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Saturday, June 2, 2007

The Compound Interest Paradox

I made an updated series of posts on the Compound Interest Paradox. Some people complained this post is too complicated, and I made a simpler version.

By a wide margin, this is my most popular post. It's popular for a good reason. You don't understand the corrupt nature of the economic system until you understand the Compound Interest Paradox.

I've seen the following argument mentioned on many "critics of the Federal Reserve" pages. It confused me immensely until I finally figured it out. The argument is that in a financial system like the one in the United States, where money is created via debt, the only outcome can be that the banks will eventually own everything. The problem is that, in the course of repaying a loan, the sum amount of payments always exceeds the amount of the loan. The net effect of a loan is to decrease the amount of money in circulation. Since money can only be put into circulation via a loan, the system guarantees that the banks will eventually own practically everything.

Suppose you buy a house for $350,000. You make a $50,000 downpayment and take out a loan for $300,000 at a fixed 6% interest rate payable over 30 years. Your total payments over the lifetime of the loan (assuming you don't repay it early), will be $647,514.

What is the effect of this loan on the money supply? When you take out the loan, the money supply was increased by $300,000. Either the bank loaned you money that was already on deposit, or it borrowed the money from the Federal Reserve at the discount rate. As you pay off your loan, money is removed from circulation. In practice, as you pay off your loan, that money will be used to issue other loans, or be paid out as the bank's expenses and profits. (Actually, the bank typically will sell your loan immediately so it isn't exposed to the risk that the short-term interest rate will change. That was the cause of the S&L crisis; banks were borrowing short-term from depositors but lending long-term to mortgages. When short-term interest rates spiked up due to inflation and the abandonment of the gold standard, the banks were stuck.)

The net effect of your loan, viewed in isolation, is that the total money supply has DECREASED by $347,514. You collected $300,000 and repaid $647,514. Fortunately for you, between the time you received your loan and when you repaid it, the bank was also issuing other loans to other people. Enough extra money was printed so that you could repay your loan.

But where does that $347,514 go? It goes to the financial industry. They are receiving the money in the future, when it will be worth less than it is now. Some of that money is paid out as profits and salaries and expenses. But what effort did the bank spend to create the $300,000 it gave you? The answer is: no effort at all. It was just a bookkeeping entry. They may have borrowed the money from the Federal Reserve at the risk-free rate of 5.25%, so they could loan it to you at 6%, but the Federal Reserve ultimately just printed the money it lent to the bank. The bank had sufficient collateral, its assets and other deposits (and now your mortgage).

In such a system, the banks will eventually own everything. The only way for new money to be created is by a loan, and money lent out is always less than money repaid. Total debt can only increase exponentially over time.

That is why newspapers and television are never critical of the banking industry. You will never see a major newspaper or TV show criticize the fundamental structure of our financial system. That's because the banks were careful to make sure they control all the major media. After all, with all the money, it's very easy to buy up all the major media. Their control is hidden via trusts and preferred voting shares. Plus, any story critical of the banking industry really wouldn't be entertaining. It would be too complicated for the average person to understand and wouldn't attract advertisers. A TV station wouldn't want to lose the ads placed by banks.

However, the banks don't own absolutely everything. A careful person can minimize his use of debt, and eventually build up a reasonable amount of investments. Plus, debt at a rate of only 6% might be beneficial, if you can invest the proceeds at 10% or more. It's only possible to do this because other people are making loans as well. If you knew that the loan you took out would be the last one ever issued, you would never be able to repay it.

Each loan has the effect of decreasing the number of dollars in circulation, because the payments always are more than the principal. What would happen if all the banks got together and said "let's collude and offer no more new loans"? As loans were repaid, there would be fewer and fewer dollars in circulation. Prices would drop. Some people would be unable to pay off their loans. The banks would foreclose, taking possession of real assets, even though the dollars they loaned out cost nothing to print. Provided the bank had managed its risk effectively, the value of the confiscated assets, plus the loan repayments received, would be enough to stay in business and still profit.

If all outstanding loans were called in, would there be enough dollars in circulation to pay them all back simultaneously? I suspect the answer is no, but I couldn't find hard statistics. That's why the Federal Reserve is able to lower the money supply by increasing interest rates. As interest rates are raised, fewer new loans are issued. The net effect is that loans are called back and the amount of money in circulation decreases.

The Federal Reserve is able to force banks to collude and offer fewer loans, because the Federal Reserve controls interest rates. If the interest rate was so high that no new loans were offered at all, then banks would just invest their assets with the Federal Reserve at that rate, instead of investing by issuing loans.

Economic cycles are inevitable in an economy where money is only created by debt. Artificially low interest rates encourage borrowing. At some point, those loans need to be repaid and there's a temporary decrease in available money. During a recession or depression, loans are defaulted on and the banks take possession of real assets. That is the only time that total debt decreases, but even with these defaults, debt increases exponentially faster than the money supply.

In my "Discounted Cashflow Paradox" post, I made an argument that the value of a dollar is zero. If the supply of dollars in circulation is less than the sum of all outstanding loans, the the value of a dollar is not zero, it's imaginary! I mean imaginary in the strict Mathematical sense. If there's no way that all outstanding loans could be simultaneously repaid, then the supply of dollars will always be less than the total demand. If you solve the equations, you get (I suspect), an imaginary number. In practice, this does not occur, because new loans are always being issued.

I really need to look up this statistic - sum total of all outstanding loans and sum total of all dollars in circulation. I have no idea where to look, but I suspect that the sum of all dollars is far less than the sum of all loans. New loans need to keep being issued to prevent collapse.

For example, the accumulated federal deficit is larger than the current M2 money supply. How can the government be in debt by more money than actually is in circulation? That's kind of silly.

Of course, if there was an absolute bar on issuing new loans, it would soon be obvious to everyone what is happening. Instead, what happens is that the price of a loan is increased slightly. This means that marginal loans are not issued. There are now slightly fewer dollars in circulation, but not so much fewer that the entire scam is exposed. Only the people with the worst credit rating are forced into bankruptcy. Does this sound familiar? It's the current "sub-prime lending" problem.

The Federal Reserve doesn't say "Let's increase the wealth confiscation rate." Instead, they say "We are concerned about inflation and decreasing unemployment and we are increasing the short-term interest rates."

Why should the Federal Reserve be concerned about decreasing unemployment? Decreasing unemployment means that workers are starting to be able to demand higher salaries. Their standard of living is increasing. That means that there is more wealth available due to a more productive economy. That wealth needs to be confiscated. The easiest way to confiscate it is to take money out of circulation, forcing everyone who has a loan to have a harder time repaying it.

When the money supply starts getting too tight, the fed lowers interest rates. However, the average person does not get to borrow at the risk-free rate. The benefits of financial stimulation (lower rates) primarily go to financial industry insiders. The average person just sees inflation, especially if he has money in the bank instead of inflation-hedged investments.

Plus, the average person does not know in advance when interest rates are going to be raised or lowered. That makes it much riskier for the average person to take out a loan. An insider has the opportunity to profit immensely.

There needs to be continuous inflation or else the whole system will collapse. Inflation is needed to ensure there's enough new money to pay back all the loans. If everybody simultaneously refused to borrow money, the financial system would collapse. If a substantial percentage of people simultaneously refused to borrow money, everyone else would be forced into bankruptcy.

Another benefit of inflation is that the average person keeps his money in the bank, or has benefits such as a pension or social security. These payments are not properly adjusted for inflation. Inflation allows the financial industry and government to slowly confiscate these assets. That's why the government doesn't want to ever contract the money supply too much. If the money supply contracted too much there would be deflation and the average person, who is holding mostly cash, would benefit.

As long as the Federal Reserve keeps a balance, the average person won't get wise to the situation. As long as a certain number of new loans are made, the average person will have access to enough money to repay his debts. There will be some foreclosures and bankruptcies, but from the point of view of the average person, those people deserved it. They won't say "The financial system was stacked against them - a certain number people had to go bankrupt because there wasn't enough money in circulation."

Most of the people who are aware of the details of this scam are themselves billionaires already. Knowing the defect in the financial system, they are able to profit from it immensely. Plus, they are insiders who know in advance which way interest rates are going to be moved. It's easy to make money if you know that. They have no incentive to fix the current system, except for the possibility that it might completely collapse soon. Any billionaire who is aware of the system can profit immensely from it. Any billionaire who is not aware will soon lose his wealth. With an awareness of the manipulations of others, it is possible to structure your own investments to maximum advantage. The basic advice I would give the average person is to minimize debt and invest in concrete assets - stocks or real estate or your own business.

If the banks wound up obviously owning everything, the average person would revolt. Some of the assets are hidden in trusts, so the average person doesn't know about it. Most media companies are incorporated in a way that insiders effectively control the company, even though they own a minority interest, through the issue of preferred voting shares. The money supply and tax rate are carefully managed so that the average person gets to own enough so that they don't revolt.

The national debt is actually absolutely necessary under the current system. Money can only be created via debt, and debt increases exponentially faster than the supply of money. The only way that someone can have money is for someone else to be in debt by an even bigger amount. Since the government is the only entity that can have unlimited debt without being forced into bankruptcy, the government needs to have bigger and bigger debt just so that there would be a supply of money for other people to have.

Is there any escape from this system? I think there is, but it would take a massive coordinated effort. I'm worried that the government and media are too corrupt to be trusted to fix this problem. It's tricky, because any solution would have to be implemented without breaking any existing laws, which are specifically designed to prevent anyone from ending this system of abuse.

I thought about advocating a return to a barter system. That wouldn't work, because a person doing barter legally has to pay income taxes on the value of his transaction, and the only valid means for paying taxes is with dollars. Because the government demands that taxes be paid in dollars, that creates a certain demand for dollars. It's impossible to live legally without dollars, because you have to pay your taxes. Maybe that's why the income tax had to be implemented the same time as the Federal Reserve system was established. Without income taxes, a person could effectively boycott the Federal Reserve, only making enough transactions in dollars to pay their taxes and dealing in barter otherwise. Since barter transactions are taxed the same as dollar transactions, with taxes paid in dollars, there's no way to boycott the Federal Reserve system by returning to a barter system.

The only way to fix the monetary system is by changing the laws. There's no way for individuals to legally boycott the standard financial system, because they have to pay their taxes in dollars.

That's one thing that annoys me about the other "critics of the Federal Reserve" websites. They explain the problem, but they don't really propose a workable solution. I don't think there is a solution possible without getting enough grassroots support to change the laws.


Anonymous said...

Your article is valuable, but I suggest you remove the reference to imaginary numbers. They're not relevant to your discussion and it's obvious that you don't understand their application.

Anonymous said...

This analysis is flawed, because you neglect the fact that bankers spend money too. You do mention that the financial interest benefits and then go on to ignore the money that the bankers spend right back into the pool of money that is in our economy. Every bank loan increases the money supply and now most banks reserve requirement is only 3%, so each loan is an increase of a small portion of the money supply by 97%.

Your very first payment on the loan is 98% interest which the bank spends to buy your congress person, your media, all that money goes back into the money pool for you to earn back via your labor so you can repeat the cycle next month with the banker only getting 97.8% to spend... we are slave of the bank.

Don't borrow, don't feed the monster.

Anonymous said...

Throwing you a bone FSK.

This speaker addresses the paradox in England, around the 2:15 mark.

Anonymous said...

i don't think this analysis is true. this is akin to saying there must be the same amount of money in circulation as there is total wealth. the chances of someone attempting to buy the sum of the world's wealth with the sum of the world's money is nil. similarly, attempting to pay back all debt simultaneously isn't going to happen.

if you take the last loan, and the bank starts removing money from circulation as you pay it off, it is still possible to pay it off. you can work for the bank!

if there is more debt than money, you produce, trade products for money, pay down debt, and repeat the process over and over and over again. The bank ultimately doesn't want all the money it simply made up - it wants your real goods. Maybe it pays you for your goods with the money you used to pay back its debt. maybe it pays someone else who pays you. the point is that money circulates along with real goods. the only way you can't pay back debt is if interest rates are higher than your production rate, in real terms.

yes, the federal reserve system is a piece of garbage. all central banking is. artificial credit is. monetizing debt is. government debt (paid by future taxes) is. Taxes are. and the media is garbage for pretending like this is as good as it gets. the whole thing can crash and burn, hyperinflation-style, or it can cause endless business cycles and economic inefficiency. And it robs people's savings, forcing them to invest (as a form of charity...expecting no returns) in those who are awarded artificial credit.

so...sorry, but i think this is a boogey man argument. yes, the ordained banking system is privileged against normal people. but its mere existence doesn't make us debt slaves.

edzillion said...

I often find myself trying to explain this paradox, and have a v. tough time getting it across.

I think you make a good attempt.

I fully agree with your core point, that the pure-fiat monetary system (and not just that of the Fed) is flawed. That it is based on a system of constantly borrowing to pay back bigger and bigger loans. Since the loans must be bigger every time (to pay back the prinicpal and the interest accrued) it causes an exponential increase in debt and consequently the money supply too.

After that point, I must admit I am lost. Can this system work? Well, for a time it seems to - after all it has worked so far. Is it sustainable? Who knows?

Maybe the wheels are coming off the wagon, though and news such as
Global Derivatives Market now valued at $1.14 Quadrillion! - which is larger that total world wealth!

This would seem to suggest that the system is collapsing due to the weight of it's own contradictions. But who knows? There are stranger systems that seem to trundle on for millenia...

Anonymous said...

The terms you need to look into are M0, M1, M2 and M3.
M0 gives you the amount on physical money and from there on the money supplied is created through loans.
In general, Fed (or other central banks) can only have a direct effect on M0 but because of capital requirements of banks it also effects indirectly the whole monetary supply.
So yes, there is less "real" money than the whole amount in the system. My question is that how come all you didn't know this?

Anonymous said...

Another problem is that interest is a cause of inflation. Most people argue that this is not true but when you buy a house for $350,000 and at the end of 30 years it costs you $647,514 how could it be argued that is not inflation? There are other causes such as supply and demand and hyperinflation when people start dumping dollars for commodities but interest is the biggest cause of inflation in our system.
The money loaned out is supposed to be backed by a depositors money so the money they earn through interest should flow back into the economy. It would be interesting to see some figures for loans given out, deposits and loan defaults. With enough information it would be possible to work out how big of a problem this is and possibly how long it can go on for.
Even if the money does make its way back into the economy there is still the problem of the interest debt compounding and increasing forever until someone defaults. There is no easy way to explain this unfortunately but here is an example:
If a bank lends 5 people call them A-E a $1000 at %5 interest they owe $5250 if the $250 interest gets lent to someone else F and the first 5 A-E earn it from F he (F) owes $262.50 still. The bank lends $262.50 to someone else G and F earns it from G then he G owes $275.62. This will go on forever increasing forever until someone defaults.
If banks accepted goods in lieu of payment then they could be paid with goods instead unfortunately they do not.

Anonymous said...

I can't believe anybody actually took the time to write such a lengthy arugment on something they obvously don't understand (along with imaginary numbers). Dude ought to hit up the local community college for an econ course (taking a couple of the posters with him) and give er another try. There are legit objections to fiat-base money, the fed, and capitalism as a whole but this "analysis" isn't even close.

Money is a medium of exchange and a store of value, not an asset onto itself. And the fact the bankers broker money is not a conspiracy, it's the business model. Money (fiat or otherwise) enables people to shift their consumption across time which people value and are therefore willing to pay for.

To use your mortgage example (which on a side note makes a variety of incorrect assumptions in its "proof") you could just as well save your mortgage payment over your 35 or so working years and pay cash for your house at retirement if you feel so taken advantage of by the bank. But most people value having their house to live in during those years (not to mention the appreciation) and are therefore willing to pay the interest expense to compensate the depositor for the use of their funds. The lender is delaying their consumption so that the borrower can consume now, which since we all have limited days the lender must be compensated for. The bank through economies of scale and scope can do this much more efficiently (i.e. cheaper) than individuals could on their own and take that savings for themselves, which is how they earn a living.

Banks seldom borrow from the discount window and most of their lended funds come from depositors because depositors are a cheaper source of funds. Typically a bank's loans to deposits ratio is in the neighborhood of 90% and as of 2nd quarter it's 93.3%. There's no need to guess and wonder because it's available to the world on the FDIC's website:
Click on the analysts link and then statistics on depository insitutions.

I know, not as exciting as consipracy theories exposed. Kind of like finding out that there's no Santa Claus.

Anonymous said...

What do u think about Muslim bank system? They already have a working system without interest in place. They works well in arab world but nobody from here wants something like that.

Anonymous said...

Unfortunately, a lot of the detractors to this analysis miss the point that banks don't actually "lend" out deposits. They merely create a credit account in exchange for a promise to pay. The bank creates the money it loans then and there, thus doesn't provide any consideration.

Aseem Prakash said...

Welcome to deficit financing. Typically the annual revenue of the State is less than the annual expenditure. Suppose in year 2000 the State receives $X revenue. The country's growth for the next year is then estimated by taking several complex factors and the past statistics into account. Expenditure for the next year is then set to an amount higher than the estimated revenue. But the expenditure is only set as much greater than the revenue as the estimated growth of the economy can allow.

So, currency is not printed indiscriminately by the Central Bank as you seem to suggest, it is printed taking into consideration the actual estimated growth of the economy.

However, if there is a serious error in the estimated growth, and the actual growth turns out to be much less, the Central Bank will be forced to print money to meet the expenditure. This leads to inflation.

The State Budget for every fiscal year comes on National Television in January in your country and on February 28 in mine.


fritz said...

Ever since I first read this post it was hard for me to wrap my mind around it,,so I read it again,,waited a week,,read it again,,waited a month than read it 3 times,,watched some u tube vids,,than wow,,it became clear,,you know what I really want to do is make a board game,,like monoply ,,where the compound interest paradox can be played out,

one person would be the fed reserve,,one person would be a small banker who barrows from the fed,,the other 2 people would be hard core business peeps like trump and bill gates ,,than with rules like real life,,see who wins,,would you charge me a royalty to make such a game?????

I'm serious here bro,,,,,,,,,,,,,keep on posten,,I like the way you think,,Peace

Anonymous said...

You are simply describing fractional reserve banking. If you truly wish to understand the problem you need to read The Theory of Money and Credit by Ludwig Von Mises.

Also inflation is not caused by interest. It can only be created by the monetary authority through the use of printing presses and the bookkeepers pin.

Interest is simply the time preference of money.

Anonymous said...

The time preference of money is completely meaningless when there is no consideration. What most people fail to realize is that in our current system the depositor who deposits money in exchange for interest is not losing his time preference for money. When someone deposits money into a savings account the bank will never say to them sorry we cannot give you your money right now because it is lent out at the moment. The money being lent out has no relation to the deposits other than the illusory abstract obfuscation that most people are led to believe.
The compound interest paradox is real and easily shown mathematically given the fact that all money is lent with interest. Since the loan is the principle (P) and what is owed back is (PxI) P cannot equal (PxI) at any point in time without a further loan of (P) which will only serve to grow the interest owed minus defaults or other mitigating factors such as a trade surplus of a country. This is basically a ponzi scheme in slow motion and takes many years for the interest portion of the debt to become a substantial percentage of the principal eventually becoming a compound L-curve mitigated by defaults and trade surpluses.

Anonymous said...

Besides repaying a loan with private money (which is always in limited supply and getting harder and harder to get adequate amounts of money to repay our debts in full), what about wiping out our debts via our social security account after first "accepting the purported debt for value" due to each debt's inherent remedy under Publc Policy of House Joint Resolution 192 of the fifth of June 1933, and then go find someone to execute your counter-claim via: a notary, an attorney, or some other public official with the clout to do this? Every debt created out of thin air (whenever money gets created in a similar manner) is a debt waiting to be "accepted for value". Every act of monetizing debt-creation is the inverse of Public Policy in that some debt (and its associated privilege of fiat money) gets attached to anyone claiming to be a United States citizen along with the privilege of operating as a U.S. citizen under our current corporate government (post Civil War). This attachment of the public debt (via the monetization of private debt) to our private self is reverseable via HJR 192. HJR 192 makes it a felony for any U.S. citizen to be coerced into "paying a debt". Only the "discharge of a debt" is allowed...discharge of a private debt off of one's private self and onto the public pool of collective-liability. The social security account contains unlimited reserves for commercial liability without any interest to worry about reducing its ability to neutralize our debts. And it is already securitized via our birth certificates which are registered with the Department of Commerce as international bills of exchange and regulated under the Securities Exchange Commission. So, its collateral is the Federal Reserve's ability to enforce our government to tax us to merely pay the interest on the Federal Reserve's money-creation...never any of its principal. Taxation could never equal the principal; the principal is too vast. And this interest-charge for the privilege of our government getting money from the Federal Reserve for nothing is a misnomer for calling it a tax. Since the money for the original loan never existed in the first was merely created out of thin air under the authority of our's, or someone else's, stands to reason that a remedy exists which wipes away a debt in a similar fashion. To think that only slavery is available to us to neutralize our debts is to forget that "due process" is nothing other than the manifestation of commercial law (under the Fourteenth Amendment to our Constitution and instigated by our new, corporate-styled government)...ergo, the "processing" of our "dues" held to our feet under commerce. And taxation (and criminal sanctions) of any sort is merely an excuse to charge a fee for their use of our signature on whatever government form or application we signed onto as a U.S. citizen requesting some benefit/privilege. Our signature is the "source" talked about in the Sixteenth Amendment which is being taxed, for it is the signature which is being milked on international bills of exchange. To pay some finance charge in the form of a tax is to play the part of a slave through ignorance of Public Policy and not because there isn't any other way out of slavery. Slavery is prohibited via the Thirteenth Amendment. They require our permission to treat us as slaves. They cannot force us into slavery (at least not under commercial law, or "due process"; it could happen under mashal law, though, aka "Patriot Act"). Our permission and consent for them to do business with us comes in the form of our belief that we violated some or another of their laws. These laws have no foundation under the Constitution's former operating mode of the Common Law which required either: someone to be hurt, or someone's property to be destroyed or stolen, or some contract was broken before it was voided. And many of these laws are not insured under a public hazard bond against anyone of us suing government for misconduct. So, our consent and belief in a fiction of crime is required along with a signature of ours signifying our willingness to step into the arena of proclaiming ourselves to be a U.S. citizen and a resident of one or another state. It takes but one nexus of residency or citizenship to preclude us from escaping this entrapment. Once inside this box, we can either pay as a misguided slave (they won't refuse us paying), or else accept the debt for value. Offering up to them the use of our setoff (social security) account is extra. And don't expect anyone in government to either admit to any of this or to fix it, 'cuz the fourth clause of the Fourteenth Amendment prohibits them from "questioning the debt", i.e. this system of debt monetization, as it stands. And anyone who receives a benefit of any kind from any tier of government, whether that benefit be a reduction in property tax, or a social security income, comes under the "rebellion" specified under the fourth clause of the Fourteenth Amendment thus making that someone an "enemy of the state". Plain and simple. Be yourself, but be sovereign. Act like one. Make your own reality. Don't reuse someone else's unless it is on your terms. And be sure and find someone competent enough to execute your remedies, for lower level lackies, such as police (for instance) are merely enforcing Public Policy to their advantage while ignoring your's. Crime has become commercialized, and justice is the reverseability of crime. Justice is blind, because commerce can either sell your wife into slavery, but it can also buy you a ticket to meditate. Amorality is rampant, because of the commercialization of society in more ways than the limited ones that we've been taught through common ignorance. See: Winston Shrout, Solutions in Commerce, and the "TAKE NO PRISONERS" (internet) radio program of Dr. Sam Kennedy at Republic Broadcasting Network for more information.

Jason Kolb said...

Nice post. I've been working on grokking this for a couple of years now, and I wanted to suggest a couple of ideas.

1) The Fed does not set interest rates. It follows short-term government bond rates. Interest rates reflect how expensive money is. When the environment is more risk averse rates fall because of the flight into government safety, and when people don't mind risk they leave the safety of government debt to find higher returns. The Fed is a facade used to slow deflation.

2) The value of a dollar is set by supply and demand like everything else. When banks are manufacturing dollars for people in response to loan requests, the value of a dollar goes down. When people default on loans or otherwise deflate the money supply the value of a dollar goes up. Supply/demand, it's that simple.

I heard somebody say once that if you can't explain something to a child you really don't understand it. I think that's probably the best way to learn economics, and the fractional reserve system in particular. Many, many rabbit holes you can fall into, but keep your eye on the prize (simplicity) and you'll figure it out.

Anonymous said...

Forget the economics and principles, look deeper. Think of it like this, who ever controls the money supply controls you. Why are we all caught in this massive con. There has always been in man's DNA,which is exactly the same as when we were cave men, greed and power or strength if you like. I would argue that a system that is based on debt is unfair , enslaves the majority , creates all the worlds woes and is responsible for wars, death, murder, crime, corruption , bad health and has a complete disregard for life itself. Dont trust me look at what is happening and has happened.

Not to many Rockafellas or Rothchilds , or Bushes or Chennys killed in war are there. Not to many members of any royal family either. This system attracts the sociapaths, the narsistic, the psycopaths. Truely people with no empathy, compassion or kindness.
They are our so called elected leaders or dictators or royal families.Some talk so eliquintly their speeches prepared to move your soul, anger you to war at some ghastly terrorist act, demand we all share the burden fiancially , increase your taxes for the benifit of us all. Care about our envoirment , global warming. YOU ARE BEING CONED ALL THE WAY THROUGH YOUR LIFE AND IT IS DISGUSTING.
The monetry system is completely flawed, the free market is an illusion same as democrocy, so what can we do. Biggest problem is human nature, it is not federal reserve banking. Power is our greatest enemy not our saviour, If we operate a fair livable system that all the resorces are shared, Utopia in itself, we may have a happier existense. But to put so much misery and difficulty into life because a few want everything in my humble opinion, goes much too far.

The language of economics is diliberately made to sound complicated. You can safely say that 1913 Federal reserve act, opened a door for a few clever minds of the day, bearing inmind at that time in America there was plenty of tough resourceful people about and this with the prohibition law created two things which are still previlent nearly 100 years later, Organized Crime and private and i mean private groups of privilaged players who are above any law or political control who pick presidents, are at the reigns of this out of control car and can never stop. What purpose is life if all that we do to educate and care for our children is a lie. Why have doctors . teachers. nurses. scientists. jobs, farmers, geologists, historians, and on and on. Notice i have ommited soliders, police forces and politicians and BANKERS.

This Federal reserve Banking system is doomed by its own paradox. the more you fix it, eventually and probably sooner than later the home made bomb created by these sociapaths , which has been used time and time again to keep everything running along will blow but the reaction might not be the required effect.

If someone had as an electorial mandate, VOTE FOR ME, I PROMISE TO CAUSE A CONTINUAL SERVING OF WAR, TORTURE, FAMMINE, AND GROW RICH ON EVERY ASPECT OF THESE PROMISES AND I PROMISE ONLY TO ALLOW THOSE WHO SERVE ME WELL TO BE LUCKY ENOUGH TO JOIN AS A JUNIOR LAP DOG AND SERVANT. I promise to give you an unpayable debt that keeps you and your family worrying and slaving without any regard for your well being and provide a media that tells you what i want you to believe . I promise to have no interest in human life only the continual abuse that i can bring.
If you find this proposal idiotic then why VOTE for it. Eventually everthing will become value less. I say teach us simple folk truth and let the governments print money not private commercial mad men

Anonymous said...

Oh my god. Where to start. You talk of investment. Where is the difference between the bank 'investing' in you and charging interest and you depositing in a bank and getting interest. NO moral high ground to be had there.

Yes, all the financial instruments (futures, loans, etc.) have only one product: inflation.

The natural counter to this is the fruit of human labor: manufacturing. The conversion of low value items into high value items. So long as the GDP, which holds up the currancy tokens, holds up then the interchange of wealth holds up.

Look to Zimbabwe to see what happens when the manufacturing base (in this case farming) of a nation fails. The cost of product (food) increases at a rate that far outstrips the capability of the financial institutions to keep up and the net value of the currancy bombs whilst the issuing authority prints more and larger denominations in an attempt to keep up.

The fedreal reserve isn't the monster. Greed, complacancy and foolish thinking are.

Anonymous said...

Let's say we have a farmer. The farmer plants things and sells them. On average, he gets around $50,000 a year for his crops. Since he's a very frugal fellow, he only spends $25,000 a year on farming equipment and necessities. To simplify things, let's say he has a fondness for money and likes to keep it in big holes on the outskirts of his farm.

There's no fundamental difference between the farmer, who takes in more money than he spends, and the banks, who also take in more money than they spend in the form of interest. The only difference is that the bankers, being fat cats, spend or reinvest all the extra money that the banks get. So the farmer is actually a bigger problem than the bankers. Amirite?

The 26th said...

I think the fundamental problem with this post is that you're confusing stock and flow. Let's take the house example and just have two people in this economy, the and you.

Day 0: owns an extra house and you only possess labor and your only need is housing. You make $2/day by working for and currently have $0.

Assets in the economy:
Mr.Bank: $100(value of house on day 0) and $100 in cash.
You: $0

Housing is worth $2/day to you over 100 day time period (current price is $100) so you agree to buy the house from He sells you the house for $100 and loans you $100 (since you're cashless) so that you can buy it. You agree to pay $100 in interest on day 100 for a total of $200, $100 in principal & $100 in interest.

Assets in economy:
Mr.Bank: $100 Cash. ($200 future claim)
You: $100 house. (-$200 future claim.)
total: $200(today) $0(future balance)

Day 100: You pay back $200 because you've made that much money from Mr.Bank through labor. You now own the house. has $200 because he sold you the house. made $100 by loaning you $100.

The total assets in the economy is now:
Mr.Bank: $300 cash
You: $100 house.
Total: $400

So to recap, at day 0, there was $200 in the economy plus your labor.

Once the financial transaction took place, there was $100 cash, and $200 in future claims. So Mr. bank traded $100 cash for a $200 future claim.

On Day 100, you get a house worth $100 and now Mr. Bank has $300. Where did the additional $200 in the economy come from? It came from your productive labor. The interest earned by Mr.Bank is the returns to capital and you gained a return to labor of $200. $100 was used to buy the house (principal) and $100 is the use value you received from housing (transfered to Mr.Bank through interest payments).

This is how economy grows. It comes from productive activity. Money like labor is productive because money is a store of past value (though not a perfect store). Since you own the house now, you can sell it to someone else for $100 and earn a return on it because money stored the value of your past productive capacity which you invested in a house. Or you can live in it since you value housing.

Just because you pay back more than you borrow doesn't mean we're on a path to destruction. There's an element of time in the calculation during which productive uses of capital is undertaken. You would never borrow $100 to pay back $200 unless it's going to make $100 in the interim. And it can only do so if you have some place to productively invest it.

Greg said...

A few people have pointed out how flawed this post is. It similar to the argument that I've seen posted by a few members of claiming that "usury", or charging interest on loans, causes economic problems.

Here's a simple spreadsheet I've created to show how this isn't true:

The type of interest, whether simple or compound, etc, is irrelevant. Whether or not the money is fiat or real is irrelevant. The only relevant problem is the fact that our banking system relies on the use of force to exist. If it were not being forced on us, we wouldn't be using it, and wouldn't be suffering the effects of price "fixing" and credit expansion/inflation/wealth redistribution through our money.

After reading your post about "dis-info agents", and then reading this terribly flawed post, it appears you (inadvertently, I hope) become a "dis-info agent".

FSK said...

A lot of people have posted comments here saying "FSK's analysis is wrong!" Their counter-arguments seem like incoherent gibberish to me. I haven't found a single example that logically refutes my "examples page".

If you want more details, look in the "Reader Mail" posts or the various other pages I wrote on the Compound Interest Paradox. (Due to a bug in Blogger, a trackback isn't generated for those other discussions.)

I don't waste time responding to idiots, but in the interest of fairness, I publish their comments. Don't think "FSK didn't respond to that comment critical of his analysis. Therefore, it is correct."

kwoonfai said...

Good day, am I not wrong to say that.. the 'invention' of compound interests ultimately guarantees the survival of the Fed.. since by servicing a loan, people would have to pay more than they loaned in the first place, and by that more bank notes would have to be printed.. an ever increasing amount of money in circulation, devaluing its intrinsic value (if.. it has value in the first place), ever increasing price of goods (MV=PQ) and inflation (well which can be skewed from media btw)

Anonymous said...

"Since money can only be put into circulation via a loan, the system guarantees that the banks will eventually own practically everything." (from 1st paragraph) Can't it be put into circulation via an exchange for labor (i.e. wage/salary) or other market operations (i.e. sale of a good or service that you have produced)?

FSK said...

No. Suppose I accept a job to write software for $5000. I get $5000. My employer gets the software. However, no new money was created by this transaction.

Only a bank has the power to create money. If you aren't a bank, no matter how much work you perform, you don't create new money.

When you work, you create wealth. Some of this wealth is then leeched by the financial industry. A bankster will loan you or your employer or someone else money, in exchange for a fraction of your work.

Under the US monetary system, the banksters are guaranteed a certain percentage of all productive labor. Only the banksters have the power to create money.

This is a common misconception. "When I work, I create money." When you work, you only create goods and services, which you trade for money. No new money is created when a non-banker works. All new money is created by a bank. That is the essence of the Paradox.

Dereksen Beck said...

First of all, I want to recognize the author. All of you who commented saying he needs to go to community college or check the FDIC's numbers is a royal idiot. This guy knows and understands a lot, about a lot of things. There are just too many people who refuse to see a problem for a what it is, they're delusional. Those are the kind of people that we need to keep FAR away from any position of decision making in this great nation. And its not to say that rich people are evil, but the state of this nation would change drastically if they CHOSE to donate a substantial amount of wealth to others. No one can argue that. It would change crime rates, particularly theft and smaller crimes, since most are of necessity. So maybe it seems that we are hoping government will fix the problems of this nation, when we are fully capable of doing it ourselves? No distribution of wealth though, people need to CHOOSE to donate and help others. It only pisses people off when government forces them to do it.

One more point: I think another reason why this argument makes complete sense is because there are SO FEW PEOPLE IN THIS COUNTRY THAT PRODUCE! Lawyers don't produce anything, politicians definitely don't and arguably detract from the overall productivity, actors, musicians. They're all great professions, but none produce. Very few fall into the "white market" as the author described in another post. The less people that fall into the "white market", the stronger hold the banks and government have. But, a thought came to mind as I wrote this. Could a musician, lawyer, actor or anyone of considerable wealth fall into that white category if they donate a considerable amount to needy people? And not buy a Lamborghini, which are great cars, but unproductive. In that sense, they are truly using their wealth acquired from something that does not particularly produce, and putting it back into the economy, specifically to those who are less fortunate. I hope we can evolve towards THAT type of society. If not, God help us!

Keep it up man, change the world.

Anonymous said...

I usually agree with your articles, but this isn't really a paradox. There are many possible solutions:

1. The banker can spend the money. As you pay the loan, the banker buys stuff from you. You borrow $10, pay 10% interest, buy 10 apples, grow 10 more apples so you have 20 apples. You sell 10 more apples to get $10 and pay back the banker. The banker buys an apple from you for $1. You pay the banker that $1 in interest. You have 9 apples left.

2. The money is debt-based instead of credit-based. So the banker (or someone else) can buy something from you by borrowing the money from you at interest. When you buy something, you don't "pay", you lend money at interest. When you buy something, you borrow money at interest. An unlimited amount of money can be created this way.

dionysusal said...

>i don't think this analysis is true. this is akin to saying there must be the same amount of money in circulation as there is total wealth. the chances of someone attempting to buy the sum of the world's wealth with the sum of the world's money is nil. similarly, attempting to pay back all debt simultaneously isn't going to happen.


That is complete nonsense. You obviously don’t know the first thing about money. The only real purpose of money is to grease the skids of commerce by providing a medium of exchange in lieu of barter. The total money supply (call it M) at any given time is mapped onto the total intrinsic value of all goods and services that can be assigned a monetary value (call it I, or “wealth”). Increasing M without increasing I a commensurate amount is called inflation, and decreasing M without decreasing I a commensurate amount is called deflation. The price of something is simply its relative worth expressed in monetary units. If someone literally had all the money in the world, he would be able to buy every good and service that can be assigned a monetary value. As for debt, FSK is absolutely right. The money supply is always running behind the debt that is generated within the system. This can happen because debt is not a good or service, although interest can be considered the “cost” of borrowing money. Also, since M is never increased for interest, the net effect of repaying a loan is an increase in I with no commensurate increase in M (the repaid money is removed from circulation), so loans must be continually issued to have money in circulation (only the banksters have the power to create money, as FSK said) and to stave off deflation. If you think FSK’s (or my) analysis is wrong, prove it using facts and logic instead of nonsense. Thank you.

FSK said...

One minor point: Velocity of money is also a factor in inflation, in addition to raw supply.

During times of hyperinflation, people try to spend their money as soon as they get it. This leads to price inflation that's greater than the rate of money supply inflation.

Also during hyperinflation, State parasites accelerate the rate of money printing. Police and State thugs/bureaucrats still have to get paid.

dionysusal said...

True, but I don't think velocity of money means all that much-- only the known or perceived amount does. Velocity within the banking system is merely a measure of mispricing and mistake due to the fiat/fractional system. The fiat/fractional system is an economic nightmare, whether the bankers get away with it or they get caught out. While it operates, no one has any real idea what anything is worth. Market signals are nearly useless. This is a bit of a problem because we've been on such a system for nearly 80 years. 80 years of malinvestment, mispricing and doing the wrong jobs in the wrong areas. What a way to run a railroad, huh?

Anonymous said...

You forget to address the ever-increasing human population and the implied ever-increasing real production (i.e "wealth") it provides.

If there were only $100 printed up, and that's all there ever was, then every time somebody was born, the dollar would deflate. The money supply must, at a minimum, keep up with population growth.

That being said, I'm not a big fan of over-population...

Doug Plumb said...

The "money" isn't money. Its debt.

Any kind of analysis that assumes the bills in our pocket are actually "money" fails from the start. Economic analysis always assumes this paper money is wealth.

In an expanding economy the system works, but the central bank doesn't have to be private. In the central bank was public then the money would not be debt. The system would work and economic analysis would apply.

Most of these analysis are false because we do not have to be lie-able to this system, thus no forced obligation.

People are using economics to analyze what should be analyzed in law.

I'm not talking about the "system that is legal" - ie the "legal system". I'm talking about actual merchant law.

Anonymous said...

Just one point. Why would it have to be done without breaking any laws? If we all, collectively, decided to stop following the broken system - and stopped following the laws that forced us to.... Well, they couldn't arrest all of us. It would overwhelm them. Passive resistance works. On a massive enough scale, it breaks the system until the system makes accomodations.

FSK said...

How do you coordinate things so that everyone resists at the same time?

If you go on TV and advocate for nonviolent civil disobedience, you may be immediately arrested for treason. For example, Irwin Schiff was not kidnapped until he went on TV promoting his viewpoint.

In practice, only a minority disobey at any given time, making it profitable to harshly crack down on them.

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