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Friday, October 28, 2011

Money Creation Glitch - Interest


While banks are generally credited with the creation of money, it is still the traders who go to the bank to borrow who are making the commitment to place goods or services on the market to repay their debt. So, as mentioned above, traders are still the functional creators of money, rather than the bank. As these traders place their goods and services on the market, and repay their loans, the money they issued (borrowed) is extinguished.

However as also noted above, when the loan is originated, and the money created, an additional debt, or tax is set up as interest on the loan, which must be paid to the bank mediating the money creation process. Interest creation is a functional glitch in the system, one which must be understood. When money is created in the current loan process, money with which to pay the interest is not created. Interest owed is only set up as a debt to the bank. No money is created to pay it with. As a result of this bookkeeping system the principle put into circulation is insufficient to repay the principal and interest owed. So either the trader uses money that someone else borrowed to pay his interest, or he does not pay all the principal and interest.

In the first case, someone else is in a worse position to make their payments. In the second case this trader is drawn into a downward spiral of debt. No matter how hard we try, somebody always has to lose. Because money is not created with which to pay interest, interest can never all be paid. Because traders have to pay out interest, they never have enough money for all their needs. Scarcity of money drives up prices, meaning  money becomes worth less, which we call inflation.

Economic growth masks the inflation issue, by bringing in new wealth to borrow on (monetize), creating more money with which to pay the ever increasing interest tax load. In the current system, the economy must continually grow so that there is sufficient money available to keep the system operating. This system flaw caused by interest creation is the reason why economists commonly see the need for an economics of growth, rather than sustainable, dynamic steady state (homeostatic) economics.

Total outstanding interest and total current interest due and payable increase exponentially over time. In other words, as time goes on, outstanding debt becomes larger and larger with respect to the sum of all exchanges, what we call Gross National Product (GNP) the productive capacity of our nation.  Because the overall interest load grows exponentially, it inevitably grows to be a larger and larger part of GNP. As the interest load becomes a significant portion of GNP, the system breaks down, because an ever larger portion of money is going to pay the growing interest load. A recession or depression is necessary in which some of the debt, and its interest load, is wiped out thru unpayable debts and bankruptcies. Sometimes smaller banks even fail, if too many of their clients are forced into losses and foreclosure.

Bankruptcies and bad debts move control of wealth to those who control assets and the money creation process. In the long term, inevitably all the money becomes concentrated in the hands of a very few people who control the money creation process, and the economy and culture disintegrate. This was one of the major factors that led to the disintegration of the cultures of Mesopotamia, Egypt, Greece and Rome.

Our Federal Government creates money by borrowing from the Federal Reserve Bank. The Federal Reserve Bank is an interesting institution. Its board of governors is appointed by the President, with confirmation by the Senate.  However its stock is owned, and the governors are paid, by the banks. Major decisions are developed by the Open Market Committee of the Federal Reserve, with concurrence of the Board of Governors. The Open Market Committee is chosen by the Board of Governors. The Board of Governors consists of bankers and economists who are knowledgeable of and favorable to banking interests, so the Federal Reserve is effectively controlled by the banking industry.