The Blessing or Curse of Modern Society?

Most of us think of money as cash, because that is what we see and use every day. That is seriously wrong. Only 5% of money in circulation is cash, and that is issued by the government through the central banks. Most money in existence is created by Banks, not the Central Bank. And it is created by Debt. You must understand this to understand the mess we are in.

Banks create money from a borrowers promise to pay back a loan with interest. But banks can lend more than they have on deposit, and the important point is how much more can they lend? If this is not regulated, then the system seems out of controlwhich would be a good description of the mess we are in now. (See Video on Money and Debt) Banks rely on the honesty and ability of the borrower, and the value of the asset the borrower is acquiring.

The strength of the bank depends on the reliability of its repayments by borrowers. These repayments, plus deposits by savers, allow the bank to lend more. But they lend a lot more than the actual sum in the bank vault. They lend against future earnings, at many times what they actually have on hand. It used to be 9:1, but it has moved up to much more than that. Confidence in the future is the key. This allows banks to invent money when they give you a loan.

I think you can see the weakness in this system right away. Banks have lobbied against this restriction of ratio, and that allows them to behave in a wild and crazy way. Feed into this the modern management preoccupation with short term profit and a disregard for long-term risk. A traditional, experienced banker would never behave this way, and would know his clients well.

In effect, the banks were being allowed, more and more, to regulate themselves. It is amazing to imagine that any profit- making institution in this era of short-term gain, is going to regulate itself. This is especially dangerous when they have a major role to play in regulating human greed and irrationality, and a total disregard for the future. It was a formula for disaster. For years, the US government distrusted banks. Now it knows why.

An important element in all this is the idea of growth. We expect the economy to grow, and for everyone to become better off. (Why?) This requires an increasing amount of debt, and this increase is geometric, or exponential. Doesnt this seem like an impossible situation? Thats because it is. Exponential growth is suicidal.

Remember, when we take out loans, we create money. Credit cards do the same thing, and so the growth is explosive. Is there any control? Banks do not lend money; they create it. If there was no debt, presumably there would be no money. Banks create only the principal, where does the interest come from? Total interest far exceeds the principal. Plus, governments run on debt too.