Debt fuels a poor result
HERE in a “nutshell” is all we need to know about how the process behind the sorry state of national finances in Greece and around the world develops (“We can’t get caught by the Greece trap”, TB, 2/ 7/ 15).
Central banks inject currency into the economy at interest. It can be accelerated by easing lending standards, reducing interest rates, and the direct purchase of government bonds.
These actions all involve the creation of money “out of thin air” and always result in a general price inflation and/ or asset bubbles in real estate or stocks.
Parallel to “monetary policy” is “fiscal policy”; which usually involves governments spending ( and borrowing) excessively in order to finance operations.
The shortfall ( deficit) is partially covered by the sale of bonds to the central banks which print the money to buy the bonds.
Because 100 per cent of currency is injected into the system via private or public loans, all money supply is debt.
Outstanding loan principal plus compound interest must therefore always be greater than the total money supply.
Therefore, debt can never be paid back. In centuries past, this was called usury and was often banned. Principal plus interest equals money supply.
As bubbles develop and/ or inflation increases the money supply ( lending) is tightened. A “liquidity crisis” develops as a growing number of borrowers, both public and private, must suddenly scramble to get their hands on enough new debt- money to repay old loans.
As loans are paid back into the banking system, the money bubble deflates. Bankruptcies surge and markets crash as frightened depositors “run on the banks”. The eggheads refer to this as a “correction”.
To “provide liquidity”, (“palliative”) central banks return to Step 1 and repeat the process. And on and on and on the madness of “economic cycles” and debt contagion continues decade after decade after decade. It is that simple! We can keep discussing treatments but if you want to prevent the sickness, the time to have a national discussion on money reform is now.
So, what is the “cure”? That’s simple too!
Abolish the central bank and abolish all forms of consumer ( not commercial) lending at interest. Apart from the sound commercial loans which will fuel future productivity and growth; issue debtfree currency from the Treasury in direct one- to- one proportion to annual productivity levels.
New currency can be injected into the economy through a combination of “useful” public works projects, interest- free home loans, grants and direct tax rebates.
CASHED OUT: A retiree in tears outside a national bank branch in Greece.