Thursday, September 8, 2011

German Government Admits Money System Is Giant Ponzi Scheme

Earlier this year a petition to the German government received enough votes (4,254) to have to be addressed by the government. The petition called for 100% reserve banking, giving the following reasons (as the government interpreted them) for its request (from Sein magazine):

As grounds for his petition the petitioner argued, in particular, that banks need only demonstrate eight percent capital cover to be able to allocate 100 percent credit. Because banks demand interest on this credit, i.e., ask for more money back than they originally lend into the system, the total debt owed grows faster than the available credit. This leads (according to the petitioner) to ever growing debts, including on the public account, and will lead to yet worse financial crises than the current.

It’s very good, in my opinion, that this debate can take place at all, and I think highly of the German state for having mechanisms in place that enable this. Nevertheless, the request was denied, and the grounds for the denial are both entertaining and revealing. I would say far more revealing than the government intended. Here are the core arguments:

Money is a central component of economic life. […] Alongside its functions as medium of exchange and unit of account, money is also a store of value. The more stable money is, the better these functions can be fulfilled, and, therefore, the smoother the economy will run.

Standard fare. And yet money-as-commodity, from which ever-growing money-profit can directly be made (per M-->Mn-->Mn2, rather than C-->M-->C’ of typical exchange (Commodity sold for Money to buy another Commodity)) via currency exchanges and interest-based means, is implicit in the government’s position. How healthy this mechanism might be is of course not up for discussion, cannot even be mentioned as a possible topic even in a response to a petition discussing the money system. Indeed, the government’s entire response is a textbook rendition of the prevailing economic orthodoxy, which rests on assumptions debunked countless times in recent decades (and even centuries).

The business operations of the money and credit institutions fulfil a central role in an economy.

Money is important, thus banks are too. Then follows some blah blah about how important it is that banks operate sensibly, with an almost tangential reference to fractional reserves (“in Höhe eines bestimmten Prozentsatzes” = “at the level of a specific percentage”). It just emerges in the paragraph, a passing reference to the main problem denoted by the petition, popping up briefly in the refusal-text as a strength.

Next the mechanism of central banking is briefly laid out:

Because the central bank in the Euro system makes high powered money (“Zentralbankgeld”) available to the banks, it can influence the business operations of those banks. Private banks create money when they grant their customers credit by booking the amount due on their accounts. They expand the money supply via credit creation without any involvement of the central bank. The banks are, however, bound to new high powered money, because they must also make cash available to their customers, and maintain a part of their account deposits as assets at the central bank in the form of minimum reserves. The high powered money requirements of private banks is thus the central bank’s leverage (?? “Ansatzpunkt”) for influencing the credit money creation of the private banks.

Again, standard fare. One look at the fact-based evidence of Steve Keen’s “The Roving Cavaliers of Credit” should be enough to destroy this oft asserted claim, and yet “the entire body strides vigorously forward” still. When you have power, you can ignore facts and repeat lies in archaic terminology slick enough to be a ‘get out of jail free’ card (until the show stops).

There follows the conventional view about central bank control of base rates (low interest rates = high economic growth, high interest rates = slow growth), even though the last few years are demonstrating—for all to see—how ineffective this ‘control’ is. Then comes the jewel:

As a rule, interest on borrowing is earned through additional production and income. Financing with new debts, on the other hand, would indeed lead to over-indebtedness and—practiced across the board—to a collapse of the financial system.
[My emphasis.]

Without growth, the system would collapse. You can’t just keep on piling debt on top of debt unless there is sufficient economic growth paying for it. That’s a ponzi scheme. I hope this justifies my tabloid-style, eye-catching headline.

There follows more blah blah about how damaging inflation is, especially for people on low incomes, best prevented by “independent central banks” charged with ensuring price stability. Best not mention the frequency of economic shocks that have peppered modern history with astonishing frequency, though there is mention of the hyperinflation caused by over-reliance on the famous printing press. I love the argument that borrowing money is not printing money. As if, because we owe more than we print, we are not printing. As if systemic addiction to perpetual growth has a stabilizing influence. Gold has risen from the mid $200s to almost $2,000 per ounce today in about ten years! In 1971 an ounce of gold cost about $40! Price stability!? Wages, on the other hand, have been quite flat for thirty or forty years. Commodities generally tell a very inflationary or volatile tale. And look at housing. Energy. Food. Even on their own arguments the system has failed. The only stable dynamic it generates is robbing the poor to pay the rich.

The last quote I want to draw your attention to is the last two sentences of the penultimate paragraph:

The petitioner’s recommendation to install a 100% reserve system for credit institutions would yield a steep reduction in credit extension and thus call the existence of private banks into question. The consequences of this would be that the banking and finance system, as well as the money circulation of the private sector, would be jeopardized.

It is precisely this the petitioner was hoping for. The response is a tacit admission that the petitioner is correct, but that The System has to be protected because it works the way it does. No claim is backed by any evidence, and everything we see around us today in economies across the planet flatly contradicts the government’s position.

To conclude: there’s a clear admission that economic growth backs usury, and a clear admission that should growth not occur for long enough, the system collapses. That is an implicit admission that the money system is a ponzi scheme. The insistence that ‘that’s how it works,’ while inevitable, is in itself an admission that they have a serious systemic problem; infinite growth on a finite planet is simply impossible. Whether or not they recognize this is anyone’s guess.

In toto the response is an admission that the government borrows—via bonds etc.—from private banks and other financial bodies the very money with which it equips those same private banks. Private banks then use the money they ‘loaned’ the government as ‘reserves’ to extend loans (credit money) to citizens at some reserve ratio. Or put another way, private banks use the (non-existent) money loaned by them to The Government and backed by The People as backing for credit-loans lent to The People for the express purpose of growing the economy and the economy’s money supply. Or in even simpler terms, people borrow from themselves to back money they then use to borrow more money from themselves. And the interest flows to the owners of money. We are puppets, and our strings are made of the money we pay the cost of borrowing into existence.

Quite the circle jerk. If you can get your head around it.


Frank Powers said...

You should try to get this posted on Naked Capitalism. And everywhere else you see fit. Really. I mean it.

Rupert Russell said...

I think I just got tinnitus from reading, is that possible?

Ray Sawhill said...

Are you familiar with the monetary-reform movement? Ellen Brown, Thomas Greco, Bernard Litaer, others. You might find them pretty simpatico. I'm amazed how seldom they come up over at Naked Capitalism. But maybe they're jokes and I'm a know-nothing. Anyway, I enjoy your blogging, looking forward to more.

Toby said...

I believe the German Government doesn't realize what it has done here. The question is, how broadly and deeply can this information be spread across the planet? That's not up to me because I am shit at that sort of thing. To those of you with charm and friends please communicate this with as many people as possible. My gut tells me this wee confession has the potential to knock the house of cards over.

Hi Ray, good of you to stop by! Yes, I am aware of those writer-thinkers, indeed, it is because of their enormous efforts that I am able to post at econosophy at all. I am no pioneer, just a messenger distributing information that seems important. Check out my translations of Franz Hoermann's work (he's one of the labels; "Professor Hoermann"). His work is really radical. Charles Eisenstein is also well worth a dip, as is David Graeber.

Debra said...

Toby, you know how much I like to play devil's advocate.
It is part of my nature. THE OBSTACLE.
While I agree with most of what you've written here, it is now my turn to throw up my hands with a wee bit of impatience and offer to send you a copy of "The Merchant of Venice" so that you can see the world from MY perspective.
The money system BECOMES a giant Ponzi SCHEME when we lose faith in the legitimacy of money as a means of exchange, etc, between us.
A quick return to "The Merchant" in the scene which I often quote to you where Antonio and Shylock are discussing interest (one of the best part of William's plays is the extraordinary philosophical/metaphysical complexity of them, and the RESULT that you don't have to read ten modern economic textbooks to understand the way economics works ORGANICALLY, you can have fun and read "The Merchant" at the same time).
As you must remember, Shylock gives a rationalisation/justification for taking interest in a little parabole where he ressurects good old Jacob, third equivocating patriarch, and Jacob's slippery tactic of peeling wands before the ewes, in order to further himself over Laban.
Here's what Shylock says : "This was a way to thrive, and he was blest ; and thrift is blessing if men steal it not."
Antonio : "This was a venture, sir, that Jacob served for, A THING NOT IN HIS POWER TO BRING TO PASS, BUT SWAYED AND FASHIONED BY THE HAND OF HEAVEN, Was this inserted to make interest good ? OR IS YOUR GOLD AND SILVER EWES AND RAMS ?

The more I think about this confrontation of two very different THEORIES OF MONEY, but not just about money, two very different theories of the place and role of man in this universe, the more I feel that we have, IN OUR OWN EYES, created a separate, competing system with what we have excluded as nature. Our way of searching to be fruitful, and MULTIPLYING (money/debt, trash goods) on this earth has had very destructive, negative consequences to ourselves, and the planet.
We have fashioned ourselves as gods, to dominate nature, to attempt to triumph over death, suffering, insecurity. Generalized hubris, in sum.
The current money/debt crisis is the symptom of our loss of faith in THIS PARTICULAR THEORY OF MAN'S PLACE IN THE UNIVERSE, and of his exclusion of God (gods ?) as symbolic agent(s) over him (guarantor).
There is no way to found a symbolic system from the inside with no guarantor whatsoever. It quite simply implodes.
That is what is happening right now.
Incidentally, the crisis in money is not our only crisis. WE ALSO HAVE A CRISIS IN OUR LANGUAGE, where there is less and less consensus about meaning, and abstraction becomes the name of the game. "Mots valise", as we say in French. Empty words where each individual plugs in HIS INDIVIDUAL definition of the word(s) and we end up talking past each other.
It is not the end of the world.
But... it is the end of an ideology, the end of our faith in it.
I'm going to give a plug at Nostradamus, here.
NOT UNTIL WE HAVE ABANDONED OUR FEBRILE ACTIVISM, our intimate convictions that WE can act to set the world right, not until we have acquired some form of new HUMILITY, and humility stems from "humus", the earth, the ground, will we be able to come to terms with our hubris.
The crisis is hubris.
The cure is humility.
And... setting ourselves LIMITS on this earth.
We need limits.
Who said "the sky is the limit "?
That is a laugh. The sky is no limit whatsoever.
"Humus", now.. THAT'S a limit that you can feel and touch with your body...

Toby said...

Interesting Debra, and again I can only remark how similar your thinking is with that of Charles Eisenstein!

The kind of growth usury demands (living creatures multiply in concert with their environment) is of good and services, which must somehow be manufactured out of what economists call “idle” resources, which are implicitly infinite in their world view. This peculiar aspect of growth is not very present in your comment, nor in Shylock’s thinking. Ecology and carrying capacity were concepts not realy available to Shakespeare. Money as we have it demands growth of the economy, in a paradigm which presupposes that buying and selling increasing amounts of goods and services are what life is all about, that humans are rational maximizers of profit and care for nothing else. It is this we both rail against. And probably William too, though in a different context. (The antisemitism is a separate issue.)

What money ‘truly’ is is anyone’s guess, and I mean that specifically. Recently I referred to it as a mirror we gaze into without realizing it is a mirror. I like that definition. Thus in it we see hubris, ambition, Babel, greed, and so on. Whether or not there can be a money which does not reflect these aspects of our souls is what we together explore here at econosophy.

Debra said...

William knew Jewish thought very well.
The infinite growth idea is a disguised form of the biblical commandment to man to be fruitful, multiply and "dominate" the earth. This commandment reappears in what is God's fundamental promise to Abraham, that his descendance shall be as numerous (and uncountable) as the stars in the sky.
The idle resources part harkens back to Descartes' idea of PUTTING NATURE TO USE FOR MAN.
Nature thus appears as idle IN CONTRAST to man, who becomes an active MAKER, charged with TRANSFORMING IT TO MAKE IT ARTIFICIAL, thus human, in opposition to animal, and also, incidentally, in Descartes' time, to God.
Jewish thought, and Descartes', maintain a vital distinction between the manner in which God CREATES, and man MAKES, shall we say.
Evincing God from the picture severely skews that opposition.
Consider also at this time how little importance AND VALUE we give to our personal NATURAL multiplication, through the meeting of man and woman...
One of the most pertinent and potent oppositions around these days is the "natural"/"artificial" one...
I sincerely doubt that William was really antisemitic ; I think rather that he was using Shylock to take disguised digs at Protestant thought. He would have been censured and hounded out of England if he had presented Shylock as a Protestant bourgeois...
My word verification.. "purer"