Wednesday, March 6, 2013

The destruction of the village – Creation of deposit money

Our monetary system has some absolutely glaring dysfunctions, which already from a purely mathematical viewpoint do not permit any different conditions from those we have in the world at present. I would like to explain what I mean by this in a story:

The nice little village

In a little village live three families:
  • The Farmer family
  • The Tailor family
  • The Mason family
Whatever there is to do, one of the three families does it perfectly or they do it together. The Farmers are in charge of producing food and also run a small country inn. The Tailors are responsible for everything to do with clothing and are famous for their traditional costumes. The Masons are talented craftsmen who are always on the spot when there is something to build or repair. Nothing is lacking in our little village; the villagers are happy and contented.

The bank comes to the village

One day a young family, the Bank family, moves to the village from the nearby town. Mr and Mrs Bank are thrilled by the idyllic villages and would like to make their contribution to its prosperity. They invite the whole village to the country inn. There they suggest that each of the local families open a current account. At first this is free of charge. If they have a debit balance it costs a small amount of interest but for this they can afford much more immediately. Besides that, the Bank family would make purchases in the village, thus bringing the interest they have taken in back into circulation. Each of the three respected families would receive an overdraft of  € 10,000 without special security, i.e. everyone is allowed to overdraw their account by € 10,000. No sooner said than done.

The economy flourishes

The first thing the Farmers do is to have their inn redecorated. The Tailors decide to hold their daughter’s wedding reception in the Farmers’ inn. For this big celebration all the villagers have new suits and dresses made by the Tailors. In this way visible prosperity comes to the little village. After a short time all the houses are freshly painted, the villagers also dress in their Sunday clothes on workdays and go out wining and dining. As everything is going so excellently, Mr Bank is only too pleased to increase the credit limit for all the families, which makes the economy flourish even more. He spent most of the income from the interest in the little village. He liked the Farmers, the Tailors and the Masons, and the Banks had found a place in their hearts.

A rude awakening

One day the bank was visited by inspectors. They found that the Farmers and Tailors had for a long time exceeded their credit limits. It seemed that they were running up greater and greater debts. On the other hand, the Masons had a credit balance of more than a million euros on their account. The two families with debts had exactly the same amount of debts as the Masons’ credit balance. The former were secretly ashamed of their debts and the latter of their wealth. And as they never talked about money, they all thought that the other families were in the same situation as themselves. After all, they all had nice houses, lovely clothes and held lavish parties.

But how did these high debts come about?
Well, nothing else is possible mathematically. When someone transfers money to another person, the former has a debit and the latter a credit. The total amount of all the accounts is zero. We call this the law of balance and it is a zero-sum game.

The collapse

The bank then requires the Tailors and Farmers to repay their loans immediately, which they naturally cannot do. Therefore their houses are forcibly converted for other uses: a supermarket moves into the former country inn and a clothing discounter into the Tailors’ house. But they are not successful for very long either and soon have to give up. The country houses which used to be so attractive have become empty ruins.

Although the Masons did earn a great deal of money initially, they could not really be happy about it as after all they had lost their best friends. The latter were now living in council houses which had been built by external companies. Discounters had also commissioned external construction companies since they were cheaper than the Masons. The nice village had been destroyed.

And the Bank family? Apart from the fact that they had also really liked the families, they had to write off their losses. The enforced conversion of the buildings had brought in far too little to cover the bad loans. So as not to go completely bankrupt. they are applying for one of the government bailouts but these are more for large banks…

All in all, all those involved have lost.

Small scale and large scale

This story is not a unique case. It is happening systematically on a large scale throughout the world. You don’t believe it? Then just change the names and make Greece, Spain and Germany out of Farmer, Tailor and Mason!
If this is happening everywhere on both a small and large scale, the system must be at fault, which it in fact is.

Our monetary system is a zero-sum game: according to the law of balance the sum of all accounts has to be zero, i.e. total amount of credit absolutely has to equal the total amount of debt. This makes the vast majority of people into losers of the system.

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