The First Danger of Debt-based Monetary Systems

09 May

The Pyramid Scheme [courtesy Google Images]

The Pyramid Scheme
[courtesy Google Images]

There are a number of dangers associated with debt-based monetary systems.

The first danger is that debt is deemed to be form of wealth.  As mad as it seems, under this presumption, the more debt we have, the wealthier we become (or at least appear to become).   The wealthiest people would be those who lend the most currency to others, or at least those who acquire the most debt instruments (intangible promises to pay) rather than tangible assets.

Under the debt-based monetary system, if you borrow $250,000 to build a new home, the resulting paper-debt instrument (the promissory note to the bank bearing your signature) is deemed to be more valuable than the physical/tangible house that was built by means of that debt instrument (intangible promise to pay).

Think about that.  Thanks to fractional reserve banking, your signature on your mortgage documents is more valuable than the tangible house the mortgage was used to purchase.

That’s because, under fractional reserve banking, banks can use your $250,000 note (promise to pay) as collateral to justify lending up to 10 times as much ($2.5 million) in additional currency to consumers to buy more flat-screen TVs, computers and groceries with their MasterCard or Visa.  Your $250,000 promise to pay can be used to “stimulate” the economy with the creation of up to $2.5 million in additional consumer loans.  As a result, the nation becomes seemingly richer every time someone borrows currency from a bank and signs a promissory note that can be used as collateral.

•  Fractional reserve banking is not an example of higher economics or more sophisticated finances. It’s a brilliant Ponzi-scheme fueled by mere promises to repay debts.

Most Ponzi-schemes fail because they claim to generate fantastic returns on investments, but actually rely on attracting more customers to invest more assets into the Ponzi-scheme to create the illusion of wealth.   The new customers’ deposits are used to pay off the earlier customers’ alleged “investments”.

For example, so long as Bernie Madoff promised to deliver a 18% to 20% return on investment, he attracted more clients who invested more money.  Bernie used the new clients’ investments to pay 18% to 20% return on investment to his previous customers.   Bernie claimed to earn 18% to 20% on the stock market each year, but most of his additional “income” really resulted from the growing deposits of his newest customers.

Bernie was robbing Peter to pay Paul.  The scheme was based on fraud, but worked so long as new customers kept coming in the door to invest more of their money in Madoff’s investment firm.   But once Bernie ran out of new customers, he couldn’t pay his phenomenal returns to his existing customers, the fraud was exposed, his business collapsed, he was sentenced to 150 years in prison and his son committed suicide.  Like (almost) all Ponzi-schemes, the Madoff investment scheme collapsed when he ran out of “greater fools” willing to “invest” more currency in his company.

Fractional reserve banking is a far more brilliant Ponzi-scheme because, in the context of a debt-based monetary system, you don’t feed that Ponzi-scheme with ever more tangible assets—you feed it with evermore intangible debt.

Inevitably, every Ponzi-scheme that relies on attracting more tangible assets fails because there’s always an absolute limit to the supply of any tangible asset.  There are only so many potential customers with ever more assets to invest in the scheme.  When the Ponzi-scheme operators reach the limit their ability to attract more customers willing to invest more tangible assets, the scheme collapses.

With fractional reserve banking, people don’t invest actual assets.  They invest debt.  They invest promises to pay (debts) rather than actual payments (assets).

Fueled by mere promises to pay, the debt-based, fractional reserve banking system becomes a kind of cornucopia . . . a proverbial money tree . . . a perpetual monetary motion machine that produces a seemingly fantastic amount of “wealth” that doesn’t depend on actual work or tangible assets but only on promises to pay.


•  The classic examples of fractional reserve banking were “liar loans” for “sub-prime borrowers”.  It didn’t matter if borrowers actually earned enough money to repay their loans.  Sub-prime borrowers (people who shouldn’t be able to qualify for a loan) could exaggerate their claims of income (lie) in order to borrow more money from the bank to seemingly purchase a home that was bigger and more expensive than they could truly afford.

The banks wouldn’t even investigate to see if these sub-prime borrowers were lying about their incomes.  The banks knew they were lying.  But the banks didn’t care because, in a debt-based monetary system, even a sub-prime borrower’s promise to pay (promissory note to the bank; debt) was deemed to be more valuable than the physical house (asset) that was purchased or built with the money from the loan.

Because a new Cadillac is enormously more valuable than a gallon of ice cream, you’d have to be crazy to pass up an opportunity to trade a gallon of Rocky Road for a new Escalade.   Similarly, since a promissory note is more valuable than the house it’s used to purchase, the banks regarded it as crazy to pass up a chance to effectively trade a new, tangible house for an intangible promise to pay (debt instrument).

Given that anyone, even a sub-prime borrower, even a homeless bum, could promise to repay a loan and thereby create more debt, the fractional reserve Ponzi-scheme seemed almost foolproof.  As long as people could get something tangible (a house, perhaps) for nothing (their mere intangible promise to pay), there would always be a steady stream of greedy and immoral people willing to exchange mere promises they couldn’t keep for valuable, tangible properties that they could keep or consume.

If the banks ran out of “prime borrowers,” they would lend currency to “sub-prime borrowers”.

If they ran out of “sub-prime borrowers,” they’d lend to young adults needing college loans.

If they ran out of young adults willing to issue promise to pay in return for their college educations, the government and fractional reserve system would rely on “deficit financing” by means of which they’d saddle future generations of as yet unborn children with “promises to pay” (full faith and credit of the American people) with the growing national debt.

If the native people of The United States of America became unable or unwilling to borrow more currency and produce more debt instruments, the government might even seek to stimulate immigration (even by illegal aliens) who would eventually borrow currency to build more homes.


•  In a debt-based, fractional-reserve monetary system, so long as there were more people willing and even eager to trade their intangible promises to pay (debts) for tangible, valuable things like land, cars, factories, and homes (assets), we could live forever in the earthly paradise of consumerism.    We could consume forever, without actually working to produce tangible wealth needed to actually pay our debts.  All we had to produce were more promises to pay, and we could shop ‘til we dropped.

It was like having a checking account that never required your deposits.  You could write all the rubber checks you wanted and no one would ever bother to send them to your bank.  All you had to do was affix your signature to one of your checks, and people would give you things like homes, cars and computers.

So long as debt was deemed a form of wealth, and there was someone, anyone, willing to go deeper into debt, we were golden.  The fractional reserve banking system could make us all rich without ever having to work to produce tangible assets.

We could consume without the need to produce.  This seeming possibility might be part of the reason why our government was willing to send some of our industries and jobs to China and other third-world countries during the last twenty years.  Who needed those stinking, polluting industries when we had an endless supply of borrowers willing to merely sign more debt-instruments and thereby create more apparent wealth?   Let the idiot Chinks produce tangible things (assets) and life-threatening pollution, and we would consume those tangible assets by means of merely giving the Chinks our intangible “promises to pay” (US Treasuries; paper debt-instruments).

And that’s pretty much what happened.  The Chinese became a primary supplier of tangible assets to the United States in return for our mere debt instruments (intangible promises to pay).  Result?  China now holds $1.2 trillion in US promises to pay (debt-instruments) which they know to be almost worthless.

But, can the Chinese complain?


Why?  Because once China admits or even acts as if their $1.2 trillion the US debt-instruments are nearly worthless, those US treasuries will actually become worthless in the eyes of the world.  Then, China will lose the last illusion of having that $1.2 trillion in debt-based “wealth”.

If China hopes to ever exchange their $1.2 trillion in US debt-instruments (intangible promises to pay) for $1 trillion worth of tangible assets, they’d better keep their mouths shut and continue to support the illusion that debt is an asset.  But, in truth, the real value (purchasing power) of $1.2 trillion in US Treasuries held by China may be falling by up to 10% per year towards the value of $1.2 trillion in Confederate dollars.


•  In a sense, the Chinese (at least to the extent of their $1.2 trillion in US debt-instruments) have become a source of the “full faith and credit” in the US dollar and US debt instruments.  The “wily Orientals” (and the rest of the world) have been conned to a degree that Bernie Madoff could only envy.

In the end, the difference between Bernie Madoff and our deb-based, fractional reserve banking and monetary system is that Madoff didn’t have access to nuclear weapons.  If Madoff had had the bomb and was able to thereby intimidate his “customers” into silence, he’d still be in business rather than in prison.

The Chinese accepted the fundamental lie of the debt-based, fractional reserve system: That debt (intangible promises to pay) could be treated as assets (tangible wealth).  Being dumb enough to accept that lie, the Chinese will inevitably lose much, probably most, of the purported $1.2 trillion in wealth (assets) stored in US Treasuries (debt-instruments).

It’ll be a good lesson for the Chinese.  They deserve to lose $1.2 trillion because they were dumb enough, greedy enough, to believe that a promise to pay (debt) was not merely as valuable, but even more valuable, than an actual payment (asset).

It’ll be a good lesson for the American people, too, when they learn that an intangible promise to pay (debt) can never be as valuable as an actual payment (tangible asset).   When they get that lesson, it’ll be painful.   Americans will scream, shout and maybe even shoot.  But the truth is that the American people were sufficiently ignorant, greedy and immoral to believe the lie that paper-debt instruments were even more valuable than tangible assets, that “consumerism” was a valid basis for a successful economy, that jobs and industries could be shipped overseas, and we could still shop ‘til we dropped.

Those who play the fool, inevitably pay the fool’s price:  poverty.  That’s true for men.  It’s true for nations.


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21 responses to “The First Danger of Debt-based Monetary Systems

  1. genomega1

    May 9, 2014 at 3:09 PM

    Reblogged this on News You May Have Missed and commented:
    The First Danger of Debt-based Monetary Systems

  2. cptnemo2013

    May 9, 2014 at 3:11 PM

    Reblogged this on Chastisement 2013.

  3. Henry

    May 9, 2014 at 3:32 PM

    Another danger of debt-based monetary systems is that, if the debt has interest attached (which is always does), then it’s theoretically impossible to pay it off. The debt only grows and grows.

    This is because the interest payments on the original debt must also be borrowed at interest. And the interest payments on the money borrowed to pay the interest on the original debt must also be borrowed at interest, etc., etc.

    In the end, the bankers who loan a nation its currency end up owning everything money can buy.

    Perhaps this aspect is worth a mention when discussing the danger of debt-based monetary systems.

  4. Yojimbo

    May 9, 2014 at 4:30 PM

    If I “make” or print a hundred dollars to lend to you at interest, but never print the 4 dollars in interest, you will never find that interest payment and thus, be indebted to me forever.

    • Toland

      May 9, 2014 at 6:37 PM

      And if you do print the 4 dollars, where’s the money to pay the interest on those 4 dollars going to come from? Another loan.

      It’s actually worse than that, because every $100 the Federal Reserve loans into circulation gets loaned again many times by the banking system owned by the same cartel. Every time this $100 is loaned and re-loaned, another $104 dollars of debt is created to the banking cartel, until eventually they conquer their host nation.

      Funny how little attention such a simple-but-deadly and hugely important scheme gets from the supposed watchdog media, including the rabble-rousing fake “alternative” media. That’s because buying out the media, on all sides of the political spectrum, was one of the first things the bankers did with all the money they’re making.

  5. prayerwarriorpsychicnot

    May 9, 2014 at 5:34 PM

    Reblogged this on Citizens, not serfs.

  6. americafirst1Wayne

    May 10, 2014 at 12:18 AM

    I was meeting with a young banker yesterday and trying to explain our debt based system so this article is very timely because it reinforces some of the things that were discussed . In fact, she was very bright but totally in the dark about the nature of FRN’s, legal v. equity titles, etc.

    The good thing was she wanted to learn as much as possible in a short period of time & perhaps more articles like these could help the next generation of truthseekers who know something is desperately wrong & are just trying to make sense of this mess.

  7. Joan of Arc

    May 10, 2014 at 10:11 AM

    What about the federal land the Chinese are about to demand of us?

    • Adask

      May 10, 2014 at 11:40 AM

      Do you think the Chinese will have better luck than the BLM did with Cliven Bundy?

      • EarlatOregon

        May 10, 2014 at 1:37 PM

        Werent the Chinese using a Federal Elected Official,
        to do their Dirty work?

    • moon

      May 10, 2014 at 2:06 PM

      Joan of Arc, who is the “us” you’re referring to in your question?

      Al, do you think these Chinese will be the same Chinese, intellectually/emotionally/etc, who helped to complete the first railroad from coast to coast?

      • Adask

        May 10, 2014 at 2:38 PM

        No. Seeing as the “golden spike” completed the first coast to coast railroad in A.D. 1869, I believe the Chinese who helped build that railroad are probably dead by now.

      • moon

        May 10, 2014 at 5:12 PM

        Are you still having a challenge with reading comprehension? If so, I hope it clears up for you soon.

        Also, in the interest of accuracy, you may want to check eBay for a current value of Confederate Dollars.

  8. Adrian

    May 10, 2014 at 1:52 PM

    The real danger of debt is that it is a negative reality.
    It absorbs the true-positive- reality.
    America is a good practical example.
    Our true resources have been sucked out for some time.
    In a true legal sense Americans own nothing.
    We live on a feudal reality.We must pay to be here.
    We have a negative wealth and negative prosperity.
    Many believe that this situation will implode soon.
    What do you think about this?

  9. Adask

    May 10, 2014 at 2:49 PM

    I’d say that your term “negative reality” can be translated as “fiction” or “lies”. I’d say that the opposite term “positive reality” corresponds to “truth”. I’m convinced that the “truth will out” and eventually overcome the lies. But I don’t know when the lies will be generally overcome. Worse, I don’t know how pervasive the lies will become before the collapse. The gov-co won’t give up its lies without a fight. It may not give up its lies without a bloodbath. The American people are so addicted to lies that they may not be able to give up those lies without something like a civil war.

    Everything I see indicates that an “implosion” should be close at hand. But I could be wrong. I thought this whole mess would’ve imploded at least 20 years ago, but here we are.

  10. palani

    May 10, 2014 at 6:20 PM

    Wars used to be limited by the unavailability of gold and silver. When the war chest was empty then reasonable negotiations took place to end the war. There was motivation on both sides to negotiate. With debt based money there is no such depletion of the war chest. Wars tend to be unresolved and infinite in nature.

  11. citizenquasar

    May 10, 2014 at 9:22 PM

    Interesting article here:

  12. Peter

    May 11, 2014 at 6:37 AM

    There is old market saying: sell in may and go away. It appears that there is selling here at the top, Au and Ag appear to be acting inversely. It is like slow motion events that happens before a crash, things may start to begin to happen very fast going forward here, get ready, it may get ugly for those in general equities.

  13. henry

    May 14, 2014 at 10:49 AM

    China has profited from the current arrangement immensely. Their per capita income has increased ten fold. They have acquired technology, infrastructure, markets, gold, confidence, and a military machine that can not be ignored. They are using their dollars to buy real estate, mines, ports (like the Panama Canal), and stock in American corporations. Their people have become educated. On the down side, their cities have become unlivable due to pollution. Even if they lose the 1.2 trillion, they are still ahead. Once the collapse of the dollar is evident, I expect that they will be buying every tangible asset they can as fast as they can.

    It is Americans that have been stupid. Our industry has left. The only we can pay the interest on our debts is to undermine the long term value of the currency. When the SS and welfare checks stop what will America look like? The US Titanic has hit the iceberg. Many Americans are underwater but those steering don’t have their feet wet so it is full speed ahead.


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