Greenbacks, Debt-Free Money, and 'The Secret of Oz'

[Gumby]

I dunno. It's just hard to have a conversation about it until you get the full picture of what they're saying... And, again, it's both videos you have to watch to see how this all ties together.

Where is Stone, by the way? I finally begin to understand what he's been talking about all this time and he goes on vacation!

[moda0306]

Gumby,

Yeah I know what you're saying... just giving you a hard time.

Stone would love this... but I still think he's wrong that DEFICITS create fuel for the shady FIRE sector... I think it's the leverage of deficits through the banks that creates that.

[Gumby]

Gumby,

Yeah I know what you're saying... just giving you a hard time.

Stone would love this... but I still think he's wrong that DEFICITS create fuel for the shady FIRE sector... I think it's the leverage of deficits through the banks that creates that.

You are both correct. Bankers have constantly been finding new fuel to grow stronger and stronger. It starts with debt-based money and hundreds of years later you have debt-based money sucking interest payments into highly-leveraged and complex Credit Default Swaps.

What I'm finding fascinating is how we got to this point. We often think that this power struggle is something that happened since World War II or perhaps the Great Depression. But, if you look at our entire history — as both a country, and the world — it becomes clear that this is a process that has been happening for centuries.

If you were to go back in time — to any point over the past few centuries — you would find people complaining about the goldsmiths, and later the banking sector, having too much power (over the quantity of money) and having too much influence in politics.

[lazyboy]

I'm reading this thread after having watched both videos and I'm astounded by how little I know...yet I enjoy the conversation.  I'm hoping in that some of this opens to some enlightening change or at  least some practical application I can benefit from.

[moda0306]

Finished the video, Gumby... I like it... though I have to wonder if the author is accurately portraying the founding fathers' adoration for money as a function of the public sector (government).

I would love to see strong-yet-simple bank regulation regarding reserves, and cease the treasury bond polka we do with the fed & member banks.  I agree with the author that any peg to a commodity is specifically picking out the captains of that industry to be insanely wealthy... to collect taxes is to choose a currency to collect them with.  to make up for the lack of a link, I think some kind of tax-free inflation-indexed savings account, as well as adjusting our taxable investment income to amounts lost to inflation would be a great way to mitigate most of the unfair loss to inflation.

I have a slight problem with illustrating fractional reserve banking the way he does.  Obviously, if companies were leveraged 40-to-1, there is a problem, but if in the act of making a loan, the person you've lent it to decides to keep it within the banking system, he's CHOSEN to have this amount open to banks to re-lend.  I feel like it serves to confuse people who don't understand money to say banks are "lending money they don't have."  I see what they're trying to say with the degree of leverage and control the banks have obtained... but I don't think it does anyone any good to have a less-than-full and honest understanding of the mechanics of banking.

Regardless of whether the narrator was correct about the opinions of men like Jefferson, it's really great to hear something outside the box.

[Gumby]

Finished the video, Gumby... I like it... though I have to wonder if the author is accurately portraying the founding fathers' adoration for money as a function of the public sector (government).

Agreed.

I have a slight problem with illustrating fractional reserve banking the way he does.  Obviously, if companies were leveraged 40-to-1, there is a problem, but if in the act of making a loan, the person you've lent it to decides to keep it within the banking system, he's CHOSEN to have this amount open to banks to re-lend.  I feel like it serves to confuse people who don't understand money to say banks are "lending money they don't have."  I see what they're trying to say with the degree of leverage and control the banks have obtained... but I don't think it does anyone any good to have a less-than-full and honest understanding of the mechanics of banking.

I think you're missing the point. You are thinking about this on a micro level, but the filmmaker is talking about a macro level. The only place that bank loan can live is in the banking system — since it's just a line of credit. If you choose to withdraw the loan as cash, you are withdrawing directly from the bank's base reserves — in which case, you've acted upon that line of credit.

Here's how I believe the banking system works (and I could be wrong)...

When a bank makes a loan, they are just extending credit off of their base money reserves (those base reserves are held in a reserve account at the Fed, plus the paper bills they have in their vaults and ATM machines). The bank loan is just a line of credit — a line entry in a book and your statement — but it's not actually money. It's a promise to pay money if you need it. In other words, all of the bank's customers — whether they got their money directly from the Treasury or from a bank loan — are sharing the very same reserve account (held at the Fed). As long as they don't all withdraw their money at the exact same time, they can all share the same reserve account with no problems. The only time their line of credit becomes money is when they withdraw paper money from the ATM, pay a bill, buy a US Treasury, or move your money to another bank — in which case a transfer is made out of the reserve account of the paying bank to the reserve account of the receiving bank (or dispensed from the ATM as paper dollars, or given back to the Treasury for a bond).

The problem is that you have to take that line of credit and pay it back, plus interest, with either another line of credit (or someone else's line of credit) or some fresh base money from the US Treasury. In other words, the bank is demanding a payment of money and interest that doesn't yet exist in the private sector. The only way you can pay the line of credit, and its interest payment, back without finding new credit or money that doesn't exist yet in the private sector is if the bank is constantly spending money in the private sector (and that doesn't happen all that much).

So, this relationship with the banks just causes them to obtain more and more reserves over time on a macro level. Banks become more and more powerful with every public and private interest payment. In fact, the only way to avoid contributing to this is to keep all your money in Treasury Bonds direct from the Treasury (as Harry Browne recommends)... or hold cash under your mattress.

In any case, Moda, did you get a chance to watch the second video outlining a brief history of plutocracy?

Video: A Brief History of Plutocracy

[Gumby]

I'm reading this thread after having watched both videos and I'm astounded by how little I know...yet I enjoy the conversation.  :) I'm hoping in that some of this opens to some enlightening change or at  least some practical application I can benefit from.

No practical application. The Permanent Portfolio still seems like the only safe way to swim in this debt-based monetary system where the rich get richer and the poor get poorer.

George Carlin had it right in this bit...

http://youtu.be/A1iXXKmq58g

Carlin is referring to compulsory education and how the wealthy engineered it to train each and every one of us to become obedient members of the proletariat. We'll talk about that next (once Moda has caught up on the second video)!

[moda0306]

Second video?

Jeez I must be skimming your writing too much.

I did not.

I will.

[Gumby]

Second video?

Jeez I must be skimming your writing too much.

I did not.

I will.

Yeah... no worries. The second video is much shorter than the first one, but it will explain the perspective on a world macro level over the course of human history. It's like swallowing the red pill. Careful...

It would all sound like a conspiracy if there wasn't so much evidence to suggest that it was all arranged this way on purpose.

[moda0306]

Careful, Gumby, don't take me back to my Rage Against the Machine head-bangin' days.

I really don't want to be arrested for lighting a German sedan on fire.

[Gumby]

Careful, Gumby, don't take me back to my Rage Against the Machine head-bangin' days.

I really don't want to be arrested for lighting a German sedan on fire.

Heh...  MMT/MMR explains how the system works, but it doesn't explain why it works that way. It's all so f-'d up.

Europe, the US, the banks, our education system, wars, world hunger, the growing wealth gap.... it's all starting to make a lot more sense to me now.

[Gumby]

Second video?

Jeez I must be skimming your writing too much.

I did not.

I will.

Moda, Did you see it yet?

[l82start]

i just watched both videos the other day, very interesting... 

[moda0306]

Second video?

Jeez I must be skimming your writing too much.

I did not.

I will.

Moda, Did you see it yet?

Yes I did.  Interesting stuff... though I tend to feel the plutocracy gained much of its strength through being the first at the land-deeding line when gov't started divvying up non-private property into private property.  The guy also implied that money is a construct of the plutocracy and we can and should try to live without it.  I completely disagree and wonder if this guy is some kind of commune hippy that thinks if we all just grew tomaatos in our back yards we'd be happy (this is fine for him, but some people want more, and more economic activity takes a medium of exchange).

I see money as a necessary social construct, and one best handled by government, but not in such a way that leaves people free to save/invest/contract in other currencies if they wish to.  I definitely, though, don't want the government allocating all the money.  I think MMR does a good job of describing it, in that if you allow a well-regulated banking sector to manage credit money you'll have a much healthier economy than if you 1) have government manage the credit sector, or 2) have credit be extremely limited and simply have the gov't print all the money.

I tend to like the framework described in the first video as a suggestion as to how the system should work... not some guy telling me to disengage from the monetary system to punish banks and simplify my life.

[Gumby]

Yes I did.  Interesting stuff... though I tend to feel the plutocracy gained much of its strength through being the first at the land-deeding line when gov't started divvying up non-private property into private property.  The guy also implied that money is a construct of the plutocracy and we can and should try to live without it.

Both films focus on the interest payments, into the fractional reserve banking system, as being the major mechanism for transferring wealth from the people to the banks on a Macro level. This serves to increasingly widen the wealth gap over time. Do you see that side of it? It really struck a chord in me. If all our money comes from public and private debt, and all interest payments eventually wind up as bank reserves, then it's really the people that have no choice but to constantly bring new money to the banks — money that often doesn't yet exist in the private sector. This drives a need for public debt to feed the banks' appetite for interest payments — which only causes more interest payments to bankers and more debt. It's a flawed system.

As Thomas Edison said, in the New York Times...

"Make it perfectly clear that I'm not advocating any changes in banks and banking. Banks are a might good thing. They are essential to the commerve of the country. It is the money broker, the money profiteer, the private banker, that I oppose. They gain their power through a fictitous and false value given to gold.

"Gold is a relic of Julius Caesar and interest is an invention of Satan. Gold is intrinsical of less utility than most metals. The probable reason why it is retained as the basis of money is that it is easy to control. And it is the control money that is the root of all evil.

...

"...Under the old way any time we wish to add to the national wealth we are compelled to add to the national debt. Now, that is what Henry Ford wants to prevent. He thinks it is stupid, and so do I, that for the loan of $30,000,000 of their own money the people of the United States should be compelled to pay $66,000,000 — that is what it amounts to, with interest. People who will not turn a shovelful of dirt nor contribute a pound of material will collect more money from the United States than will the people who supply the material and do the work. That is the terrible thing about interest. In all our great bond issues the interest is always greater than the principal. All of the great public works cost more than twice the actual cost, on that account. Under the present system of doing business we simply add 120 to 150 per cent to the stated cost.

"But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good, also. The difference between the bond and the bill is that the bond lets the money brokers collect twice the amount of the bond and an additional 20 percent, whereas the currency pays nobody but those who directly contribute...in some meaningful way.

...

"It is absurd to say that our country can issue $30,000,000 in currency in bonds and not $30,000,000 in currency. Both are promises to pay; but one promise fattens the usurer, and the other helps the people. If the currency issued by the Government were no good, then the bonds issued would be no good either. It is a terrible situation when the Government, to increase the national wealth, must go into debt and submit to ruinous interest charges at the hands of men who control the fictitious values of gold.

"Look at it another way. If the Government issues bonds, the brokers will sell them. The bonds will be negotiable; they will be considered as gilt-edged paper. Why? Because the Government is behind them, but who is behind the Government? The people. Therefore it is the government who constitute the basis of Government credit. Why then cannot the people have the benefit of their own gilt-edged credit by receiving non-interest bearing currency...instead of the bankers receiving the benefit of the people's credit in interest-bearing bonds?"

"The people must pay any way; why should they be compelled to pay twice, as the bond system compells them to pay? The people of the United States always accept their Government's currency. If the United States Government will adopt this policy if increasing its national wealth without contributing to the interest collector — for the whole national debt is made up of interest charges — then you will see an era of progress and prosperity in this country such as could never have come otherwise."

...

"I am just expressing my opionion as a citizen. Ford's idea is flawless. They won't like it. They will fight it, but the people of this country ought to take it up and think about it. I believe it points the way to many reforms and achievements which cannot come under the old system."

— Thomas Edison, quoted in NY Times, Dec. 6, 1921

What I found interesting about the two films is that it shows how our entire modern money system was designed — hundreds of years ago — to extract wealth from the masses into the pockets of goldsmiths and bankers. This is what Edison is talking about.

However, I don't believe it's all a giant conspiracy. More likely, it seems that greedy goldsmiths and bankers just devised ways to profit when they were called upon to loan gold to the kings and/or the people. What started as a simple profit scheme morphed into the money system we have today. And bankers want (and need) it to stay that way.

The point is that the system was always rigged — right from the beginning.

I completely disagree and wonder if this guy is some kind of commune hippy that thinks if we all just grew tomaatos in our back yards we'd be happy (this is fine for him, but some people want more, and more economic activity takes a medium of exchange).

Well, yes, he is a hippie. On his website, he offers some alternate monetary systems. But, they aren't very realistic as far as I can tell. The solutions from the first film are much more attainable, given our current laws. What's nice about the first film is that it provides solutions to individual States.

Forget the hippie professor's solutions. What's important is that he described how the system was rigged by the bankers and goldsmiths from the start.

I see money as a necessary social construct, and one best handled by government, but not in such a way that leaves people free to save/invest/contract in other currencies if they wish to.  I definitely, though, don't want the government allocating all the money.

Right. But, nobody is advocating having the government allocating all of the money. And the first film definitely offered some solutions that keep a healthy banking system intact. The major point to take away from both films is that the only way to prevent a mass transfer of wealth from the people to the banks is for the people to have access to debt-free money. Interest is nothing more than a private tax from the poor to the wealthy.

I think MMR does a good job of describing it, in that if you allow a well-regulated banking sector to manage credit money you'll have a much healthier economy than if you 1) have government manage the credit sector, or 2) have credit be extremely limited and simply have the gov't print all the money.

But then you haven't eliminated the transfer of wealth from the people to the banking sector via interest payments. Do you not see how interest makes that transfer on a macro level? That's what Edison is talking about. That's what all these films are about. Debt requires interest payments. The interest payments always wind up in the pockets of bankers.

[moda0306]

I am still trying to work out in my head if setting up a debt-based currency means that you'll have "theft" from the poor to the rich.  When new money is spent into existence via appropriate social programs, one is giving to the poor from others... If they then require more money for building a factory, borrowing is an option... and yes, on an aggregate scale, you must borrow from someone who already has it.

So banks may collect an ever growing amount of interest, but so do individuals in society that continue to save.

I don't know... it's just not computing for me, yet.  It seems to me that if the monetary wealth of our nation isn't properly allocated, resulting in the poor needing to borrow from the rich, then the problem isn't the interest so much as the misallocation of wealth in the first place. 

[Gumby]

I am still trying to work out in my head if setting up a debt-based currency means that you'll have "theft" from the poor to the bankers.

When you combine debt-based money in a fractional reserve banking system, it most certainly means that you'll have theft from everyone (not just the poor) to the bankers. Edison, L. Frank Baum, Henry Ford, and many others, understood this and tried to fight it.

When new money is spent into existence via appropriate social programs, one is giving to the poor from others

The payments are made to all people (not just the poor), and the government spends money and pays interest for those offsetting bonds into the fractional reserve banking system. All of that base money (comprised of the spending and the bond interest) is used to back our credit-based money system — which comprises the majority of the money supply. Every single line of credit extended from those reserves requires more interest payments back into bank reserves. In other words, every single interest payment (both public and private) increases the size of bank reserves. On a macro level, the population is paying a fee into the banking system every time public and private money is created.

... If they then require more money for building a factory, borrowing is an option... and yes, on an aggregate scale, you must borrow from someone who already has it.

But, the banks don't need to have the money to build the factory. They just extend a line of credit to build the factory (literally numbers in an account) and ultimately the bank demands a payment of new reserves, plus an interest payment, which does not yet exist in the private sector. On a Macro level, this sucks money out of the hands of the general population, with every line of credit, and gives it to the bankers.

So banks may collect an ever growing amount of interest, but so do individuals in society that continue to save.

When you say "individuals in society" that says that you're still looking at it from a micro perspective and not a macro perspective. You need to look at it from a macro perspective. When millions of people "save" money in a bank, their money is being used to back new loans in the private sector. That's where the interest payments come from. The loans must be paid, plus interest, with base money or credit which doesn't yet exist in the private sector. On a macro level, that is a recipe for taking money out of the hands of the entire population.

Let me put it another way. If the overwhelming majority of our money supply is private lines of credit, then by definition, most savers are just saving other people's lines of credit. The remaining savers are saving the government's credit. And when a saver receives an interest payment, it almost always tends to stay in the private banking system — backing new lines of credit, and therefore new interest payments (that don't exist yet and need to be created), into the banking system.

If all money is debt and credit, then who is really saving?

I don't know... it's just not computing for me, yet.  It seems to me that if the monetary wealth of our nation isn't properly allocated, resulting in the poor needing to borrow from the rich, then the problem isn't the interest so much as the misallocation of wealth in the first place.  

You're missing it. When Edison says "interest is an invention of Satan" in the New York Times, he nailed it.

In a fractional reserve banking system, most of the money supply is nothing more than lines of credit that demand interest payments of money that doesn't exist yet in the private sector on a macro level. The only way all of those lines of credit can be paid back without new money entering the private sector is if the banks are constantly paying debtors for their goods and services. But, that's not what banks often do... Banks mostly just extend credit into the private sector — which requires interest payments of money that doesn't exist yet.

Even if the poor were given the right "allocation" of debt-based money, it would still leak back to the hands of bankers over time, with every interest payment that was due.

[doodle]

I watched the videos Gumby....I think I need a dose of Rage Against the Machine.

Debt requires interest payments. The interest payments always wind up in the pockets of bankers.

At the macro level this is spot on.

When Chris Martenson describes the  exponential growth of debt and the money supply he seems to be touching on the central problem with interest in general in that it requires a constantly expanding money supply in order for the borrowers to pay back debt + interest. Even low interest rates will eventually lead to a situation where given a large enough debt, interest payments eventually dwarf the money supply itself. Then what? Game over?

Based on Edison's quote I wonder if gold is the best asset to hold in the PP, especially if populist leaders climb onto this interest and gold are Satan bandwagon. I would think that a basket of economically useful commodities plus productive land would be a safer store of value. Is gold nothing but a modern version of cowrie shells destined for the scrap heap of failed money trinkets?

Watching these videos gives me a strange urge to gravitate away from the superficial constructs of the modern economy and become Amish. Like the second video's presenter said, if the money supply crashes the rice is still growing in the fields. There is something very vaporous about searching for security through a bunch worthless pieces of paper and useless metal discs.

[moda0306]

The whole interest thing I think is just a general macro-quandry with money.  If a society uses a standard medium of exchange (even if it's gold), and denominates time-value compensation (interest) in that same currency, on a macro level, some sort of failure has to happen unless more money is generated (gold is mined).

But in an odd sort of puzzle-fit, I don't necessarily see this as a problem.  Our system of money is designed to expand with a growing economy, so future interest payments are generated through increasing money supply to fuel increasing growth.

Now that's the surface-issue of money and interest, but it may not speak directly to whether the system is inherantly rigged for banks to be the collectors of all interest.  I tend to think that the ability of the government to enact its public purpose of printing more money and distributing it amongst the populace is a great "democratizing element" to what might otherwise appear to be bank control.  Now I DO agree that the fact that we have to issue debt initially (often to banks) to fund the deficits is unfortunate, and I would bet my left arm that the banks arbitrage the heck out of the fed/treasury bond do-si-do... so there's definitely room for improvement to the system (aka, eliminating the NECESSARY issuance of treasury bonds AND giving vertical money (cash/t-bills/t-bonds) a larger role than they have now in relation to bank-debt in driving the economy.

Off hand, with almost zero nuanced knowledge of the risks that hit my system (how do I still feel like I know nothing about money after reading all this crap)... here's my Cliffnote's King for a Day Policy Switch:

- Enforce and improve antitrust laws so no banks are bigger than they have to be to serve a public purppose.

- Eliminate the NECESSARY issuance of treasury bonds to spend, and only issue enough to help give the bond markets some base-line and slow down the velocity of money a bit for savers... maybe throw in an i-bond-like instrument for the vast majority of middle class people who want to save but protect themselves from inflation to a degree.

- Set 25%-50% reserve requirements in banks (I'm willing to budge on this... just a big guess).

- Make banks hold X% of the loans they make, picked at random.

- Since every contract in existance is a potential liability of our gov't to sort out, create some minimal tax on these asinine wall-street machinations.

- Some sort of regulation of security lending (Damn you TLT... Damn you to heck).

There's probably more I'm forgetting, but feel free to comment.  I'm still trying to figure out in my head what interest means at the macro-level not just in terms of sustainability without more deficits (that one we knew about for a while) but its ability to unfairly allocate wealth to the wealthy.