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Our “Catch-22” Monetary System…There is No Way Out

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  • Wed, Jun 02, 2010 - 03:36pm

    #1

    DrKrbyLuv

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    Our “Catch-22” Monetary System…There is No Way Out

Catch-22 may be defined as an "illogical, unreasonable, or senseless situation; a situation presenting two equally undesirable alternatives."  When no other options are available, one may mitigate the situation by choosing the route with the less grievous outcome. 

The only way to resolve a Catch-22 by avoiding it altogether.  Of course, this is not always possible as the Catch-22 may be the result of an act of nature totally outside of our control.  There are times when we create our own Catch-22 scenarios, for example, one might commit a serious crime and be confronted with the options of going to prison or shooting it out with the police. 

Money is the life blood of commerce and the media used for exchange.  It is not a stretch to say it represents the sinews of civilization and is a catalyst for social harmony and cultural development.  Unfortunately, our private debt based monetary system is a Catch-22 in that there is no way to avoid it's collapse and the degeneration of our society.  The Catch-22:

  1. Borrow money to have some money (unsustainable, debt grows exponentially)
  2. Don't borrow any money and have no money (everything stops)

These dire alternatives can be proven mathematically; they are not based on conjecture or beliefs.  First, let's listen to Mary Hobart as she proves the fallacy of alternative #1:

"Our present monetary system was established by legislation, without any reference to the mathematical science of numbers.

To make entirely sure that our reasoning upon the impossibility of paying interest when the principal is all loaned without the production or coining of money is logically and mathematically true, we will apply to our problem the test of higher mathematics. In examining the credit system we find that it must be composed of a definite number of interest-bearing contracts. By analyzing one of these contracts we shall find two parties are concerned in them, the borrower and the loaner. The loaner loans a stipulated sum of money called the principal; the borrower receives it and agrees to return a like sum together with a premium called the interest, which is estimated at a legal rate per cent on the sum loaned for a given time. Failure of the borrower to comply with these conditions calls for the forfeiture of his securities. This comprises all the quantities and considerations of an interest-bearing contract. It may be algebraically expressed thus:

Let a = the amount of a contract (which is the sum of the principal and interest)
p = the principal
r = the rate per cent
t = the time

Now p = a at the date the contract is drawn, and p+prt/100 = a at the time the contract expires. Quantities that are equal to like quantities are equal to each other. Hence p = p+prt/100 which is impossible

This formula shows that the contract is impossible, that prt/100 calls for a production of money and cannot be canceled by a production of values. Neither can it be eliminated by a contraction of t, which constantly increases pr/100. This being true of one contract it must be true of any number of contracts with the credit system may contain. This formula solves one of the important problems of the age and is presented to the scientific people of America for inspection.

The mathematical conclusion which must be drawn from this formula is that the interest on our circulating medium is imaginary and impossible, and under our present system must be satisfied by securities, which is legalized robbery."  – Mary E. Hobart, A Scientific Exposure of the Errors in Our Monetary System, Published in 1891

Please note that Mary Hobart wrote this in 1891 when virtually all of our money was backed by gold and silver.  The obvious point is that the species of money has no impact on the equation.  So, we can see that it is impossible to sustain our system by borrowing money.  Let's listen to Robert Hemphill explain what would happen if we actually repaid all of our debt (impossible) or simply stopped borrowing:

"If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation.  This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve.

We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon."  – Robert Hemphill, Credit Manager of Federal Reserve Bank, Atlanta, 1935

Our debt based money system is a classical Catch-22, there is no way to avoid the eventual financial collapse and degeneration of society.  Massive default and untold human suffering is inevitable.  Bail-outs and more regulations may extend the life of system but they cannot alter the course we are on.  

You may wonder why a private debt based money system, like ours, was selected when it had already been mathematically proven to be unsustainable.  The answer is that it is functioning as intended.  It was designed to be a tool of slavery.  

The good news is that it is not difficult to remedy through real monetary reform.

Larry

  • Wed, Jun 02, 2010 - 06:51pm

    #2
    Peak Prosperity Admin

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    Re: Our “Catch-22” Monetary System…There is No Way Out

1739 Posts Larry 

I would hazard a guess that 1000 are in relation to our monetary system and those in control.

Does anyone one hear think we can do something about it ? Are we all just waiting for the total failure of the system with the hope that something will take its place that is better? Is that a vain hope? Does anyone think that those who crafted the current monetary system  will just go away?

Does anyone think that those who crafted our current monetary system will allow any kind of competition?

Does anyone know why the American Revolution was fought?

V

Great post Larry

  • Wed, Jun 02, 2010 - 09:25pm

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    Re: Our “Catch-22” Monetary System…There is No Way Out

[quote=V]

1739 Posts Larry 

I would hazard a guess that 1000 are in relation to our monetary system and those in control.

Does anyone one hear think we can do something about it ? Are we all just waiting for the total failure of the system with the hope that something will take its place that is better? Is that a vain hope? Does anyone think that those who crafted the current monetary system  will just go away?

Does anyone think that those who crafted our current monetary system will allow any kind of competition?

Does anyone know why the American Revolution was fought?

V

Great post Larry

[/quote]

Larry,

In what way does this justify creating a new forum topic?  I am not disputing the infomation that you bring but you have posted about Mary E. Hobart in several other threads.  Couldn’t you have just added this info to an existing monetary thread because this hardly seems worthy of another topic in the forum?

The monetary discussions must be like thread spam to those that are not interested in the discussion.

  • Thu, Jun 03, 2010 - 12:22am

    #4
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    Re: Our “Catch-22” Monetary System…There is No Way Out

 

  “Does anyone think that those who crafted our current monetary system will allow any kind of competition?”

  No.   Legal tender law and a 28% capital gains tax on gold coins  (classified as “collectible” by the IRS)   is proof of that.

  • Thu, Jun 03, 2010 - 01:21am

    #5
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    Re: Our “Catch-22” Monetary System…There is No Way Out

Egalitarian communities did not use money, and they survived.  They’re are other ways to run society, not just money.   We are pathetic if we need 75% cotton and 25% linen to get motivated.  We need a new emerging value and culture system.  Until then, money will not work until we get some Debt free money in the system.  

  • Thu, Jun 03, 2010 - 02:48am

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    Re: Our “Catch-22” Monetary System…There is No Way Out

I’ll no doubt step in it with these comments, but at the risk of unleashing of storm of disapproval, I have tried to follow these monetary threads, and I find a central component lacking.

What of the premise of increasing value by way of proper utilization of a business loan? I don’t think I have ever seen or heard anyone bring this up, I’m not trying to advocate for debt based economics, but the (above) simple algebraic expression does not capture the reality of value increasing in the economy by the judicial application of capital. It would seem that additional unrealized value in an economy can be used to offset the necessity of printing more money to satisfy the unstable equation.

Although Mary uses time as an input, and recognizes this a factor, this is really being looked at as a static equation, and all static equations must solve for equilibrium, e.g. all factors must sum to zero and balance. But cash economies are forever being represented as being static (or quasi-static in Mary’s example) implicit equations, they are not, they are dynamic systems, and must be represented by dynamic explicit equations. In these types of equations, time must be factored, and as such, it is no longer necessary to solve for static equilibrium. So in fact, it is not necessary to have all the cash at time zero, as  the equation attempts to demonstrate. This seems to me to be simply an inappropriate use of an overly simplistic equation trying to describe a dynamic system.

Now, there are unstable dynamic systems in any field, and there are occasions when even well behaving dynamic systems become unstable (too small or too large a time step for the motion imparted) and the analog in economics would be a run on the bank, wherein too many depositors try to draw out too much money simultaneously.

This doesn’t mean dynamic systems are inherently bad or flawed, but it does mean that such systems must operate under strict laws to maintain stability. And it certainly does not mean that all principal and interest must be accounted for at time zero.

Surely this is known and understood?

 I am well out of my wheelhouse with this subject, but is not one of the justifications and mechanisms for dynamic balance the aforementioned increase in value by prudently applying loan proceeds to business ventures that create more value than they expend in capital, therefore providing a component of future value that newly printed cash can expand in to, and absorb? Of course, this does not bear fruit if one borrows money to take a vacation, or buy a car, but for commercial purposes, cannot the application of capital provide robust benefits to the economy by creating additional value even factoring in the interest payments?

Are we not simply witnessing the misuse and overreach of money, to impossibly high levels, and utilizing credit in a way that is in direct conflict with the laws of stability? Is it not possible to contain dynamic systems with external balancing factors such as limiting capital growth to the growth of value in the economy?

Sorry for all the questions, but it is not plausible to conclude that for 200+ years no one has noticed that the basic calculus of debt based currency is an impossibility. A more logical conclusion would be to take the position that such systems exhibit instabilities, and must have close regulation and tightly managed rule based oversight to insure longevity, which we clearly do not have.

In the end, the conclusion may well be the same, as an analogy, a nuclear reaction is basically unstable, but can be controlled by professionals with a great deal of effort and precision. If a group or organization becomes  unwilling or unable to perform this critical oversight, than you can no longer use that technology. The consequences are inevitable and too severe.

 

Perhaps that is where we are.

  • Thu, Jun 03, 2010 - 07:41am

    #7
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    Re: Our “Catch-22” Monetary System…There is No Way Out

[quote=darbikrash] Is it not possible to contain dynamic systems with external balancing factors such as limiting capital growth to the growth of value in the economy?[/quote] The short answer: No, it is not possible, since the fuel in our system is basically confidence and trust levels rather than unambiguously determinable value.

  • Thu, Jun 03, 2010 - 11:42am

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    Re: Our “Catch-22” Monetary System…There is No Way Out

Excellent and well thought out post darbikrash. The problem of course is that it is far easier to quote a static equation of state and shout ‘unsustainable’ than calculate the far more difficult time-dependent flows. For what it’s worth I completely agree that the current problems reflect dynamic instability due to the size of the imbalances rather than any embedded problem with interest-bearing debt.

Looking at the nature of our money system as the source of our problems is the wrong way round IMO. One needs instead to look at containment of animal spirits within whatever financial structure is prevalent. Cart, horse and all that.

  • Thu, Jun 03, 2010 - 01:59pm

    #9
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    Re: Our “Catch-22” Monetary System…There is No Way Out

Our Catch-22 situation is untenable over the long term as Mary Hobart illustated above.  And, there is no natural equilibrium or balance between the money supply and debt. 

As we know from the Crash Course, there will always be more debt than money which means not all the debt can be repaid.  And, the gap between the money supply and debt grows exponentially.

The system inherently contracts as the money taken out through debt repayment (P+I), is greater than the amount of money created (P).  Money is destroyed everyday when we repay the principal on bank loans.  For example, let’s make the numbers easy and say that 10,000 million people bought cars on credit and the average monthly payment is $500 at 5%.

Mos/Payment  $500
Mos/Principal  $475
Mos/Interest  $25

Mos/Payment Total  $5 billion
Mos/Principal Total  $4.75 billion
Mos/Interest Total  $250 million

So, in this example, the $4.75 billion dollar principal payment is destroyed (extinguished) every month and much of the interest is spent back into circulation.  If nothing else happens, the money supply contracts which is why I mentioned that the system inherently contracts.  

To prevent the money supply from contracting (deflating), people and government need to keep borrowing more and more.  Economists and pundits are constantly getting worked up worrying about inflation but the natural force is towards deflation.  And that is where we are now as the amount of new debt needed is exceeding our ability to take on more – there just aren’t enough willing and worthy borrowers.

Let’s look at the news to see this actually occurring:

US money supply plunges at 1930s pace as Obama eyes fresh stimulus

The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.

The M3 figures – which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance – began shrinking last summer. The pace has since quickened.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever.

“It’s frightening,” said Professor Tim Congdon from International Monetary Research. “The plunge in M3 has no precedent since the Great Depression.

They will be looking to get more money into circulation, one way or the other, but as Mary Hobart taught us, it won’t solve the problem as all new money is debt.  Let’s revisit Robert Hemphill’s comments:

“We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.”

Once we understand the “defects” it becomes easy to prescribe the “remedies.”  

Larry

  • Thu, Jun 03, 2010 - 03:04pm

    #10
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    Re: Our “Catch-22” Monetary System…There is No Way Out

darbikrash – I suggest you at least suspend your belief in Austrian economics and just look at the math.  Mary Hobart explained:

“Kind reader, before perusing this little work, you are earnestly requested to lay aside all prejudice and preconceived ideas, and examine the facts and demonstrations herein set forth in the spirit of a truth seeker…The author of this work does not depend upon the legerdemain of words, but relies entirely upon logical reasoning and mathematical demonstrations to discover the errors which have been so long imbedded in our monetary system…If any criticism are to be made on this work, let them be made in the name of science and supported by logical and mathematical demonstration.”

Lets discuss this without buying into any economic denomination.  The Mises, Marx, et al, bibles and belief systems should not be used as a substitute for math, science and logic.  If you are saying Mary’s static equation is irrelevant, please demonstrate the “dynamic” variable and how it changes the outcome?

I think Mary Hobart has already explained the dynamic element when she wrote:

“This formula shows that the contract is impossible, that prt/100 calls for a production of money and cannot be canceled by a production of values. Neither can it be eliminated by a contraction of t, which constantly increases pr/100. This being true of one contract it must be true of any number of contracts with the credit system may contain.”

Larry

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