The End of Money

April 25, 2013 11:53 pm Published by Leave your thoughts

Turn on any news channel today or flick through any newspaper and you’ll inevitably come across a generalised analysis of how the financial sector is doing. Figures and stats are flung at you like valuable heartbeats of information: movement in the FTSE, value of the Euro, growth in Gross Domestic Product over the last quarter, changes in house price… It is as certain as the weather, and afforded a similar portion of our news diet. We might only take passing notice of it, but there is comfort in hearing that these things are doing well and dismay when they aren’t. This is the pulse of the economy and it is the lifeblood of human civilisation.

The truth is, most people don’t understand a word of it.

People are usually happy to leave economics to the experts, as if making decisions on how the world should be run is like collecting the bins or carrying out post-mortems – we know it goes on but please spare us the details.

Successive governments have played on this massively, especially the Tories. How many times since the 2010 election have we heard George Osborne and his gaggle of economic strategists tell us that we all have to pull together and make sacrifices to rescue the economy? How many times since Thatcherism even? Whether it’s the public sector pensions, the minimum wage, tuition fees, lowering of interest rates on savings accounts, redundancy or welfare ‘reform’, it seems it is the job of the 99% to bail out the sinking ship that the 1% managed to smash into some rocks. And then, of course, there are the trillions in public money paid out to private companies (banks) to stop them going under – the most hypocritical capitalism ever seen. While this is going on, Osborne grants tax cuts to the rich, like a little goblin chuckling away as it prances around an apathetic sleeping giant, poking it with a stick.

Yet we continue to buy into it en masse. How quick were the Daily Mail to jump on the story about Mick Philpott being found guilty of burning six children alive and point out that he was on benefits? This will only further support the general feeling amongst many that benefits = bad. Then there’s Ian Duncan Smith snorting his snooty little nose at people who struggle on £53 a week. What will happen to him? Nothing. The anger of the public very rarely translates into real change before apathy sets in and the system resets.

But we are deluded, from the very beginning too. Not just about blaming whatever poor souls the government and media scour up from the bottom layers of society, whether it’s the unemployed, single parents or even the disabled, while the millionaires and billionaires keep on filling their boots. No, our delusion starts at a much more fundamental level than that – our contemporary understanding of how human society grows and advances. And by that I mean our unshakable faith in money.

Economics is not just some arbitrary abstraction for distributing natural resources and generating products. It is our primary value system – influencing from birth how we think and act towards each other and the world around us. It is a global religion, one which dictates to us that the only possible way to civilise our primitive culture is to encourage competitiveness whilst at the same time devour whatever we have the opportunity to devour. An ‘invisible hand’ – we believe – prophesised by economist Adam Smith in 1776 in ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ will inevitably guide the market towards a brighter, healthier, prosperous and free future for all.

Despite writing his seminal work almost two and a half centuries ago, Smith’s understanding of eighteenth century economics still forms the basis for modern day capitalism – hence why the British treasury idolise him on the back of today’s £20 note. Unfortunately, this traditional economic thinking has a frame of reference completely adrift of the unchangeable laws of science and ecology. The entire premise is outdated. What we now know about global ecology and sustainability has left Smith’s economic ideas in tatters.

Fast-forward to the twenty-first century and we have a deteriorating environment, a climate time-bomb, more starvation, more disease, and more people living in poverty than ever before. But it’s okay because I can now fit 8,000 songs onto my new smart-phone rather than the scant 7,000 on the previous model. Something is amiss, and you can forget about Credit Default Swaps, sub-prime loans and AAA ratings. Looking for a better way by examining the complicating factors is like attempting to save a drowning man by describing the water to him.

In order to wade through the mind-numbing mathematical models and jargon the little man isn’t supposed to understand and find some sort of sense in it all, it’s time for a little Economics 101.

Simplified only slightly, the monetary system is a lot easier to understand than we are led to believe. When a central bank decides the economy needs a boost they increase the amount of money in circulation. The government then print some little pieces of paper called bonds and apply a value to them. It then sells these bonds to the central bank (Bank of England in the UK, Federal Reserve in the US etc.) in exchange for some other pieces of paper called notes which have the same value. These bank notes have not come out of the existing money supply but rather they have been created out of thin air. In reality all this is done electronically, with only around 3% of the money supply existing in physical currency. Government bonds are essentially IOUs – given to the Central Bank in exchange for money it has just created out of nothing. Problem 1.

This new money quickly finds its way into commercial banks and, like all deposits, becomes part of the bank’s reserve. We use a system called ‘fractional reserve’ banking which says that all banks must maintain legally required reserve equal to a prescribed percentage of its deposits. This is usually 10%, (but in reality it can be virtually 0%). The remaining 90% is available for the bank to invest how it wishes.

What this means is that when you deposit £1000 into your bank account, the bank only has to keep £100 of that while the rest is loaned out. However, it still counts the £900 it has loaned out as its own assets, as loaned money is technically their property. This expands the money supply further, as that £900 eventually ends up in deposits at other banks and the cycle repeats. You still have £1000 to your name and the person borrowing £900 still has £900 to their name. One deposit and one loan creates £1900 already.

Follow this cycle to the end and for every deposit in the banking system, around 9 times that amount can be created out of nothing. This is why people often say that if everyone wanted to draw out their money from the bank at all at once, there wouldn’t be enough money to give. Problem 2.

Now, the new ‘thin air’ money takes its value from the existing money supply, as it has been created irrespective of the demand for goods and services, and is not backed by gold or something similar. The purchasing power of each unit of currency falls as a result. One pound is worth far less today than it was ten years ago. To balance this, prices rise and we have ‘inflation’. Inflation becomes a hidden tax on the public because our savings have less value over time. Problem 3.

Unless your bank is an Islamic bank, every time it lends you money it will charge ‘interest’, whereby it expects you to pay back more money than it lent you originally. Even the central banks expect interest on the money lent to the government. However, once again this interest doesn’t actually exist in the money supply. Signing a loan agreement doesn’t physically create more money. Therefore, thanks to interest, the amount of money owed to the banks will always exceed the amount of money actually out there. This means there will always be people who cannot pay off their debts, and hence poverty. Problem 4.

Never forget that money is debt, not wealth. The more money that balloons into the economy the deeper the economy disappears into a black hole of debt. The truth is, we will never be free from national debt or personal debt as long as we have money created out of nothing, inflation and interest.

The International Monetary Fund (IMF) and the World Bank are global versions of the central banks. They loan money out to governments already struggling with debt and they charge interest for it, imposing conditions on the loan that force that nation to sell off any natural resources such as forests, strip away pesky worker’s rights such as a minimum wage, and allow foreign corporations to come in and exploit the nation for a fraction of what they would usually have to invest. These institutions perpetuate the financial system of debt creation and inflation, enslaving entire nations in the process.

Deregulation in the 1980s, spearheaded by free-market capitalists like Thatcher and Reagan, allowed the financial sector to drive towards bigger profits on riskier investments, creating banks that were thought too big to fail. This for a time seemed like the golden years of finance, with a powerful new group of Gordon Gekko wannabes awash with more money than sense, and a decade of excess for those in the financial sector. Meanwhile, the majority of people continued to struggle to pay the bills, and defenders of the free-market did nothing to save nationalised industries while they busied themselves opposing regulation and demonising the unions.

We can talk all we want about sub-prime loans, Collaterized Debt Obligations and Credit Default Swaps, which intensified the risk in the financial sector to such an extent that by 2008 we were given the global meltdown we still suffer today. But in all honesty, these are merely indicators of the corruption our monetary system breeds. The system dictates that if we all aim to maximise profit then all will reap the rewards. Yet sub-prime loans carry more interest so, according to the laws of our profit-addicted system, they were actually preferred by the banks. When people defaulted on these mortgages the debt was simply absorbed by the system, until the market couldn’t take on the debt any longer and the governments (i.e. the public) took responsibility for it.

Be under no illusions, just like after the end of the Great Depression of the 1930s when the likes of JP Morgan and Rockefeller gained massively by expanding their banking operations, banks today are bigger than ever, and fighting tooth and nail against any mention of new regulations. At the same time, society continues to wander mouth agape towards the shiny blinking lights of consumerism, ignorant that the system that collapsed in 2008 is not being changed, merely reinforced against change.

Even without the current financial crisis, what is society today but a system for consumption and debt? Companies sell us consumables that are made with consideration to their unit cost, not their longevity. As a result these products are destined to fail before long, therefore encouraging more purchases, more use of finite resources and more profit. Our cleverest minds work in the private sector where the pay is better, thinking of ways to sell us more things rather than finding new sources of energy, say, or unlocking the secrets of the microcosm. Meanwhile, students are saddled with more debt, creating slavery to the life-long wage that we all told ourselves was lost when the industrial revolution ended.

Yet we are told to pray for the stock markets, the housing market and a rise in GDP. We are forced to do jobs that contribute nothing towards the greater good, while all the while striving for the unobtainable goal of profit for the sake of profit. Trillions are reinvested by the system back into the system just to keep it falling into the black hole it has created. How much human effort must be squandered creating financial profit before we realise what a waste it is?

The entire machine has become a self-perpetuating wealth extractor, and the human race now exists simply to keep the cogs turning. Think this is too strong? Then why collectively decide to plough trillions of dollars back into the system just to prop it up when we could easily have invested in new renewable energy technologies to get us off fossil fuels, or paid for the training of millions of medical researchers and practitioners, or created new food supplies, better housing and clean water for the billions living on less than a dollar a day around the world? Because we are afraid of the system collapsing? Or because we aren’t smart enough to find a new system that works?

Or was it because the decision was made for us by the politicians and the banks without this choice presented to us?

The problem, of course, is that this cannot keep going for ever. If we are unable to wean ourselves off the system then the unchangeable laws of nature will do it for us. Climate change doesn’t care if we can still make a profit without pollution. The trick is to make humans fit the environment again, not vice versa.

Economists have struggled for years to put an economic price on nature in order to help protect it. How much would you pay to protect a wild elephant? How much is too much? And how would you get a poor African government to factor this into their economic plans, considering an investment in an elephant yields no direct dividend?

This is where our consumer economic model collapses, for at its very core is the ethos that supply and demand ultimately lead to healthy profit, underlined by the second ethos that human progression is paramount.

Coupled together and it’s no wonder we see habitats being lost to agriculture, endangered species being hunted and sold for vast sums, and large-scale deforestation the world over. There is the supply, there is the demand, and the profit is the goal. And there are people poor enough to need the money. How much would you pay then to save a hundred hectares of ancient forest in Borneo? What about in Scotland? Is there really a difference?

There simply is no economic price for nature, especially when you consider what we now know about climate change. Smith and his contemporaries philosophised about the economy based on false assumptions – ignorant of Earth’s finite resources, and its fragile ecology, (not to mention their disregard for the survival of the masses).

The word ‘sustainability’ is thrown around a lot by politicians and businesses to try to show willing in the right direction, but true sustainability is the antithesis of a money-based economy. An honest sustainable economy can only be resource-based, where consideration is given first to the finite supply of natural resources. The idea that humans cannot fit into an economic model based on sustainability is false. Throughout human history the one thing our species has shown a knack for, repeatedly and across all cultures and continents, is adaptability. Instead of adapting to this green enlightenment, however, we continue to sleep walk into an evolutionary cul-de-sac where we finally push ourselves into extinction.

Economy dependent on consumption is an anti-economy. The world is finite in all senses and a consumer-growth money-based economy is outdated and dangerous. There are more people dying from want of food and clean water than ever before yet we in the West are fooled into thinking everything is slowly progressing because Apple have just launched a ever-so-slightly improved version of a telephone, or Google have finally come up with a way we can stop thinking for ourselves and just submit like mindless puddles of flesh as every last semblance of our existence is recorded on a massive computer database for future reference.

The great delusion of human life is that we have evolved to such a point that we are now masters of nature, harnessing it for our purposes.

We are free from nature, beyond it. However, this is not and will not ever be true. We are nearly seven billion people of a few simple needs that can easily be met with today’s technology, who all trace our ancestors back to the same mitochondrial-Eve 200,000 years ago, and who could, given the right frame of mind, expend with the pointlessness of war and destruction of the environment.

And for that I’d gladly give up my new smart phone.


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This post was written by Oliver Lewis Thompson

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