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Ponzi Money 6 comments
I agree. Without the fiscal and monetary easing and support of the real estate market, considering that mortgages comprise over 60% of total banking system assets, we would have already seen banking system collapse and the current Depression would be obvious to all. We ain't in Kansas anymore, Dorothy.
What has collapsed is the illusion that our present monetary system, where all money is issued as debt at interest by the banking system, can "work". As Chris Martenson lays out in his "Crash Course", and as economists like Steve Keen and Michael Hudson have been explaining for years already, a system that issues its money as debt at interest requires exponential money supply growth to keep up the appearance that the Ponzi is a viable system of money. It is not viable.
When money supply growth is positive we have smooth economic sailing. When money supply growth is flat we have recession. When money supply growth goes negative, like the 1930s and now, we have depression. Money owns and controls the real economy, so changes in money supply growth have a direct arithmetic effect on the economy.
The present monetary system was instituted in 1913 with the passage of the Federal Reserve Act and the Bank Act, which legislated an absolute monopoly over the creation of US dollars to the Fed and commercial banks. The Roaring 20s was the result of the massive amount of money that was created by this system to finance WWI, and that liquidity glut generated the kinds of speculative malinvestment typical to times of excess liquidity. The economy is incapable of absorbing that much money in "real" productive investments, so it ends up creating bubble prices in assets like real estate and stocks.
That's where we're at again today. Some people have unpayable debts, other people have investable money, the money that was created by those debts. There are not enough real investments to profitably absorb the money because too big a share of the economy's people is financially exhausted and can no longer spend money buying the outputs of productive investment.
The Roaring 20s ended, as these things do, with the Crash of '29. By 1932 the economy had collapsed into the state of obvious Depression that we would be experiencing today were it not for the monetary and fiscal easing. "The free market" did not, ever, lift the economy out of Depression (WWII did). David wrote that capital investment will not lift us out of this current Depression either, for the same reasons as 1932. The middle class is broke. Why invest in making stuff when nobody has any money or credit to buy that stuff?
What began lifting the economy out of Depression was what, from a pure market perspective, would be called exogenous or artificial "interference" by government, which performed the role then as now of borrower and spender of last resort.
In 1913 the government legislated away its power to create its own money, so Washington has to 'borrow' money that is created by Wall St. Anyone who has read Niall Ferguson's, "The Ascent of Money: A Financial History of the World", will know that the modern money system began and developed as bond merchant financiers creating money to lend to governments to pay for wars. Governments do not understand money and governments historically did not create money. Bond merchants, now "bankers", create the money and 'lend' it to governments. Governments repay that money by taxing their economy. "We" are the collateral on our government's debts to the bankers.
As Martenson, Keen, Hudson, and others before them have recognized, a system that creates money as debt at interest MUST, as a matter of arithmetic certainty, create more debt than it creates money to pay that debt. If a system like the US gives an absolute monopoly over money creation to private banks who issue money as interest bearing 'loans', then each time a bank creates a $1000 loan at 5% per annum it also creates a $1000 principal repayment obligation PLUS a $50 per year interest payment obligation. It creates $1000 of "money" but it creates $1000 + interest of "debt".
This kind of money is a closed system. Nobody but the banking system is allowed to create money. Banks create ALL the money. Banks create the "principal" that they issue as loans, but NOBODY creates the money to pay the interest. Bank loans cannot be repaid in "economic production". Banks do not accept your coal or textiles or chickens or professional services as repayment. Loans must be repaid "in money". And the money to pay the interest does not exist.
The only way for early borrowers to get money to pay principal and interest is for a constant stream of new borrowers to continuously add new money into the equation. But all this new money carries its own interest obligation, so with this kind of monetary system it is arithmetically impossible for the economy to EVER pay off its debts to the banking system that creates the nation's money. Our system is Ponzi Money, plain and simple. When new suckers stop bringing new money into the scheme it is revealed as the Ponzi it always was, and the Ponzi collapses.
As Professor Bartlett explains, any function that changes at a percentage over time is an "exponential" function. Money that is created as debt at a percentage interest per year is an exponential function. To understand the effects of exponential change the idea of "doubling time" is useful. 70 divided by the percentage gives you the doubling time. Money issued at 5% per year interest, 70 divided by 5, gives a 14 year doubling time.
If you borrow $1000 today at 5% and make no payments, then 14 years from now with compound interest you will owe $2000, double the original amount. 14 years after that you will owe $4000, then $8000, $16000, $32000, $64000, $128000, etc. After 98 years, which happens to be how long the Federal Reserve system has been in effect, a creation of $1000 of money at 5% is now a "debt" of $128000.
But the banks only created the $1000 principal. The interest money is "imaginary", an arithmetic fiction that lives on bank balance sheets but does not exist anywhere in the economy. It is impossible for the economy to come up with that money to pay its debts to the banking system for the simple reason that the money does not exist.
In 1933 FDR began his borrow and spend campaign to ease the Depression. Much of his spending was actually "investment", in useful and productive infrastructure like electrical generating dams. In 1937 the government tried to withdraw its stimulus and the economy collapsed back into Depression.
The event that pulled the world out of the 1930s Depression was WWII. Following Hitler's example, the world's governments effectively seized control of their economies by borrowing vast sums from the bankers and 'investing' that money in war production. Economies were rapidly brought back to full production and full employment. The private sector was earning "incomes" for contributing to the war effort, and the incomes were funded by government borrowing and spending. There was rationing so there was little opportunity for people to spend their incomes on consumption, so people were able to pay down their Depression debts and save their money. The outputs of all the war production were conveniently blown to smithereens so there were no "final demand" consumer goods competing for the new income money. It looked like the system was generating positive sums of income money.
After the war spending ended, 1947, the economy once again began to slump back into Depression. But a succession of new financing schemes like the building of suburbia, mass auto ownership, building the Interstate highway system, the Korean War, the Viet Nam war, all contributed to keeping the money supply expanding. In the 1913 system "money supply" is issued as debt at interest, so the economy's total debt to the banking system has grown exponentially over that period. Michael Hudson thinks we have reached "terminal debt", the point at which opportunities to create new money to keep the Ponzi afloat are now exhausted.
I agree. If it took government "interference", in the form of financing and fighting WWII, to get the world out of its first monetary system Great Depression, then it took the rebuilding of the world's infrastructure to accommodate the automobile to keep the system afloat, and it is going to take an equivalent scale of "interference" to get us out of this one. I submit that no such global scale economic development scheme, pursued not for socially beneficial economic purposes but solely to keep Ponzi Money alive, is either desirable or possible in our era of peak population and peak resources.
This is not a "self-correcting" economic problem. It is a "terminal" arithmetic problem. There is vastly more debt in existence than there is money to pay that debt. That is the problem. Once you recognize what the problem is, the nature of workable solutions becomes obvious.
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Apparently ancient Israel picked up the Jubilee practice from even older Iron Age civilizations. The problem is a consequence of an enduring feature of human sociology. In any given society there will be a few people who are really good at acquiring ownership of all the stuff. They offer to trade short term advantage to the sellers of productive capital, which induces most people to sell their future for present gain. I'll tell you a little story to illustrate. The story is true, by the way:
When I was about 8 years old an aunt visited and brought 4 bags of marbles, one each for me and my 3 sisters. I desired those bags full of collections and wanted to possess them. So over the course of the day I traded stuff to each sister and by the end of the day I possessed all the marbles. But then none of them wanted to play marbles with me, so all my "wealth" of marbles became a static hoard. Eventually I lost interest and today I have none of those marbles.
Since last night I have been reading Silvio Gesell's, "The Natural Economic Order". You may remember Gesell for his "stamp money". The core of his monetary thinking is that for an economy to flourish there should be no ownership bias toward money and against real economic goods. His solution is "free money", issued by a "currency office".
A US $100 bill issued by the currency office requires whoever holds it to buy a 10 cent stamp every week, which means holding the $100 of money costs the holder $5.20 per year, for a 5% loss of purchasing power. The idea is to reverse the bias toward spending money rather than hoarding it. Gesell believes that money should be purely a medium of exchange and should not be a store of value. I agree with his reasoning.
The conventional justification of savings is that you store up for the future some consumption that you have sacrificed today. But in a chapter on "Robinson Crusoe", Gesell shows the fallacy of this thinking. Stored goods, whether they are obviously perishable items like food or more enduring items like buildings, LOSE value over time, not gain value. Food spoils, your house requires maintenance and replacement of the roof, etc. Vaults must be built to store gold and guards paid to prevent theft. Holding economic goods for future consumption is a COST to the holder, not a benefit.
But money, unless supply is constantly inflated to make prices for goods constantly go up and hence the goods-exchange power of the money go down, does not diminish over time. If you carefully wrap up and bury a $100 bill in your backyard today it will still be there in 50 years. $100 "worth of" potatoes would be completely rotten and useless after 50 years. $100 "worth of" building materials, left outside, would be likewise weathered away to worthlessness. Barns and warehouses are costs to store these goods, so however you look at it in real economic terms "saving" is a COST to the saver, not a profit generating behavior.
But the kinds of money systems we have been using do not reflect this economic reality of spoilage. We expect to earn interest on our savings. We expect somebody to "pay us" for storing our goods for our future consumption. This is, of course, absurd.
In Gesell's Robinson Crusoe story a newcomer to the island offers to borrow Crusoe's stores of goods for his consumption today, and replace those goods with new goods at a future time when Crusoe is ready to consume them. The newcomer will pay no interest on the loan, but in fact will relieve Crusoe of his spoilage losses. Crusoe was prepared to lose 5-10% per year of his food and clothing stores to "moth and rust" because spoilage is unavoidable no matter the costs you endure to try to prevent it.
So the lesson is that "savers" should expect to suffer losses of the value of their savings over time, unless they lend those savings today to somebody who needs to consume those goods today and who will provide tomorrow the same quantity of goods that the savers lent today.
As it stands, there is no cost and indeed there is often benefit to "saving" money. But as humanity has discovered since the Iron Age, saving/hoarding is not an economically virtuous or sustainable behavior.
Gesell's early 20th century economy is unlike today's in many ways so Gesell does not apply untranslated to today's realities. But his monetary analysis is correct and once we see the roots of problems it becomes possible to devise rational and realistic solutions to them.
But you are correct, if everyone at the top has massive money, and everyone else does not, perhaps the lower classes lose interest in money? Interesting concept. Not sure it is true, but probably for many people it is true.
And the article is very well written.
But what perplexes me is that so many well-known economists talk about so many different aspects but never mention this.
So I'm wondering why this is, and whether the situation is more complicated
In the 1920s and 30s Irving Fisher and others explained these same defects in our money system. This kind of analysis is always suppressed and obfuscated by the people who control our money. The history of the United States is a history of the political battle between governments and "European banking interests" over who gets to issue America's money. Alexander Hamilton favored a central money issuing bank (modeled on the Bank of England) and centralized government control, while Thomas Jefferson et al warned stridently that allowing private banks to issue America's money would lead to serfdom.
The bankers got their First National Bank, then their second National Bank, which Andrew Jackson famously 'killed' in 1935. Between 1935 and the Civil war there was monetary chaos as states and state banks and others issued their own money. Rather than pay the bankers 24% - 36% interest rate to finance the Civil War, Lincoln exercised the federal government's constitutional authority to issue its own money, "greenbacks", United States Notes. The Confederates also issued their own paper money, "graybacks".
After Lincoln was killed the bankers regained control, demonetized silver, and restored gold standard bank money in the US. This led to the depression of 1873, as all gold standards restrict the quantity of money, and as the economy grows the money does not grow with it, so money prices decline. This is wonderful for the owners of gold, and rich bankers always monopolize ownership of gold (silver is always "the poor man's money"), but it is catastrophic for the economy.
There is a direct opposition between preserving and increasing the value of money, and preserving and increasing the real economy. Contrary to all the slogans you hear, a single form of money cannot simultaneously function as a medium of exchange in a profit seeking economy, and a store of value. To accommodate interest, and profits, the money supply must expand faster than GDP. This is inflationary. Money becomes less valuable in terms of real economic goods, and real economic goods become more valuable in terms of money. So the political battle is between money and the economy. "The rich" prefer to suppress the economy so their money is worth more, and everybody else wants to suppress the value of money so their economy is worth more.
In 1913, just before the largest financial undertaking the world had ever seen to that point (World War I), the bankers gained legal control of America's money with the 1913 Bank Act and 1913 Federal Reserve Act. This ensured that Lincoln's move would not be repeated, and the bankers would benefit from creating all the money to finance the war.
War is always inflationary because an enormous amount of money is being invested by governments in producing goods that are not for sale to the people who are producing those goods. War production is designed to blow up, not to be sold. So people earn all that money as incomes contributing to war production, and there are no new consumer goods to buy with the money, which means demand bids up the prices of the available consumer goods (during WWII JK Galbraith was instrumental in implementing price controls that prevented WWII spending from being too inflationary, and consumer goods were rationed, so people used their incomes to buy war bonds).
After WWI war production ended the economy went into recession before all that new war money started flooding into asset markets, including real estate, but especially stocks. The 1929 Crash ended the stock bubble and divided the population into the "winners" and the "losers". Winners were the ones who sold stock at high prices; losers were the ones holding the bag when the market crashed. Even though the losers had borrowed most of the money they invested in stocks and couldn't pay their loans after the market crashed, there was no recourse to get the money back from the winners, so people went bankrupt and their lenders (banks) were taken down in insolvency by the thousands.
With all the economy's money in the hands of the winners, and everybody else either bankrupt or suffering extreme declines in demand for their work and produce, the economy went into Depression and would have stayed there in a neo-feudal state had it not been for FDR's New Deal that got money being spent into the economy again. By 1937 people were concerned with FDR's deficits and growing debt so they tightened fiscal policy and the economy lapsed back into depression, until 1941 when the US got into WWII. War is "fiscal stimulus" on an extreme scale, and government borrowing and spending for WWII pulled the world out of the Depression. In 1947, as usual when the war economy winds down, the economy was going back into recession. But Eisenhower's government began a number of stimulative initiatives, like replacing public transportation with individual cars, and expanding mortgage lending which resulted in the building of suburbia, all amplified by the economic growth engine of the post war Baby Boom, which led to the post war Golden Age of the US economy.
Those economic growth engines were pretty much exhausted by the mid 1960s, then America got into the Vietnam War which again stimulated the economy by injecting incomes. But by 1971 the costs of the war exceeded what the US could finance under the Bretton Woods gold-dollar standard, so in August 1971 Nixon ended the dollar's link to gold. The US$ money supply was now free to expand without the external limit imposed by the gold standard, and since then it has indeed expanded enormously.
But all that money is issued by the banking system as debt at interest, and unless the money supply keeps growing by people borrowing new money and spending it into the economy, the Ponzi arithmetic collapses and it becomes clear that there is not enough money for everyone to pay their bank debts. This not only threatens to bankrupt all the borrowers who can't pay their loans; it threatens the solvency of the banks who can't collect on those loans. That's what happened in 2008 after the enormous money creation of the 2000s real estate bubble.
So you see in this history, we have never "solved" the Ponzi arithmetic of the 1913 money system. We only kicked the can down the road for a century by creating more and more money, which is also more and more debt. Unless there is another world war to blow everything up then rebuild it all (which would open up more road to kick the can), we have reached the end of the can-kicking road. We either have to look at the reality of the Ponzi arithmetic and recognize that the government needs to add non-debt money into the system as incomes in the hands of Americans, or we go through another Depression where the oligarchs gain ownership of the country in a bankruptcy firesale, a new feudalism.
So we're still in the same political battle over who issues the money. If government issues the money debt free then we can keep having a viable economy. If banks retain exclusive right to issue the money as debt at interest, then we devolve into feudalism where bankers own the world and we become their serfs.
Not sure about that. Inflation is a tax on all of us. Commodity inflation is very bad but the rich make oodles of money from it.
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