''What about removing the central bank altogether and keeping the current stock of paper money unchanged? Would that not do the trick? No, it would not. An unchanged money stock will cause an almost immediate breakdown of the present monetary system. After all, the present system survives because the central bank, by means of monetary injections, prevents the fractional reserve banks from going bankrupt. ‘’
'It would appear that the central bank can manage and stabilize the monetary system. The truth, however, is the exact opposite. To manage the system, the central bank must constantly create money “out of thin air” to prevent banks from bankrupting each other. This leads to persistent declines in money’s purchasing power, which destabilizes the entire monetary system. This tendency to destabilize the system is also reinforced by the fact that a money monopolist naturally has the incentive to look after his own interest. ‘’
I don’t get the stuff in bold. Can you please explain it?
All money in today’s economy is credit, in other words, all money is debt. So, how could interest be paid if all money is debt? It can’t be, unless new debt is created. It’s a vicious cycle. The second part of the video talks about it!
The Compound Interest Paradox is the answer to that point. Technically, it isn’t part of Austrian Economics because Mises never wrote about it. I have several articles on my blog on that subject.
I’m not going to pontificate on the validity of the CIP, but technically something is Austrian econ if it follows from the schools grounding principles, not whether Mises wrote on it or not. He is just its most influential thinker, but by no means its Alpha and Omega.
Agreed. As economists, Mises and Hayek opposed banking cartels for economist reasons (inflation, monopoly, etc.), as a moral philosophers, Rothbard for example, certainly understood the “taxation is theft” principle, as well as the “inflation is a hidden tax” principle… Although none of the “Austrians” explicitly exposed the idea of CIP (as far as I’m aware) there is nothing to suggest that they weren’t aware of it. The (in)famous “Money as Debt” video describes the process by which the CIP operates, and even though the video may not be considered “Austrian” there are several economic historians (Huerta de Soto, e.g.) who have researched and documented what is, essentially, the CIP throughout the course of history.
While it is true that all money is debt, and that if all debts were repaid there would not be a single penny in circulation, it is only a partial truth to say that the only way to pay back the debt, is to borrow more. This view fails to account for the value of labour.
As an example: You take out a $1000 loan, and pay back around $900/month. About $80 of this $900 represents interest. You then realize that your current income isnt enough to pay back the loan, so you take on a part time job, say, washing windows for the bank. The bank is now making $80/month profit on your loan, and so has $80 extra to spend. You are hired at $80/month to wash the banks widows.
So, you earn the money to pay the interest on your loan, which is the same money you had previously paid. As long as this continues, you can pay back your loan, with no new money being added.
Of course, you do not have to work directly for the bank for this to work. No matter where you earn the money, its origin was a bank, as is its ultimate destination.
Just because you don’t like one part of an article, doesn’t mean the whole thing is invalid.
I haven’t seen any counter-evidence to the Compound Interest Paradox since I understood it. A lot of people get offended by it, though, especially those that have received a lot of State economics education/brainwashing.
When the bank loans me $1,000 I am indebted to the bank (something like) $1,100 (10% on a 1-year note, e.g.) Since all money in our economy is debt (and incidentally, only debt is legal money), that extra $100 (the difference between what is borrowed and what is owed) does not exist unless the bank chooses to create it.
So as long as you are perpetually indentured to the bankers, this charade can continue.
The Compound Interest Paradox is no paradox. The explanation of the structure of production in the ERE immediately shows that there is no interest problem. interest is just income!
The arguments of the “money as debt” people usually treat money as some constant measure of value. When you let go of the fixed money value constraint or at least the false idea that it cannot gain in value, it becomes apparent that there is never a problem of any shortage of money.
Interest rates can be a problem only as far as they have been set according to false expectations of the money value. Long term fixed interest rates that are discovered to be excessive for example, if monetary deflation was allowed to take its course after a bust, would simply prove to be business errors. Such loans would be defaulted. But they would be defaulted not because there is some paradox of interest or shortage of money, but because they were entrepreneurial errors (The large scale errors are of course explained by the Austrian Business Cycle Theory).
Many “money as debt” cospiracy theorists as populerized in books such as “web of debt” simply do not understand economic theory. They adhere to some of the worst economic fallacies of the past few hundred years. They see all problems related to the quantity of money. Money for them is wealth.
Spot on. I’d like to see a line-by-line refutation of the Money as Debt video… do you know of one? The first half of the video is a pretty clear explanation of FRB, but it descends into nonsense when it starts talking about government fiat money as the solution, or the silly notion of there “not being enough money to pay back the debt”.
I expect what Shostak what referring to was merely that most of the money supply in existence is unbacked, and if free banking were to be restored, there would be enormous pressure on the banks to increase their reserves and withdraw money from supply. Thus, the present monetary system would immediately collapse. He certainly wasn’t talking about any “compound interest paradox” rubbish.
The same money the worker pays as interest to the loan can be put back into the economy again only as debt, which again has interest associated with it. So it doesn’t end the cycle.
Why, because a Youtube video says so? Interest is income. You can go buy Ice Cream with it.
Look, these videos with the people chained to an Iron ball or to a bank and the banker counting all Gold are pure Socialist Propaganda. It takes a little time and effort to realize it, and then even more time to expose it. I have a chain around my neck but it is tied to a Government bureaucrat. The same bureaucrats they are advocating for in order to “free” us.
Right, because everyone knows lenders never consume anything!
Look, Im not really opposed to stuff like Money as Debt, The Secrets of The Federal Reserve, The Money Masters (which I still rate as a fantastic documentary). Most of the content is actually quite accurate. I agree with almost everything you say, in regard to the problems of a debt based banking system…but at the same time, people need to get passed this juvenile idea that banks are our ‘enemies’. Government is the only enemy.
The Federal Reserve is a cartel. Private banks can only fleece the public with the help of their partners in the cartel; the government.
In the same passage where you chopped off half of my sentence, apparently in order to make it appear as though I was laying all the blame at the feet of government, I stated:
“The Federal Reserve is a cartel.”
You then purport to refute this by saying:
"Fact is, both banks and the government are criminal entities and partners"
You are failing to get the point. I already thought of a scenario where there would be a metal standard in place, and amazingly, if gold is deposited to the bank in huge amounts that the rest of the cash reserves don’t suffice to pay a positive interest rate, where would the ‘missing’ interest come from? Increased purchasing power answered me!
But that’s not the problem with the present monetary system. It is popular belief today, under the fiat money regime, to look only into nominal interest rates. In fact, even businesses today dislike price levels going down. To cater to this inconvenience, banks HAVE TO inflate credit again as new debt, so that it can make sure businesses get to pay positive interest rates.
See what Shostak mentions in his article’s opening:
Most economists believe that a growing economy requires a growing money stock, on grounds that growth gives rise to a greater demand for money which must be accommodated. Failing to do so, it is maintained, will lead to a decline in the prices of goods and services, which in turn will destabilize the economy and lead to an economic recession-or, even worse, depression.
This isn’t theoretically correct, but popularity-wise it is.