I have recently re-watched Zeitgeist Addendum. I tried to follow it’s economic analysis, but found it difficult since it seems utterly illogical to me. (It probably is.) However, I think I can summarize the line of reasoning as follows:
“Money is created by banks through our loans, and because of interest, the total debt will always exceed the total money supply. In order not to collapse, the system needs continuous economic growth to pay for the continuously growing debt, which in the long run transfers all real wealth to the banks. Thus, we become wage slaves in a hamster wheel - we work to pay of a debt that has been forced upon us, and that (because of the monetary system) can never be repaid.”
I now seek your help in understanding all the errors in this argument. Of course, I do realize the absurdities involved here, but somehow it seems a bit illusory to me. Please help me identify the crucial errors of the Zeitgeist/Venus Project theory!
My summary may be inexact or to some degree incorrect, since I found it hard to grasp. If you’ve seen the movie or know about this from before, it would obviously help.
PS. I’m Swedish and I’m really tired, so try to look past my flawed English
Money isn’t created by lending out money. Money in the US is created when the Fed purchases and monetizes government debt. So, the reality of the situation is that money is created by eliminating debt. Moreover, in a free enterprise market economy, money would be created by private currency producers. Thus, the entire situation described above would be avoided.
Hej Goddag- your english is excellent.. welcome… I do a lot of work with swedish companies
I did not look at your link but it sounds like Byron Dale???
I am not as knowledgeable as most on this site - but what I don’t understand is that no one is required to go into or stay in debt. years ago people saved and paid everything in cash.. even mortgages were 5 year balloons for the most part, no 30 yr BS. many peopl rented until they could afford a house ( which were in teh range of 15,000USD just a generation ago) even today some people refuse to buy anything on credit and have no debt - so what am I missing about this ???
This is, I believe, incorrect. There is a money multiplier (1/rr where rr = reserve ratio), i.e., credit expansion brought about by the creation of bank loans. Commercial banks take deposits and create loans which expands the supply of credit money (money in the broader sense). Banks create their own private money though this recycling process. It’s true that money proper is not created by the banking system, but credit money most certainly is. An elevated demand for cash holdings will slow this recycling/credit-money expansion process down (low velocity).
There is a decent amount of truth in this statement but it is incorrect. 10 trillion dollars of debt can be paid of, at least conceivably, by 10 $1 U.S. federal reserve notes. Money is recycled continuously and it permeates amongst the members of society. This is known as velocity, i.e., the rate at which a single unit of currency changes hands per time period “x.” If the total supply of money in the broader sense, which includes bank/credit-money, equals the total demand for money, then there is no redistributive process. The money merely satiates the demand for money as money and prevents unnecessary deflation’s. The arbitrary redistributive process this person is talking about only occurs when the banking system is cartelized, allowing it to expand the supply of money, again in the broader sense, beyond the demand for cash holdings (this is inflation).
Some Austrian economists, though, will find this statement more agreeable. Their position is that any expansion in the supply of money (broader sense) is a priori inflationary and must lead to an arbitrary redistributive process. They support 100% reserve ratio’s which would end the money multiplying process by the banks. But they would never say that total debt must be greater than the total supply of money because of interest; that shows complete ignorance.
“Money is created by banks through our loans, and because of interest, the total debt will always exceed the total money supply. In order not to collapse, the system needs continuous economic growth to pay for the continuously growing debt, which in the long run transfers all real wealth to the banks. Thus, we become wage slaves in a hamster wheel - we work to pay of a debt that has been forced upon us, and that (because of the monetary system) can never be repaid.”
Modern fiat in a nutshell? Some propose fixing this by simply spending money into the economy without issuing backing debt, but I think the whole scenario could be avoided to an extent if legal tender were abolished (but not entirely since fiat money will still be required to pay taxes).
“Some Austrian economists, though, will find this statement more agreeable. Their position is that any expansion in the supply of money (broader sense) is a priori inflationary and must lead to an arbitrary redistributive process. They support 100% reserve ratio’s which would end the money multiplying process by the banks. But they would never say that total debt must be greater than the total supply of money because of interest; that shows complete ignorance.”
I have a question about this. When they talk about 100% reserve, do they mean that no loans may be made out, or do they mean that deposits should be matched against loans? For example, if a bank lent out 50% of its reserves, but gave its depositors a slip only redeemable at some point in the future instead of cash, would this bank be considered a fractional reserve bank, or a 100% reserve bank?
For example, if a bank lent out 50% of its reserves, but gave its depositors a slip only redeemable at some point in the future instead of cash, would this bank be considered a fractional reserve bank, or a 100% reserve bank?
If the “depositor” received a bank liability with a maturing date that matched the maturity of a corresponding bank asset (loan) then that would not constitute a fractional reserve banking in any way. The deposit is a time deposit and the 50% reserves are no longer reserves. They are simply loans.
This is true, but banks can only overextend themselves because they are protected by the central bank acting as a lender of last resort. Without a central bank protecting them, the fear of bank runs keeps the fractional reserve banks in check and does not allow for them to create inflation.
So its kind of misleading saying that fractional reserve banks create credit expansions. Only regulated fractional reserve banks can.
No money is actually being created. I put in $100 in CitiBank. CitiBank lends out $90 and stores $10. Net money creation? $0.
The traditional example is that Person A deposits $100 in Bank A. Then Bank A lends out $90 to Person B, who deposits the money in Bank B. Then Bank B lends $81 to Person C, who deposits the money in Bank C. Et cetera. But if you actually look at the concept of fractional reserve banking, no new money is created. Existing money is only transferred from one person to the other.
Credit would be created if Person A deposited $100 in Bank A and Bank A lended $110 to Person B. But that situation hasn’t happened in the United States since at least the early to mid 20th century.
Doesn’t matter a damn. The same money can circulate and pay off more debt than the total money supply.
Yes it is. Person A deposits $100. Bank A lends out $90. But Person A still has $100 which he can spend however he likes! The other $90 was created out of thin air.
Physical bills? Yes. The problem is the bank is still obligated to give you that $100 if you decide to take it out of your account. And most people expect this to happen, so they spend their money in the same levels as they would if they had all the cash under their mattress, while those who have the “new” money from taking out loans are also spending their money. In other words, the depositor’s demand curves don’t fall, while the demand curves of the debtors rise. Hence, price inflation.
Thanks for your thoughtful replies! However, how money is created was only one issue here.
I find that whenever The Venus Project adherents say something true about economics, the solution is always to reintroduce the gold standard. But when they say something absurd, I just lose myself in their bad reasoning, unable to “connect the dots”. Of course, these adherents don’t want a gold standard. They seek to abolish the monetary system completely.
Let me be the devil’s advocate for a moment and pose a couple of direct questions:
Why would interest cause a debt that can never be repaid? I’ve watched the movie several times and I haven’t understood the line of reasoning behind this.
Why are we not wage slaves, as the summary suggests?
Two reflections of my own:
In order not to collapse, the film says that we need continuous economic growth to pay for the continuously growing debt. This would be a bubble. And bubbles do burst, sooner or later. This part of the reasoning seems to suggest that the entire monetary system is a bubble, and that a collapse is inevitable. It’s just a question of when.
Also, the film says that all real wealth ends up in the banks. Thus, the common folk stay poor while some elite on the top of the pyramid has all the “real wealth”. They can’t make up their mind! When common people have money, it’s a debt forced upon them, making them go into wage slavery. But when that elite gets the money, it’s real wealth! In reality, money isn’t wealth. It’s mearly the yardstick of wealth. And as far as the “money is debt” thing goes, I’m not convinced.
It probably goes like this: I lend you 5 ounces of Carolinium (of which only 5 ounces does or can ever exist) at 10% interest. Now you owe me 6 ounces of Carolinium, and thus can never repay without negotiating another method of payment.
Of course the total amount of debt exceeding the money supply due to interest is pretty silly even to someone with no economic understanding. When it comes down to it, they hate interest because it’s “something for nothing.” They don’t understand the interest rate is the price of time.
Easy. We work voluntarily, and we can quit any time we want. That means we aren’t slaves by definition.
Maybe this can help you understand how money is created. It is put together orignally written by the mises, and rebubbled by Byron Dale, and I figured since someone else brought up Byron in this thread I would toss this in here.
It’s an excellent read and really delves into the mechanics of money creation. Even the Mises writers agree that Banks create money when they issue new loans.
Because its untrue. As they have commented before, you dont need more money supply to pay for the debt, money just goes changing hands and repaying the debts.
But the question then is, why does the debt become not payable in reality?
The problem on how they answer this question is that they see it from a mainstream keynesian way, and since they dont find anything wrong they conclude that more money is needed. But this is utterly incorrect as explained before.
The real reason is that the manipulation on interest rates creates a distortion in the capital structure. If you are not familiar with the capital structure concept, this means that the low interest rates fool investors into starting projects that are unsustainable and thus it distorts the structure of the productive economy (the capital structure). This projects are not profitable and therefore they can not pay their debts. This is the bust of the bubble.
So in reality, its not that the debt can not be theoretically payed with the existent money. What happens is that the bussiness that are created are not profitable (because invessrtors were fooled by the low interest rates) and therefore can not pay the debt. If the manipulations and distortion of the economy were not happening, this speculative and unsustainable bubbles would not happen and this “debt traps” would not happen because the majority of bussiness would be able to sell stuff to honor the debt.
The important thing is if bussiness are creating the type of goods that consumer demand, so they can repay the debt. But because keynesians just look at agregates and dont have a capital structure they completely miss the point.
They are confusing inflation with weatlh, with real growth. The system is based on inflation, but that does not mean real growth.
“The traditional example is that Person A deposits $100 in Bank A. Then Bank A lends out $90 to Person B, who deposits the money in Bank B. Then Bank B lends $81 to Person C, who deposits the money in Bank C. Et cetera. But if you actually look at the concept of fractional reserve banking, no new money is created. Existing money is only transferred from one person to the other.”
Kaju, clarification please. You are describing money creation, money in the sense of demand deposits (fiduciary media). In your example, there is only $100, but $171 plus the $100 = $271 is available in the form of demand deposits. $100 vs. $271 in demand deposits, could be liquidity problem and the money supply has increased by $171. Existing money is not being transferred because person A still has a claim to $100 (not $10), and person B has a claim to $90 (not $9), etc.
