If We Don't Change The Way Money Is Created, Social Disorder Is Inevitable

Authored by Charles Hugh Smith via OfTwoMinds blog,

Centrally issued money optimizes inequality, monopoly, cronyism, stagnation and systemic instability.

Everyone who wants to reduce wealth and income inequality with more regulations and taxes is missing the key dynamic: central banks' monopoly on creating and issuing money widens wealth inequality, as those with access to newly issued money can always outbid the rest of us to buy the engines of wealth creation.

History informs us that rising wealth and income inequality generate social disorder.

Access to low-cost credit issued by central banks creates financial and political power. Those with access to low-cost credit have a monopoly as valuable as the one to create money.

I explain why in my book A Radically Beneficial World: Automation, Technology and Creating Jobs for All.

Compare the limited power of an individual with cash and the enormous power of unlimited cheap credit.

Let’s say an individual has saved $100,000 in cash. He keeps the money in the bank, which pays him less than 1% interest. Rather than earn this low rate, he decides to loan the cash to an individual who wants to buy a rental home at 4% interest.

There’s a tradeoff to earn this higher rate of interest: the saver has to accept the risk that the borrower might default on the loan, and that the home will not be worth the $100,000 the borrower owes.

The bank, on the other hand, can perform magic with the $100,000 they obtain from the central bank. The bank can issue 19 times this amount in new loans—in effect, creating $1,900,000 in new money out of thin air.

This is the magic of fractional reserve lending. The bank is only required to hold a small percentage of outstanding loans as reserves against losses. If the reserve requirement is 5%, the bank can issue $1,900,000 in new loans based on the $100,000 in cash: the bank holds assets of $2,000,000, of which 5% ($100,000) is held in cash reserves.

This is a simplified version of how money is created and issued, but it helps us understand why centrally issued and distributed money concentrates wealth in the hands of those with access to the centrally issued credit and those who have the privilege of leveraging every $1 of cash into $19 newly created dollars that earn interest.

Imagine if we each had a relatively modest $1 million line of credit at 0.25% interest from a central bank that we could use to issue loans of $19 million. Let’s say we issued $19 million in home loans at an annual interest rate of 4%. The gross revenue (before expenses) of our leveraged $1 million would be $760,000 annually --let’s assume we net $600,000 per year after annual expenses of $160,000. (Recall that the interest due on the $1 million line of credit is a paltry $2,500 annually).

Median income for workers in the U.S. is around $30,000 annually. Thus a modest $1 million line of credit at 0.25% interest from the central bank would enable us to net 20 years of a typical worker’s earnings every single year. This is just a modest example of pyramiding wealth.

Next let’s say we each get a $1 billion line of credit which we leverage into $19 billion in loans earning 4%. Now our net annual income is $600 million, the equivalent income of 20,000 workers. We did nothing to improve productivity, nor did we produce any goods or services. We simply used the power of central banking and fractional reserve lending to skim $600 million in financial rents from those actually producing goods and services.

Note that we are not uniquely evil or avaricious in maximizing our private gain from the central bank system; we're simply responding rationally to the system’s incentives.

The system concentrates wealth and subverts democracy not because participants are different from the rest of us but because they are acting rationally within a perverse, exploitive system. Would you turn down $600,000 a year? How about $600 million a year?

It makes no sense for banks and financiers not to maximize their gains in this system. Those who fail to maximize their gains will be fired.

I hope you understand by now that the current system of issuing money and credit benefits the few at the expense of the many. The vast privilege and the equally vast inequality it generates is the only possible output of the system.

This inequality cannot be reformed away; it is intrinsic to centrally issued money and private banking with access to central bank credit.

The problem isn’t fiat money; it’s centrally issued money/credit that is distributed to the few at the expense of the many. If we want to limit the subversion of democracy and reduce wealth inequality, we must decentralize and democratize the issuance and distribution of money.

In the current system, money isn’t created to reward increasing productivity. It is created to increase the wealth and power of the privileged.

If we want to connect the creation and distribution of money/credit with productivity, we must issue new money directly to those creating value and boosting productivity, bypassing the privileged few in central and private banks.

By concentrating wealth and power, centrally issued and distributed money doesn’t just subvert democracy. It also optimizes inequality, monopoly, cronyism, stagnation, social immobility and systemic instability.

The status quo "solution" is Universal Basic Income (UBI), a form of subsistence designed to quell the righteous urge to throw off the monetary yoke of the privileged financial Elites. If scraping by as a debt-serf on UBI is the New American Dream, we need a new economic/social system.


Cutlery Hill Tue, 06/27/2017 - 14:50 Permalink

There will always be the haves and the have nots.  The haves are the ones who follow the trading signals to short the stocks when Shepwave says to do so like today and make a killing in the nasdaq. 

Bryan So Close Tue, 06/27/2017 - 15:02 Permalink

Money=Power=Mo'Money. "The love of money is the root of all kinds of evil."  Money is simply a tool.  Used wisely, it can help you be more comfortable in this life.  Used foolishly, it can cause lots of problems for you in this life.  Lusted after, it can become your downfall and ruin.

In reply to by So Close

Herd Redirecti… DownWithYogaPants Tue, 06/27/2017 - 15:45 Permalink

I would like to make two points:  First, if you think of society as some sort of video game it is obvious what is required.  A reset.  In monetary terms, a JUBILEE.Secondly, here is the secret about money.  It can be conjured into existence.  This we know.  But get this, it can be conjured into existence AS EITHER DEBT or EQUITY!  That is the secret!  Money can be issued as equity!  There does not need to be a loan that corresponds to the new fiat.  It is only because that is the only option the moneymasters have provided to us, that we are oblivious to this fact. Now, of course there would still be inflation, if UBI is issued as equity.  But the point is, it wouldn't be like our current inflation, where the benefits are received by one small group of special interests (CBs and their assorted cronies), and the costs borne by all of society.  Both  the benefits and costs would be received by all of society.  So if inflation was deemed out of control, the amount issued as equity would be decreased (of course a mechanism to allow society to make this decision would be required).

In reply to by DownWithYogaPants

Twee Surgeon Bryan Tue, 06/27/2017 - 16:05 Permalink

"Money" Is not really money if certain selected people have a license to 'Print' their own and others don't.The fat cats get to chill and think themselves clever while the industrious creators of Civilizations must jump through every hoop provided by the so called Bankers every whim. The whole Federal Reserve act was Treasonous Fraud perpetrated on the American people and the World, back in 1913. It's Unconstitutional, it is severely Un-American and Anti-Christian. It removes the value of Industriousness and Honesty and places power over others in the hands of people who have not earned respect by Natural law but have achieved their prosperous condition by collusion with mass fraud, often for generations in similar social groups.                      The only time these fucks break a sweat is playing Sporty-Person at the Cuntry Club Gym. (I have no axe to grind with wealthy people, Inheritors of wealth, Trust fund recipients,Wealthy Lawyers and Investors etc; that played the system as it exists. ) But wealth that is Achieved by Fraud to the Detriment of the Nation is a completely different matter. It's not just an Economic matter, it is a Morale (not Moral) problem and a spiritual problem, it defiles Human endeavors. It Inflates prices to detrimental levels, It causes many children of the land to be Homeless and many Imbeciles to be wealthy and often Employed by an upside down .government. When it goes away, America will breath a sigh of relief. They are Fucking Monsters and being Angry is the only sane response.https://www.google.com/search?q=moral&ie=utf-8&oe=utf-8#q=morale  

In reply to by Bryan

7thGenMO Twee Surgeon Tue, 06/27/2017 - 18:06 Permalink

Yes, this article is a worthwhile read, but also a distraction from the most important question that needs to be asked.  Who owns The Fed?  The Fed isn't even audited but has a monopoly to issue fiat dollars as a private corporation.  Its Owners have a large amount of control over all Western governments, which is why they prefer to remain anonymous.

In reply to by Twee Surgeon

Twee Surgeon 7thGenMO Tue, 06/27/2017 - 20:58 Permalink

Well I'm a fairly common Man of this Nation with an 'Education' level of little to no notability (My weekend at the college did not turn out as I'd planned.)And I'm fairly informed about the popular theory of 'Who owns the Federal Reserve Bank', as you are, and millions of other people. The Cat is out of the bag now that this greater access to information has become available, via the Internet and it is never going back in the bag again. All you have to do is ask, really. But that is not the Point. The Law of the land in the United States is called the Constitution of the United States of America.Your point is my point. Everybody knows. https://www.youtube.com/watch?v=Lin-a2lTelg

In reply to by 7thGenMO

Dr.Carl Cutlery Hill Tue, 06/27/2017 - 15:00 Permalink

The artricle here is of some truth value  still has a whole lot of speculation.  Money is perceived value in any society. The analyst you mention is good and effective for those who want to follow directions. My experience is that most traders are know it alls and don't want to follow directions. But yes their sell call today in the nasdaq was a good one for sure. 

In reply to by Cutlery Hill

PGR88 Tue, 06/27/2017 - 14:55 Permalink

CANTILLON EFFECT bitches!The theory was proposed 300 years ago - but the banksters and economic priests don't talk about it.

Cordeezy (not verified) Tue, 06/27/2017 - 14:56 Permalink

If we ever get a UBI it will be great at first, but as time goes by the money given will amount to less.  This will eventually force people to find another way to cover their daily bills, but since we will all be on UBI, we will likely have no skills or the generations of the future wont anyway.  This is like when pensions were introduced.  We told people work for 40 years, and the companies will take care of you.  We all know how this is working out today.  www.escapeamazon.com/read-this

Glyndwr will return Tue, 06/27/2017 - 14:58 Permalink

Best article of the year. And this particular truth is about to go mainstream. If it does not do so by itself then the pensions collapse and bailins will do it instead . Which is why, when those events happen , they will do with an utter vengeance and / or everything will be nationalised. Then we find where the rubber hits the road and does not. I think 90% of the earths surface will be uninhabitable from that point on from an elite point of view . I guess they know it. Good luck in NZ. A country full of real men who will also be impoverished. I'd rather be me than them .Plus of course there is the particular elite religious sect in charge of all this . And that particular story is already out. People know Muslims are not here by accident and they know who made the design. More and more.

Ben A Drill Tue, 06/27/2017 - 15:04 Permalink

When you have public union retirees netting 5K a month with full health care for the rest of their life. What do you expect? That's just for a librarian.

taketheredpill Tue, 06/27/2017 - 15:06 Permalink

  "If we want to connect the creation and distribution of money/credit with productivity, we must issue new money directly to those creating value and boosting productivity, bypassing the privileged few in central and private banks." So.....Shariah investing then?  Instead of borrowing and lending, Islamic finance relies on sharing the ownership of the assets and therefore risk and profit/loss.

24Richie Tue, 06/27/2017 - 15:03 Permalink

The majority of money is private money which is deposited in banks by individualas and corporations.  The Fed only controls public money which, even after enormous QE, is only about one quarter as much as private money

EndOfDayExit Tue, 06/27/2017 - 15:09 Permalink

The reasoning in the article is mostly BS. First, a bank wanting to leverage its money 20x times needs to first find willing borrowers who need that money and who can pay it back. In times when such borrowers are plenty and easy to find people then go and open their own banks if they're so inclined. Here it is - easy money. Until those  borrowers start defaulting, that is. And second, the UBI is a political solution for a very difficult problem of having a lot of people who are not really needed by the economy. The 19 century solution was to allow those people to die (or all go farming or something). The same is just not feasible today. Does anyone have better ideas than the UBI?

MEFOBILLS EndOfDayExit Tue, 06/27/2017 - 15:32 Permalink

Does anyone have better ideas than the UBI?Yes, Social Credit Theory.  Clifford Hughs Douglas proposed injecting into the price system.  That way "goods" could be liquidated.  He used the money system to distribute goods, rather than inject directly into allowing people to sit around on their ass.That said, I believe something like what Russia is doing is worthwhile.  There are some injections into family formation, as Russia had gone into demographic decline, now stopped.  In the West, white people are reproducing below replacement rates.

In reply to by EndOfDayExit

Yen Cross Tue, 06/27/2017 - 15:09 Permalink

  This $usd selling has all the hallmarks of the SNB. The $usdx is down 1.00% and the euroindex is up over 1.00%. Those cock suckers sell $usd vs the chf and then short those dollars vs the euro to prop up eur/chf. [ for Swiss exports] When the equity markets eat shit the chf is going to eat shit as well, because the SNB is going to have to liquidate their stock holdings and they already have negative interest rates. 

eggsistense Yen Cross Tue, 06/27/2017 - 16:53 Permalink

Here's my solution: https://libertyroadmedia.com/2015/03/11/self-issued-currency-the-way-ou… A sample:"Check out this extremely relevant and important article from Washington’s Blog: 9 Mind-Blowing Facts About Money.    It is a great primer for those not familiar with fiat currency and the fact that modern currency is, without question, created out of thin air (i.e., we are on the Air Standard as opposed to the gold standard).  Fiat currency is, in short, the most important financial invention ever because of the fact that–as the article states–it “is not backed by any tangible commodities.”  Fiat currency is the perfect form of money because it is admittedly and openly fictional, as all forms of money are (yes, even precious metals).  The problems with fiat only arise when: 1) it is treated as non-fictional and as the primary obligation of a person, taking precedence over life, liberty, and the pursuit of happiness, and 2) when the issuance of it is monopolized, which inevitably leads to the first problem. Self-Issued Currency The solution to these problems, then, is self-issued currency.  That is, every citizen in a fiat system ought to have the ability to issue his or her own money, up to any amount needed.  [NOTE 8-5-15: By “his or her own money”, I mean money denominated in the national currency, i.e., dollars, euro, etc.  I do not mean that each person would issue his or own personal currency named after him or herself, as some critics of this idea apparently misunderstood.]  This will solve both of the problems above, because when self-issued currency becomes the norm, paying money will be as easy and as painless and as much as an afterthought as saying “Thank you” is now.  Problem one solved.  And obviously problem two is solved because there would be no monopoly on the issuance of currency, hence no unnecessary control over anyone or anything, either by the state or by the issuer of the state’s currency.For those that might recoil in horror at such an idea, keep in mind that all money is fictional.  In fact, all money is already self-issued, as will be shown below.  Money must be created by someone, somewhere, because money does not exist in nature–except to the extent that a natural item like gold or salt might be assigned the properties of money."

In reply to by Yen Cross

Advoc8tr eggsistense Tue, 06/27/2017 - 20:41 Permalink

sounds titillating ... but what happens when say 10 people all want to buy this one particular ocean front home in the best location ?  The person who is able to imagine the largest number wins ?  why would the owner ever sell the asset ? They could just create money to buy their new penthouse in New York while keeping the Sydney harbour mansion for weekends ?I think something like every citizen receives a capital lump at age 25 to get started extra for children maybe if you're trying to infuence demographics.  Can't take it with you rule / mechanism that limits inherritance maybe ? Soon enough many would waste theirs while others would use it productively. Importantly each person gets a fresh start with similar opportunities; unincumbered by the success / failure of their parents ?

In reply to by eggsistense

SidSays Tue, 06/27/2017 - 15:10 Permalink

“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”– Thomas JeffersonTick...Tock...

Herd Redirecti… chickadee Tue, 06/27/2017 - 17:17 Permalink

History often gets whitewashed.Like Stalin's Jewish wives.  Now its just  a fiction.  A myth.  Then they say "If Stalin was Jewish, why did he want to kill his Jewish doctors?"The better question is, if he wasn't Jewish, why did he have Jewish doctors?  And if he wanted to kill them, isn't it possible it is because he knew they wanted to kill him, too???Voltaire's quote, too, about "To find out who rules over you, you must simply discover who you cannot criticize", has been re-attributed.  But really, why does it matter WHO said it?  Shouldn't a statement be judged on what it is stating, and not who stated it?

In reply to by chickadee