How much does money, control our world? Our education, our lifestyle, our money, even the fact that I am blogging on blogger and not selling tea in a stall is because of the amount of money I earn and our economy. I have always been interested in what exactly is money and what is this great "engine" that we call an economy.
I have recently seen the movie Zeitgiest addendum and boy does the movie scare me. I will talk about two scary aspects of money not well known to people outside trained economists.
1) What is a 1$ note(or any other currency note) :- A 1 dollar note is a "loan" given from the Federal Reserve Bank of America to the Govt. and other banks. The FED expects the loan to be returned with "interest". Now, the questions is if every note that the FED(or indeed any other central bank) issues is a "loan" then to pay the "loan" one needs more money, hence more notes, but these are again "loans". Even a non programmer can see the infinite loop here?
Basically, the main job of a central bank is to "kick-start" the money supply by supplying loans to the govt. of a country.
2) Fractional Reserve Banking: This is the second aspect of the system and was what most astounded me.
Mummy asks Pappu:- "Pappu if a bank has 10$ of money with it and it lends that to a person, how much money does the bank have".
Pappu:- "Mummy 0".
Of course, Pappu has not done a course in economics and he has failed again!!!
When bank lends 10$, 10$ is magically created in the economy !!! So now the total money supply in the economy is actually 20$(Magic!!!). The funny thing is if this 10$ is loaned to some other bank who loans it further another 10$ is created..out of nowhere.
Well actually, the amount of money created reduces with every bank lending since "central banks" need a certain reserve amount be there in the bank deposit which is a fraction of the "loans" made out. This means that Bank A (who originally got the loan) can only lend 8$(if the Fractional Reserve Ratio is 20%) and Bank B can lend up-to 6$ and so on.
The chart[source: Wikipedia] shows how a 100$ deposit magically becomes 500$.
As an engineer the chart looks just like a chart of an engine. Of course, for a given Fractional Reserve Ration the amount of money supply in the system approaches a limit as shown above!!!
The conclusion of the two points above is "Money" is "Debt or Loans". All "Money" is "Debt", and hence all "Money" needs to be re-paid. That means the "Money" supply needs to continuously increase.
But where does all the Debt get paid from? Well from you and me, from start-ups and companies and all those who borrow. Further loans, are actually finances from deposits we make!!!
Anyone can recognize the fundamental problem here!! Someone will not be able to pay back his loans, someone will go bankrupt, it is the nature of the system , some bank will go insolvent
And this is the main reason for the boom-bust, depression and all economic cycles as for "inflation" and a steady price rice.
What happens if loans are not paid back to the bank and depositors start withdrawing money- You have a depression like the sub-prime crisis we faced.
Things become more complicated if you add a Stock Market Bubble to this!!! (That would be another post).
This enormously complicated engine is "tinkered" around by a "handful" of bankers around the world and it is there decisions that affect our lives!!! Make a policy mistake and viola, I could be flipping burgers at Mc Donalds or maybe writing a lot more blog posts, since unemployed people write more!!!!
Many believe that it's the bankers that are the cause of all depressions , wars , coups etc and are the real masters of the world. It is hard to refute such an argument.
The movie goes on the show how Money controls other things like Crime(with the exception of crimes of passion all serious crime has a direct or in-direct relation to money!!!).
All the above scares me and makes me believe that there should be a better way a better system. Can we have a world without money? No, not a communist egalitarian society but a world without money?
That will be the topic of my next entry!!.
3 comments:
How about barter system ??
Just watched Zeitgeist Addendum after reading your blog... Still left me feeling profound about the grand scheme of things and how we are controlled... thanks to you... but I still doubt and wonder if people would be as motivated if money factor doesn't exist.
It is time for us to ponder on what we really produce - Service? And, what is it really worth to the society? - Not in terms of Money.
How do we Quantify Service? God forbid, if a banker is involved in this equation.
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