Money (That's What I Want)

"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'. 

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.

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.

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.