Sunday, October 30, 2011

Credit and Bankers in Paradise

By law, money is defined as a physical mass of silver.  Credit (bookkeeping entries and promises) is not lawful money.  Banks, by law, cannot loan credit, only money.  But given that there is virtually no lawful money (gold or silver coin) in circulation, banks are, in fact, loaning credit.

Who cares?  What difference does it make if you buy a house, car, or Jetski with “lawful money,” credit, or buffalo chips, so long as you get what you want?

It makes a lot of differences too numerous to describe here.  But consider this:  Before the bank will loan you any credit (which has no tangible reality and is created essentially out of thin air), they typically demand that you put up some tangible property (your land or car) as collateral.  If you fail to repay the loan of intangible credit, the bank will seize your tangible collateral.

For example, to secure a loan to plant crops, some farmers risk the land that’s been in their family for generations as collateral, but the bank risks virtually nothing other than a few scraps of paper and bookkeeping entries.  If the weather is bad and the crop fails, the bank winds up owning the real, physical farmland without ever paying a dime in real, physical money (silver).  This is literally “something (the farm) for nothing (credit).”

Given that the weather is bound to go bad sooner or later, any farmer who borrows regularly is playing Russian roulette.  It’s only a question of time before the bank gets the farmland without really “paying” for it, sells it to some “creditworthy” corporate agri-businesses, and the price of your groceries skyrockets.

Consider another consequence of the banking business: Failure to create the interest necessary to repay the loan guarantees mass bankruptcies.  Our collective need for interest money is as critical as oxygen but just as invisible in a nation of 300 million credi-holics.

To illustrate, imagine you live on an island with a total population of ten, each of which owns 10% of the island’s land.  Your island is a tropical paradise so benign that you and your neighbors survive by simply plucking food off the trees on your land.

Along comes a banker and offers to loan you $1,000 to build a grass shack on your land.  Sounds good (with a grass shack you could impress that cute little redhead and maybe get her to marry you).  Of course, to get the $1,000 loan (and the shack and the girl) you must agree to repay the banker $1,100 a year from now ($1,000 for the loan plus $100 in interest).  And you have to put up your 10% of the island paradise as collateral.

You sign, they loan, you build the shack, and the redhead starts flirting.  Great, except your muscle bound neighbor also likes the redhead, and therefore also borrows $1,000 from the banker, agrees to repay $1,100 a year from now, and puts up his land as collateral.  Suddenly, the redhead isn’t flirting with you—she’s flirting with Mr. Macho.

Soon, all ten island inhabitants (even the cute redhead) have each borrowed $1,000, put their 10% of the land up as collateral, and agreed to repay $1,100 in one year.  Collectively, the ten of you borrowed $10,000 ($1,000 each) and agreed to repay $11,000 (including 10% interest).

The banker comes back a year later wanting his money (or your collateral), and guess what?  Some of you can’t repay the loan and therefore must surrender your land to the bank.  Well, bidness is bidness, right?  Some folks are lazy.  Some unlucky. Some simply lack the personal discipline or smarts to handle credit wisely, right?  Or so we suppose, but it’s not that simple.

When the banker loaned $1,000 to each of you he placed $10,000 total into circulation on your island.  That money allowed you to buy sticks from one neighbor, thatch from another and labor from a third to build your shack.  But the banker didn’t loan (create) the additional $100 to each of you ($1,000 total) that would later be due as interest.  Collectively, you ten islanders owed $11,000 but there was only $10,000 total in circulation on your island.  This means no matter how hard you islanders worked, it was mathematically impossible for all of you to repay your loans!  Therefore, some of you were guaranteed to lose your land to the bank.  The game was rigged!!!!

For you to have $1,100 to repay your loan, you would have to squeeze the extra $100 in interest out of one or more of your neighbors.  Suppose you overcharged for the sticks you sold to build your neighbor’s shacks.  Then you could get an extra $50 from the muscle man (yeah right) and another $50 from the redhead (hey babe, life is tough).  Then, at best, they could each only pay back $1,050 on their loans, and both would lose their 10% of tangible paradise for lacking $50 in non-tangible credit.  All ten islanders would face the same stressful choice: either overcharge and exploit your neighbors or lose your land.  Once infected with credit, your island paradise becomes more immoral, unethical, and unfriendly.

The great irony in all this is that you islanders were living in near paradise.  If you wanted to work cooperatively, you had all the sticks, grass, and labor you needed to build your shacks.  Instead, you decided to do it the “easy way”, with credit.  The bank offered you a something-for-nothing deal, and you took it.  You just didn’t understand that the “something” was your land and the “nothing” was the bank’s credit.  Net result:  at the end of the year, two to five of your neighbors could be homeless, and the bank (which risked virtually nothing) might easily own 50% of the tangible island based on loans of non-tangible credit.  I believe this constitutes government-sanctioned oppression.

Real life is more complex and the fundamental impact of credit is harder to see but every bit as unjust.  The mathematics of a credit-based economy guarantee that some of us – no matter how hard we work – are bound to go bankrupt and lose our tangible property to a bank.  Now do you understand what is happening in America today? Where are the indictments?


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