Debt

I want to take a moment to explain how money is created and destroyed in our debt based money supply. Environmentalists don’t often look for, let alone see the relationship.

The simplest way is via an example:

1) You go into a bank for a mortgage of 300K. Let’s say that the mortgage is fixed at 6% for 25 years, payable monthly. You will make no early pre-payments or double up your monthly payments. Very simple.

This means at the end of your mortgage (after 300 monthly payments = 25 years). According to this calculator here, this means that you will pay $1,919.00 a month. You will pay back the amount you borrowed (300K) + the interest – a whopping $275,826.00. So at the end of your mortgage you will pay back $575,826.00 – almost double the amount you borrowed.

2) The bank puts you through some preliminary hoops to see if they are going to make money off of you. I.e. you have a job, your credit is not maxed out, etc.

3) The bank creates 300K out of thin air. They do NOT take that money from their depositor’s accounts to give to you. Because of the fractional reserve requirements, they only have to keep a very small amount of “money” in the vault to back that loan. I say “money” because that is easier for most of us to understand, rather than the term “capital instruments”or “securities”.

So if a central bank requires the private banks maintain a reserve requirement of 10%, this means that they have to have $30,000.00 dollars of “money” in the vault. Here in Canada, the reserve requirements for our private chartered banks is 0%. That is not a typo. Our banks, in reality DO keep reserves, but there is no law that requires them to do so. Instead they police themselves with such governance documents like Basel I and II, which are always in flux. I am not aware if banks are required to follow them, and if they don’t what penalties apply for failure to comply.

4) You pay the seller of the house with your new $300K loan from the bank. Be it the builder or the owner, they take that money and (a) pay for all the labour and materials used to build the house and keep a profit, which they will spend into the economy sooner or later, or (b) the owner of the house takes that money and buys a yacht or another house or whatever. That new “money” you borrowed (the 300K) makes its way out into the economy. In otherwords, by you willing to shackle yourself to debt, the banks get to add 300K to the money supply.

By a simple accounting trick, the bank records the loan in two columns in the ledger book. The mortgage goes in the asset column as it is an interest bearing financial instrument. It ALSO goes in the liability column as someone will deposit it into an account and start writing checks against that account. Thus, the books balance.

5) You work for 25 years to pay that back, paying your $1,919 a month.

6) Around year 13 of your 300K mortgage, you would have paid the principal back. You still have 12 years to go to pay the $275K in interest back. Question. Where did the money come from to pay back the interest? What created the $275K and added it to the money supply in order for you to obtain it by working to pay the bank?

Do you see at this point? The bank loan actually reduces the amount of money in circulation over its lifetime! It transfers wealth out of the economy and gives it to the bank for the bank’s unearned work (their right to mint “checkbook money”)! Normally, this system would collapse!

But our system hasn’t collapsed. So what gives?

The answer is simple.

The money comes from people who borrowed AFTER you. They borrowed the money via the same mechanism from their private banks, dumping their newly minted “money” into overall money supply.

7) To sustain the money supply, we need to attract new borrowers into the system as old loans are being paid off. Rate of money created = rate of money disappearing = stable money supply.

If the rate of money creation is higher than the money being destroyed, we are told it is economic “growth” and possibly inflation, which rewards producers/spenders, but hurts consumers.

If the rate of money creation is lower, we have the opposite effect. The money being retired, we are told we have a “recession” and possibly deflation, which rewards consumers, but hurts producers. However, we rarely see deflation. The reason is that producers (i.e. big business) are in positions of affluence and influence in government. It is the little guy that bleeds via the inflation tax.

8) This is where the Fed (or any central bank) comes in. These central banks (or cartels of government agents and banking interests) look at a pool of economic data, have the power to artificially raise or lower interest rates. If they see the economy getting “hot” and inflation rising, they raise the interest rates.

This deters people from lining up for new loans. The money supply begins to contract. The economy slows down.

If the economy gets too slow, they lower interest rates, thus enticing people to line up at the loan window of the banks. New money is dumped into the economy. It heats up again.

In other words, the Fed is always looking for the sweet spot where banks can maximize its members profits of the backs of slaves (run as fast as you can on the old hamster wheel = keep up payments), but not kill them (i.e fall off the hamster wheel = bankruptcy). What’s that old saying? “You can’t beat a dead horse.”

9) The bank, believe it or not, does NOT want to foreclose on your house. They hate that. Now they have a non-paper asset they have to pay taxes and maintenance on. They might have to sell it into a market where there is a glut of foreclosed homes on the market = lower prices. They hate that. They just want your payments.

10) That money you paid back to the bank does NOT stay in the bank. Banks record the interest as profit. From that profit, they pay their employees, taxes, shareholders, capital/operational costs, finance business growth, and of course, the obscene bonuses to the CxO’s. Since shareholders are making a profit, they cheer the bank on! Employees are grateful for their jobs! Government relishes the tax revenue!

But all of these people who work at the banks/government/shareholders have loans they have to pay back too.

Since the money is backed by debt and issued by the bank, it’s ultimate destination is always back to the bank.

You can see where this is all going right? Because we have a money supply that demands new loans to be created to keep the money supply stable, this means that we MUST have infinite economic growth.

More loans = more houses = more jobs = more consumption.

Continuing our example. Your loan will cause a deficit of $275K when it is paid back in 25 years. We need Hank to take out a 300K loan to fill that deficit so you can actually pull the money out of the supply by working. This leaves us with a surplus of 25K (300K – 275K) in the money supply.

Now Hank needs to pay back 300K + 275K in interest. Since there was a surplus of 25K in the money supply, we need $550K in the money supply for it to be possible for Hank to pay back his loan!

This calls for Bill and Bob to take out two 300K loans. And so on, and so on…

Now in reality, the rate of creation, amount, interest rate, terms, and amortization of all these loans varies. The arithmetic can be quite complex when you multiply it by all of the players in an economy, but the underlying problem is the same.

This is not sustainable. The economy is 100% driven from whatever we can fish out of the sea, farm off the land, or dig out of the earth. It can’t go on forever. The planet will collapse into a smoking hole. I am not a big truther on global warming, but it would be insanity to ignore ALL arguments. The earth is flashing warning signs at us.

And we bicker without understanding the nature of the problem. There can be no environmental sustainability unless the money supply issue is fixed. We need to have a non-debt based money where we can prosper in a zero-growth economy. This concept is usually pretty foreign to most people.

And as the earth declines, it will be the banking industry and their debt based money standing on our corpses, before they are killed too. All their power won’t save them. You can only buy your way out if there are goods and services to be bought, meaning that there are people to produce them.

So how do we avoid this?

Firstly, part of the solution is that we return to sound money. Money that is not created out of debt – like gold and silver. Why do these make an ideal form of money? This explanation is suitable for it’s own post.

Secondly, embracing agorism would help with this as well. Simply put, agorism is a way that people could trade with each other, using sound money, outside of the taxation system.

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