"Money, so they say, is the root of all
evil today"
Pink Floyd
Where does money come from?
European bailouts, loaning from one to
pay others, borrowing from Peter to pay Paul, Quantatative Easing,
LIBOR, the credit crunch... all these events started me wondering,
where does money come from? Does it grow on trees?
I did a little research into where it
came from, and how it is created. How banks actually work and why
they're in such trouble.
And why we all are.
This is how I thought banks worked. A
bit like in 'It's A Wonderful Life'.
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| Run On The Bank |
You know, where you have a Savings and
Loan situation. Some people have money. They put it into a bank to
gain interest. To pay this interest, the bank lends the money
straight back out again at a higher rate, and takes a nice cut for
itself. As long as the loan is repaid, on time, and of course, with
interest, all is well.
I thought the credit crunch was where
people didn't repay. Actually this wasn't precisely true.
It turns out, this is not really how
banks work.
And if you didn't know this already,
I'm not sure you're going to believe it. I'm not sure I do.
When you want to borrow money from a
bank, it doesn't actually use money they already have deposited with
them.
In fact, they create it. Out of thin
air. Let's say you decide to borrow £1,000. What the bank does is
type the figure into their computer as both an asset and a liability.
So the books both read that they owe you £1,000 AND that you owe
them £1,000. So these cancel out until you withdraw this £1,000 as
cash. This cash is actually secondary money, which other people,
including the government, will accept as payment. That's all that
matters really. It doesn't matter what you use as long as it's
accepted as money.
After you withdraw this £1,000, you
now owe it to them, plus interest. The interest is actually where,
of course, they make their money. The actual capital is irrelevant.
It didn't exist before, and it doesn't really exist now. When you
pay back the £1,000, it will cancel out the arrangement and it will
cease to exist. The thing that brought this £1,000 into creation is
your signature.
So does this matter? After all, what
difference does it make what you use? As long as it's accepted as
money, by others and the government, to pay taxes, what's the
difference?
The only flaw with this idea is the
interest part.
For example, let's say you borrow this
£1,000, at 10% per year. So, you agree to repay £1,100 after one
year. Fine.
But let's imagine that if money is only
created by borrowing, that you were the only person who took a loan
out ever. The total money in the system would be £1,000. So...
where is the £100 going to come from?
Or, let's imagine your friend also
borrowed £1,000. So in the whole country's system, there was only
£2,000. You have to repay £1,100. You're going to need £100 from
your friend (by doing business with him, selling something, whatever)
to cover it. Great, you're all paid up. But, now there's only £900
in the system, and he's short. Where's that going to come from?
The problem, as with a lot of things,
is time. Time is money! Because our currency is based on debt, the
amount that needs to be repaid will always be larger than the sum
lent out. Always.
So someone must always be in debt, or be
bankrupt, or whatever, for this system to work.
Why do you think banks where so anxious to loan out so much? In 2007 alone, they lent out £567bn. It's like they had a licence to print money. Actually, they do. Now I know where that phrase comes from.
How is that a good system?
Actually, it's worse than this.
I haven't mentioned compound interest.
A power so scary that it accelerates debt and destroys this crazy
system further.
If you borrow £1,000 at 10%, within
seven years, you'll owe £2,000. Seven years later, £4,000.
Another seven years....£8,000. If there's only £1,000 in the
system, where's that £7k going to come from? More borrowing and
more debt creation. In order to pay off the original debts... The
money supply can only ever grow exponentially which brings its value
down. Then there's inflation!
If inflation is 3%, it takes about 20
years for prices to double, all things being equal. Another 20
years to double again. So your savings/pension in 40 years time has
to be able to keep up with this. The only way that can happen is if
the money supply has grown. The only way for the money supply to
grow (as we've seen), is for people to take out loans. With interest
due on them. This is why in Europe, countries are lent more money... there is no other way. So we have contradictory statements from politicians, such as,
"In order to reduce the deficit, [money owed by the government], we need to kick-start the economy [people need to pass money based on debt to each other], and the only way to do that is if banks start lending again [create more money and increase the money supply]."
Me: So... what you're saying is... in order to get out of debt, we need more debt?
Politician: Yes.
Me: Okay then...
Scarily, the money supply has grown hugely. In
1997, it was £193bn. Now, it's over 10 times as much at approx £2.1
TRILLION. That's £2,100,000,000,000.
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| Money created by banks out of thin air |
And every single penny of it has
interest on it. So scarily, it's actually more than this. And to
get an idea of how big a number just that 2.1 trillion is, before
interest, if one pound was paid back per second, it would take 4
million YEARS to repay. And that's just the UK economy folks!
The world will always be in debt.
How is that a good system?
So who do we have to blame for all this? Well, I can name fingers and point names.
Richard 'Watergate' Nixon, 37th President of the United States, who moved goalposts in 1971.
So if 'money' is just a fiction, what has real value?
Gold. That may be why the gold price (amongst other reasons) has done this.
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| 500% increase in its value in 10 years |
It got up to $1889!
Shame Gordon Brown sold ours off in 1999 then. Why? To bail out the banks.
It's déjà-vu, all over again.
