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Debt-Based Monetary System Demands Ever More Debt—Part II—Ponzi Schemes?


Ponzi1

Is our Debt-Based Monetary System a Ponzi Scheme?  [Courtesy Google Images]

Recently, in Part I of this series, I promised that in Part II, I’d explain “why” the survival of our debt-based monetary system (DBMS) depends on the creation of ever more debt. I argued that our massive National Debt is not an accident or evidence of political malfeasance, but rather an intentional and necessary consequence of accepting our debt-based monetary system (DBMS). I argued that our DBMS can’t survive without going ever deeper into debt.

I compared “payments” (which are tangible, real assets like gold or silver coins) to “promises to pay” (which are intangible, paper debt-instruments like paper dollars). I warned that, given the choice between receiving a tangible “payment” and an intangible “promise to pay,” only a fool would take the paper “promises to pay”.

I illustrated my argument about “promises to pay” by reminding readers of how many times they had made or received promises that had failed. My point was that promises are easily made and routinely broken.

So, I suppose it should come as no surprise that my promise to use this week’s article to explain the “why” behind the debt-based monetary scheme will also be broken. I began to write this second article with some background on “Ponzi Schemes” (which is how I and others frequently describe our DBMS).  But, when I looked into “Ponzi Schemes,” I discovered that maybe that’s not the most accurate way to describe our DBMS. I also realized that maybe I should try to discern and describe the nature of our DBMS before I got into the “why”.

Result? Here, in Part II of this series of articles we’re going to explore whether our DBMS is really a “Ponzi Scheme” or if it’s something else. Then, in Part III (coming soon) I’ll present my notions concerning the fundamental “why”.

I promise.

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Our Debt-Based Monetary System


The Rules of a Debt-Based Monetary System [courtesy Google Images]

The Rules for a Debt-Based Monetary System
[courtesy Google Images]

What follows is mostly speculation.

I’m going to explore several premises and, using my version of “logic,” build on those premises.

I’m not claiming that my premises are necessarily true. I’m not claiming that my “logic” is necessarily logical.

I am claiming that these premises and my “logic” lead to some hypothetical conclusions about our debt-based monetary system that are at least interesting and perhaps surprising.

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Crazy Ideas


The Economists' Motto [courtesy Google Images]

The Economists’ Motto
[courtesy Google Images]

Business Insider published an article entitled “This is how a central bank could kill off cash and bring in negative interest rates on your savings.”  According to that article,

 

“Since the financial crisis, the world’s understanding of economics has been undergoing a lot of rapid changeIdeas that would have been considered crazy just a decade ago are now seen as much more likely.”

 

The balance of the Business Insider article focused on “negative interest rates” as one of those “crazy” ideas.  Negative interest rates are undoubtedly “interesting” but, for now, I’m more interested in asking why “crazy” ideas are becoming “more likely”.

Most of this inquiry deals with “crazy” but a lesser part deals with “more likely”.

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The First Danger of Debt-based Monetary Systems


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.

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Repudiate the National Debt?


[courtesy Google Images]

[courtesy Google Images]

One of my readers claims that the only way out of our current economic problems is to simply repudiate the existing National Debt.  He argued that repudiating the debt was justified by the fact that the entire National Debt is based on fraud.  More, he compared repudiating the National Debt to the “Jubilee” in the Old Testament wherein every 50 years, all debts were cancelled. 

I replied as follows:

 

Simply repudiating the debt would work fine if our monetary system were still based on precious metals or some other tangible substance.  We could eliminate the debt but our economy would still retain the assets—gold & silver coins—although some of the gold and silver might be redistributed into other people’s hands.

The reason the Old Testament people could have a Jubilee every 50 years and wipe out all the debt is that those Old Testament people used an asset-based (gold, silver, even cattle) monetary system.  When the Jubilee occurred, it didn’t destroy any assets.  Whatever tangible assets (gold, silver, cattle) existed within the local economy, tribe or nation before the Jubilee began, would remain in the economy during and even after the Jubilee had ended.  Only the debt would be destroyed.

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