Borrowing Nothing from Nowhere: Phantom Money and Phantom Debt

Borrowing money is a tricky thing to talk about, even trickier than talking about money itself. We all seem to have a love-hate relationship with the stuff. Well, maybe ‘stuff’ is not the right word. People disagree about what money actually is. Some, who I’ll call “money realists,” believe that the essence of money is that it is a physical thing that has intrinsic value. For the money realist, only a fixed commodity – usually gold – is “real” money. So called “fiat money,” valued because a government declares it as “legal tender,” is not seen as “real.” Some others, the “money representationalists,” believe that money is an object that has value because it represents something else that is valued, also usually gold. That is what the “gold standard” was about, but money also represents the value of anything we value. Borrowing is a major reason money is so troubling.

Money represents the value of a credit or debt, enabling the exchange of anything of measurable value (in monetary units of quantity) for that thing. Finally, for most people money is an abstract symbol of value based on some metric or quantity that measures the value of anything. That is why money can be transferred, borrowed, and lent electronically – it is a symbol, whether represented in paper or binary code, of a measurable value. Despite that abstraction, we usually treat money as a real object to be exchanged for other real objects, or for real services, or even for promises to provide such things later. Most money today is “fiat” money, because it is declared by a sovereign government to have a relatively stable measurable value for any exchange. But what is value? Is value real or do we just imagine it so?

You can read Wikipedia’s entries on money to get an overview of the conventional definitions of money, currency, credit, and debt. But something is missing. What is increasingly important today is how money is being transformed. Critics complain that the government is “printing too much money.” However, most money today is brought into being by electronically “posting” it to a computerized accounting system in a bank. An electronic bookkeeping entry creates money as a debt to a bank, not as printed currency.

Borrowing Nothing

A bank that is a member of the Federal Reserve, lends money into existence electronically when a customer borrows it. That’s right; it didn’t exist before it was lent, but it creates debt for the borrower and an “asset” (credit) for the lending bank in the form of a note or bond. The note or bond held by the bank obligates the borrower to pay back the amount borrowed plus interest. That means that more money is always owed (to the banks) than is ever borrowed, which is a peculiar problem in itself with deep implications for the entire economy. Think Greece; same basic deal.

The Federal Reserve oversees this process, called the fractional reserve banking system. “Fractional reserve” means that the bank gets to loan out a certain percentage more than it holds “in reserve” as deposits. This whole process must be carefully regulated or things can get way out of hand. Just before the financial crisis of 2008, banks were allowed to loan many more multiples of their reserves than ever. Leverage always entails risk.

Banks may lend some of the money they create to mortgage lenders and “payday” lenders, as well as to corporations and individuals. Mortgage lenders – savings and loan institutions, regional banks, etc. – will borrow from the national bank, make a home loan, and then sell the mortgage to another bank. Without vigilant regulation of the conditions of loans, things can get quite messy. If enough bad loans are written and if enough loans default, the whole system becomes unstable. This is especially true when loans are bundled into “derivatives” and sold to unsuspecting investors looking for a steady income stream.

Making Phantom Money

The gradual deregulation of banking and finance, starting with Bill Clinton, Alan Greenspan, and Larry Summers, has released the most powerful financial elites from societal controls. The 2008 financial crisis resulted from several factors, including the lowering of reserve requirements for the Big Banks. Mortgage brokers and other primary retail lenders loosened the lending requirements for borrowers. Regulators looked the other way. The resulting risky mortgages were then purchase and packaging into “derivative” financial instruments by the Big Banks on Wall Street. They were then resold to pension funds and other institutional investors, putting many people at risk. Lots of money was “made” in the form of fees and profits. In the process the entire world economy was endangered. After all, the banking system of the U.S. and other major industrial nations had already been integrated and these financial manipulations had spread world-wide.

The advent of high-speed electronic data processing and communications has allowed the creation of new forms of financial manipulation of the money system. High-speed computers can skim “value” from stock markets by engaging in electronic “trading” so fast that tiny differences in bid-ask pricing can be exploited in the interim between offers by ordinary traders. So-called “derivatives,” financial instruments comprised of abstracted fragments of mortgages or other debts, can be marketed to the point of risking collapse of markets. The largest financial institutions have transformed money from a public medium of economic exchange into a method of economic plunder and political control of society. But these financial absurdities only exist because of the greatest absurdity of all. We are all forced to borrow nothing from nowhere and it is costing (almost) everyone dearly.

Phantom Federal Debt: Who Needs It?

It has been generally taken for granted that “fiat” money is issued by sovereign governments for the benefit of their national economies. Not exactly. Most currencies are valued on the basis of the solvency of the government, its international balance of payments, and the stability of its economy. International exchange rates are based on such factors. But since the early 20th century, for the most part such assumptions have been a fiction. In the U.S., despite the Constitution, which authorizes the Congress “To coin money, regulate the Value thereof, and of foreign Coin,” the government does not create money. Yes, it still stamps out pennies and quarters, but the private banks, which own the Federal reserve, create most money. In 1910, the major private banking interests conspired at their infamous meeting on Jekyll Island to control the national monetary system. In 1913, Congress passed the Federal Reserve Act, empowering the cartel of private investment banks to control the money and banking system and “loan” money created out of nothing and from nowhere to the U.S. Treasure. Hence, the national debt. What a windfall for the banks – and a permanent indebtedness for the nation – unless we reassert our national sovereignty.

It has worked out much better – for the mega-banks – having the government borrow money from the private banking cartel called The Fed so that the banks can control everything and the rest of us can take on all the resulting debt! If our government were actually sovereign (instead of subservient to the mega-banks), it could ISSUE money rather than borrow fake money from corrupt banks. What a different economy that would produce.

The National Debt and Deficit Scam

Ever wonder why the richest nation in the world, the U.S., has become a “debtor nation”?  Oh, but they’ve already told you.  It’s those politicians, especially the ‘liberal’ ones who just spend too much.  You know, those “tax and spend” liberals.  Well, I’m no apologist for the liberals.  I agree with Chris Hedges that the liberal class of politicos is essentially dead.  They still talk some about their concerns for the “middle class” and “working people,” but their actions reflect the same servility to the rich and powerful as do the ‘conservative’ — the misuse of that term is a whole other story — Republicans who have been cutting taxes on the rich and shifting the costs of plutocracy to the poor for decades.  So, we sure have a clue as to why we are in so much debt.

The Banksters’ Coup

The history of money and banking is far more interesting than any economics course on the topic.  It is long and complicated, but the essence of how current economies have become debt-based can be condensed to some key elements in the struggle between the public purposes of money and credit, and money-lenders’ efforts to control the issuing of money and renting that money for profit.  A nice summary of the key historical events can be read in Ellen Brown’s latest book, The Public Bank Solution: From Austerity to Prosperity.  In that book she also explains effectively why we — both people and government — are all in such debt, but need not be.

The international private banking cartel was started with the Bank of England around the time of the American Revolution.  Ultimately, the Federal Reserve was formed in the U.S. as a private banking cartel, owned by its member private banks.  The Federal Reserve Act of 1913 was passed under great pressure from the major private banks in the U.S.  It ceded sovereign authority for creating money to the Big Banks we know so well today.  That raises important questions that are rarely discussed in public.  What is money if not a public utility for making the exchange of goods and services effective?  Why should a public utility be controlled by a private cartel?

Money, Sovereignty, and the Public Interest

Numerous examples of public banking throughout history demonstrate that for achieving public purposes, public banks are more effective than private banks.  But rather than argue the details of why — Ellen Brown’s book does that quite well — let’s look at purpose and principle.  Banks are a necessary part of any economy.  An economy is a crucial component of any operating society.  The public has an inherent interest in banks being operated to serve public purposes, primarily the management of the creation and circulation of money as the means for making economic exchange work and facilitating public projects.

Money is a public good; indeed, it is a public service.  Contrary to the mythology foisted on the people, the value of money exists in its movement.  Furthermore, it is a process, not a thing — its value is in what it represents, not what it is [paper, wooden tallies, gold, etc.].  And what it represents is credit.  Stored in a vault it means nothing… except in the illusions of whoever controls the vault.  Banking has become the epitome of the illusory game of acquisition of wealth.  From the perspective of the citizen, however, the circulation of money is the means by which the people are able to sustain themselves over time.  If “we the people” are sovereign, then why is not the monetary system owned by the public?  But on to the main point.

The Debt and Deficit Scam

Simply put, because it gave up its sovereignty over the creation of money to the private banking cartel, the government borrows money from the Federal Reserve (central bank), which it created and gave the power to create money.  Where does the Fed get the money it loans to the government?  Why, out of thin air of course!  An entry is made on an electronic ledger and money is created and loaned to the very entity — the government — that allowed that ledger [of the private banking cartel] to exist.  A federal debt is created.  How counter-productive — stupid — is that?  The only interest this proess serves is that of the concentration of wealth in the hands of the banksters.

Well, it’s very productive for the banksters.  After all, its free money to be lent out and for interest to be collected upon.  Wow!  We could all use some of that kind of deal.  Free money to loan out and make more money on.  Now, project that process into the whole economy and think of the result.

The underlying absurdity is that by structuring debt in that way, it can never be repaid.  Only by continuing to expand the economy to allow more loans can the principle and interest on existing loans continue to be paid.  With the recent financial collapse due to uncontrolled speculative manipulation of mortgage lending, the system was exposed for the Ponzi scheme that it is.

Is There a Way Out?

The Banksters are just too powerful to stop directly.  The financial elite virtually runs the federal government.  But, as they said in the 1960s, “What if they gave a war and nobody came?”  Several lines of action are possible.  The Bank of North Dakota — the only public bank in the nation — is a model of what states might accomplish.  But municipal and county owned banks can also be formed.  Local movements for local public banking are developing.  Meanwhile, take your money out of those Big Banks and put it into your local credit union.  Divestiture worked to stop apartheid in South Africa.  It is starting to work to turn around the carbon economy.  It can be a big part of the great transformation of banking from a private extractive industry to a set of public institutions serving the public interest.

Runaway Capital and the Necessity of SLOW

Slow Food; Slow Money; Slow Life. Such concepts are anathema to the frenzied culture of the dying industrial age. But these ideas are becoming popular among a small but growing class of folks who are simply tired of ‘the rat race.’ “Slow” is closely aligned with the simplicity movement. What do they mean, why should we want to achieve them, and what’s the point?

To fully recognize the fatal flaw of the current economic path and the need for a new direction, one really must understand acceleration. Or, grasping the power of compound interest would do. With regular savings and compound interest over a working career, a worker with a modest salary could retire a millionaire. But how many do?

For that to work, the saver must also avoid debt – especially consumer debt. That is increasingly less likely as wages are squeezed for ordinary workers who are pressured to consume more with “easy” credit. Of course, “credit” is the availability of money for borrowing. Consumer debt is a burden that more than neutralizes any savings program. The debt-based economy is a complex trap.

Runaway Capital
The debt-based economy must continually expand. How else can interest be paid but by adding more money to the system? Banks are allowed to loan a lot more money than they keep in “reserve.” That new money is created as debt in the accounts of borrowers. Economic expansion is based on expanding debt. Government debt and private debt are the basis for the profit that interest rates generate as growth.

Since the 2008 collapse, the Federal Reserve loans the Big Banks money at near zero rates. It has bought the bad debt that should have pushed the Big Banks into bankruptcy. But infused with new cheap capital, banks are nevertheless afraid to lend to businesses since so little demand remains in the economy. The result is that with institutional rates so low, banks buy each other instead of lending to business.

Corporations are afraid to invest in production since demand is so low. They use their trillions horded in cash to buy back shares and drive up share prices, making themselves appear more valuable. This allows executives to ‘justify’ larger bonuses, instead of investing in meaningful production – which would expand employment, if only in Asia.

In a finite world, at some point the acceleration of growth – via compound interest on growing debt– becomes an unsustainable Ponzi scheme. It is no longer the real economy that is growing. The expanding “financialized” economy of accelerated growth of phantom wealth through complex derivative instruments keeps expanding. It is allowed because no real restraints have been imposed on the banksters who caused the crash. The fatal flaw has been covered over in imaginary cash.

This false creation of money has no substantive basis for capital creation in real life. These financial manipulations generating phantom wealth produce no real value. The consequences for the currency will be dire. The basis for the value of the dollar cannot be sustained in debt alone. That is why the Chinese are quietly unloading dollar debt instruments – treasury notes and bonds – in favor of gold and currencies with more long-term security.

Slow Capital, Real Investment
The most important problem with “Fast Capital” is that it drives financialized economic growth at the expense of the real economies of communities. “The economy” no longer fits the real circumstances of the world we live in. It was a tenuous fit to begin with. By the 20th century so little of the world was left to conquer that it had scant room to grow. Now the growth model is being tested against environment limits. But financial growth, being abstract, is only limited by debt structures.

Today the real-growth economy is restrained by a finite supply of depleting resources and its own accelerating ecological destruction. Unfortunately, most attempts to provide an alternative world based on ‘renewable’ energy and resources are framed in the failing economic-growth model. Most advocates of renewable energy and resources do not argue for a no-growth economy. Growth is a deep political value in the economic culture. Growth is seen as an inevitable requirement for prosperity – everyone is for it. It is both the essential element and fundamental flaw in the conventional model of the economy.

A new economy that is based on slow capital is now necessary. Certainly, the transition from the economy of indiscriminant expansion to a carbon neutral economy of stability will involve selected areas of real growth – and others of major contraction. In this new context, capital investment must apply technological innovation to “the old ways” of producing needed goods in creative ways. The technologies of “labor saving” overproduction cannot work. Slow production with higher quality responding to real needs will support more jobs requiring more skill and education. Slow education is labor intensive and would require little capital – it will require social commitment of slow capital.

Creating an abundant new ecological economy requires innovative thinking and experimentation, not automated extractive industry to supply overproduced useless objects. Slow capital must be invested in new technologies for effective use of more skilled labor to convert the economy to more carbon-neutral activity serving human needs, not fast capital serving financial growth for elite phantom wealth.

It is still hard for us to visualize. Our thinking is so influenced by the growth-economy culture. But the ecological economy will be slow and both intellectually and artistically rewarding. It will focus on human interaction to realize the cultural goals of achieving basic sustenance, artistic expression, intellectual exploration, and civic engagement. None of these require fast capital, or false wants for overproduced meaningless objects of momentary attraction. All those suburban storage units will not be needed. What is most required is a societal commitment to an economy driven by core human needs.

Money: Banking on the Economy of the Absurd

Money and banking seem far too mysterious to far too many people.  Read all about it and you may feel that much of your time was wasted, simply because at root it seems not all that complicated.  Oh, the world of money and banking has been made quite complicated, but that’s because of who is running things and why they make decisions over all of our financial lives the way that they do.  With the endless elaboration of the complex institutions from which emanate the decisions that matter for the rest of us, the so-called “financial industry” has emerged as a much larger share of the economy than ever before.  But what does that mean?  Are we all wealthier?  Hardly.  As the “main street” economy has faltered while big corporations and banks grow ever larger profits, why has the financial industry—which claims to be so vital  to the nation’s economy—grown so large?

Along with the ideologically excused deregulation of banking and finance—driven, actually, by the growing influence of the big banks and their corporate companions over the laws that govern economic activity—have come a steady onslaught of banking practices that have made a very few people and corporations very, very rich and resulted in the rest of us falling further and further behind.  By expanding their control over the creation and lending of money, these institutions have expanded far beyond their usefulness to the nation. To big to fail?  Yes, if propped up by government bailouts.  But more important, too big to tolerate!

Have you ever wondered why over many generations people pay mortgages on their homes, yet very few of the succeeding generations ever live in a home without it being mortgaged?  Where is the accumulation of wealth?  Well, while complex interactions of a number of factors are at play, and individual cases vary, the “bottom line” is that we live in a debt-based economy, and it is debt based on purpose.  No, it wasn’t your idea and it wasn’t my idea.  It was the idea of the private bankers who took over the public function of banking way back when.  In a debt based economy, new money has to be created to pay the interest on old debt.  That requires endless economic expansion financed by new debt.  It is a never-ending cycle until one of two things happens:  1) a crash brought on by the excessive speculation in new debt—gambling—by the Banksters; or 2) the whole system expands beyond the carrying capacity of the ecological system on which we all depend.  The Great Depression of the 1930s has been matched by the real unemployment of the “Great Recession” of 2008-present as the absurd economy roars past sustainability.

Banking is an inherently public function.  In fact, money is a public institution.  Whether private banks control it has varied in time and place.  When you are playing Monopoly (the board game) the players are equivalent to the public but each acts as an individual, not as a member of that very small public—which helps to instill in the players an individualistic sense of what money is.  But the “play money” used in the game is “real money” for the purposes of that game.  One player is designated the banker, but only manages the allocation of money during play.  The players agree as to the initial distribution of money (usually equal) and to the rules of the game.

Eventually, through luck and skill, one of the players gathers so much money and property that the game is over—s/he won!  Oh, but then there’s no game anymore, unless the players want to start another game, in which case they have to redistribute the money so each player will have money with which to play.  In fact, once the game is over, there is no money, only amusing little pieces of colored paper in a box with the board and various symbols of property, etc.  But why does someone always win Monopoly?  The widely ignored fact of economic reality also ends every game of Monopoly.  Once a player has accumulated significant economic power, that player’s ability to gain economic power increases.  So it is in the real economy, with the added bonus of increased political power, which means that to keep the game going, something’s got to give.  The result has to be either collapse or some form of redistribution, that’s what history demonstrates.

So, you can see the difference between a game and social reality, or, technically, economic reality.  In the real world, the game can never be over, even when one element—the Banksters in our case—accumulates enough wealth to render the other players powerless to make a successful move.  In the real world, this holds right up to the point where some starve to death for lack of resources.  In the game, with all the money accumulated by a small number of lucky and/or skilled players, everyone else is out of the game.  In real life that is deadly and is bound to result in some kind of chaos, collapse, or major restructuring of the economy.  Look around, both in the world today and in history.  Money hasn’t been in play all that long.  It emerged slowly and in various odd forms when and where some surplus of valued goods was accumulated.  When, at various times when wealth became so concentrated in the hands of the elite, a monarch or emperor recognized that wealth had to be radically redistributed in order to keep the economy going.

The earliest examples of money and debt were in societies where sedentary agricultural practices replaced nomadic hunting and gathering.  Much of this is chronicled in David Graeber’s fascinating book, Debt: the First 5,000 Years.  Graebner is an anthropologist whose analysis of money and debt as cultural phenomena clearly breaks out of the illusions about money and debt upon which our deeply absurd, and equally unjust, economy is based.

Unless we face some very fundamental and widespread social illusions, we will be unable to grasp how debt drives our absurd economy and how deeply destabilized the system has become.  Sometimes these illusions have two sides, neither of which reflects economic or cultural reality.  For example, we have the “gold bugs” and the advocates of “fiat money.”  Gold bugs confuse symbols with reality and fiat money fanciers confuse wealth with abstractions of value.  Both obsess over the form of money, failing to see that the very essence of its existence is consensual rather than essential.

There is nothing in the essence of gold that makes it money and there is nothing in the essence of paper that prevents it from being money.  All manner of items at one time/place or another have been money because the conditions allowed and the people agreed to define them as money, from sticks to shells to stamped pieces of copper or other metal to beads to paper.  In no case did just any stick, shell or piece of paper do.  It had to have certain qualities or it couldn’t become money.

In one fascinating example, a stick with certain inscriptions would be split in two and the creditor and debtor each took a piece.  No other stick could represent that relationship of value-exchange because no two sticks will split in exactly the same way.  That made the stick parts a unique symbol of the value exchanged.  With gold, the size, ie., weight, of a nugget or shaped coin stands for its exchange value.  In every case of an object that becomes money, its value is designated in such a way that it cannot be altered.  So it is with paper.  With paper money, methods are devised to make it nearly impossible to duplicate without detection, but of course some counterfeiters have been very skillful, which results in a technology race between the legitimate and illegitimate printers of money.

Today, of course, most money takes the form of an electronic entry in computerized accounting systems controlled by banks and other financial institutions.  And that brings on an entirely new level of complexity and exploitability of what at base was a very simple relationship. But, as always, who controls the creation of money is still at the root of the way the money system works.

Because the nation so stupidly gave away the rights to control a fundamental public utility—money—to a cartel of private banks, the Federal Reserve, the creation of money (except for coins, which, trivially, are minted by the U.S. Treasury) is controlled not by public policy but by private banking interests.  “The Fed” is owned by its member big-private-banks yet is politically defined as a quasi-public institution even though it is entirely controlled by the cartel of private banks, except to the extent that the political system can influence its actions, which is almost nil.  Power flows from the banks to the government, not the other way around.

Well, you saw how well that worked out when the federal government essentially gave away the commonwealth by “covering” the bad bets of the world’s biggest gamblers—the Banksters, as I prefer to call them—because their agents, from Treasury Secretaries “Hank” Paulson and Timothy Geithner, Larry Summers, and the rest of the Wall Street gang were very much in control of the political response to the crisis.  These same Banksters had helped steer the congress to do away with the protections against gambling with depositors’ money that resulted from the Great Depression of the ‘30s.  The recent ‘Great Recession’ was the result of the same kinds of financial manipulations as precipitated the great crash, but now with lightning speed of computerized trading and lax limits on holding reserve capital to cover losses, as well as a whole new breed of “financial instruments” which are “derivatives” of complex combinations of debt.  The whole Dodd-Frank “reforms” were a smokescreen to cover continued abuse by the financial elite.

The whole system is, as they say, rigged.  And because it is entirely dependent on generating more debt in order to sustain profit, ultimately all that debt cannot be paid, since it is really a pyramid scheme basing illusory wealth on ever-expanding debt that cannot be sustained.  No, it is not about “the national debt” and “deficit spending” by the federal government, though they are part of the system.  And the “debt ceiling” is pure political theater.  It is about the centralized private control of the public means by which money is allocated to the actual people who participate in the economy as a way of sustaining their lives—through debt—with that private control being exercised in the sole interests of the so-called “masters of the universe,” the Wall Street Banksters and financial deal makers who have no idea what a real economy looks like.  It’s all about the art of the deal which generates paper profit [or, I should say, electronic profit] out of money generated with no other purpose, but which bounds the people to a system of debt over which they have no participation except as victims.

Therein lies the absurdity of the economy for you and me.  Money, the function of which had been to provide a medium for and a repository of actual exchange value—that is, the exchange of real objects and services of value to people in a real economy—has been perverted into a devise for generating false wealth—paper or electronic profit—which is treated as real wealth by the Banksters who control the Economy of the Absurd.