The video provides a history of money, the gold standard and the fractional reserve banking system. It then takes a position that the current monetary system is unsustainable because all money is derived from debt. Since all interest on borrowed money must be paid from the same monetary supply, it basically creates a ponzi scheme where an ever increasing amount of money needs to be borrowed to pay off future interest. Finally, it goes into some potential solutions like labor based money, no interest lending or direct government spending without borrowing.
My personal take is that like 9/11 videos and Ron Paul, it is mostly horseshit that appeals to your basic conspiracy theorists and other Ignoramatti. Using a combination of reasonable sounding voiceovers, provocative quotes by famous and powerful people, half truths and inuendo, it implies that something most experts have taken for granted for centuries is obviously wrong.
Some of the flaws I see right off the bat:
-It only talks about the fractional reserve banking system. It says nothing about money created or destroyed by the Federal Reserve through open market operations or money created through interest on savings accounts and CDs.
-It would be more compelling if the banks weren’t all on the verge of collapse after all their crazy lending. Banks are not in the foreclosed home business and there is little value in an asset they can’t resell at a profit.
Haven’t watched the video, but correct me if I’m wrong, isn’t interest on savings accounts and CDs paid for by lending? You are giving your money to the bank to lend out to other people, and that’s why they pay you interest?
I haven’t seen the video but I have long thought there is a fundamental flaw with the entire basis of capitalism because of a similar reason.
Simply put, because of the continuous lending and need to repay loans at interest, capitalism depends on continuous economic growth. its not possible for a modern debt based capitalist economy to stop and stay at a stable economic level, as when growth stops, its not possible to keep the chain of lending / repayment going and so the whole system goes backwards as loan defaults and bankrupties become the norm.
Eg debt based capitalism has no stable equilibrium point. This strikes me as something that simply has to change, the physical limitations of energy production and land for agriculture make continuous growth impossible, so if capitalism assumes that then its just wrong and we have to throw it out and find a better answer.
I’m not a fan of socialism or communism, they have just as flawed assumptions, I don’t know what kind of answer there can be but I see this as the real challenge for the 21st century, not the “war on terror” but moving from an economy based on continuous growth to a new economic model that is long term stable.
Thats been my biggest concern about modern society as well, though I hadnt actually thought through the detailed implications it has on the monetary system.
Its all based on GROWTH.
Its bad enough when some folks get rich just from growth.
But when the whole system is dependent on growth to function you are just asking for trouble eventually IMO.
Maybe we can hopefully make a soft landing into another system sometime in the future.
So what if it is debt? I live in a nice, warm apartment in front of a snazzy computer, and during the holidays I board a shiny jet which flies me thousands of miles home to see my family. A vastly superior option to walking. All of this involves and requires money to send signals and incentives to distant actors in the economy to carry out their specialized skills in building bricks, furnaces, computers, and jet-planes.
I’d say money as a means of organizing ourselves is working out quite nicely. Say whatever you want about what money “really” is, the “real” economy is operating at a level better than subsistence farming.
I haven’t seen this guy’s work before, but I recently came to a conclusion that the system we’re using has a mathematical debt ratchet that forces the economy to go further & further in the red. Scary.
Then I checked my math.
Actually, mathematically, it evens out–if the banking system is in balance with the rest of the economy. But if it’s possible to get very rich being a banker, then there’s an imposition on the rest of the economy anyway.
I think there is a psychological/behavioral ratchet that has the same effect unless rules inhibit banks from abusing the system.
I largely agree with the OP’s assessment of the video. It’s a slick production in the conspiracy theory school of documentary filmmaking. Came across the thing months ago, I forget where from, and it’s filled with glaring errors about the creation of money. Just a few examples:
Money based on the gold standard did not represent “value” in a way superior to fiat money. Gold is just another commodity. It is not a magically objective yardstick for human production, as Ayn Rand would have us believe. It’s weird how nuttery from both extremes of the spectrum has a way of coinciding like this.
The current fractional reserve system is not based on “debt money” reserves. It’s based on the monetary base, which is cash reserves. The fact that the reserves were born from a printing press (or a wire transfer) doesn’t mean it’s based on debt. It’s not. It’s simply more efficient to give the power over the monetary base to central bankers, rather than to be helplessly dependent on the physical presence of a shiny metal and the technical skill of miners to dig it out of the ground.
Grignon doesn’t understand what “high-powered money” actually is. High-powered money is nothing more than the monetary base, created by the Fed. He’s got a such a loose handle on the mechanism of bank money creation, he thinks that banks can deposit 1,111 dollars in reserves with the central bank and then immediately loan out 10,000. Uh-uh. Ain’t how it works. Yes, private bankers create money, but they can’t create the high-powered base. The actual cash they lend out is not created internally. They have to use their real reserves (the monetary base) to pay out their loans. This is what creates the new money, but the total reserves, the base, is stable. And their money creation is ultimately limited by that base. It’s the fractional reserve banking system itself (his Russian dolls analogy) that causes the money multiplier, not some magical first deposit with the central bank. And the high-powered base, created solely by the Fed, has nothing directly to do with debt.
This could be actually seen as supporting the video’s point about the instability of the system. There’s not enough new production out there to pay back the old debts. Of course, it undermines the bank conspiracy angle, but conspiracy theorists don’t mind contradicting themselves. They use whatever argument seems best at the moment.
This is a fair point, worth thinking about. But it’d probably be better to start such a discussion from a clear foundation of fact. I don’t think this video is the right place to begin.
I watched that video a while back- it is helpful in reminding people of the power of the commerical bank down the street to create money through its lending power. It’s easy to forget that.
But I agree with others who say the video misses the mark in criticizing the basic fractional reserve system. There’s nothing in fractional reserve banking which requires fraudulent mortgage-backed securities, etc to be created and marketed to gullible consumers. That’s been our problem lately, not fractional reserve banking itself.
The video is helpful in reminding people why we have so much deflationary pressure right now. A few years ago banks would lend to anyone with a pulse to buy a home. Now they are being very tight with their money, largely because the securitization market has collapsed so banks have to live with their own lending decisions instead of making gullible investors do so. That means that there is a lot less money out there, and it’s very difficult if not impossible for the Fed to counteract that with the quantitative easing policies. The tendency is for the money printed by the Fed to just pile up in the vaults of banks who don’t want to lend it- that’s just what happened in Japan after they started quantitative easing in 2001.
Search crapped out on me, but not too long ago there was a thread where I posted to the effect that our current system has been based on the expectation of growth and the creation of new opportunities since the sixteenth century. That investment in the modern sense would have been all but impossible in the sort of steady-state economies that existed in classical and feudal times, and that we’d be in serious trouble if the day came where there was nothing new left to invest in.
Probably though, our immediate worries are more the result of the US undergoing some serious “imperial overstretch” in the words of Paul Kennedy. That since the Reagan era the government has tacitly endorsed economic practices that give the impression of prosperity but which mask the long-term decline of US competitiveness
I suppose in a larger sense, all money is debt. In other words, each dollar is an agreement to be reimbursed for the value of one dollar (whatever that happens to be at the time).
My point was that the video disregards an entire segment of the money supply that isn’t created by fraction reserves lending.
Technically, capitalism just depends on private ownership of wealth and property. Theoretically, you could have a capitalist system where there was no debt and all transactions had to be made in cash or debit cards.
Real economic growth is desireable (something else the video glosses over). The population is increasing. For overall standards of living to improve, the economy must grow at least as fast.
Although I have often pondered why we have a system where commercial and investment banks create money so people can buy homes and businesses, the revenue from those businesses is then taxed by the government but then the government can just issue more Treasury bonds if it needs more money. I guess the obvious reason is that if the government just printed the money it needed whenever it wanted to instead of taxing or borrowing it (as the film suggests), pressure to provide various public services would soon cause inflation to spiral out of control as in pre-war Germany.
It seems to me that the current instability is due more to the banks being overzealous in making loans that would never be repaid (technically failing to accurately assess the risk or those loans) and now they can’t afford to make loans at all.
yes and theoretically communism will create a utopia. Such a system you describe is inherently instable, because someone with capital will just start lending it out for interest rather than working (even if thats illegal). Their willingness to create wealth through lending means they soon have enough money and power to influence the law to make lending legal and bingo we end up back in the current system.
Can you cite one stable capitalist society in any historical era which existed as you say with no debt?
I think I’d agree with that assessment. Problem is, though, that if the banks had not issued these toxic loans, what else might they have done? Would there have been any growth (i.e. profit) opportunities outside the mirage of the housing bubble?
If you subscribe to the notion that increases in productivity and efficiency are nearing their end in the industrialized world (and I personally don’t), then you could argue that the banks pursued bad loans because there weren’t any good loans to be had. That fits with the theme of the video, and also the question in this thread of a future economic equilibrium where we only worry about sustaining our present lifestyle instead of attempting to continually increase our production. That’s potentially a weighty GD thread, but I wouldn’t personally have much of substance to offer such a discussion thread because questions like that are pretty much outside my scope of knowledge. I can point out dumb mistakes about the money supply, but it’s another thing altogether to predict our future inability to exploit available resources to maintain our quality of life.
I have the theory that money is best thought of as a promise, which is similar in some ways to a debt but not exactly. The promise is as good as the people making it. If a government tries to pay it’s bills by simply printing paper, it’s “promise” soon becomes worthless. It has to redeem those promises by collecting them back again in the form of taxes.
When were there ever steady-state economies? Feudal and classical economies were constantly seeking to expand themselves, and when they quit expanding–either through warfare or exploration–they began to decay and collapse. The process may have been slower–rapid communication and transportation has sped everything up–but warlord after king after emperor all found that to lead you must make your followers wealthy, and to keep them wealthy you must find sources of new stuff.
Well I did say “in the modern sense”. In classical times and especially in feudal times, war WAS the main method of anyone who wanted to get ahead in the world, and leave some sort of legacy for their beneficiaries. Roughly speaking, you conquered more territory, taxed the serfs and peasants of what’s now your land, raised a bigger army, and set out to conquer more land. It was “steady-state” in that the supply of arable land wasn’t going to expand to any signficant degree until the discovery of the Western hemisphere, so it amounted to a zero-sum game.
:dubious: Isn’t that more properly monetism, to coin a word? As a leftist, I define capitalism a bit more narrowly. If there isn’t investment with expectation of interest or control, it’s not capitalism as we know it.
But the point still stands that for all of recorded history, economies have needed to expand in order to survive: if they weren’t growing, they were dying. It’s a good thing that capitalism gives us ways to expand that don’t involve warfare.
My point is simply that the desperate need to expand isn’t anything new, or an especial bugbear of capitalism (and capitalism does have it’s own distinctive bugbears–I am not radically pro-free-market here). The need to constantly expand seems to be a fundamental problem with all economies.
Actually, yes, provided it doesn’t outstrip economic growth.
Human beings are the most valuable resource we have. If your capital outstrips your labour supply, the economy is inefficient. Wealth is created by humans. More humans means more wealth potential.
