Owing It To Ourselves?

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An A.D. 2006 article entitled “The Lost Decade—Per Capita Net Worth and Living Standards,” declared in part that “as citizens of the U.S. we own the national debt.”

Technically, that’s correct.  Whee duh pee-pul do “own” the National Debt.  But 40 years ago, when gov-co was first going hugely into debt, it was borrowing from the American people and justified increasing the national debt by saying it was OK since we “owed it to ourselves”.

There was a certain logic to that justification.  The USA—as a national entity—was not exactly “indebted” so long as gov-co borrowed from within the USA.  To illustrate, suppose I borrowed $20,000 from my neighbor.  I’d have $20,000 more cash which I might covert into a new pickup truck, and my neighbor would have $20,000 less cash but he’d also have my promissory note to repay $20K plus interest at some future date.  While I might seemingly be enriched by the additional $20,000 I’d borrowed, my and my neighbor’s neighborhood not be enriched or impoverished by that loan.  I’d be up $20K; he’d be down $20K; but the net worth of the neighborhood would be unchanged.  So long as the $20,000 borrowed (debt) and the correlative “asset” (debt instrument) both remained within a particular context, that context would not fall into greater debt.  A loan where both the debt and the correlative “asset” (debt instrument) remain within a particular context does not create a debt in the sense of a loss so much as a mere “transfer” of wealth.

But suppose someone in a Chinese central bank loaned me $20,000.  When a sum is loaned from a bank to a private lender, the consequences of that loan are enormously changed and only vaguely resemble a loan taking place between two private individuals.

Why?

Under our “modern” fiat monetary system, there are two reasons:  1) a mere evidence of debt—a mere paper promise to pay (like a debt instrument, mortgage, consumer loan agreement, etc. rather than an actual payment like gold or silver coins, land, food, or something tangible) can be treated as an asset; and 2) Fractional Reserve Banking.

As a result, if a Chinese bank loaned me $20,000, I’d have an extra $20,000 to go buy a new pickup truck and I’d also owe $20,000 to the Chinese bank.  Ignoring interest, there’s a certain superficial equality in that loan: I receive the advantage of using $20,000 now in return for repaying $20,000 (plus interest) later.  I would have a new pickup (an asset worth $20,000) but I would also owe a debt worth $20,000.  The Chinese bank would (by virtue of having loaned me $20,000) have lost $20,000 but (by virtue of obtaining my paper promise to repay the debt plus interest) would’ve anticipated recovering the $20,000 over the next several years, plus making a profit (interest) on the loan.

But unlike my neighborhood lender, the Chinese (or American) banks enjoy the privilege of fractional reserve banking which allows banks to loan out a sum of credit that is several (say, ten) times the amount of whatever “assets” that bank holds in the vault.  My private neighbor can only loan what he’s got.  If he has $20,000, he can loan me $20,000.  If he only has $10,000 he can only loan me $10,000.  If he has only $10,000 and writes me a check to me for $20,000, he can be criminally prosecuted for fraud.  But, under the privilege of fractional reserve banking, if a bank has a $20,000 paper “asset,” it can loan $200,000 (maybe more)—and it won’t be charged with criminal fraud.

Without debating the morality of a fractional reserve banking system (or the fiat monetary system on which it depends), you can see the enormous advantage of fractional reserve banking (at least for bankers).  Under fractional reserve banking, every time a bank lends 1 dollar, the resulting debt instrument (promise to pay from the debtor) is classified as a bank “asset” and can be used by the bank as a basis on which to lend another 10 fiat (paper or digital) dollars.  When the bank lends those 10 new fiat dollars, they’ll get additional promissory notes for 10 borrowed dollars which they can treat as “assets” to authorize them to loan another 100 fiat dollars.  They can lend that 100 fiat dollars, and convert the resulting debt instrument “assets” into loans of 1,000 fiat dollars, etc., etc.

Note that under fractional reserve banking, the bank that started by lending just 1 fiat dollar is now lending 1,000 fiat dollars and should soon be lending millions, billions, trillions and even quadrillions of additional fiat dollars—all based on “assets” in the bank’s vaults that are nothing but paper promises to pay previous debts—that are “multiplied” by fractional reserve banking.

It’s estimated that the world’s global economy generates an annual GDP of $55 trillion.  It’s also estimated that there are over $1 quadrillion (with a “Q”) in “derivatives” circling the globe.  I.e., the global economy’s derivatives (a particular kind paper debt instruments) are roughly 20 times the global economy’s annual gross income.

If you owed 20 times as much money as you gross every year, could you hope to ever repay that debt?  Ohh, a handful of borrowers might be able to repay such enormous loans, but the vast majority could not hope to do so.  The vast majority would be lucky to even pay the interest on a loan for 20 times their annual gross.

So, if an average man can’t hope to repay a loan for 20 times his annual gross income, how will the global economy (that generates $55 trillion each year) hope to repay over $1 quadrillion in derivatives?

1. To suppose that such repayment is even possible is absurd to the point of madness—or institutionalized fraud.

If so, how did the bankers and financiers’ of the world come to somehow create over $1 quadrillion in derivatives?  Didn’t they know such debt was impossible to pay?  Didn’t they know that issuing such debt instruments was insane?

Sure.  They had to know.  But they didn’t care.  They were having such a great party, nobody wanted to stop.

Why?  Because under fractional reserve banking, the more banks lend, the more they have.  (Once they lend $1, the resulting $1 promissory note lets them lend $10.  The resulting promissory notes lets them loan $100, etc. etc.)

I suspect that today’s $1 quadrillion in global derivatives is the inevitable result fractional reserve banking.  The banks simply got into the cycle of loaning 1 fiat dollar, using the resulting promissory note as an “asset” on which to lend another 10 fiat dollars, then using those resulting promissory notes as assets on which to loan another 100 fiat dollars, etc. etc., until the cycle inevitably “multiplied” a seemingly “impossible” 1 quadrillion in excess fiat dollars.  Where do bankers pile the inevitable haystack of excess fiat dollars that result from fractional reserve banking?  I think the answer may be Derivatives.

As the mathematical consequences of fractional reserve banking become increasingly apparent, people will begin to sense that fractional reserve banking is inherently mad (or fraudulent).  It is, in the final analysis, an international bankers’ Ponzi scheme fundamentally identical to that of Bernie Madoff.  Both the bankers and Madoff knowingly engaged in a con of monumental proportions.  Both Ponzi schemes were destined to fail from the moment they were initiated.  Madoff’s has failed.  The bankers’ fractional reserve banking scheme will fail.  When the banking scheme fails, the results will affect the world much like Madoff’s failure affected his “investors”.  People’s saving and investments denominated in fiat currency will be wiped out.  The bankers (like Madoff) will hopefully be captured and punished—but I wouldn’t bet on it).

Note that the fractional reserve banking fraud could not be perpetrated without 1) legal tender (fiat, paper and digital “money”) and 2) the belief that a mere paper promise to pay could be treated as an “asset”.  If we had gold and silver money in circulation (as required by our national Constitution), banks could not loan what they did not have.  If I deposited 1,000 physical silver dollars into a bank, that bank might be able to loan some or all of my 1,000 silver dollars, but it could not (through the alchemy of fractional reserve banking) loan 10,000 silver dollars.  The physical reality of gold and silver coins would prevent the banks from lending more gold or silver coins than they actually had (or perhaps even existed).  The only way the banksters could “magically” turn 1 into 10, 10 in 100, and 100 into 1,000, etc. was by means of fiat (paper and digital) dollars that have no tangible reality.  That’s surely why our government removed gold and silver from circulation.  That’s also why we have nation and global debts that so enormous that they can’t possibly be paid.

All of which bring me back to why it’s not merely dangerous but even self-destructive to borrow from foreign banks.  Under fractional reserve banking, so long as we were “borrowing it from ourselves” (borrowing from within the context of the USA), I might borrow $20,000 from the local bank, the bank would use my debt instrument (promise to pay) as an “asset” to “create” another $200,000 in credit to be loaned into my local community.   My borrowing (or that of my government) might thereby enrich my neighbors and my community.

But what if my government starts borrowing from China?  Who gets the multiplied benefit of fractional reserve banking?   Not the American people.  China gets the asset “side” of the debt instrument so China gets the multiplied effect of fractional reserve banking.

When we borrow from China, Chinese banks receive the resulting debt instrument (asset) and Chinese banks operating under fractional reserve banking are thereby entitled to loan out ten times the value of that debt instrument (promise to pay).  The Chinese—not my American neighbors—are enriched by our government’s borrowing from China.  Under fractional reserve banking, when I borrow $20,000 from China, China (not the USA) gets to loan $200,000 to Chinese businesses.

If this conjecture is roughly correct, we can reasonably wonder what sort of madness or treason has motivated our “fearless leaders” to borrow credit from foreign countries.  In the “Mad, Mad, Mad, Mad World” of fractional reserve banking, the more banks lend, the more banks have.  So, when our government stopped borrowing from the American people, the American people were thereby impoverished.

Again, in our fiat monetary system, one man’s debt is another man’s asset.  If I borrow $20,000 from a bank, I assume a $20,000 debt, but I give the bank a $20,000 promissory note which the bank regards as a $20,000 asset.  My debt is the bank’s purported (paper) asset.  So long as both my debt and the bank’s asset remain within our local community, the community is not financially impoverished by the debt/asset and may be financially enriched by fractional reserve “multiplication”.

Today, foreigners increasingly “own” the asset “half” of our national debt.  That is, foreigners hold the asset “side” of our debt instruments while Americans hold the debt “side”.  This international division of asset from debt—and movement of assets overseas while the debts remains here—will certainly degrade our economy and may be ruinous.  Formerly, when we calculated our Per Capita Net Worth, the result reflected the value of the asset “side” of each debt instrument as being within the USA right along with debt “side” of each debt instrument.  The two “sides” would tend to cancel each other out.  Our national Per Capita Net Worth might be neither increased nor diminished by lending and borrowing that took place within the nation.

But today, when we calculate our Per Capita Net Worth, all of the debt “sides” of our debt instruments are still here (within the USA), but many of the asset “sides” are now in China or some other foreign country.  Result?  Our Per Capita Net Worth may be falling in direct proportion to our foreign borrowing.  As our Per Capita Net Worth falls, so will our standard of living.

I won’t say it’s ever a good thing to borrow.  But if we must borrow, so long as we borrow “locally” and we “owe it to ourselves,” the resulting debt may be more or less harmless and (under fractional reserve banking) perhaps even beneficial.  But, under fractional reserve banking, borrowing from foreigners and no longer owing the debt “to ourselves” may be a kind of national financial suicide.

If you can think of a way out of the inevitable mathematical consequences of fiat “money” and fractional reserve banking, do tell.

If you can’t, buckle up.

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