Thursday, November 18, 2010

The Banks are Forcing Debt on the Rest of US

(Check out the videos in the previous entry.)

Government issues about 5% of the money that is in circulation. The rest of it is created by banks, when they make a loan.

When a bank makes a loan, it creates the money to loan out of nothing, just adding numbers on their computer. So the total money supply is the principal of all the loans outstanding, P, plus the amount issued by the government, G. This does not include money the government borrows, which, after all, is still just created by the banks.

The banks then charge interest on the loan, on money which they have created out of nothing.

Because of interest, the total money needed to pay off all loans will be greater than all the money loaned, ie greater than the money supply in ratio (P + G + I - E)/(P + G), where I is all the interest, (not the interest rate,) and E is all the expenditures of the financial industry, if I > E. (If I < E, the opposite will be true.) This implies (I - E)/(P + G + I - E) share of borrowers will always be unable to pay off their loans. Only when I = E is the system stable, and all borrowers able to pay off their loans. Where E is less than I, this leads to an exponential growth of both the money supply and debt. Only with an exponential growth in real consumption, and thus necessarily production, can this be maintained. Since this is ultimately impossible, this spiral has no (nice) ending.

What can the government do? From the equation, it would seem not much, since G appears in both numerator and denominator, and is only a small portion of the total money supply. However, if we consider that the interest comes due at the end of the time period we are considering, it would seem that if G were to increase by I-E over that period, the money supply would remain in balance. That is, the government, if it wishes to keep the economy from going bad, would ‘print‘ the quantity I-E, that is spend that quantity in excess of revenue, but not by borrowing it.

However, for the government to borrow that money it would also add to I. While this might be useful counter-cyclically, it would be less efficient than printing it. Further, it would add to the total debt burden, and thus fail to address the long range problem: It would still contribute to a debt spiral.

So, barring government ‘printing’ at least the quantity I-E, the financial industry, by holding expenditures, E, less than the interest, I, on all loans outstanding, creates a shortage of money. There is simply not enough money to pay off all the debt and the interest. So they force the rest of the system into increasing indebtedness to them, in order to pay off the debts they already owe.. They force individuals, companies, and governments to take out more loans or default. They have simply created a shortage of money needed to repay the loans and the interest, in the real economy, while hoarding the rest of that money to themselves.

The financial industry has been doing this for years. That is why individuals, companies, governments and their countries' real economies, are gradually being ruined. That is why, in the US, for instance, total indebtedness has been climbing to over $50 Trillion, now about equal to all the US real assets. Great Britain, and many other countries are in worse shape.
(Check out the charts. The links are at the top of the page.)

The figures are incredible when you think that it’s most everybody that’s in debt. Indeed, is so called deleveraging (paying off debt) even possible, with so much debt? After all, annual interest on $50 Trillion, is about $2.5 Trillion, at 5%, which is more than the entire revenue of the federal government.

Government austerity, by forcing all future increases in debt into the private sector, will inflict tremendous hardship and damage to the real economy.

This 'crisis' is just another step down the road, where the financial industry, in their eagerness to own it all, kill the goose that lays their golden eggs.

1 comment:

  1. "When a bank makes a loan, it creates the money to loan out of nothing, just adding numbers on their computer."

    No argument, as I do not know. But if every loan recipient asked for cash, the above statement would seem to be unfeasible. If I take out a mortgage to buy a home, the seller recieves the money. My bank transfers digital credits to his bank. But if the seller asks for cash, then what?