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Darius Guppy: our world balances on a sea of debt

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  • Tue, Feb 23, 2010 - 05:43pm



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    Darius Guppy: our world balances on a sea of debt

  – complete article link

Hard to believe but an excellent expose on money appeared in the mainstream media yesterday.  This is a good piece to show doubters that our monetary system is rigged and corrupted by private banks.  Forget new regulations and greater transparency, the system is rotten to the core.  We need to take back the control and issuance of our money – anything short of that will cost us our freedom and the freedom of future generations.

What is needed is a root and branch re-evaluation of that most curious of cultural inventions – money, argues Darius Guppy.

In the year 1994 there resided in the cell next to mine a certain ‘Tommy.’  Now Tommy had been imprisoned for counterfeiting Dutch Guilders to such a high standard that he had fooled the banks themselves.

As was customary among prisoners who became friends, Tommy allowed me to read his legal papers and I quickly became fascinated by the Judge’s sentencing speech, the gist of which was that Tommy’s activities had been parasitical. By creating money out of little more than thin air he had reduced the purchasing power of more deserving members of society. What would happen if everyone behaved like him?

Immediately I thought of arguments used, in a different context, by Thatcherites and neo-liberals in general regarding inflation. Inflation, just like counterfeiting, dilutes the value of the community’s hard-earned wealth and as such constitutes a terrible social evil. Creating too much money – ‘real’, just as much as ‘fake’ – can wreck an economy.

A lot of nonsense has been written and said about the world’s current economic woes – how the crash is the fault solely of the banks and how, by implication, Governments are blameless and in particular how it could all have been avoided and will indeed be made right by greater financial regulation, and so on. All of which constitutes a classic example of what the philosopher Alasdair MacIntyre terms “the fallacy of managerial expertise”: an attempt by ‘experts’ to blind us with science in order to justify their own over-paid existences and mask their confusion. After all, if they had been so skilled, then why is it that not one of them – either politician or finance minister or financial journalist or just plain financier – was able to predict the current debacle?

These ‘experts’ will tell you that the present difficulties are simply the result of abuses and excesses in a system that is basically sound. In short, all that is required is for some faults to be corrected. But do not believe them. For the reality is that the problem is systemic and a little tinkering here or there will achieve nothing in the long term.

In fact, what is needed is a root and branch re-evaluation of that most curious of cultural inventions – money – how it is created, how it circulates within an economy and how it can best be used to serve the interests of the community itself.  To begin then, the experts owe it to the people to explain to them in the simplest terms how it is that money actually works.

Such is the task I propose to undertake in this essay and for this it seems to me that the layman must grasp two fundamental concepts above all others:

First, that the confusion should not be made between ‘legal tender’ and ‘money’ as a whole. In particular, were one to ask the man on the street – indeed were one to ask most politicians and even most bankers – who it is that actually creates the money which rules our lives they would no doubt reply “the State.”  And in this they would be wrong.

For while it is true that Governments create legal tender – which is to say the physical notes and coins that circulate in an economy – that legal tender represents, at its absolute highest, only 3 per cent of the total money in circulation in the global economy. It is in fact the commercial banks, largely unaccountable and privately owned, that create the world’s money in the manner I will describe below.

Note: At least in the United States, virtually ALL of our money is created by banks and not just 97% as suggested by the British author.

Indeed, even were Tommy responsible for printing every single note in circulation throughout the world his power to dilute the rest of our wealth would amount to only a tiny fraction of that of the real manufacturers of money – which leads us to the second most fundamental point of all – that the activities of my friend Tommy and the activities of the bankers are in essence identical: the creation of money – which is to say claims on the rest of us – out of nothing.

Without knowing it, therefore, Tommy’s judge punished him for usurping not so much the role of the State as the role of the banks.

More to the point, the very same mistake – namely the mis-identification of where money truly originates – has been made by virtually all our politicians, economists and financial commentators.

Consider the absurd contradiction at the heart of neo-liberal, Monetarist, Thatcherite economics which has constituted the Western orthodoxy for the past few decades: to emphasise on the one hand that the money supply should be brought under control whilst simultaneously allowing banking – where the money is actually manufactured – to run riot!

Just as incredibly, this fact – the key to understanding how the international financial system actually operates and why the world is in such a mess – is discussed virtually nowhere in mainstream circles: not in The Financial Times, not in The Economist, not in the broadsheets, not in Parliament, not in the City and not in the economics departments of most Universities.

Either the process is unknown in these circles therefore – a sign of mediocrity – or it is indeed understood but kept deliberately quiet – a sign of wickedness.

Let me repeat: supposedly ‘sovereign’ Governments – representative of their people, at least in theory – do not control the single most important mechanism when it comes to their economies: namely the production and distribution of money. That role has been diverted in large measure to the banks which manufacture money out of nothing and charge interest on that conjured-up money. In fact, beyond a pathetic interest rate cut here and a token cut in VAT rates there our politicians have zero real power when it comes to directing their country’s economy.

Only in a world of lies and illusions, a world in which actors become our leaders and our heroes, could such sorcery be possible.

Moreover, the illusion becomes self-reinforcing. Those involved in the process, sitting behind their computer screens, shuttled from one air-conditioned capsule to another, stressed by the pressure and the volatility of the hallucinogenic nightmare they inhabit, yet sheltered from the tactile realities of the outside world, no longer control the beast they have created.

Now it may be argued that while it is true that money is manufactured in the manner I have just described – in other words by creating loans to the banks’ clients – surely just as much money is destroyed every time a loan is repaid? This is true to an extent. However, the point to be grasped is that while money is indeed created and destroyed in vast amounts every second of the day, the interest on that money remains un-destroyed and accumulates within the system – and at a compounded rate, moreover.

The reader will appreciate the problem and how it is that the process described is far more inflationary and far more parasitical than the activities of all the Tommys in the world put together. For while that money, which by now has mutated into a vast mutual-indebtedness monster, grows exponentially, the wealth it is supposed to represent cannot grow at the same pace for very long. In short, while there is no limit to the number of zeros we can create on a computer – zeros which represent claims on us and on what we own – there is a very real limit to the amount of oil in the ground, the amount of wheat in the fields and the amount of livestock in our farms.

Consider the well-known tale of the Chinese Emperor and his opponent at a game of chess to whom the Emperor asks what reward would satisfy him in the event his victory. The opponent, his subject, replies that a single grain of wheat, doubled for each of the 64 squares on the chess board, would suffice. The Emperor, imagining that he has a good deal, plays on and loses, only to learn that he now owes his adversary the equivalent of 2000 times the current annual worldwide production of wheat.

Such are the miracles of compound growth. Such too is the reason why financiers have been able to award themselves increasingly astronomical sums. For their virtual printing presses are calibrated to an exponential production while no such calibration applies to Mother Earth.

First, such a system constitutes in effect a redistribution mechanism from the poor to the rich which is of course precisely why the banks and Western Governments are so desperate to ensure its survival and the hegemony which results from it.  Money breeds more money and develops a quality akin to matter – the larger the agglomerations, the greater their gravitational pull or, as the Bible puts it: “unto he that hath shall be rendered and from he that hath not shall be taken away, even that which he hath.”

Indeed, contrary to what they may tell you, the banks never really want their loans to be repaid at all. Just so long as the interest is funded it is in fact to their benefit for the capital to remain outstanding on their books as ‘assets’ and for the debts to be rolled over. Every time the IMF or World Bank extends a line of credit to some impoverished nation, are they being ‘charitable’ therefore or are they simply perpetuating the enslavement?

Second, such a system relies entirely, as do all Ponzi schemes, on the assumption of continued growth, hence its inherent instability. Once that growth is threatened the edifice collapses. Householders in Britain today will appreciate such a phenomenon – the result of ‘leverage’ – only too well: put up 10 per cent for a property and borrow the rest from the bank. That property’s value need rise by only 10 per cent and you have doubled your equity. But on the flip side that value need fall by only 10 percent and you are wiped out.

Which in turn explains precisely why a contraction of a mere 2 or 3 percent in the global economy leads not to a correspondingly minute fall on international stock markets, but to financial Armageddon.

Likewise with the banks – lend ten times more money than you possess and when the economy grows – or at least pretends to grow – Porsches galore, but when the lack of growth is exposed it requires only 11% of the loans on your books (in value terms) to be bad and you are bust. The truth is not that these institutions have suddenly become insolvent therefore, but that they were never really solvent in the first place since the assumptions on which they were founded could not apply in the real world. Simple false-accounting has meant that by rolling over their debts they have been able to keep them on their books as ‘assets’ rather than losses and forestall the evil hour.

There is an overarching name for the process I have outlined – ‘usury’ – and our predecessors from the Ancient and Medieval worlds appear to have appreciated much better than us its ultimate destination: ruin.

The consequences of that swindle, in particular the desperate need for economic growth, the consumption, wastage, and the environmental and cultural despoliation which it engenders, together with some possible antidotes worthy of consideration, must be dealt with separately.

In the interim, suffice to say that some original and radical thinking, the type of thinking one encounters nowhere in any of the political parties, will be required.

True monetary reform is the only solution to our problems.  Besides being our greatest power as a sovereign, the creation and issuance of money is the bedrock of freedom. 

I contend that there are two fundamentals that must be part of any solution.  First, all money should be created by the government as our forefathers intended under their newly formed republic.  Second, the exponential growth of interest debt must be eliminated or mitigated.


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