(#218) Our Mathematically Unsustainable Monetary Policy

If all debt in the world were repaid, there would be no money

As posted at www.goldmoney.com on 12/18/12

 

 

For the uninitiated, this podcast provides an excellent primer on how our current monetary system operates.

Interviewee Ben Dyson, is Founder/Director of Positive Money, a UK not for profit research and campaign group focused on monetary reform. It believes that the root cause of many of our current social, economic and environmental problems lies in the way we allow money to be created out of debt.

Dyson explains that 97% of the money supply is being created by banks through credit extension in form of a mere book entry (i.e. money is created out of nothing).  In essence, what is happening is:

• Every time money is borrowed at a bank, that money is created because, today, all money is backed by debt, not a physical asset such as gold as it had been in the past.

• Unfortunately, the money to pay the interest does not yet exist and so more money would have to be created for that purpose as well.

• Since the foregoing scenario proves that it is mathematically impossible for all debt and the associated interest to be paid off, the current monetary system relies totally on continually expanding debt to function.

• Therefore, the only way we can increase spending is to encourage people to take out more debt which is why you have a situation in which a monetary crisis occurs because people have too much debt, and the government’s solution is to lower interest rates to make it cheaper for people to borrow more money.

This causes a great deal of dependency on the banking sector.

While our monetary system relies on the continuous extension of debt in order to keep functioning, only little of this credit is being provided to businesses (13%), while the bulk of it went into mortgages (40%), consumer finance (10%) and financial markets (37%) in the decade running up to 2008. Dyson also shows how this is deleterious to wealth creation and also causes redistribution mechanism benefiting those who are close to the issuers of money on the backs of to those who aren't. Also discussed is the environmental consequences of this debt money system.

Finally Dyson's proposal for monetary reform is discussed, which involves the transfer of power over the money creation from banks to a newly established, transparent, public monetary body which decides how much money should be added to the economy through the government to pay down existing debt. They also discuss the viability of using metal as money again, the emergence of alternative currency systems and whether an authority can really be trusted with managing the money supply.