A story of how we got here, where we are now and the change we need.
I am not sure how many people are aware of the system that is being built around us and how we have all been enslaved. The current economic crisis has allowed me to articulate what I felt was so wrong with the financial system (and how it has driven consumption of resources). I never thought much of bankers much less want to have anything to do with what they do. And it is not because of resentment but because I felt that the system they have built is fraudulent and unsustainable. I wasn’t able to articulate in the past what I had perceived as nothing more than one massive legal ponzi scheme. But now, current events have motivated me to understand what I had perceived and to express what I feel.
Why am I writing this? I need a place to organize my thoughts and because I believe everyone should realize that they have the wool pulled over their eyes. And if you think the world is going to chug along and recover from this just like any other and live that happy dream then you should stay unaware and uninformed. I do not pretend to have monopoly of all the knowledge because what I know now, I have learnt from others. And I am now beginning to connect the dots.
One cannot begin to understand the financial system of the world without first understanding the history of money. Money is the medium by which we use to exchange for goods and services. For thousands of years gold, silver, shells, beans etc were used as such. Up till 1971, gold and silver were still used as a standard for the paper money issued by the central banks. Money has evolved from representing something of value for the exchange goods and services to debt. Money today is debt.
Here’s a short allegorical tale of how money came to be. The goldsmiths of the middle ages evolved into today’s bankers. Goldsmiths were the first to have vaults for their gold. Soon people started to want to use the goldsmith’s vault to store their own gold. The goldsmith would then issue a cheque against the depositors gold. Very soon, people started using these cheques for trade as they would represent the gold that in the vault. The goldsmith made an observation that since the cheques are being used in the market place very few people actually came to redeem their gold, even if they did, they didn’t do it all at once. The goldsmith had another business where he loaned out gold with interest. Now that the cheques are being widely used, borrowers began asking for those cheques instead of physical gold. As Europe expanded, more and more people needed credit for expansion thus more and more people borrowed. The goldsmith having already realized that hardly anyone came to claim for their gold began to issue cheques not backed by the physical gold. Eventually the people realized that the goldsmith had been loaning out gold he didn’t have and this caused a run on the bank. However, because Europe was so dependent on credit for expansion, issuing more paper money than the actual deposits were allowed and the ratio of paper money to actual deposits were capped to 9:1. This is fractional reserve banking where the banks only have a fraction of the money in deposits compared to the loans that are made out.
One mechanism by through which money is created is through fractional reserve banking. The consequence of fractional reserve banking is massive debt and a lot of money in the economy. Suppose Mr. Baker deposits $1000 into the bank, the bank can make a loan of $900 to Mrs Smith. Mrs Smith uses $900 to buy a bag from Mr Vuitton, Mr Vuitton then takes the $900 and deposits into the bank. Now the bank can make a new loan of $810, eventually, the money being created would amount to $10,000. This is fine as long as people do not withdraw all at the same time.
The other mechanism through which money is created is simply through an outright debt. New money comes into existence when you borrow from a bank. You sign on the lines declaring that you promise to pay. Fundamentally this isn’t very different from the goldsmith who issued the cheque as a loan which is backed by nothing at all. The bank then types into your account the amount you borrowed and you get to spend that new money in the economy. This new money is backed by nothing other then your promise to pay the bank back, with interest of course. Therefore money today is nothing but debt. If everyone repaid their debt, there will be no money.
The third and last mechanism is through governent bonds. I am going to use the US government as the example because the US dollar since Bretton Woods 1944 has become the world reserve currency. Like it or not because, it is the reserve currency of the world, and therefore all other economies are inextricably tied to the United States.
If the Congress needs 100 billion, it will ask the Treasury for money. The treasury would then issue bonds worth 100 billion to international buyers like China. China would then buy US dollar to pay for those bonds and give the treasury US dollar for those bonds. But you would realize that China can only pay for those bonds with the US dollar that already exists in the market. Where does new US dollar come from? What gives the Federal Reserve the authority to print more money? The Federal Reserves prints the money when it buys the bonds back from China. The net effect of the Treasury issuing government bonds is essentially allowing the Federal Reserve to print money. The United States has essential given private banks, i.e. the Federal Reserve the authority to issue money.
“Give me control of a nation's money and I care not who makes her laws" - Meyer Rothschild
In all these three mechanisms, money comes about to the economy through debt. We are all indebted to the bankers, who print money out of thin air. Notice so far, that I have not discussed interest that must be paid back. If the Federal Reserve supply all the paper money in the world where does the extra money come from to pay the interest? If government only printed $1000 worth of paper money, there is only $1000 floating in the economy. If all these money is loaned out, where is the extra money to pay for interest? No where, UNLESS the government, or in this case, the Federal Reserve prints more. By now it should be obvious that the entire system needs to expand PERPETUALLY to keep the economy running. This harks back to the European expansion from the 17 to 19th century where they have become so addicted to credit that fractional reserve banking was allowed. And this is where we are now. It has to keep expanding to pay the interest on money that is created out of nothing. Money today is backed by nothing, it hasn’t been backed by anything since 1971 when President Nixon took the US dollar and consequently the world off the gold standard.
As an aside, think really hard about the rationale for an interest to be paid back. Why would you slap on an interest? The argument that interest is to cover the risk of the lender does not hold water. If the borrower cannot pay back, no matter how much interest you slap on the loan, the borrower will never be able to pay it back. It can be argued it is the price of the opportunity cost of lending the money. This is logical only when the money exists in the first place. But when money is created through debt, there is no opportunity cost. In fact the banker should pay the borrower for helping the banker to create money! The ramifications of this is profound. Interest on non-existent money is fraudulent. Because this is the system we are in, the system is prone to defaults and foreclosures because at any one time there won't be enough money circulating the economy to repay the interests. New money needs to be constantly created to cover the interest on the money that was previously loaned out. It's a game of musical chairs. Everyone is fine when credit is flowing. When it stops, it will just be too bad for those who find themselves without a chair. Does anyone still think this was unpredictable or unavoidable? This system has bankruptcies written all over it. People are meant to go bankrupt, people are meant to default on their loans. Then and only then do the banks foreclose on them and lay claim to whatever property or assets they have used as a collateral. Real assets will be transferred to the banks in exchange for made up paper money.
As you can see, this system, which needs to perpetually expand, cannot exist in a world where resources are limited. Eventually this expansionary system will be our undoing. This system is making the future pay for the present. We are living off the productivity of the next generation. Because when money is loaned into existence, it is assumed that the money will be put to good economic use and thus produce goods and services. And therefore the money loaned out now can be said to represent the productivity in the future. (As an aside, war is most inflationary, because you print and spend the money to make things like bombs which will be destroyed eventually. They contribute no productivity to the economy. Once the bombs have the delivered, the money stays behind in the economy. The war in Afganistan and Iraq is not about terrorism or oil. It was about money. But that’s another topic altogether) Which brings me to the point of economic growth. If an economy wants to maintain growth at 5% every year, it will eventually reach a point where it has expanded so much so quickly that it will consume everything the earth has to offer. Do the math yourself. Lets arbitrarily give an economy a number, say 100. And lets say the economy needs 1 barrel of oil to grow 1%. To continue to grow 5% every year, it would need 5 barrels in the 1st year, 5.25 in the 2nd, 5.515 in the 3rd and in the 14th year you will need ~ 10 barrels, in the 29th year you will need ~20 barrels. The number of barrels you need will double every 14 years. After 70 years of growth, which isn’t a very long time (that’s just 2 generations), the economy would need 160 barrels to grow a measly 5%! In the 70th year alone, it would consume more oil than it did in the first 10 years. A 5% growth every year might not seem a lot but there will come a point where it will become unsustainable. The question is not how resources are going to sustain our economy, rather, how are we going to change the way we allocate resources to sustain our economy. Politicians have the cart before horse, they've got it wrong.
“… in each of those decades (1950s and 1960s) more oil was consumed than in all of mankind’s previous history” - President Jimmy Carter
“The greatest shortcoming of the human race is our inability to understand the exponential function” - Prof. Albert Barlett
The debt based expansionary economy based on fiat money is going to drive consumption of resources at an exponential rate. Governments who subscribe to Keynesian economics compound this problem. Keynesian economics encourage the government to stimulate economic growth through interest rates adjustments, taxation and funding of public projects. After the dot com bubble burst in 2000 and after the infamous “attacks” of 9/11 the Federal Reserve under Alan Greenspan kept the interest rates artificially low to stimulate the economy. Look where it brought us today. For seven years, almost every asset class was in a bull market. Stocks, commodities, real estate and what have you all rose in prices. Times were good. It was a job seekers market. And just when we all thought the sky is the limit, everything crashed. Most would know by now that it was easy credit that fueled the rise in all asset classes. Easy credit was given because bankers were just too eager to lend and when they lend they CREATE new money. It didn’t matter if people defaulted on their loans because they were going to lend more and create more money. Just as long as everyone believed that all real estate prices would continue to go up. But the creation of money led to more real estate projects because it was deemed profitable, which eventually led to an oversupply of houses. Then the real estate started its spectualar downward spiral. This is a misallocation of resources which had its roots in Keynesian economics. If only the Federal Reserve allowed the dot com bubble to resolve by it self. Misallocation of resources coupled with an ever increasing appetite for resources in a limited world is going to be catastrophic.
The current Obama administration is doing nothing but perpetuating the problem, stealing from the next generation to pay for the mess of this generation. It was easy credit and the free creation of money that led to this. More government spending will not help in the long run. Recently, the Federal Reserve is considering buying the Treasury bonds themselves, if China does not buy them. This is essentially like writing a cheque to oneself. This, simultaneously with kitchen sinks and trillions of dollars thrown at the economy is going to be highly inflationary. Inflation is not rising prices. Inflation is a monetary phenomenon.
“Inflation is always and everywhere a monetary phenomenon” - Milton Friedman
When the RATE of increase in money supply is more than the RATE of increase in productivity, the purchasing power of money decreases. Inflation is a silent tax on the people. It allows the government to spend without an outright tax. The government and bankers get to spend the newly minted money first and when the money finally makes its way into the economy i.e. into your bank account, its quite worthless because the initial spending by the government and bankers have driven up the price of food, energy and real estate.
We will never go back to the price levels of 1970s ever again or even the 1990s because money is always being created too quickly and money is lent out too easily. Along with the two wars in Afghanistan and Iraq and the ever present Middle East conflicts we are permanently set up for inflation. The recent ascent in the price of gold and silver is an indicator of this somber fact. It should not be looked upon as an investment but as a preservation of wealth. Sure, it pays no interest but when the world is flooded by worthless reserve currency, would people still look at the US dollar with confidence? The United States is bankrupt. It has no more money and its printing its way out.
The system has to change. It cannot be a debt based system of credit anymore. I would think that this is a good time to change. But I am afraid the men and women who are in the power to do so do not have courage to do so. There are alternatives to this system. It might be hard to imagine any other systems for our civilization because this is all we know. But there are alternatives like a resource-based economy. Google Venus Project. However, the pessimist in me says that the Rothschilds, the Rockefellers, the Morgans of this world would have none of that. Because their aim is not money but to utterly destroy the economy and usher in the new world order. Already there are talks about the Amero, the single currency for Canada, USA and Mexico but that is another matter altogether.
Why am I writing this? I need a place to organize my thoughts and because I believe everyone should realize that they have the wool pulled over their eyes. And if you think the world is going to chug along and recover from this just like any other and live that happy dream then you should stay unaware and uninformed. I do not pretend to have monopoly of all the knowledge because what I know now, I have learnt from others. And I am now beginning to connect the dots.
One cannot begin to understand the financial system of the world without first understanding the history of money. Money is the medium by which we use to exchange for goods and services. For thousands of years gold, silver, shells, beans etc were used as such. Up till 1971, gold and silver were still used as a standard for the paper money issued by the central banks. Money has evolved from representing something of value for the exchange goods and services to debt. Money today is debt.
Here’s a short allegorical tale of how money came to be. The goldsmiths of the middle ages evolved into today’s bankers. Goldsmiths were the first to have vaults for their gold. Soon people started to want to use the goldsmith’s vault to store their own gold. The goldsmith would then issue a cheque against the depositors gold. Very soon, people started using these cheques for trade as they would represent the gold that in the vault. The goldsmith made an observation that since the cheques are being used in the market place very few people actually came to redeem their gold, even if they did, they didn’t do it all at once. The goldsmith had another business where he loaned out gold with interest. Now that the cheques are being widely used, borrowers began asking for those cheques instead of physical gold. As Europe expanded, more and more people needed credit for expansion thus more and more people borrowed. The goldsmith having already realized that hardly anyone came to claim for their gold began to issue cheques not backed by the physical gold. Eventually the people realized that the goldsmith had been loaning out gold he didn’t have and this caused a run on the bank. However, because Europe was so dependent on credit for expansion, issuing more paper money than the actual deposits were allowed and the ratio of paper money to actual deposits were capped to 9:1. This is fractional reserve banking where the banks only have a fraction of the money in deposits compared to the loans that are made out.
One mechanism by through which money is created is through fractional reserve banking. The consequence of fractional reserve banking is massive debt and a lot of money in the economy. Suppose Mr. Baker deposits $1000 into the bank, the bank can make a loan of $900 to Mrs Smith. Mrs Smith uses $900 to buy a bag from Mr Vuitton, Mr Vuitton then takes the $900 and deposits into the bank. Now the bank can make a new loan of $810, eventually, the money being created would amount to $10,000. This is fine as long as people do not withdraw all at the same time.
The other mechanism through which money is created is simply through an outright debt. New money comes into existence when you borrow from a bank. You sign on the lines declaring that you promise to pay. Fundamentally this isn’t very different from the goldsmith who issued the cheque as a loan which is backed by nothing at all. The bank then types into your account the amount you borrowed and you get to spend that new money in the economy. This new money is backed by nothing other then your promise to pay the bank back, with interest of course. Therefore money today is nothing but debt. If everyone repaid their debt, there will be no money.
The third and last mechanism is through governent bonds. I am going to use the US government as the example because the US dollar since Bretton Woods 1944 has become the world reserve currency. Like it or not because, it is the reserve currency of the world, and therefore all other economies are inextricably tied to the United States.
If the Congress needs 100 billion, it will ask the Treasury for money. The treasury would then issue bonds worth 100 billion to international buyers like China. China would then buy US dollar to pay for those bonds and give the treasury US dollar for those bonds. But you would realize that China can only pay for those bonds with the US dollar that already exists in the market. Where does new US dollar come from? What gives the Federal Reserve the authority to print more money? The Federal Reserves prints the money when it buys the bonds back from China. The net effect of the Treasury issuing government bonds is essentially allowing the Federal Reserve to print money. The United States has essential given private banks, i.e. the Federal Reserve the authority to issue money.
“Give me control of a nation's money and I care not who makes her laws" - Meyer Rothschild
In all these three mechanisms, money comes about to the economy through debt. We are all indebted to the bankers, who print money out of thin air. Notice so far, that I have not discussed interest that must be paid back. If the Federal Reserve supply all the paper money in the world where does the extra money come from to pay the interest? If government only printed $1000 worth of paper money, there is only $1000 floating in the economy. If all these money is loaned out, where is the extra money to pay for interest? No where, UNLESS the government, or in this case, the Federal Reserve prints more. By now it should be obvious that the entire system needs to expand PERPETUALLY to keep the economy running. This harks back to the European expansion from the 17 to 19th century where they have become so addicted to credit that fractional reserve banking was allowed. And this is where we are now. It has to keep expanding to pay the interest on money that is created out of nothing. Money today is backed by nothing, it hasn’t been backed by anything since 1971 when President Nixon took the US dollar and consequently the world off the gold standard.
As an aside, think really hard about the rationale for an interest to be paid back. Why would you slap on an interest? The argument that interest is to cover the risk of the lender does not hold water. If the borrower cannot pay back, no matter how much interest you slap on the loan, the borrower will never be able to pay it back. It can be argued it is the price of the opportunity cost of lending the money. This is logical only when the money exists in the first place. But when money is created through debt, there is no opportunity cost. In fact the banker should pay the borrower for helping the banker to create money! The ramifications of this is profound. Interest on non-existent money is fraudulent. Because this is the system we are in, the system is prone to defaults and foreclosures because at any one time there won't be enough money circulating the economy to repay the interests. New money needs to be constantly created to cover the interest on the money that was previously loaned out. It's a game of musical chairs. Everyone is fine when credit is flowing. When it stops, it will just be too bad for those who find themselves without a chair. Does anyone still think this was unpredictable or unavoidable? This system has bankruptcies written all over it. People are meant to go bankrupt, people are meant to default on their loans. Then and only then do the banks foreclose on them and lay claim to whatever property or assets they have used as a collateral. Real assets will be transferred to the banks in exchange for made up paper money.
As you can see, this system, which needs to perpetually expand, cannot exist in a world where resources are limited. Eventually this expansionary system will be our undoing. This system is making the future pay for the present. We are living off the productivity of the next generation. Because when money is loaned into existence, it is assumed that the money will be put to good economic use and thus produce goods and services. And therefore the money loaned out now can be said to represent the productivity in the future. (As an aside, war is most inflationary, because you print and spend the money to make things like bombs which will be destroyed eventually. They contribute no productivity to the economy. Once the bombs have the delivered, the money stays behind in the economy. The war in Afganistan and Iraq is not about terrorism or oil. It was about money. But that’s another topic altogether) Which brings me to the point of economic growth. If an economy wants to maintain growth at 5% every year, it will eventually reach a point where it has expanded so much so quickly that it will consume everything the earth has to offer. Do the math yourself. Lets arbitrarily give an economy a number, say 100. And lets say the economy needs 1 barrel of oil to grow 1%. To continue to grow 5% every year, it would need 5 barrels in the 1st year, 5.25 in the 2nd, 5.515 in the 3rd and in the 14th year you will need ~ 10 barrels, in the 29th year you will need ~20 barrels. The number of barrels you need will double every 14 years. After 70 years of growth, which isn’t a very long time (that’s just 2 generations), the economy would need 160 barrels to grow a measly 5%! In the 70th year alone, it would consume more oil than it did in the first 10 years. A 5% growth every year might not seem a lot but there will come a point where it will become unsustainable. The question is not how resources are going to sustain our economy, rather, how are we going to change the way we allocate resources to sustain our economy. Politicians have the cart before horse, they've got it wrong.
“… in each of those decades (1950s and 1960s) more oil was consumed than in all of mankind’s previous history” - President Jimmy Carter
“The greatest shortcoming of the human race is our inability to understand the exponential function” - Prof. Albert Barlett
The debt based expansionary economy based on fiat money is going to drive consumption of resources at an exponential rate. Governments who subscribe to Keynesian economics compound this problem. Keynesian economics encourage the government to stimulate economic growth through interest rates adjustments, taxation and funding of public projects. After the dot com bubble burst in 2000 and after the infamous “attacks” of 9/11 the Federal Reserve under Alan Greenspan kept the interest rates artificially low to stimulate the economy. Look where it brought us today. For seven years, almost every asset class was in a bull market. Stocks, commodities, real estate and what have you all rose in prices. Times were good. It was a job seekers market. And just when we all thought the sky is the limit, everything crashed. Most would know by now that it was easy credit that fueled the rise in all asset classes. Easy credit was given because bankers were just too eager to lend and when they lend they CREATE new money. It didn’t matter if people defaulted on their loans because they were going to lend more and create more money. Just as long as everyone believed that all real estate prices would continue to go up. But the creation of money led to more real estate projects because it was deemed profitable, which eventually led to an oversupply of houses. Then the real estate started its spectualar downward spiral. This is a misallocation of resources which had its roots in Keynesian economics. If only the Federal Reserve allowed the dot com bubble to resolve by it self. Misallocation of resources coupled with an ever increasing appetite for resources in a limited world is going to be catastrophic.
The current Obama administration is doing nothing but perpetuating the problem, stealing from the next generation to pay for the mess of this generation. It was easy credit and the free creation of money that led to this. More government spending will not help in the long run. Recently, the Federal Reserve is considering buying the Treasury bonds themselves, if China does not buy them. This is essentially like writing a cheque to oneself. This, simultaneously with kitchen sinks and trillions of dollars thrown at the economy is going to be highly inflationary. Inflation is not rising prices. Inflation is a monetary phenomenon.
“Inflation is always and everywhere a monetary phenomenon” - Milton Friedman
When the RATE of increase in money supply is more than the RATE of increase in productivity, the purchasing power of money decreases. Inflation is a silent tax on the people. It allows the government to spend without an outright tax. The government and bankers get to spend the newly minted money first and when the money finally makes its way into the economy i.e. into your bank account, its quite worthless because the initial spending by the government and bankers have driven up the price of food, energy and real estate.
We will never go back to the price levels of 1970s ever again or even the 1990s because money is always being created too quickly and money is lent out too easily. Along with the two wars in Afghanistan and Iraq and the ever present Middle East conflicts we are permanently set up for inflation. The recent ascent in the price of gold and silver is an indicator of this somber fact. It should not be looked upon as an investment but as a preservation of wealth. Sure, it pays no interest but when the world is flooded by worthless reserve currency, would people still look at the US dollar with confidence? The United States is bankrupt. It has no more money and its printing its way out.
The system has to change. It cannot be a debt based system of credit anymore. I would think that this is a good time to change. But I am afraid the men and women who are in the power to do so do not have courage to do so. There are alternatives to this system. It might be hard to imagine any other systems for our civilization because this is all we know. But there are alternatives like a resource-based economy. Google Venus Project. However, the pessimist in me says that the Rothschilds, the Rockefellers, the Morgans of this world would have none of that. Because their aim is not money but to utterly destroy the economy and usher in the new world order. Already there are talks about the Amero, the single currency for Canada, USA and Mexico but that is another matter altogether.