Wednesday, September 19, 2007

Where does money come from?

After reading a few articles, I posted a comment to an article on Alternet today. The comment was a very brief summary of a book I suddenly remembered - I got it a long time ago and it's probably out of print, but you should make an offer to find it. [In fact, there are used copies available for as little as $6.00 at!]

It's called "Debt Virus" by Jacques S. Jaikaran, M.D. and it's not what you think - it's not about credit cards and irresponsible spending and personal finances and all that.

Instead, it's about how our debt-driven economy works at its most fundamental deep level. And it shows that there is an inherent flaw in the way the American economy has been working since the banks were able to get all of the restraints imposed after the Great Depression removed. The vast majority of "money" in this country wasn't made on printing presses, it was created as "debt."

For example, say you buy a house. You go to your bank and ask for a loan, and they say "yes." They don't actually have that much money sitting around waiting for you to borrow it - they just create the money out of the thin blue air and it is made of "debt." You pay the previous owner of the house the money. Let's say, just for purposes of illustration, that you bought an older home from an old couple who had paid off their house years ago. They go and "spend" that "money" you gave them - money that is really nothing more than a debt you owe. It has entered the "circulation" of the economy. It now "exists" and can be "counted" and all that.

Meanwhile, you move into the house and start making your mortgage payments. So far so good. Millions of other people do the same. So you can see, hopefully, that between mortgages, consumer loans, and credit cards, corporate loans, and government borrowing, that almost all of the "money" circulating in our economy was created as a debt someone owes to somebody else.

Now, class, here's the question: when and where is the "interest" payment created? Where and when is the additional money needed to pay your interest payments created?

It isn't.

It is never created.

You and everybody else in this country toger "owe" and have to "repay" more money than actually exists in our economy.

Think about that for a minute.

It wasn't so bad back before about 15 years ago, when we had a solid manufacturing base, because we could also create "wealth" and things of real "value" that would more or less cover the interest payments. And prior to that, we were on the "gold standard," meaning there was an actual thing of value providing the wealth that the money we printed represented. If we needed more cash, we just needed to mine more gold and other precious metals and gems. Also, we were able to bring in money by selling stuff to other economies, via our manufacturing base. So until roughly 50 years ago we got enough money, between what we have circulating and what we gained by selling stuff, to cover the interest payments on all the different types of loans, both personal and corporate, and even government.

But now, since we aren't actually creating very much in the way of durable goods with real value, we have nothing to sell. And since our money is backed by nothing but "the full faith and credit of the United States," that is, by nothing at all, the only way to acquire actual "wealth" is through manufacturing. But have gutted our manufacturing base - or allowed the robber barons to gut it, which in the end is the same thing. Indeed, we are buying stuff from foreign economies by the boatload every single second of the day - we're giving them money to pay their interest payments, and leaving ourselves with less money even that our loans originally created. So now we not only can't pay the interest, but we can't pay the principal, either.

It's complicated, class, but if you go back read slowly I think you'll see the chain of events leading to the train wreck.

Now here's where it gets really bizarre. What happens when you do pay off your debts? The money disappears off the ledger - it is "unmade." So the more people who try and be responsible and get out of debt, the less money there is available for the general economy to function.

And the less money people have, the more they need to borrow. So it's a self-reinforcing spiral that has nowhere to go but down - because as money gets tighter and tighter, they will have less and less discretionary income, meaning more and more businesses will fail, and more and more people will be laid off, and so on and so on. And what types of businesses will be the first to fail? The so-called "service economy." Struggling people can't afford to pay other people to do their chores, but they still need plates and shoes and other household goods - all made overseas. So more and more money is sent to them, and we have less and less and less, until the economy finally collapses.

Some say that is the whole point of the process, to wrest control completely away from ordinary people and their representatives and put it in the hands of the multinational robber barons, who are so much more "worthy" to run the world. I'll reserve judgement on that, but it certainly is true that you'd have to be an idiot not to know this was coming. And are there really that many idiots running the economy, class?

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