Money As Debt II: Promises Unleashed Page #3

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What have they got to lose?

The answer to that question is that

banks differ from counterfeiters...

in that the banks are legally allowed to create

new money but only by certain rules of accounting.

Banks can only create money by entering a

borrower's payments and collateral as an asset...

on the positive sign of the ledger

balanced on the negative side by the loan...

or what the banks call the deposit

liability created by the bank.

When the borrower defaults on the payments, the asset

pledged as collateral is siezed by the bank and sold.

In a declining market where

repossession is most common,

the new lower value of the asset

doesn't cover the bank's liabilities...

which were based on the

previous higher value.

This shows up as a

loss on the bank books.

When foreclosures are rampant as in

a collapsing real estate market...

much of the value of the banks collateral

simply evaporates as home prices drop...

exposing the bank to huge losses.

In truth it's all just numbers

created out of thin air.

But banks must adhere to the

dictates of these numbers...

and the coincequences of bank

arithmitic gone wrong can include:

economic standstill,

social disentegration...

total financial chaos,

lawlessness, starvation and war.

Those who live by numbers

can also perish by them...

and it is a terrifying thing to have

an adding machine write an epitaph.

George J.W. Goodman best-selling

author, The Money Game (1968)

However for the purposes of

understanding the anatomy of a loan,

we shall assume that the

system is still functional...

and all three of the loans we

were looking at will get paid.

The end result is that none one dollar

of existing money has changed hands...

but 30.000$ of new bank credit has been

created and spend into the money supply.

And each of the three banks gets to

collect interest on 10.000$ of it.

Is creation of this brand new 30.000$

really an act of fraud like counterfeiting?

The obvious difference is that

the banking system is legal...

regulated by goverment and disciplined by

the courts to follow the rules of accounting.

Another difference is that

there is no obvious victim...

like the person getting

caught with a counterfeit bill.

Banks argue that the buyer and the seller both got

what they wanted and agreed to, so where's the fraud?

And if there was a fraud, who lost out?

To detertant that let us list

who got what out of the deal.

The borrower got the item he desired

on terms he willingly agreed to.

He may curses decision later as he

strungles to make the interest payments

or he may live happily ever

after thankfully got the loan.

The seller got an

increase in bank credit...

which she's been conditioned since childhood

to think of as her money in the bank.

She's confident that she'll able

to spend it in turn and she will.

So as far as the seller is

concerned she's been paid in full.

She's happy.

So who if anyone suffered

as a result of the deal?

Is there another party to this

transaction, we've overlooked?

Well, there is also the bank that gets to

collect interest on promise to pay money.

That's the business there're

in and usually do very well by.

And anyone else?

Well where did the car come from?

It came from the world of real things.

Natural resources, energy and

labor were expended to produce it.

What if we consider the hidden

party to be society at large...

and the natural world from

which all things ultimately come.

Because the brand new bank credit

money didn't just sit there.

It got spend into the general

circulation in the real world.

It's the real world that ultimately gets

the new money in exchange for its car.

This new money might

stimulate new production,

temporarely enlarging the economy,

making lots of people happy.

In fact it often does, as most bank

credit comes into being as a home mortgage,

stimulus for the residential construction

industry, a big provider of good-paying jobs.

However after its initial productive

use, this newly created money,

more basically just

dilute the money supply,

reducing money's purchasing

power by a very small amount.

So in contrast to counterfeiting where

the loss occurs to specific victims

here the loss is born by us all...

because the real substance of the loan

(car) was extracted from the economy at large

by a slight loss in the

value of everyone's money.

"The decrease in purchasing power

incurred by holders of money...

due to infation imparts gains

to the issuers of money."

St. Louis Federal Reserve

Bank, Review, Noov 1975, p 22

To continue our comparison of

bank credit with counterfeiting,

counterfeit cash eventually gets

detected and removed from circulation,

causing a direct loss

to whoever accepted it.

There is of course no guarantee

of how much will be detected,

nor any prescribed

schedule for its removal.

Bank credit is also removed

from circulation over time...

because as bank credit is paid back, the

principal part of every payment is extinqueshed.

Now remember that almost all the money

in existence today is bank credit.

Therefore almost every dollar that passes through

our bank accounts has a schedule appointment...

to one day be paid as a principal payment

on a bank loan and siezed to exist.

On top of the principal

are the interest payments...

which will become bank income

much of which will be recycled...

into the economy as interest to

depositors and other bank expenses.

So it's not immediately apparent that...

that there is a loss to someone as a result

of bank credit being withdrawn from circulation

the way there is with counterfeit cash.

But if we look closer, we

find an interesting situation.

We don't need anything more

than fundamental arithmetic...

to understand the power that lies

in controling the money supply.

And the way it is currently designed total debt

must constantly expand or the system collapses.

Whenever the rate of debt money creation falls

behind the rate of debt money destruction...

the total amount of

money in use will shrink.

This is called deflation because the money

supply is shrinking, like a deflating balloon.

The result is less money relevant

to the goods and services available.

With less money around to pay for them

the prices of goods and services go down.

At first this sounds like a

good thing and it could be...

if money were not created

as debt at interest.

For anyone not in debt, deflation would

be like a general divident on money...

paid in good and services of our choice.

It would be as if money were the people's stock

in their own prosperous company, their nation.

People wouldn't have

to demand a pay raise.

If a nation were more productive as

a whole thus deserving of a raise,

everyone would benefit automatically

by having their money buy more.

However this is definitely not the

effect, deflation has in a system...

where money comes in the

form of interest pairing debt.

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