Posts Tagged ‘Federal Reserve’

Growth economics is about to meet its maker. Debt is money. We have taken on too much debt. If debt is reduced so then is the global economy for the repayment of debt equals the destruction of money which is essentially the destruction of an economy. But don’t take it from me. Read the following explanation of how money is created and destroyed. Unlike my alarmist goading it is well written in a matter of fact tone.

Whether you like it or not this is the reality that we all must deal with going forward. The problems will not simply go away. The future will not magically become full of hope and optimism. The years ahead will be challenging and disorienting. This crisis is not like the ones we’ve been through so many times before…it is more akin to the fall of Rome… Well at least for America it is. But all other nations of the world will suffer collateral damage as the U.S. Behemoth rolls over and dies.


Interest creation is a functional glitch in the system, one which must be understood. When money is created in the current loan process, money with which to pay the interest is not created. Interest owed is only set up as a debt to the bank. No money is created to pay it with. As a result of this bookkeeping system the principle put into circulation is insufficient to repay the principal and interest owed. So either the trader uses money that someone else borrowed to pay his interest, or he does not pay all the principal and interest.

In the first case, someone else is in a worse position to make their payments. In the second case this trader is drawn into a downward spiral of debt. No matter how hard we try, somebody always has to lose. Because money is not created with which to pay interest, interest can never all be paid. Because traders have to pay out interest, they never have enough money for all their needs. Scarcity of money drives up prices, meaning money becomes worth less, which we call inflation.

Economic growth masks the inflation issue, by bringing in new wealth to borrow on (monetize), creating more money with which to pay the ever increasing interest tax load. In the current system, the economy must continually grow so that there is sufficient money available to keep the system operating. This system flaw caused by interest creation is the reason why economists commonly see the need for an economics of growth, rather than sustainable, dynamic steady state (homeostatic) economics.

Total outstanding interest and total current interest due and payable increase exponentially over time. In other words, as time goes on, outstanding debt becomes larger and larger with respect to the sum of all exchanges, what we call Gross National Product ‑‑ (GNP) the productive capacity of our nation. Because the overall interest load grows exponentially, it inevitably grows to be a larger and larger part of GNP. As the interest load becomes a significant portion of GNP, the system breaks down, because an ever larger portion of money is going to pay the growing interest load. A recession or depression is necessary in which some of the debt, and its interest load, is wiped out thru unpayable debts and bankruptcies. Sometimes smaller banks even fail, if too many of their clients are forced into losses and foreclosure.5

Bankruptcies and bad debts move control of wealth to those who control assets and the money creation process. In the long term, inevitably all the money becomes concentrated in the hands of a very few people who control the money creation process, and the economy and culture disintegrate. This was one of the major factors that led to the disintegration of the cultures of Mesopotamia, Egypt, Greece and Rome.

The Federal government (remember, the business owned by all the people) has often been forced to become borrower of last resort, borrowing from the banks to bring enough money into circulation to prevent major depression and mass foreclosures. It is called deficit spending. But nothing has been done to prevent the systemic exponential growth of interest and debt, which is the driving mechanism, leading to the failure. Meanwhile, Government borrowing to create money to maintain the economy has created a ballooning government debt.

In the early and mid 90’s there was an increase in individual debt, largely due to the increasing use of credit cards, taking some of the debt load off the federal government. The entry of the former Soviet Union and China into the international market has also opened new growth markets and, more importantly, assets to be monetized and borrowed upon to temporarily sustain the appetite for growth of the international money system.

In the late 90’s private debt increased in the US to the point that the Federal Government thought it was going to be able to pay off the national debt. But as the economy has slowed down, the government gave away its surplus, and consumer spending and debt has been insufficient to meet the demand for an increased money supply, it is becoming evident that Government debt is not going away, and on the contrary is increasing again.Those who would balance the Federal budget and reduce the Federal deficit under the present money creation ground rules do not recognize that their goal is simply not feasible. If the government stops its continued borrowing and balances its budget, and private borrowing does not take up the slack, the money supply will be so drastically shrunk that there will not be enough money to pay interest (or principle) on outstanding private debt, and the economy will go into a tailspin. This happened in 1836-37 after President Andrew Jackson paid off almost all the federal debt. The ground rules of money creation must be changed.

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Great interview on Bloomberg with Jim Grant, a longtime vocal critic of Ben Bernanke and quantitave easing. He explains in very clear terms how the Federal Reserve has become America’s de-facto central planner by telling us “what assets to buy at what prices and what level of nominal GDP we should all need”.

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