by speculators...
- looking to make winful profits on currency fluctuations.
- It exists but only in the gabling economy.
- So how unpayable is the ubiquitous interest burden in actual fact?
- That could only be deternaned with certainty by tracking all of the money in the world.
- With over six billion people earning, spending, borrowing and lending...
- the world's money flows are at least as complex as the flows of the ocean.
- They are impossible to know.
- But the direction is pretty clear and simple.
- And it's the same old story,
- the rich are taking increasingly more money into the gabling economy...
- where ordinary borrowers have almost no chance to obtain it.
- And the only way the system can stay solvent is to create more money...
- and as money is created as debt,
- the only way to create more money is to create more debt in every way possible.
- Including ridicously easy credit for unquelifed borrowers, massive government expendures on security and war
- and bailouts of insolvent banks.
- What are you going to do about it?
- How does the individual loan cycle relate to the boom and bust phenomena known as the business cycle?
- The individual loan cycle can be described like this:
- First there is economic stimulation because of initial spending,
- this is followed by inflation because new money basically just dilute the money supply...
- and eventually inflation is followed by deflation...
- as loan repayments grantually extinqush the principal removing that money from circulation.
- As long as the individual loan cycle don´t match up, these cycles can smooth each other out.
- This creates a fairly stable money supply that leads to fairly stable prices.
- Although continous growth of the money supply is required at least in part...
- because as you recall the money to cover the interest was never created.
- This is the model on which our economy is currently based.
- Avoiding deflationary spirals and keeping inflation at a level that doesn't upset people's applecards
- constitutes the art of managing the economy...
- which is rather narrowly defined as achieving so-called price stability.
- However a look at the purchasing power of US dollar in real goods over the last century...
- instantly reveals what the so-called price stability has really meant.
- The dollar has clearly lost almost all its value (96%)
- ...and is continuing to do so at a rapid pace.
- So, price stability is not being achieved...
- and one hardly needs a degree in psychology to understand how human nature itself...
- would turn the individual loan cycle into the collective phenomena of the business cycle.
- The simple reason being that if one person sees great prospects...
- and is doing well borrowing and expanding, others would have a confidence to do the same.
- Beyond the merely psychological effects, if one business is expanding on the basis of credit,
- its suppliers and distributers will find it necessary to do so as well...
- or lose that business to someone who will.
- The same herd effect would occur for a gloomy look and a company in credit contraction.
- Thus, is entirely predictable that individual loan cycles would have a built in propensity to line themselves up...
- rather than be randomly distributed and when they do, we see largest scale cycle called the business cycle...
- emerging directly from the cummulative of effects of individual loan cycles.
- So to sum up, one could say that out of the exchange of promises made by the bank and the borrower...
- society gets chronic inflation and interdependency on banks for increasing infusions of money...
- to pay ultimately impossible interest payments.
- This results in an inescepable treadmill of accelerating debt and depriciating money.
- The only alternative being a deflationary collapse of the economy followed by social chaos or war.
- This eminently unhealthy situation filters down through society weaking harm on every level.
- We are like addicts...
- but the fix is not more and more heroin, it's more and more credit money.
- And eventually our collective ability to borrow and repay so much credit becomes exhausted.
- This then creates the need for constant expansion of credit into new markets.
- In essence creating a fiscal imperative to drive everyone in the world further and further into debt for ever.
- In US this constant debt expansion has led to a total credit market debt in 2008
- of more than 53 trillion dollars which is about five times the total annual income of the entire country.
- So is the world at large happy about its end of the loan transaction?
- Probably not.
- But the world at large has very little awareness of where these problems originate.
- The illusive system of counterfeiting and hidden control that is modern banking.
- And how about the banks? How of the bank's fair has resulted of the system?
- Well first, by putting up only a small fraction of the money they lend
- the banks have obtained a river of income from interest payments on consumer loans and mortgages.
- Second by using their credit powers to acquire a large portofolios of corporate and government bonds
- banks collectively appropriate control over government and industry.
- And thirdly, due to the inevitable defaults and foreclosures,
- the banks gain legal title to a lot of real property the world over.
- And finally, if the worst happens.
- If borrowers default on mass causing the banks large losses
- the government is forced to rescue the banks with multi-billion dollar bailouts...
- to save the financial system.
- And what are these bailouts financed with? You guest it.
- More tax payer debt.
- It is really quite an achievement to pull this off...
- and without most of the victims even being aware of it.
- If you're now thinking there ought to be a law...
- well, there is a whole body of law that makes all of this legal.
- So how did a system like this ever become the law?
- To answer that we go back to England in the mids 17th century.
- When plunder becomes a way of live for a group of men living together in society,
- they create for themsevles in the course of time a legal system...
- that authorizes it and a moral code that glorifies it.
- Frederic Bastiat 1801-1850 political economist
- With the development of better ships and the new explorations they allowed...
- ...trade was expanding rapidly.
- In order to carry out commerce especially over great distances and lengths of time...
- written contracts were becoming more and more important and more sophisticated.
- Under english common law had been long established
- that a contract could only been enforced if something of real substance has changed hands.
- A transfer of goods or rights in property was the real stuff of the exchange...
- and that was what the court would evaluate for fairness,
- not just the words on the document.
- A contract under which there had been no exchange of consideration,
- meaning real goods or rights in property was deemed to be empty...
- and was therefore not enforceable by the court.
- So a contract in which a borrower say pledged a car...
- he does not own in exchange for a bank's promise of payment...
- would not even qualify as a contract.
- No common law court would enforce it.
- As well, in the event of a dispute over a contract under common law,
- only someone who had actually provided consideration to the transaction,
- in other words, only someone who delivered the goods had the right to sue in court...
- for fullfilment of the contract by the other party.
- This right was not transferable to a third party.
- When early traders went off personally on expenditions with trade goods...
- they bought those goods at home with their local currency...
- and would sell them for foreign currency in the distant destination.
- They would then buy foreign goods with the foreign money,
- bring those goods home and sell them for the local currency.
- Pretty simple.
- But as trade became more sophisticated, traders became more inclined to stay home...
- and just hire ships to carry out deliveries.
- This gave traders the freedom to import cargos of foreign goods from different sources...
- than in the destination to which their home goods had been exported.
- Thus, a problem was created.
- The exported goods had been paid for with foreign coin, the value of which needed to be spent somewhere else.
- Moving money as coins entailed a high risk of theft...
- as well as the near certainty of partial loss by currency conversion in a different land.
- This problem of payments from a distance was overcome by the use of bills of exchange.
- A bill of exchange was a signed order from a payer to an adressee...
- demanding that the adressee pay a certain specified sum of money to the person identified as the payee.
- These were secured by signature...
- and they could not be acted upon in court by anyone other than the original parties.
- Thus, they're have no use to a thief or any other third party.
- You probably recognize that these were the precursors of checks.
- I the payer instruct the bank the adressee to pay the payee,
- a person named on the check a certain sum of money.
- This was all well and good for transactions among parties who were known to each other.
- The bill of exchange was used merely as a way to order payment in coin at a distant location.
- But merchants soon wanted more flexibility, they wanted to be able to use bills of exchange...
- to reconcile payments among many merchants in many locations...
- using bills of exchange like money itself.
- For this to work, bills of exchange had to be assignable to and enforceable by third parties.
- As we shall see, this was the moment in legal history that gave sanction to the banking system we have today.
- A third party who might have honoursly purchased a bill of exchange...
- several steps remove from the original exchange...
- could not be expected nor would have the right to show up in a common law court...
- and defend the validity of the contract and collect on it.
- This made third party bills of exchange an unacceptable risk.
- So, in order to be able to use bills of exchange as a convenient and guaranteed third party payment system,
- essentially equivalant to money,
- the common law practise had to be set aside regarding bills of exchange.
- In England, by a series of legal decisions from 1664 to 1699...
- this problem for commerce was remedied by making bills of exchange enforceable by third parties.
- If a third party had purchased a bill for valueable consideration and in good faith...
- having no apparent reason to suspect fraud or some deficiency in the right of the seller to sell it,
- then the bill automatically became good and enforceable by the court against the signer.
- What did this change mean?
- It meant essentually that any bill of exchange would be consider legitimate once it was sold.
- Bills of exchange and all other subsequent types of signed promises to pay...
- with the notable exceptions of checks became transferable and enforceable in court.
- Just what the merchants wanted.
- Now debt contracts could be sold like things and transacting business would be a whole lot easier.
- Not only that, it opened up a whole new market for profit seekers, trading in bills of exchange themselves.
- The marketing of debt was born.
- The change in the law had another affect as well.
- It made it possible to trick or even force a person into signing a legally binding promise to pay...
- and then if that promise were purchased by a third party for real consideration and in good faith...
- it would be enforceable against the signer in court.
- Ultimately, this became one of the foundational principles of the uniform commercial code...
- which governs the conduct of business in the US and by extension in most of the world.
- The entire taxing and monetary systems are hereby placed under the U.C.C.
- US Federal Tax Lien Act of 1966
- Think about it. If we buy a stolen laptop from a guy on the street, we're guilty of receiving stolen goods, a criminal offence.
- Doesn't matter if we paid on with money and were unaware the goods were stolen.
- The court will restore the goods to the rightfull owner.
- We as purchasers, innocent or not, lose our money and may even be charged with a crime.
- But if we buy a loan contract from a banker and give him real value for it in good faith...
- it doesn't matter that the loan contract may have come into existence under false pretenses.
- Whoever signed it, is required by commercial contract law to pay up...
- and the courts will enforce the obligation.
- Today, debt contracts come in a myriad of forms, including and especially loans and mortgages.
- It's significant to know that just as these common law restrictions were been removed,
- the brand new Bank of England was been established.
- The first banks were state-authorized to create money out of thin air.
- The new laws fit in perfectly, making the new bank's empty contracts enforceable against the so-called borrower.
- The bank hath benefit of interest on all moneys which it creates ouf on nothing.
- William Paterson founder, Bank of England
- Those who've discovered the true nature of their own bank loans...
- and have attempted to challenge the validity of their debt contracts in modern courts...
- have discovered to their dismay that this commercial contract law is still the bedrock defence of money as debt.
- The bank would have sold the original loan agreement to a third party for value...
- and even though that third party is often just a sister company of the bank,
- all that matters to the judge is who posseses the document, what it says and whose signature is on it.
- The bank's failure to inform the borrower about the true nature of the loan contract...
- and the absence of any actual money loan on the bank's part is not relavant.
- So, to conclude our investigation...
- it appears that modern banking practise rests on several dinstict violations of...
- common law, common sense and natural justice.
- The first violation is the fraud the borrower commits, by pledging as collateral property, the borrower does not yet own.
- and the bank is complicit, as it knowingly accepts the fraudulent pledge, as backing for the credit it creates
- The second violation, is the failure of the bank, to disclose the true nature of the contract
- The bank calls it..a LOAN. Leading the borrower to believe...
- the he or she is receiving a loan of existing money
- But the bank knows full well, that it has provided a brand new promise to pay, simply typed in, on a computer screen.
- A promise that a bank knows it will probably never have to fulfill
- Thirdly, the loan agreement should be invalid.
- Because impossible contacts are legally invalid
- The bank is creating an impossible contract, because the conditions required to guarantee that the borrower's have the opportunity to pay off
- the principal, plus interest are NOT met. Unless the system enforces 100% recycling of both principal and interest
- which emphatically does NOT. Some borrowers are going to default and lose their collateral
- simply due to the systemic shortage of money
- The fourth violation, is the violation of natural law, by the law of contracts.
- Which confers automatic legitimacy of title on any contract, if the contract is sold to a third party for valuable consideration
- This violates the principle that one can not give better title to someone than one has.
- But perhaps, the biggest fraud of all...
- is that most of the people, who produce the real wealth of the world, are in debt
- and in risk of losing everything they worked for, to bankers who fabricate money...
- out of mere promises to pay
- and where does this leave us?
- We are hostages, in an economy, that must grow faster and faster
- to keep up with an ever growing money supply or the entire system collapses in ruin.
- The money system as currently structured, refuses to recognize
- that the real economy is limited by the capacity of the planet to provide
- the raw materials and waste disposal services the economy needs
- The planet is finite and therefore it should be obvious
- that the economy can not grow in an accelerating pace for ever
- Our current money system, runs like the bus in the movie "Speed"...
- It could not slow down or the bomb planted on the bus, would go off
- and our situation, is even worse, because the rate of debt creation
- must forever accelerate or the entire economy crashes.
- The notion that infinite, perpetually accelerating growth is possible...
- is a great fallacy of modern economics
- its a fatal delusion, born of greed.
- An economic, social and environmental crash of unprecedented proportion is surely inevitable.
- In this monetary system is utterly and hopelessly incapable of adapting to it.
- No wonder monetary reformers around the world, insist that the entire monetary system needs to be rebuild, from the ground up.
- "Banking doesn't involve fraud, banking IS fraud." Tim Madden, Monetary Historian & Consumer advocate
- So what is the solution?
- One idea, as many people suggest, is to return back to days where money was backed with gold
- Gold they argue is the true money, because its inherently valuable
- The underlying principle here, is that money is valuable due to its scarcity, as gold is scarce.
- There's a general rule, those who hold this view of money, also believe that money, should exist independent of government.
- Another school of thought, diametrically opposite,
- is that the creation of money, should be the exclusive prerogative of governments
- Government, which represents all the people, should spent money into existence, in the public interest..
- thus backing the currency, with what is was spend on
- having taken back the power to simply spend money into existence...
- government would never need to go into debt or pay interest
- Off course governments spending without limit, will result in a worthless currency
- to prevent inflation, money would also need to be extinguished
- This could be accomplished using a wide variety of taxes, resource royalties and user fees.
- Government spending and taxes would therefore be interdependent and would equal each other in a perfect equilibrium
- However, the goal of taxation is to achieve price stability..
- as the government would have no need for tax revenues, in order to operate.
- Over the centuries, both the gold based system and various government credit money systems, have been used
- But the gold based system, prevailing well into the 20th century.
- This wasn't because government credit money did not work
- It did, withing the country itself, where it was accepted in payment of taxes.
- But until the invention of modern currency exchanges..
- international trade had to be carried out in gold
- In addition, gold has almost a supernatural fascination for humans for a very long time
- We have been conditioned for millennia, to think of money, in terms of portable inherent wealth.
- As in gold coin.
- However, this is not the only way to think of money
- Nor, in the era of runway debt money, is it any longer accurate
- Money is, at its root an idea. An idea that humans invented, in order to transform simple subsystems into complex civilizations.
- Thus the development of money, that made possible specialization of labor
- and the indirect exchange of goods and services
- Through out money's evolution, direct barter, to standard trade goods and on to standard coins, to paper promises of precious metal..
- to digital promises of paper cash and now to digital promises to pay digital promises
- Throughout this long evolution, the prevailing idea has always been to achieve greater flexibility by using secure and convenient promises to pay..
- instead of money itself.
- The problem with promise to pay money, has always been that it provides a golden opportunity to cheat
- To create more promises, than there is real stuff, to back those promises up.
- But is there a way, to make tha exchange of actual money, just as secure and convenient, as the promise to pay system.
- Now there is.
- Digital money, convenient and secure is now a possibility, because of new encryption technologies.
- Works like this. Imagine taking the serial number off a dollar bill and dispensing of the paper.
- What do you have? A digital dollar.
- A digital dollar. that can now be electronically transferred around the world , just as easily and securely, as a promise to pay dollar.
- However!! and this is a big however.
- The digital money, while being entirely electronic, is also like a metal coin.
- It can never be in two places at once
- Thus, the multiplication of promises can be prevented , by insisting on actual payment in cash, paper or digital.
- We don't even need to keep this digital cash in a bank, as it provides its own safekeeping and can be transferred by internet
- An instantly transferable digital money, could perform intelligent functions, far by anything money was capable before
- For instance, with simple math, programmed in, money could be made to calculate its own value.
- Eliminating human speculation, manipulation and error. Would that be something.
- In the mean time, efforts are already underway to reform the monetary system, through legislation.
- Initiatives, like the monetary reform act and American monetary institutes monetary act, have already been written...
- prescribing in detail, how to return the power to create money exclusively to government..
- and thus limiting banks to lend existing money, just the way most people imagine it works now.
- Well, differing in detail, all such reform proposals, in what ever country they originate, always advance the same simple idea.
- The benefits of money creation belong to the public.
- At present, money is created not for the benefit of society, but for the profit of private banks.
- Banks like to create enormous amount of money from our debt, because the more we borrow into existence, the more interest the bank gets to collect..
- and the richer the bank becomes.
- In the process the banks gain more control over everyone, individuals, industry and government alike.
- Abundant money too often leads to speculative asset bubbles that make insiders rich...
- but as we have witnessed, these bubbles, inevitably burst under the unbearable weight of ever increasing interest demands.
- The losers are many, including governments. Already burden with huge debt and shrinking revenues, governments are forced to add trillions to that debt
- in order to rescue the banks, that are the cause of the problem. Other wise we would have no money system.
- Its an absurd situation and a tragic one, considering that governments could instead create the money itself..
- and spent it interest free on infrastructure, education, universal health care.
- and most of that debt free money will enter the economy as wages, circulating to all levels of society for everyone's benefit.
- This kind of abundant money, will fund a re-invigorated, productive economy, in which the savings of the people
- could fund honest loans of real existing money.
- At its root, money is a means by which we exchange real value.
- Without real value in the world, money is nothing.
- As we have seen, its the real world that makes the loan, NOT the bank.
- We the people, in conjunction with the material blessings of the natural world, are the source of all real wealth.
- Therefore money creation and its benefits belong to the public, not to private bankers.
- And what about interest?
- As we have seen, interest posses an arithmetic problem.
- And its a problem that can only be solved in three ways.
- 1. Defaults and foreclosures
- 2. Perpetual growth of the money supply
- or the preferable and only other solution, a 100% recycling of interest as spending
- But such full recycling, can only be accomplished by nationalizing the banking industry, in the public interest.
- For example, interest earnings from public service banking can be paid to all, as a citizens dividend.
- or it could be used to fund government in place of taxes, as it was done successfully in colonial Pennsylvania
- And that's one instance of a society that organized its monetary system differently.
- There always been alternatives and there are alternatives now.
- What the evolution of money really teaches us..
- is that the real measure of money value is very simple, its usefulness as money
- There are several different ways to create useful money.
- For instance, money can simply be an individual's private promise to pay.
- A pledge of one's own product or service, as in such community currencies,as the LETS system or time dollars
- Thousands of these community currencies already exist, in circles of trust...
- where members can be counted on to honor the credit they issued for themselves
- In such community currencies can be a life saver, in the event of a catastrophic collapse of the conventional banking system.
- When money shortages or hyperinflation, disrupt trade and bring economic standstill..
- a working community currency can sustain a local economy.
- Are such proposals radical? You bet.
- But there are unprecedented challenges before us.
- No longer can exponential growth allow us to sustain a monumental debt..
- that must ever increase to prevent a house of cards collapse of the whole system.
- Increasing wealth disparity, crushing debt , failing banks and social and environmental catastrophes, are what we face..
- unless we radically change course
- We must transform our monetary system, to one that can adapt, to future that we can now clearly foresee.
- To begin, we must explore monetary system designs, that can deal with wide spread economic shrinkage...
- without inducing massive foreclosures and bankruptcies.
- But what can you do right now??
- Right now, there are people and organizations around the world, that understand the problems and the injustice
- of today's monetary system. And you can join them in their effort, to bring about a fundamental changes we need.
- Its time to talk to our friends. The financial crisis is the ultimate teachable moment
- When bankrupt banks have to be bailed out by the governments, the banks where formerly lending to, the contradictions, the fraud and the fatal flaws
- of the current system... are laid bear for all to see.
- But the solutions, are there to see too, if we look.
- We can not afford business as usual, making adjustments to the current system, would not save us.
- The changes we need to make are radical and dedicated to the good of all..
- not the profit and control of the few.
- To make these changes, we must leave behind our old-moded assumptions and misplaced faith.
- We must face the challenge of a complete transformation.
- Reality calls!!!!
- "Money does not pay for anything, never has, never will.
- It is an economic axiom as old as the hills. that goods and services, can be paid for only with goods and services."
- -Albert Jay Nock Memoirs of a Superfluous Man (1943)
- "Only when the last tree has died and the last river has been poisoned and the last fish been caught will we realize we cannot eat money."
- - Cree Indian Proverb


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