Friends, a recent article in The Guardian exposed the world to something that many of us had known for ages: money is just an IOU, it has no relationship with actual value of any kind.
It’s just a social convention.
That in itself is not a problem, not really.
But the added revelation (that many of us also already knew) that it’s not the government who decides how much money is in circulation, it’s actually the banks that do that, creates potential for massive abuses.
Abuses that I’m pretty sure are already happening, and have been for a while.
Here’s how it works.
Banks are the ones who ‘manufacture’ money.
Not the paper, but the actual theoretical construct that underlies all purchases.
The little numbers on computer screens that tell us how much we have to spend.
In the beginning it worked as follows:
I. Thabo goes to the bank and puts $100 into his account.
II. Lilian then goes to the bank and takes out a $100 loan.
And the amount of money in the economy grows by $100.
Because Thabo still has his $100. When he looks in his account it’s still there, he can even use it to buy stuff.
But so can Lilian. She also has $100 that she didn’t have before.
In this way banks manufacture additional money.
And there isn’t anything wrong with this.
At least until a housing bubble bursts and people need their loans repaid, and the banks realise that they don’t have the money, because most of the money was illusory…
That’s how a burst bubble turns into a global financial crisis.
But there’s an even bigger problem.
What if Bank A makes a billion dollar loan to Bank B, who then makes a billion dollar loan to Bank C, who finally makes a billion dollar loan back to Bank A?
Essentially each bank has just decided to give themselves a billion dollars, for free.
Would they do this if they could? Of course they would.
But even the most pathetic and anemic regulatory agencies can see through that scam, so it can’t be done in practice.
So what if instead of doing it this way you did the following:
1. Bank A creates a series of bizarre, esoteric, derivative trading stocks that are so complex that they are impossible to understand.
2. Bank B gives bank C a billion dollar loan.
3. Bank C spends a billion dollars buying those esoteric trading stocks from Bank A.
4. Then the same thing is done again, except this time it’s Bank B that gets the stocks.
Essentially it’s the exact same thing all over again: the three banks have just decided to give each other a billion dollars.
And because billions of dollars are apparently being put into the stock market the market steadily rises, meaning that the value of the derivatives goes up, making an apparent profit for the banks concerned.
Until the Ponzi scheme runs out of juice, and the entire system comes crashing down.
Now, perhaps I’m wrong about this. Maybe this is just a conspiracy theory.
But if it is then perhaps someone can explain to me how these esoteric derivative products that everyone is investing in, that have no relationship to the real economy, can ever actually create wealth?
I know how they can work in ‘zero sum’ fashion, but how can they ever actually create new wealth?
Take your time.
Because as far as I can tell with my limited knowledge of economics there is absolutely no way that this can be anything less than pure inflation. They are ‘printing’ however much money they want, giving it to themselves and by doing so they are devaluing the money that normal people have.
And sooner or later this house of cards is going to come crashing down, again.
[EDIT: I’ve been linked to an article that claims that the global derivatives market is not nearly as large as people claim, so I edited the article to be more accurate.
I had great difficulty reading it because I am not schooled in finance. But the bits that I did understand still didn’t seem to contradict my belief that players in the derivatives market are essentially just creating money out of nothing, and then giving it to each other.
You can read the article here, and if you can add to my knowledge please, for the sake of my sanity, post in the comments section.]
[Standard Disclaimer: this post was entirely my own opinion and was not paid for in any way, directly or otherwise, by anyone or anything that stands to gain in any way from the ideas expressed herein.]