The Crash Course - Chris Martenson [29]
Is your mind repelled yet?
Two Kinds of Money—One Exponential System
So now we know that there are two kinds of money out there. The first is bank credit, which is money that is loaned into existence, as we saw in the first bank example. Bank credit comes with an equal and offsetting amount of debt associated with it, consisting of a principal balance and a rate of interest that must be paid on that balance. Because this money, which is also created out of thin air, accumulates interest charges, it promotes the growth of the money supply, even though the principal balance must be paid back. The interest represents money that accumulates over time, and as long as everything is working according to plan, it does so exponentially because it accumulates on a percentage basis.
The second type of money is also printed out of thin air, but it is created by the Fed, and it forms what is known as the “base money supply” of the nation. If you’re thinking of “base” as in a solid foundation, as in permanent, then you have the right mental image. This money forms the base of all other loans, which, as we saw earlier, can be multiplied fantastically due to the miracle of fractional reserve banking. Base money, too, is loaned into existence, and a quick glance at the Federal Reserve’s balance sheet reveals nothing but various types and forms of debts that it has swapped for thin air money. Together these two forms of money (base and credit) conspire to create a money system that will expand exponentially. Loaning money into existence, at a rate of interest, virtually assures this outcome.2
The very mechanisms of our money system promote and even demand the exponential growth of money and debt. If the deconstructed workings of the lending and interest cycle are not enough to make the case, then perhaps some empirical data will do the trick.
In Figure 7.1, we see a chart of the total credit market debt in the United States from 1952 to 2008.3
Figure 7.1 Total Credit Market Debt
All forms of debt are represented here: federal, state, municipal, corporate, and household.
Source: Federal Reserve.
Here again, we see a nearly perfect hockey stick, but this example is of debt. Even without knowing all of the details that underlie money creation and policy, we could simply observe the exponential features of this chart and readily form a quite strong hypothesis that we’re studying an exponential system.
The fact that our money/debt system is growing exponentially is an exceptionally important observation, and one that has enormous bearing on how claims on wealth will be settled in the future. Remember, money is simply a claim on wealth. When money is exponentially accumulating (growing), it carries both an implicit and explicit wager that the economy will be exponentially larger in the future. After all, if the economic future turns out to be smaller, but there is exponentially more money and debt floating around, then all of those monetary claims will be chasing a smaller stack of goods, which means they will be worth less than they currently are. Therefore, when we see money and debt growing exponentially, our very first task should be to assess whether the economy is growing similarly. If not, then we might rationally question whether paper claims against wealth are the best way to store wealth. Perhaps it might make more sense to hold wealth itself, not claims against it. We will go into more detail about wealth in Chapter 9 (What Is Wealth?).
What we’ve just learned about money allows us to formulate two more extremely important concepts. The first is that all dollars are backed by debt. At the level of the local bank, all new money is loaned into existence. At the Federal Reserve level, money is simply manufactured out of thin air and then exchanged for interest-paying government debt. In both cases, the money is backed by debt—debt that pays interest.
Because our debt-based money system is always continually growing by some percentage, it is