Tuesday, January 03, 2012

Economics 101 - The Money Problem

There's a problem with money, and no, it's not the root of all evil.

Money is called a fiat currency, because it's used in place of something of value.

In the old days, people traded goods. Sugar for meat, or horseshoes for people shoes. You made something, and you traded away your surplus for other goods you wanted.

Well, if you grew corn, and the cobbler didn't like corn, you were out of luck...you couldn't get shoes. So, you'd have to trade corn with someone who had what the cobbler wanted, so you could trade that with the cobbler instead.

So, we switched to gold and silver, since everyone agreed that they had value. But gold gets heavy, so after awhile, we switched to pieces of paper that represent the gold or silver. 1 piece of paper can mean 1 cob of corn, or one shoe, or whatever. This is the purpose of money...to make trading easier than trading the things themselves.

But in our modern world, the money has been taken control of in two fundamentally corrupt ways. Compound interest-bearing debt, and the creation of money from nothing. Let me explain:

Let's imagine that we're going to create a new society. Let's make our society 10 people, and each person needs 10 pieces of paper to swap with other people so we can do trade.

But in this society, we can't just make the paper. We're forced to BORROW the paper from a central bank. Where do they get it? The same place anyone would. They print it FROM THIN AIR. Now, we have to go into debt to get that paper, and pay the debt back, with interest.

So we borrow $100 for our society, at 10% interest, and we'll pay it back next year. But when it comes time to pay it back, we owe the bank $110! That's more money than exists in our entire society! We pay back the original $100, but still owe $10 to the bank. AND our society has no money again! So we borrow $110 this time, and give $10 to the bank (for what we owed them) and keep the $100 for our society to use this year.

At the end of the second year, we owe the bank the original $110 (remember, we gave them back $10 instantly and kept $100 for our society), plus $11 in interest for the loan. So we have even more debt! Now we owe the bank $121 for the $100 in our society!

But of course, we only have $100, so we need to borrow the extra $21, just to pay them back. And we need $100 again for this year. It's not hard to see how the Central Bank can come to own and rule a country very quickly using this system.

So, there are two equally important, corrupted aspects of money supply:

Eliminate Interest-Incurring Currency
Earning interest for pieces of paper that say IOU is just plain WRONG. It's the ultimate business, and totally unethical. Government needs to take control of the issuance of money, and make it free for us to use (i.e. there's no cost associated with creating it). So money is a public service provided by the government, and no profit is made from the creation of money. No interest-bearing money creation means no ponzi scheme, and no built-in collapse.

Responsible Control of the Supply of Currency
The amount of money in system effects how well the system can do business. Too much money, and prices go up, and bubbles form. Too little money, and recession kicks in, because nobody can get the money (IOUs) they need to engage in trade. If it gets really bad, they start to barter, but that's the whole reason money was created in the first place...to make barter unnecessary. So the amount of money is very important to make sure the economy runs smoothly. Central Banks create boom/bust cycles by controlling the amount of money in the system.

Many people believe in the gold standard because they believe nobody can be trusted with creating money from nothing. It's too great a power. If you can print money from thin air, then you can do that to buy or control anything. By tying money to gold, you have some 'objective' way of controlling how much money is created. This is a separate debate.

One last thing about money in the US:

The US dollar is the "Reserve Currency". Basically this means that the US forced the world to use its money to buy and sell oil. This means the Federal Reserve can print lots of money to fight wars, pacify its citizens, and buy anything it wants, without making the money worthless. Countries are forced to buy US dollars to buy oil, or other goods. This creates additional demand, and keeps the US dollar stronger than it would otherwise be.

Want to learn more about Money and Economics? 

The Money Fix - A Documentary on Monetary Reform.

Chris Martenson's Economic Crash Course.


Ludwig said...
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viet.nhatlam96 said...

indeed u are right. fuck them!!!