Feb 11

Watch this youtube series when you have an hour to kill- it’s extremely thought-provoking:

I knew we had long since departed from the gold standard but I had no idea of the ratios by which banks are legally able to fabricate and disburse new money in the form of debt. Apparently this is authorized for banks under a rule called the fractional reserve. As with any opinionated piece, take this with a grain of salt but there are some interesting thoughts:

The system in its current form is a treadmill that by nature guarantees the slowest runners to fall off no matter how fast they run. With a finite money supply of X required to pay X+Interest – it’s not possible for everyone to make it. Worse still, the treadmill once in motion must continuously accelerate in order to function. Common sense tells you that you can’t speed up a treadmill indefinitely and hope to stay on it.

Nowhere in any school system or mass media channel are these mechanics ever explained, or even acknowledged for that matter. We outlaw ponzi schemes and yet condone a financial system which is functionally equivalent? Given the inevitability of the outcome, the universal impact to every citizen, the magnitude of the impending damage and the potential curability of the problem (these are things we have the ability to change today- not like trying to stop an asteroid or reverse the greenhouse effect), why are lesser problems that are beyond our control getting all the attention? The silence around the acknowledgment of this issue and the search for a viable solution is eerie.

The argument that banks need to be for-profit institutions charging their customers interest in order to survive is usually backed by the idea that repayment failures cause losses and need to be offset somehow. If you dissect the process though, the interest rates and penalties are what cause most of the foreclosures and forfeitures in the first place. How’s that for a super-sized chicken/egg sandwich?

For all the sound and fury around the importance of our government establishing a balanced budget, it’s a meaningless activity until the currency behind it is stabilized. It’s like negotiating a salary while leaving the currency type as a variable – you’d probably be stoked about securing a $1MM figure until you realize the currency is in Lire or Yen.

It’s annoying to find fault and propose no solution. The proposal of the video is to convert all banking institutions to become non-profit entities that distribute dividends to their customers, abolishing what is effectively usury. I don’t know anything about the entity that funded the creation of the video and I haven’t given more than a few hours of thought to the implications of this proposal but I believe they’re essentially calling for banks to become credit unions. I can’t think for the life of me what kind of personal gain the author of the video stands to make by proposing this- which means I’m inclined to believe he/she is suggesting it for the right reason.

Bottomline, this is a thought provoking video series. There are no doubt entities that stand to make huge profit by keeping the broken system exactly the way it works now. Learning that the Federal Reserve is neither a government entity nor does it have any reserves was a shocking discovery – maybe others knew this already but that is a mind-blowing revelation to me. So my questions in thinking about this stuff at this point are:

  • What is the agenda behind this video? What are the downsides of the ideas proposed here that I’m missing (other than the obvious short term inability for banks and government to fabricate money when they need it)?
  • How can I become a bank (just kidding)?
  • Who are beneficiaries behind the Federal Reserve and why isn’t this entity named something more indicative of it’s private, for-profit status?
  • Is it truly feasible that the beneficiaries of the Federal Reserve would ever allow it to be dismantled and replaced by “credit union only” type system?
  • Wouldn’t achieving a more even distribution of wealth have positive effects on the economy for the same reasons that breaking up power monopolies fosters health in the form increased competition, activity and exchange?
  • If money were only allowed be conjured into existence when it was used to create tangible and immediately-usable infrastructure that facilitated more efficiency and growth in the economy, why would we not pass such a rule (the modern day gold standard where the gold equivalent is infrastructure of provable value)?
  • What is the most fair and plausible way to correct this broken system at this point and make it sustainable so everyone lands on their feet?
  • How many watch lists do you get added to when you suggest ideas like these? I guess I’ll find out…
  • Why does Ron Paul appear to be the only candidate addressing this issue?
  • If there’s anyone who is knowledgeable on this subject who wants to get together and talk over coffee- I’m interested in wading through the issues and understanding this better.

    7 Responses to “An eye-opener on debt and the money creation process”

    1. Hey Sean, good video series there.
      The one way I’ve recently looked into “being the bank” is by lending via social lending sites like Prosper or Zopa. Technically you could lend an amount and thereby lend more out including the percentage you’ll get from that first loan as it is pretty definite that you’ll get your money and the extra percentage back.
      Not something I’m jumping into by any means but when I first checked out Prosper mid last year it did cross my mind.

    2. Tim says:

      Another good one to watch is “America: Freedom to Fascism”


    3. Maxim Porges says:

      Interesting and insightful as always. I haven’t watched the video, but I enjoyed your comments.

      Having (a) been the grateful recipient of lessons from my parents in the ways of credit when I started earning my own keep, and (b) witnessed a number of people I care for suffer the agony of crushing debt due to a lack of receiving the same, I can’t understand why they don’t teach this in home economics in high school.

      My parents basically didn’t tell me how credit cards worked when I was 16, and I was under the impression I had to pay them off every month. By the time I was old enough to get my own credit card and read the terms, the regular payoff habits and spending discipline were already ingrained. I’ve been pretty much debt-free ever since. Not sure this would work these days with the unlimited amount of information available to teens today via the ‘net, but I’m sure an early education would serve them equally well.

      Just my 2.14451 Yen. :)

    4. Sam says:

      Hi Sean,

      This is the third such thing I’ve encountered in as many days. First I watched Zeitgeist. Then a friend send me an article on how our federal government is really a corporation. Now this… Thanks for the takeaways; I’ll watch when I have the time.

      Certainly, a grain of salt is advised, but there seems to be strong possibility of nefarious goings-on. The thing is… What can I/we do?

      Google these words (no quotes): Constitution canceled– the US is a corporation

    5. Adam Green says:

      I have admit I’ve not had a chance to see all the vids, only the first, so I cant be fully informed in my post – however, I get the slant of the first video, and whilst it does explain a little known concept of finance it misses the point. I have for several years been a financial regulator in the UK. I have regulated both banks and life insurance firms, with the principle duty to protect the public. There is a lot to be said about regulation and finance, but that’s another very big story. In short money is interesting stuff, very interesting, and very misunderstood. One of the cores of finance is the creation of money from certain activities, one of which is lending. The idea that this is some great con is misplaced. It is a function of physics, maths and people. Money is debt and debt is money. Without this basic function we would all have no money, no risk capital and be pretty miserable. To see what happens when bankers and other financiers cant “magic” money out of thin air to support risk assessed debt, there are plenty of countries in the world which lack the social and technical infrastructure to support banking, and thus have no credit. These are poor miserable places. There is a lot wrong in the financial systems, and the imbalance of “capital owners” and “worker” long ago passed a point you could call obscene. However, there are many other reasons for this, and going to a gold standard (e.g.) is not going to help (days can be spent discussing the fundamental concept of wealth and inter-relations of foreign exchange). As a side point the UK sold all its gold a few years ago, so has the UK no wealth? (we did hash the market timing and loose several billion, but that’s markets for you)

      Part of your post mentions the federal reserve system. Each country has their own ‘core money system’, each with its own strengths and weaknesses, so I’d be on dangerous ground prodding the US system too much, but it is quite whacky :) there are some very concerning conflicts of interest there, and many commentators say its not fit for modern finance (you see a lot of that in US finance… and well, everywhere else in the world)

      As a sort of summary – money is complex stuff. Credit is pretty vital to society – it is the fuel of risk and development. Good use of credit makes wealth. Bad use of credit is highly damaging to the debtor. Many people and companies are poor financial decision takers and make bad use of credit. Banks and governments are not best placed to assess the needs of individuals, as limiting credit overall reduces opportunity. Banks and governments need to do more to educate people about credit, and how to use it properly.

      Its is not a giant conspiracy, but there are quite a few people who think it is. I’ve argued with people holding these beliefs several times and their views fall apart after about 30 minutes looking at the logic, and their own verifiable experiences of money, which they had not stopped to consider. I think it should get taught in schools, but the UK has tried with basic concepts of personal finance and 1) most people don’t want to know 2) the lack of tangibility is real impediment. We need to try harder.

    6. The previous commenter’s have taken most of the wind from my sails. Chuck already mentioned prosper.com and our friend Adam from the UK hit every other point I would care to make. I’m no expert by any means but I’m VERY interested in finance so I follow it. I would redirect everyone’s attention to the last paragraph of Adam’s comment, and especially focus on answering the problem at the end of it. In almost every case, in every post on every blog an answer, or THE answer is or can be found in education.

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