Thursday, November 27, 2008

9 Postulates on Money

I'm off to Dorchester today to discuss the economy with the local Green Party. Here are my notes (in case I leave them behind by accident):

1. The amount of money in the world is increasing year on year. The growth in the global money supply has a doubling rate of 6-12 years.
It follows from this that:
(a) the system is unsustainable
( b) money is being created somewhere

2. Since the power of Government to create money is limited to coins and notes, about 3% of the total, it follows that private loan institutions (banks &c) put 97% of the new money into the system, creating the growth in the money supply.

3. They do this by making loans (creating debt) which must be paid back with interest, and using a fractional reserve system that allows them to lend to a multiple of the amount of capital that they actually hold.

4. Governments have granted lenders the ability to provide loans which are supported only by the confidence that
- not many of their borrowers will default at the same time
- not many of their creditors will want to withdraw their money at the same time

These are not safe assumptions, as the 2007-9 financial crisis caused by the “credit crunch” has demonstrated. The privatised, interest-bearing loan method of creating money leaves the economy open to periodic crashes, which cause poverty, inequity, social tension and carry with them the risk of war. At the same time, when the system is working, the lenders’ only constraint is their judgement as to the borrowers’ credibility. They have no thought as to the benefit or harm to society and environment that the loans to which the loans will be put.

5. The necessity of paying back loans and interest is one of the drivers of economic growth, since a business that has interest and loans to pay off must produce more goods than a business that has no such obligations.

6. Economic growth is destroying the ecosphere.

7. Since all money is issued as debt, bearing compound interest, it is no wonder that the world is drownig in debt, at every level, from personal to international.

8. The derivatives have inflated this debt by “leveraging” – borrowing to buy in the hope of future profits. Minsky describes some derivatives as Ponzi schemes – pyramid selling. The total value of derivatives market is about 10x the world’s GDP. This is one reason that banks do not trust each other, and so will not lend.

9. If the banks will not lend, there is not enough money in the economy, and we go into deflation. It is absurd for the Government to borrow money from the banking system it has just rescued at huge cost to the taxpayer. In this deflationary situation, it is open for the Government to issue new money for investment purposes, creating the needed money just as banks create it (as a multiple of its reserves). This can be issued to renewable energy projects as low interest loans, zero interest loans, or grants.

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