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    • Mon, Feb 09, 2009 - 05:08am

      #7
      mred

      mred

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      Re: Why do we pay interest?

    Nice job bearing01.

    DrKrbyLuv,

    I have much affinity with your
    sentiments regarding the evils of the current monetary system. I
    accept the use of the term “usury” for interest charges collected
    on money created on demand out of thin air. I also think that the central banking
    scheme is a fraud and an instrument of control that is totally unable
    to accomplish the goals it is supposed to have. We are in agreement
    that one necessary condition to restore some sanity in the system,
    and most importantly, economic freedom is the abolition of the Fed.

    I guess that you make this proposal along the lines of the “Mathematically
    Perfected Economy TM” (gotta love that TM) that you have indicated elsewhere you favor. Here is where we part ways.

    We have just gone through a land boom
    of phenomenal proportions. We have seen only the first part actually:
    residential real estate. The second part is coming: commercial real
    estate. That is the one that will inflict the largest amount of pain.
    A bubble like this can be produced under one condition: virtually
    unlimited expansion of credit; that is, by money created on demand.
    And that was even with the disincentive of interest rates.
    Furthermore, the residential bubble occurred with non-recourse loans,
    which is a synonym with having the promise to repay “backed” by
    the property. You see where I’m going? A proposal for a system with
    money created on demand, interest-free, backed by the property is a
    recipe for an even greater bubble, an even larger distortion of the
    markets and an even larger destruction of productive capital. That is
    what I understand your proposal to be.

    If you are picking things from this
    MPE-thing, then I have to say that this suffers from an even larger
    vice: the MPE author has no idea about how inflation (by whatever
    definition you use: monetary or price) arises. Look at the following
    quote that I suspect you will be familiar with:

    [quote]

    "If all the money is loaned into
    circulation as debt, and the debts are subject to interest, and if we
    cannot borrow more than the value of whatever we are borrowing the
    money for, it is unclear first of all how it is even possible
    to suffer what you define to be "inflation."

    "In other words, if we can’t borrow $50,000 to buy a $35,000
    home or $50 to buy a $20 tire, how can we possibly *ever* suffer
    ‘inflation’?"

    "But I don’t understand then, even if it were possible to
    suffer inflation, that an increase in circulation per goods and
    services would engender increasing prices."

    "In other words, I understand that *if* we somehow *could* be
    subjected to a circulation greater than the value of all the things
    for which we had borrowed the money into circulation, *seemingly*
    that greater circulation which we do not even know can exist might
    only at first provide a capacity to *pay* higher prices; but
    as to why or how it would cause them, there is no connection
    whatsoever, for how does a factory say for instance first detect
    that one day the circulation we do not know can even increase in such
    a way has somehow increased… are you saying that in these
    potentially non-existent circumstances that nonetheless the factory
    simply raises prices one day, to take greater profit from
    ‘inflation’?"

    [/quote]

    And then he goes on to demonstrate further his utter confusion.
    Please tell me that you see how absurd the tenet in the above quote
    is.

    Tampering with the interest rates has brought upon us the
    derivatives casino and ultimately this economic mess. There is
    super-important information entailed in the cost of money. In a sound
    system it would inversely correlate with the savings level.

    Money on demand is a tragedy imposed on us for the benefit of a
    particular group at the expense of everyone else. It destroys one of the main purposes of money: to be a store of value. We certainly don’t need any more of that.

    • Sat, Feb 07, 2009 - 09:35am

      #52
      mred

      mred

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      Re: Fatal Flaw in Logic of the Crash Course?

    [quote=fujisan]

    mred,

    Yes, that’s the point. 

    At Chapter 8, Chris Martenson states (emphasis are mine):

    [quote]

    at a minimum, each year enough new money must be loaned into existence to cover the interest payments on all of the past outstanding debt

    our debt-based money system […] is an exponential system by its very design.

    perpetual expansion is a requirement of modern banking

    [/quote]

    I cannot agree on the above statements.

    [/quote]

    I guess I want to revisit this. This is an important topic that we should not mind beating to death, especially since in other posts above I see some statements claiming logic while they aren’t really a logical sequence of thought.  To re-start this discussion, I want to comment on the three statements from the CC listed by fujisan. 

    1. The first one, I admit, is wrong. The correct version would be something like:  "at a minimum, [in order to keep the money supply constant] each year enough new money must be loaned into existence to cover the principal portion of the repayments of the outstanding debt." The reason is clearly that such is the amount of money that will disappear in a given year. In fact, if the amount of money created corresponded only to the amount of interest due (as in the original statement), then in any circumstance where the (average) interest payments are smaller than the (average) principal payments then one would have instant deflation. By re-defining the first statement, deflation would be impossible. Note something quite important: if such hypothetical equilibrium were attained, all debts could indeed be repaid in full and any number of times, just that they need to be rolled over permanently, in a state of perpetual debt. 

    2. The second statement is correct in the practical sense because the perfect equilibrium between money created and destroyed can not be attained, lest the smallest fluctuation would send the economy into deflation. Thus the central bank gives itself a cushion, making going into debt attractive by enough people so as to avoid having deflation even under inevitable fluctuations in credit demand. This I accept is "by design", and in fact it is, as it was one of Friedman’s tenets that a small inflation would be ok… (for him of course), thus defining the system as exponential. This is simply a recognition that while a zero-growth debt-based money is theoretically possible, it is practially unfeasible.

    3. The third is also correct in the practical sense, as it describes the only reasonable policy of the central bank can apply to protect itself against deflation: continual inflation. This point is really identical to point 2.

    So if the ideal target is a constant money supply, why devise a system so stupid that is prone to unpredictable fluctuations, bubbles, busts, and perpetual inflation? Because the system is designed to make every individual and every business pay a royalty to the banking sector. The royalty is the interest that the banker collects for letting people use (license?) their bank notes for which they have an issuing monopoly. I mean, they may actually view the notes as theirs, thus permanently collect interest on all of them. The power to issue money is unlimited power. In a system of historical or constitutional money, the bank would simply be a warehouse, charging more modest intermediation and storage charges, but with the present system, they collect a fee for every monetary unit out there. You have to take off your hat at the unbelievably effective instrument of control that this system represents. And the sheeple don’t even notice…

    I also take issue with the comments above that what is the problem is the interest. There is a fundamental and obvious difference between charging interest for counterfeited money versus charging interest for putting earned sound money at risk. The interest payment is a charge indistinguishable from any other charge or profit by any other business activity. Something that people ignore is also that the nature of money has deep cultural implications. For one, sound money that keeps its value is more correlated with saving, while the easy, cheap money given by debt-money is particularly compatible with debt and excess, especially by the insiders that know how to game the system. The issue of compound interest is a red herring under a sound money system, it is because the profit rates (which are the same thing) eventually just enter diminishing returns. This was recognized long ago by Adam Smith:

    "[…] But the rate of profit does not, like rent and wages, rise with
    the prosperity, and fall with the declension, of a society. On the
    contrary, iti is naturally low in rich, and high in poor countries, and
    it is always the highest in the countries which are going fastest to
    ruin." — Smith, in Wealth of Nations

    • Thu, Feb 05, 2009 - 07:52am

      #4
      mred

      mred

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      Re: Is money supply inflation? Perhaps not

    noodlydoo,

     

    You should also get a taste of the
    opposing view. A sample is here:
    Money and Inflation: The Tendency to Deny Reality

    The article closes with the reasonable
    observation:

    “Inflation, as this term was always
    used everywhere and especially in this country, means increasing the
    quantity of money and bank notes in circulation and the quantity of
    bank deposits subject to check. But people today use the term
    "inflation" to refer to the phenomenon that is an
    inevitable consequence of inflation, that is the tendency of all
    prices and wage rates to rise. The result of this deplorable
    confusion is that there is no term left to signify the cause of this
    rise in prices and wages. There is no longer any word available to
    signify the phenomenon that has been, up to now, called inflation. … 
    As you cannot talk about something that has no name, you cannot fight
    it. Those who pretend to fight inflation are in fact only fighting
    what is the inevitable consequence of inflation, rising prices. Their
    ventures are doomed to failure because they do not attack the root of
    the evil. They try to keep prices low while firmly committed to a
    policy of increasing the quantity of money that must necessarily make
    them soar. As long as this terminological confusion is not entirely
    wiped out, there cannot be any question of stopping inflation.”

    –Ludwig Von Mises

    The “Quantity Theory of Money”, as
    the tiny equation you presented is called, is the macroeconomics equivalent of the
    drunkard looking for a lost coin under the lamp post because there is
    light there, and not looking where he actually lost his coin. Why?
    Think of the inherent complexity of an economic system, the diversity
    of economic sectors, players… think about how when money is
    injected into the economy it does not appear simultaneously
    everywhere at the same time in a neutral way, but first in some
    sector, then going from asset to asset, from first users of the new
    money to the last users… In this ocean of complexity ask yourself
    how reasonable it is to try to capture all that with the equation you
    showed. Ponder about it and you can only be overwhelmed at the
    absurdity of the thing. Yet, that is the state of modern
    macroeconomics: total bankruptcy. Under the enticement of precision
    given by the use of sometimes quite sophisticated mathematical
    models, lurks an unbelievable amount of "inaccuracy", to put it mildly.

    Consider also that simplistic views
    like the QTM are the main instruments of a discipline that is the
    main culprit of the economic disaster that is just beginning. Yet,
    somehow, by continuing to use "tools" like the QTM, implicitly everyone is continuing to lend credibility to
    this kind of thinking which has: been unable to predict this crisis;
    been unable to explain the 2-decade Japanese recession even in light of all the
    Monetarist and Keynesian arsenal that was deployed there; provided the most ridiculous rationalizations to try to justify the
    “benefits” for “market efficiency” given by the derivatives
    monster; been unable to explain how a multi-decade American trade deficit can be maintained
    in the face of dollar devaluations and whatever other tricks they
    have … and the list goes on.

    Modern macroeconomics is quite
    different and opposed from the classical economics that resulted from
    the intellectual tradition of the Enlightenment. Modern “theory”
    would truly offend the principles of guys like Adam Smith, or Thomas
    Jefferson. The thinking of these men is not obsolete, and I would
    argue that is becoming more relevant by the minute.

    Despite what someone might tell you,
    Economics is not a science. Its ideological content is enormous and
    for the good observer, obvious. When you go and try to figure these
    things out on your own, ask yourself what interests are being
    promoted by a particular economic position or another; ask yourself
    whether some view promotes centralization and statism or
    decentralization and liberty. These questions are fundamental. Today,
    people are so massively propagandized that they take for granted
    whatever is fed to them through the TV or the words of some person
    deemed an “expert”. Finally ask yourself why the particular brand
    of macroeconomics that I’m saying is bankrupt has taken over major
    universities, think tanks and virtually all governments. There are reasons for that, and they
    have nothing to do with the “objectivity” or demonstrated power of that discipline.

    Since I’m trying to give you a taste of
    the opposite view, I’ll add a couple more articles from the same
    source. If you are the type of person that only accepts arguments “on
    authority”, you can try this by F. Hayek: The Pretence of Knowledge

    And finally a more extended argument
    from the “classicists” against the “Keynesians” in The Misesian Case Against Keynes (I’m sorry I’m giving you stuff from only one source, but this is actually a great one-stop shopping place for these views)

    Am I presenting you "science" in contrast with … whatever modern macroeconomics is? No, but at least you should be aware of how differing ideologies present very different views about the same situation.

    Going back to the beginning: the idea of "price inflation" deflects the attention from the monetary policies of the central bank, and sometimes redirects the blame to "greedy businessmen", speculators or whomever. The idea of inflation as an increse of the money supply is a clearer concept, because it decouples price fluctuations arising from supply and demand from monetary policy.  Finally, I hope that you end up discovering how under an inflationary system (which favors the banking sector only) purchasing power is being siphoned from your earnings and savings even when the "price level" remains constant. When you get to understand that last statement you’ll see the kind of sham that the whole system is.

    Good luck in your explorations.

    • Wed, Feb 04, 2009 - 03:45pm

      #37
      mred

      mred

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      Re: Fatal Flaw in Logic of the Crash Course?

    [quote=reubenmp3]

    To conclude I would say that in a perfect system (on paper) there is no mathematical reason for the money supply to expand.  In the real world, things are not so neat, and while it may not be a mathematical requirement, it is still a requirement of the system that the money supply expand for the system to continue to operate smoothly.

    [/quote]

    Yes, Reuben, that is what I said.

    CM had offered his response already, where he emphasized correctly that in practice, in order to avoid a chain of defaults, and because people don’t have "perfect access" to the pool of money, I may add, the money supply must be expanded. The money supply is expanded by inducing the population and corporations to acquire debts at a rate sufficient to offset the destruction of money. People don’t take loans to contribute to a greater good of facilitating others to make their payments, but are induced  collectively to go in debt by the policies of the central bank. This is what has been designed. In practice the central banker can’t attain the elusive equilibrium between creation and destruction of money that I referred to in my last post. The statements in the CC are correct if interpreted in the "practical" sense. They are also incorrect if interpreted in the fundamental, idealized sense.

    The condition for a "mathematical requirement" would be that at any given moment, the payments due on all debts be greater than all money in the total pool.  This is not easy to achieve.

    I don’t think that there is any disagreement anymore. Everyone agrees, as far as I can tell, that in practice one must continually grow, but in an idealized model, one can show that at a fundamental level, growth could indeed be zero if everything is "just right".

    • Wed, Feb 04, 2009 - 07:22am

      #34
      mred

      mred

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      Re: Fatal Flaw in Logic of the Crash Course?

    If the point in contention is that there is no mathematical requirement
    for expansion of the money supply under a debt-based system, then…
    fujisan is totally right.  I stand corrected, as I held that belief for
    some reason… sloppiness probably. But on a closer look, it is a false
    belief. Thank you fujisan. By "mathematical necessity" what is meant is
    a continuation of the monetary system without defaults, obviously. One
    can contrive scenarios in which a mathematical need for expansion is a
    necessity, but they are even less realistic than the example provided.
    And only one example is needed anyway to prove that point. Of course this exercise requires perfect availability of circulating funds for whomever needs to make a bank payment, but I don’t think this weakens this super-idealized example.

    As fujisan agrees, things are more complex in practice: the perfect
    balance between creation and destruction of money is unattainable.
    Furthermore, the greatest fear of the central banker is deflation. The
    CB’s stated objective is stability (yeah right) but a scenario in which
    the money supply is constant would be cutting it really close to a
    deflationary situation (exactly at the transition point), so the CB
    gives itself a cushion in the form of inflation. That is then one
    important reason for the inflation: the nervousness of the CB fearing
    to fall into the deflation hole. If they were "perfect" then the CB
    could in principle arrive at an interest rate structure that could keep
    the money supply constant, which would do away with the main excuse
    they have given to get rid of gold: its lack of "elasticity". But that
    excuse was bogus for other reasons even. In light of the above, the
    central banking model looks even more perverse than what I thought.

    • Tue, Feb 03, 2009 - 07:14am

      #20
      mred

      mred

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      Re: Fatal Flaw in Logic of the Crash Course?

    [quote=DrKrbyLuv]Fractional lending doesn’t cause the problem and no matter what reserve percentage you use, it can’t solve the problem. And, currency specie doesn’t matter, you may have gold backed, fiat, or even coconuts as dollars – the problem will remain. 
    [/quote]

    Would you mind expanding on this? The nature of money is all-important. What particular problem are you referring to?

    • Tue, Feb 03, 2009 - 07:10am

      #19
      mred

      mred

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      Re: Fatal Flaw in Logic of the Crash Course?

    Scepticus, mate, it just dawned on me that you are writing from the UK.

    The argument goes unchanged. Note that the process of (high-powered) money creation is (nominally) the same: governments sell their debt in public bond auctions; whatever they can’t sell, the central bank picks up the tab with brand new money. The inflationary requirement of the debt-based system is the same. I don’t quite understand your comment about direct debt monetization, that is after all another example of debt-based money. What did I miss? But I see where you are coming from now; and the following is my take on it. You make the observation that in the British case, the government would be selling a debt to itself and therefore, in principle it could write it off, so it is really no big deal. Is that a fair representation of what you think?

    Assuming that it is, what must be considered is not only the government-central bank tandem, but also the rest of the players. Let me make a roundabout argument:

    In a different time, competing banks would issue their own gold certificates to depositors. As competing entities, they could not afford to issue more certificates than the amount of gold in reserve, lest when the certificates ended up in competing banks, these would in turn ask for certificate redemption and deplete the fraudulent bank of its gold. However, the temptation for all banks to over-issue certificates was simply too big. The solution: form a cartel that would issue a common certificate for all competing banks, and furthermore, have a centralized provider of reserves in case that any bank fell short. The end result: competition was minimized and all banks could then inflate in unison. Since their profits are the interests, their previous profits would now be multiplied by the reserve ratio. I’m sure you knew this, but I need this to be kept in mind.

    For the system to work, the minimal reserves of the banks must be sound. The reserves are composed mainly of deposits by the public and the high-powered money in the commercial banks’ accounts at the central bank. This is the main connection of the CB-government tandem with the outside. The CB’s role is to support (if you want, subsidize) the local banking cartel. When the CB purchases government securities, the value of those securities ends up increasing the cartel’s reserves. It is for this reason that even though at the level of the government/CB one could say that the government owes money to itself and thus may ignore the obligation, the fact is that such act would decapitalize the commercial banks. The obligation of the government is thus ultimately to the commercial banks under this scheme.

    The depths of the present crisis are manifested in the desperate measures to save the commercial banks even at the cost of loading the CBs with crap assets. They know what they are protecting: the biggest cash cow is the commercial banking sector. That is the first line of defense, even if the CB is weakened to the possible point of becoming insolvent itself (which they are already).

    The elites in other countries may not be as shameless as the American ones, in terms of openly having a CB that directly stands to benefit when the government’s deficit spending increases. That the regional banks’ stocks can’t be traded, or that the profit rate is capped at 6% is a smokescreen. It is the whole concept of central banking that is tailored to serve the interests of a particular sector. The only case in which this would not be true would be the case in which the government owned both the central bank and all the banks that collect demand deposits from the public. There have been successful instances of these that I know about. In any other scheme,  whether public or private, the CB is an instrument of control and a means to subsidize a local banking cartel. As a side comment, the Bank of Japan is not fully public, about 40% of its shares are privately owned and also privately traded. The Bank of England may very well be fully government owned, but the interests/families that once owned it have frequently staffed the board of governors since its "nationalization." In conclusion, other elites know better about how to guard against negative perceptions than the American ones. But if you understand the system as a whole, you’ll see that it is a scam that was not set up to serve the public, but rather to be served by it.

     

     

     

    • Mon, Feb 02, 2009 - 08:35pm

      #11
      mred

      mred

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      Re: Fatal Flaw in Logic of the Crash Course?

    The author’s argument hinges on the statement that when a bank pays a salary (or whatever cost of operations) it "spends the money into existence". This is patently false and absurd. A bank will not "spend money into existence" anymore than I can when I buy a piece of chewing gum. Whenever a loan payment is made to a bank, the principal part of the payment disappears, while the interest part continues to be part of the circulating money stock, and the bank spends it like anyone else. As long as a dollar is not repaid as a repayment of principal, it simply continues to circulate and accrue interest. Since all money stock is accruing interest, it must continue to grow to avoid a chain of defaults. Since no money is created unless as debt, then there you have your requirement of perpetual growth of total debt. Show me where money is created not as debt and I’ll retract my statements. But that is going to be hard as 100% debt-based money is how the system has been designed.

    The same argument applies at the level of repayments to the Fed. 

    One could have a field day demolishing the article, like with the stuff about the Fed being partly a government agency. That is a front, and a card that they play when it is convenient, like in this case. But when, say, Bloomberg put the FOIA request to find out about TARP recipients, then the Fed’s defense was simply: "we don’t need to comply, we are not a government agency." Just know this: The Fed is private in what matters: the collection of dividends by stockholders due to its day-to-day operations.

    As they say: "it is difficult to understand something when one’s salary depends on not understanding it"

    • Sun, Feb 01, 2009 - 08:01am

      #5
      mred

      mred

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      Re: Steve Keen’s model of a credit economy. In his theory …

    [quote=scepticus]The ultimate outcome of this is that the credit money supply is being replaced slowly by debt free fiat money. Even if treasuries are created as debt, when the lender and the borrower are the same entity (the government, and a nationalised/propped up bank) then no debt exists.[/quote]

    I wish that were the case, but it isn’t. There is no debt-free fiat money being created. Remember, the government does not create the money, it collects it by selling its debt. Suppose that indeed there was the nationalization of some bank in the most favorable terms for the government (this has not happened, as the government is simply paying top-dollar for trash or positions in insolvent, totally unprofitable entities). Any money injected to such bank in the form of high-powered money ("seed money") would still have been created by the Fed as monetized debt. The debt is not owed by the government to itself, but by the government to the Fed, or whatever bond holder. Let me emphasize: the absurd reality continues unabated: The government "borrows" money created out of thin air by the Fed, which is not a federal agency. Remember, the government only creates debt instruments that are then monetized by the so called Federal Reserve. All of this is business as usual. Nothing has changed.

    This situation will continue until the following happens: a) the abolition of the Federal Reserve, b) the writing-off of any "debt" still owed to it by the government and c) the repossession of any assets transferred to the Fed as collateral for any debts owed (that is, the repossession of the American gold, or whatever is left after the Fed’s illegal sales.)

    [quote]Even if the government/bank lends their new reserves into existence, the interest paid on it by borrowers goes to the government not private individuals and can thus return to the public via tax cuts of public spending. Alternatively they can just give it away as a welfare payment for example.[/quote]

    In the operations of this hypothetical public commercial bank, the money borrowed by the public or corporations would be created in the usual way: as debt and out of thin air. So there is no debt-free money by this avenue either. That any profits could go back into the government coffers is irrelevant with respect to the nature of money.

    [quote]Why can the government not simply replace the credit money supply on a 1 for 1 basis with debt free money, over a period of time?
    [/quote]

    That is the 260 billion dollar question. It is unsafe to assume that the government acts in the best interests of the population. By now it ought to be obvious to anyone that isn’t asleep that the government acts in the best interests of the bankers and of a bunch of corporate insiders. It is not surprising then that the control of the monetary system, virtually the ultimate source of power in a society, is kept in private hands. The debt-based fiat system is designed to benefit the bankers and to accrue more power to them irrespective of the consequences. As for the consequences, we are just starting to experience them…

    • Sat, Jan 31, 2009 - 10:40am

      #2
      mred

      mred

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      Re: Steve Keen’s model of a credit economy. In his theory …

    Thanks Gibber for the post. Just a
    comment: The distinction between credit-based currency and fiat
    currency is artificial. Normally people talk about fiat currencies
    with the understanding that a “fiat” currency has purchasing
    power “by definition” (or more accurately, by coercion), not
    because of any intrinsic value (hence the “fiat” name). One can
    further qualify a fiat currency as “debt-based” when one means
    the particularly destructive variety of fiat money that uses a
    promise to repay as an “underlying value”. However, this is still
    obviously fiat, since a promise to repay does not endow the currency
    with intrinsic value if the repayment is made with even more fiat
    money, that is, with even more promises to repay. Only payment with
    something of intrinsic value could possibly liquidate a debt. To
    monetize “the promise to repay with something of value” was a
    practice applied successfully for centuries under the name of a bill
    of exchange. The bill of exchange was one of the assets that was
    allowed to exist in the Fed’s balance sheet according to the original
    Federal Reserve Act of 1913.

    The other objection I have to this
    article is related with the claim that the money created by the Fed
    (called “seed money” there) is not debt-based; but it clearly is.
    Who is the debtor? The Federal Government, who promises to repay,
    with interest, the amount of money created by the Fed out of thin
    air. The government’s promise to repay is called a “Treasury Bill”
    or a “Treasury Bond”, as everyone knows. So, modern money is fiat
    and also debt-based (the worst kind). To add insult to injury, the
    government itself must repay in the type of money that the Fed (a
    private cartel) has the monopoly to issue. As it is said: “The hand
    that lends is above the hand that borrows.”

    I thought that the other points made in
    the article are very valid. It was interesting how the author pointed
    out that modern macro-economists can’t even get the order of the
    events right. It is astonishing how bankrupt in every sense this
    dismal discipline is, and yet how people continue to lend credibility
    to the same intelligentsia that has provided intellectual cover to
    the scam embodied in the banking system. Even “graduates” of the
    Crash Course continue to use frequently the same jargon and concepts
    of the absurd 2-parameter “Quantity Theory of Money”, the
    obfuscated definition of inflation and other terms. Some even
    question whether commercial banks create money when they make a loan
    or even if perpetual growth is a requirement of the system… we need
    a lot more work in this area if we want people to be sufficiently
    aware of what is going on to really react. Everything follows from the structure of the monetary system: the balance of power in a society, the existence or not of economic freedom, and as a result, even the existence of political freedom.

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