So here I finally arrive at the real heart of the issue why the world is in the state it is – MONEY.
It’s the way money works that has locked us into an inevitable collision of two mutually exclusive operating principles. A manmade requirement for infinite growth that collides with a man-sustaining and unyielding finite planet resources.
My undergraduate major was in Economics and everytime I see these politicians and industry guru’s talking about economic recoveries, I laugh.
I laugh because I know the fundamentals of economics and money are in direct contradiction to every single word and action they are committed to.
Last week I sat with two wonderful young adults (16+) that I’m currently mentoring and explained to them, what I’m going to share with you, it’s what underpins the world’s current economic paradigm.
You see it’s very difficult to explain these principles without your eyes glazing over and your brain going limp, but seeing “my kids” took to it, I believe it is very straightforward.
The only thing that needs to be opened to grasp it is your mind.
The world makes money by printing it.
Money no longer has any connection to anything tangible.
Fiat currency is any currency that is created merely by a directive to print it – a fiat.
In all civilisations (up until the modern day) money was always based upon something that was physical – gold or silver, food or trade goods. Right here in Britain, the Pound Sterling was a classic example of this. It was linked to one pound of silver.
Seeing there was only a certain amount of that precious metal in existence and historically, money was pegged to that tangible substance, either in whole or in part.
By saying that there could be no more than X number of pounds or dollars in relation to a nations store of silver or gold, there was a naturally imposed limit on how much money could be in circulation. Money was used to open businesses and to buy or make things that other people bought.
This connection to something tangible provided for very stable currencies, but limited how much growth could take place by connecting it to the physical limitations of the earth.
Over the course of the last hundred years, every major nation in the world has steadily decoupled their currencies from this fundamental fact.
Under the Nixon administration in the 1970’s, the US removed any legal requirements linking dollars to gold reserves and all U.S. currency became Federal Reserve Notes.
The Federal Reserve (or Fed) is not a government institution.
Who actually owns the Fed?
A congressional hearing in 1976 listed a group of names which sound all too familiar now – Rothschild, Rockefeller, Warburg, Morgan and Alex Brown (closely linked to the Bush family).
It’s a consortium of privately owned banks – which can print whatever amount of money it deems necessary, without any regard to physical limitation.
The basic rules are:
Print too much money and you have inflation – which is bad.
Print too little money and there is no growth – recession or a depression – which is also bad.
The “Bad” is only “bad” as it applies to the monetary system of endless growth, it has nothing inherently to do with the well being of people, nations, or of the planet.
We’ve been led to believe that taking care of money was the same as taking care of ourselves, when, in fact, the opposite is true.
Taking care of money kills people.
Fractional Reserve Banking
This allows a bank to create money all by itself, based upon the number of actual dollars it has on deposit.
You deposit £100 with Bank X
Bank X can now make loans of about £900 in keeping with its reserve requirements.
Although reserve requirements vary the world over, the rule of 9:1 is a good example.
It’s more money being created out of thin air.
This is what bought down Northern Rock.
The great financial meltdown we’ve been in since September 2008 resides in the fact that with all the bad and fraudulent debts from the housing bubble on their books, banks have lent all the money they can without exceeding their reserve requirements.
That’s why credit dried up.
The bailouts given to banks were essentially to take away the bad loans from their books – to create more money so they could issue more credit.
This failed as banks refuse to lend to its customers.
The massive banking consolidation we saw meant that the wave of acquisitions and mergers pre 2008 happened so that the bigger banks could acquire the deposits of failing banks and use that cash to service their debt and lend more money – and create more money for themselves.
Compound Interest & Debt Based Growth
Almost all economic growth is accomplished by borrowing.
Start up companies borrow to set up production lines and infrastructure.
Established companies borrow to finance everything from major new projects that would otherwise eat up all their cash, or to buy out other companies (leveraged buyouts).
You and I (used to be able to) borrow from our credit cards for our car loans and for our mortgages. In every case more money must be paid back than was usually borrowed. This can only happen if there is growth.
Compound (rather than simple) interest says that for that portion of the debt that remains unpaid per month or per year, more interest is charged on the unpaid balance.
Simple interest, on the other hand, fixes the amount of money created with each transaction.
A simple-interest contract of 5% says that on a £1000 loan “a fee” of £50 will be paid for using the banks money.
A compound-interest loan says that 5% of the unpaid balance will be charged each year until the loan is paid in full. If only £100 of the loan is paid in the first year, then 5% of the remaining £900 (or £45) will be charged the next year and so on until the loan reaches a zero balance.
In the third year, assuming 10% of the principle is paid leaving a balance of £810 the interest will be £40.50.
In just three years £135.50 of new money has been created on a £1000 loan.
You pay back much more than you have borrowed.
Banks create are creating money in this process that simply didn’t exist before.
If you take many years to pay off your credit card, the debtor – the bank, has created lots of money, which of course goes back to the bank, which in turn can and will lend it out nine times over (fractional reserve remember?).
Now lets inflate the value of a home arbitrarily (anywhere in London or the UK) and lock the home buyer into a 30 or 40 year adjustable rate mortgage and you start creating lots of money that, because of the economic paradigm, must get used again – to create more money!
It’s a giant pyramid scheme.
The entire global economy and monetary system is a pyramid scheme.
Brace yourself……here’s where it gets really ugly.
China and India have in recent years, both boasted about growth rates of 8% per year.
For example, China had 300 million cars in 2004, an 8% growth rate would suggest an increase of 24 million cars in one year.
In developing nations the first thing everyone wants is a car, so vehicle growth rates are actually much higher.
In 2002 China’s demand for cars increased by 56%.
“As long as the economy goes on galloping at its current high single-digit-clip, many expect car sales to increase by 10-20% annually for several years to come…”
“We project that the number of cars will increase by 2.3 billion between 2005 and 2050, with an increase by 1.9 billion in emerging countries”
Re-read the above passage.
Is that 2.3 billion vehicle increase in China alone or globally?
Well you can look it up, or you can start to laugh really hysterically……because it doesn’t matter.
The UN and other sources estimate there are only 700-800 million internal combustion powered vehicles on the planet and seeing we don’t have the capacity of natural resources to sustain our lives as they stand today, where are all these cars going to spring up from?
Do you see anyone building factories to match that demand?
We’ll soon be at the stage where someone will have to turn around and tell the Indians and Chinese “Oops, sorry, you don’t get to live the American dream that we marketed so well through our movie and pop culture, because we’ve used up all the oil”
Here’s a very simple equation for you to carry out:
Take a chessboard – draw one out (64 squares).
Put one grain of rice on the lower left hand square.
In the square to the right of it put two grains.
Double that to four grains for the third square.
Keep doing that until you reach the last square.
Stop reading now if you don’t want to see the answer.
The UN’s Food and Agricultural Organisation’s 2008 global rice harvest was 683 million tonnes – or 15% of what appeared on your chess board.
Compound growth outpaces every naturally available resource on this planet.
So to the crux of the matter – those expecting to get repaid can only do so if there is a continuous stream of new borrowing (i.e. growth) at the bottom.
Those at the bottom can only make payments if they grow, and they will only make money if people buy their products or services – frequently by ……..you guessed it ……. borrowing.
The circle continues until their is no energy left – no natural resources.
It’s what’s known as “The Die Off”
Our modern world is created and ruled by corporations more than governments.
Unless you change the way money works, you change nothing.
You can contact me on twitter @HotterThanCurry