Science Forums 2

[Eclipse Now]

This argument about money creation is not talking about bad policy, but bad design. They are not talking about bad use of the tools, but that the very tools themselves are broken. As the Financial Sense University says,

A debt-based monetary system has a lifespan-limiting Achilles heel: as debt is created through loan origination, an obligation above and beyond this sum is also created in the form of interest. As a result, there can never be enough money to repay principal and pay interest unless debt is continually expanded. Debt-based monetary systems do not work in reverse, nor can they stand still without a liquidity buffer in the form of savings or a current account surplus.

FSU Editorial: "How Debt Money Goes Broke" by Steven Lachance 12/12/2005

Or as Scientist (not economist) Chris Martenson states:

Consider these data:

* Money supply growth has gone parabolic. It took us from 1620 until 1974 to create the first $1 trillion of US money stock. Every road, factory, bridge, school, factory, and house built, every unit of economic transaction that ever took place over those first 350 years required the creation of $1 trillion in money stock. But it only took 10 months [edit: 2006 data] to create the most recent $1 trillion and I don't recall seeing an entire continent's worth of factories, schools or bridges built during that time. [Edit: that figure is now an astonishing 4.5 months as of March 2008]
* Household debt has doubled in only 6 years. Think about that for a minute.
* Total credit market debt (that's everything) was about $5 trillion in 1975, has increased by $5 trillion in just 2 years, and now stands at over $51 trillion.
* The wealth gap between the super-wealthy and everybody else is widening at a furious pace.

What's going on here? Could it be that the US economy is so robust that it requires monetary & credit growth to double every 6-7 years? Are US households expecting a huge surge in wages to be able to pay off all that debt? Are wealthy people really that much more productive than the rest of us? If not, then what's going on?

The key to understanding this situation was snuck in a few paragraphs ago; every single dollar in circulation is loaned into existence by a bank, with interest.

That little statement contains the entire mystery. If all money in circulation is loaned into existence it means that if every loan were paid back, all our money would disappear. As improbable as that may sound to you, it is precisely correct although some of you are going to consider this proof that I could have saved a lot in tuition costs if I had simply drunk all that beer at home.

But with a little investigation you would readily discover that literally every single dollar in every single bank account can be traced back to a bank loan somewhere. For one person to have money in a bank account requires someone else to owe a similar sized debt to a bank somewhere else.

But if all money is loaned into existence, with interest, how does the interest get paid? Where does the money for that come from?

If you guessed "from additional loans" you are a winner! Said another way, for interest to be paid, the money supply must expand. Which means that next year there's going to be more money in circulation requiring a larger set of loans to pay off a larger set of interest charges and so on, etc., etc., etc. With every passing year the money supply must expand by an amount at least equal to the interest charges due on all the past money that was borrowed (into existence) or else severe stress will show up within our banking system. In other words, our monetary system is a textbook example of a compounding (or exponential) function.

Yeast in a vat of sugar water, lemming populations, and algal blooms are natural examples of exponential functions. Plotted on graph paper they start out slowly, begin to rise more quickly and then, suddenly, the line on the paper goes almost straight up threatening to shoot off the paper and ruin your new desk surface. Fortunately, before this happens, the line always reverses somewhat violently back to the downside. Unfortunately this means that our monetary system has no natural analog upon which we can model a happy ending.

The End of Money | Chris Martenson