It's always interesting to see my Google Analytics stats. When someone finds my blog via Google search, I see what keywords they are searching. For example, searching for "federal reserve sucks", my blog is the #6 result and I've gained two visitors that way. I've had 16 searches for ' "compound interest paradox" ', with none of them new visits; presumably, someone who knows the phrase "compound interest paradox" has already read my blog.
Google Analytics has some meaningless stats. I haven't figured out what "Bounce Rate" is good for. It's when someone comes to your blog, visits one page, and then leaves. That can be good or bad. Someone who checks my blog regularly would visit one page and then leave. Someone who visited and didn't like what they saw would read one page and leave. I'm not sure if "new visits %" means anything. A low "new visits %" means I'm getting returning visitors, which is good. However, a low "new visits %" means I'm not attracting many new visitors, which is bad.
I'm still at around 50-70 Absolute Unique Visitors per week. That's enough that I don't feel like I'm wasting my time. On the other hand, I think I need to be around 1000 to 10,000 Absolute Unique Visitors to start really making a difference.
I'm really popular in California, with 3 times as many visits as any other state. I've had visits from almost every state. The only states with no inhabitants that have a clue are: Alaska, Wyoming, Montana, South Dakota, Mississippi, West Virginia, Vermont, and Maine. (It's odd that nobody from Wyoming has read my blog; that's one of the states for the "free state project".) I've had visits from 41 countries. I think that Blogger is blocked from China; I've had zero visits from China.
Also, if you read my blog via the RSS feed, make sure you visit the blog itself sometimes. I have some links and other stuff that's only visible directly on the blog page. I also repost the best reader questions in separate posts. Otherwise, many people won't see the comments. People who read my blog via the RSS feed, or don't revisit the page after the comment is published, would miss the comments.
Sometimes I see interesting questions or topics on other discussion forums and I copy the question and my response here. I try to post in other forums to gain readers, but I don't want to compose a response and then have it wasted.
One reader asks:
What's the deal with the IMF? How do they figure into things?
The IMF and WTO were created after WWII. They are responsible for the economic enslavement of third world countries. There was an agreement that the US gets to pick the WTO president and Europe gets to pick the IMF president.
The WTO and IMF make loans to third world countries for "economic development". In practice, the money winds up in the pockets of the leaders of the third world countries.Then, under a crushing debt burden, the third world countries are forced to enact policies that favor economic imperialism. These "economic development" loans get the Compound Interest Paradox started in the third world countries.
The most noteworthy example is Argentina's economic crisis a few years ago, which was entirely caused by the WTO/IMF. Every country that has received WTO or IMF aid has been ruined.
For example, as condition for membership in the WTO/IMF, third world countries are *FORBIDDEN* to have a gold or silver standard. Third world countries are required to use fiat debt-based money.
Redpillguy says:
You may want to discuss this in your blog:That article looks like complete nonsense to me.
Debunking the Federal Reserve Conspiracy Theories, by Edward Flaherty
I address most of these points in "Federal Reserve Thoughts - Answers to Media Myths".
I found a response by the author of "The Creature from Jekyll Island". However, this response has a mistake, because Edward Griffin doesn't understand the Compound Interest Paradox. I give more details in my next response below.
There's another point to be made about the author of that post, Edward Flaherty. He has a PhD in economics and works for a university. In other words, he is dependent on government subsidies (i.e. grants). It is almost impossible for a university economics professor to write articles critical of the Federal Reserve, because then he would not receive any government research grants and would lose his job. The author of the article mentioned by redpillguy is biased, and the article is poorly written. I don't think it's worth my time to write a point-by-point rebuttal of Flaherty's article, because it's redundant with my other posts. However, I'll do it if someone asks.
Redpillguy asks:
Apparently there's a book by Dr. Jacques Jaikaran, "The Debt Virus". The "Debt Virus" is another term for the Compound Interest Paradox.
Flaherty attacks the concept by saying
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"Hypothesis: All money is created only when someone takes out a loan. Therefore, there can never be enough of this debt-money in circulation to repay all principal and interest. This imbalance causes inflation, financial crises, social maladies, and will eventually destroy the economy unless there is a massive injection of "debt-free" money. This idea is from Dr. Jacques Jaikaran's book, The Debt Virus.
Facts: The hypothesis shows an incomplete view of how the banking system interacts with the economy. The system necessarily creates an amount of "debt-free" money equal to the interest on its loans. It does this whenever it pays operating expenses, dividends, or purchases assets. As a result, there is more than enough money in circulation to retire all bank-related debt."
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Griffin's response is:
"I object to being lumped together with other analysts on this issue. I did not write The Debt Virus, I wrote The Creature from Jekyll Island. On page 191, I explained why I consider the claim that there is not enough money to pay off interest to be a myth."
Do you have any comments on this?
It appears that neither Griffin nor Flaherty understand the US monetary system. I have not read "The Debt Virus". The Compound Interest Paradox is real. It's a fundamental structural flaw in the monetary system, put there on purpose to enslave people under a crushing debt burden. If you look at any graph of "money supply" and "total debt" over time, the Compound Interest Paradox is obvious.
The fallacy of both Griffin and Flaherty is that they only look at the balance sheet of banks. If you also construct a balance sheet for the "rest of society", then it's obvious. The "rest of society" is stuck in a permanent money supply shortfall, because they don't have the power to create money. The only way the "rest of society" can get money is by taking out a loan. The loan repayments always exceed the amount of the loan. This is the "Compound Interest Paradox".
Consider an example of a single loan. I borrow $1 million for one year at 5% interest. In a year, I have to repay $1.05 million. Where does the extra $50,000 come from? That extra $50,000 was never created or put into circulation. If my loan was the only loan in existence, I would obviously be unable to repay it, because I could never get the extra $50,000. You can't add minuses to get a plus. Each loan puts the "rest of society" in a deeper and deeper hole. No matter how many loans you add together by different individuals, the Compound Interest Paradox is still there.
Consider another example. All outstanding loans were taken by the same person. Is there any way that person could repay his debts? No, because there isn't enough money in circulation for him to repay the loan. If one person took out $1 trillion in debt at 5% interest for a year, he would have to repay $1.05 trillion in a year. There would be a $50 billion shortfall that he would be unable to make up. In the actual economy, the loans are spread out over millions of people. Out of statistical necessity, the weakest debtors are forced into bankruptcy. Currently, the weakest debtors are individuals owing subprime mortgages.
That's one of the rules of Mathematics. In order to understand something, construct an example. Whenever you construct an example of the debt-based monetary system in action, you see the fundamental structural flaw and the Compound Interest Paradox is obvious. The fallacy of Griffin and Flaherty is that they only look at the bank's balance sheet, in isolation. From their point of view, everything is fine. If you construct a "rest of society" balance sheet, then the Compound Interest Paradox is obvious.
Later in this post, I will make a more detailed example.
The process by which money is created is incredibly complicated. There are several mechanisms by which money can be created.
- Deficit spending by the Federal Government, when the bond is purchased by the Federal Reserve.
- Deficit spending by the Federal Government, when the bond is purchased by a private bank or individual.
- Fractional reserve banking, where the loan is made from customer deposits.
- Fractional reserve banking, where the loan is made from reserves borrowed or created by the Federal Reserve.
- The Federal Reserve's open market operations.
Banks can create new money via fractional reserve banking, but they are restricted by law to a 10x reserve ratio. Banks want to maximize their profitability, so they always stay "loaned up" to the maximum amount allowed by law. The power to create new reserves lies solely with the Federal Reserve.
First, consider deficit spending by the Federal Government, when the bond is purchased by the Federal Reserve. For example, the Federal Government issues a $1 billion bond for 1 year at 5% interest, purchased by the Federal Reserve. Only $1 billion is put into circulation, but that bond must be repaid with $1.05 billion in a year. There is a money supply deficit of $50 million.
Here is the mistake that Flaherty is making. After receiving the $50 million in interest payments, the Federal Reserve uses it for its own expenses or turns that money over to the Federal government. However, the "rest of society" still has a money supply shortfall of $50 million. The Federal Reserve's books balance, but the "rest of society"'s books do not balance.
A fairer monetary system would not have the Compound Interest Paradox. Whenever the Federal Reserve creates money via debt, the government should simultaneously receive a credit equal to the required interest payments. Of course, the Supreme Leader of Humanity will never allow this reform to be passed. The whole point of the monetary system is to enslave everyone under a crushing debt burden!
However, the Federal Reserve normally does not directly purchase Federal Government debt. The debt is first issued to private banks or individuals. The Federal Reserve purchases debt that is nearly expired, or makes short-term purchases via repurchase agreements. Item (1) does not occur in practice. However, about 7-10% of Federal Government debt is owned by the Federal Reserve at any given time. With a 10x reserve ratio, the Federal Reserve creates 10% of the money necessary to purchase government debt. Fractional reserve banks can then create the remaining 90% of the money necessary to purchase the rest of the government debt.
As I mention in my discussion of (5), the Federal Reserve spends its surplus interest income for its own expenses, or returns it to the Federal government. The Federal Reserve's books balance, but the Compound Interest Paradox still enslaves the rest of society.
Second, consider deficit spending by the Federal Government, when the bond is purchased by an individual or a bank. In this case, there is no Compound Interest Paradox. Suppose I had $1 billion cash. I buy a 1 year Treasury bond at 5% interest. The government spends the $1 billion. In a year, I am repaid $1.05 billion cash, which I can now spend. There is no Compound Interest Paradox in this case.
However, most government debt is purchased by large banks. The Federal Reserve creates, via its open market operations, around 10% of the cash required to purchase government debt; fractional reserve banking creates the remaining 90%. The money created by the Federal Reserve always has debt-strings attached and the Compound Interest Paradox applies.
Further, if I actually had $1 billion, I would be a fool to invest it in Treasury bonds. The 5% interest I receive is insufficient compensation for inflation, especially after income taxes. Why would I be willing to lend my dollars at 5% when M2 is growing by more than 6%? The reason is that the Federal Reserve repurchases government debt to keep prices up and interest rates down. The average person is fooled into thinking that the "free market price" for government debt is a good deal. They don't realize that the "free market price" for government debt is artificially raised because the Federal Reserve repurchases government debt to keep prices high and interest rates low.
Why are large banks willing to purchase government debt? When a large bank purchases government bonds, it is allowed to use a leverage ratio of 100x or more. If the average Fed Funds rate over the next year is expected to be only 4.75%, then large banks can make a riskless profit by borrowing at the Fed Funds rate and buying government debt priced at 5%, because 0.25% times 100 is 25%, a good return. When a large bank purchases government debt, it borrows from the Federal Reserve via its open market operations. The Federal Reserve's open market operations do involve the Compound Interest Paradox.
That's the reason you normally have an upward-sloping interest rate curve. Longer term Treasury bonds are riskier, and banks are required to use more conservative leverage ratios when buying longer term Treasury bonds.
Third, consider fractional reserve banking where the loan is made from customer deposits. For example, suppose a bank credits customers with 4% interest on deposits. The bank issues a loan at 6%. The bank's expenses plus profits equal 2%. If you only look at the balance sheet of a single bank, you don't see the Compound Interest Paradox. However, the Federal Reserve injects reserves into the banking system via its open market operations. That is where the Compound Interest Paradox occurs.
When a person borrows money from a fractional reserve bank, they immediately deposit it back into a bank. This bank then loans out the money again, issuing fractional reserve loans up to the reserve ratio.
The banking industry is heavily regulated. This inflates the prices banks can charge. In other words, this inflates interest rates charged. Suppose I had several million dollars and wanted to get in on the banking scam. It would not be worth my effort to start a new bank. I could get better returns by buying shares in an existing bank. Regulation of banking is a barrier for me to enter the banking industry. For example, right now, the large banks are colluding and refusing to purchase mortgages and mortgage bonds. That hurts all small banks who attempt to sell mortgages.
Regulation of the banking industry raises prices. In my above example, the bank offers depositors 4% and issues loans at 6%. However, the bank's expenses plus reasonable profits are only 1.5%. Government regulation of banking allows an excessive profit of 0.5%. This is another instance the Compound Interest Paradox. The banking industry gets to confiscate the wealth of the rest of society at a rate of 0.5% per year (or whatever their rate of excessive profits). This is in addition to the wealth confiscation caused by the Compound Interest Paradox when the Federal Reserve creates money.
Fourth, suppose a bank issues a loan via borrowed reserves. A bank's ability to issue loans is not constrained by the amount of reserves it has. If a bank has a surplus of reserves, it can loan them to other banks. If a bank has a shortage of reserves, it borrows them from other banks. The interest rate that large banks charge each other for reserves is the Fed Funds rate. Over time, the Fed Funds rate naturally rises, due to the Compound Interest Paradox. The Federal Reserve, via its open market operations, creates new reserves. Banks can loan reserves to each other, but only the Federal Reserve has the power to create new reserves. By creating new reserves, the Federal Reserve lowers the Fed Funds rate to its target level, currently 5.25%.
Finally, money is created via the Federal Reserve's open market operations. Here, the Compound Interest Paradox operates with the full force of law. For example, the Federal Reserve purchases Treasury Notes with a $1 billion face amount a few days before maturity. These Treasury Notes have a market value of $999 million. The Federal Reserve purchases them for $999 million, creating $999 million in reserves, and there's a debit of $999 million in its own account. A few days later, these Treasury Notes are redeemed with the government for $1 billion. There is a money supply shortfall of $1 million. The Federal Reserve will have a credit of $1 million cash in its account, which is spent by the Federal Reserve or returned to the government. However, that $1 million required to pay the interest was never created or put into circulation; it is only created by future additional loans.
It is only at this step, where the Federal Reserve creates new bank reserves, that the Compound Interest Paradox occurs with the full force of law. When the bank makes a fractional reserve loan with customer deposits, it pays out all its interest income as expenses or profits.
If you only look at the balance sheet of the Federal Reserve and large banks, you don't see the Compound Interest Paradox. You need to construct a "rest of society" balance sheet to see the Paradox.
Instead of issuing loans to banks, the Federal Reserve could outright give them money. The effect would be equivalent. However, then the books would not balance and the massive subsidy to the financial industry would be obvious to everyone.
The Compound Interest Paradox operates in two locations. First, the Compound Interest Paradox enslaves the "rest of society" under a crushing debt burden. Every time the Federal Reserve creates new reserves by purchasing government debt, the aggregate indebtedness of society increases. This guarantees that everyone is enslaved under a crushing debt burden.
Second, the Compound Interest Paradox operates in the profits of large international banks. Regulation of banking lets them charge interest rates above the "free market" level, allowing them to confiscate wealth at a rate equal to the spread between "free market" interest rates and the interest rates they can actually charge. Income taxes create an artificially high demand for large banks' products. Income taxes must be paid in dollars, and dollars can only be obtained from a bank. People must keep borrowing more money, just to repay the loans they've already taken.
A Detailed Example
Let's look at a detailed example of the debt-based money system in action.
To simplify things, I will only have the Federal Reserve, one bank, and 10 citizens.
The Federal Reserve sets interest rates at 8% initially. The bank, who has a monopoly, decides to charge 10% for loans. In reality, there are multiple banks that act as a cartel, and the effect is the same. The bank can borrow from the Federal Reserve at 8%, so it offers depositors 7% interest. The bank will never offer depositors a higher interest rate than the Fed Funds rate.
Let's ignore the effect of the bank's operating expenses and profits for now; this example is complicated enough as-is.
Each citizen owns property worth $1 million. This may be his current actual property, or he may be pledging his future earnings. Since there is no money in circulation at the start of the simulation, it's kind of silly to say "their property is worth $1 million". That's the value the bank assigns to the property, which is good as any other number in a debt based fiat monetary system.
At the start, there is no money in circulation.
The balance sheet is:
Federal Reserve: $0
Bank: $0
10 Citizens: $0 and $1 million in property
Each citizen borrows $1 million, pledging his $1 million property as collateral.
The bank borrows $1 million from the Federal Reserve at 8% interest.
The reserve ratio is 10x, so this $1 million borrowed from the Federal Reserve is used to create $10 million in actual money. Each citizen immediately deposits his money back in the bank.
The balance sheet is:
Federal Reserve: -$1 million (money it created)
$1 million (owed by bank)
Bank: $10 million in deposits (owing 7% interest)
$1 million owed to Federal Reserve (owing 8% interest)
$10 million in loans (earning 10% interest)
$1 million in cash
10 Citizens: $1 million in their bank account
$1 million in debt
$1 million property
Let's add in the interest now.
The balance sheet is:
Federal Reserve: -$1 million (money it created)
$1.08 million (owed by bank)
Bank: $10.7 million in deposits (owing 7% interest)
$1.08 million owed to Federal Reserve (owing 8% interest)
$11 million in loans (earning 10% interest)
$1 million in cash
10 Citizens: $1.07 million in their bank account
$1.1 million in debt
$1 million property
At this step, you can already see the Compound Interest Paradox. The Federal Reserve created $1 million and loaned it out at 8% interest. However, the Federal Reserve never created the $80,000 required to make the interest payments. Later, when the Federal Reserve receives its $80,000 interest payment, it pays it out to the government or for its own expenses. This is the mistake that Flaherty and Griffin make. The Federal Reserve, when it does collect the $80,000 interest, pays it out as expenses and profits. There is a permanent $80,000 money supply shortfall. Even though the Federal Reserve and the bank will pay out their profits, the Compound Interest Paradox still exists. The books of the Federal Reserve and the bank will balance, but the books of "society as a whole" do not balance.
It is only at this step, where the Federal Reserve creates new bank reserves, that the Compound Interest Paradox occurs with the full force of law. When the bank makes a fractional reserve loan with customer deposits, it pays out all its interest income as expenses or profits.
The citizens trade with each other. Nine of them are the most skilled workers, and they have $1.1 million, enough to repay their loans. The last citizen is left with only $0.8 million and he declares bankruptcy.
9 Citizens: $1.1 million in their bank account
$1.1 million in debt
$1 million property
each repays his loan, left with $0
1 Citizen: $0.8 million in his bank account
$1.1 million in debt
$1 million property
declares bankruptcy
The bank collects the $1.1 million from each of the 9 solvent debtors. The bank seizes $0.8 million from the 1 bankrupt citizen and seizes his $1 million property.
The balance sheet is:
Federal Reserve: -$1 million (money it created)
$1.08 million (owed by bank)
Bank: $1 million in cash
$1 million in property (confiscated from one citizen)
9 Citizens: $0 in their bank account
$0 debt
$1 million property
1 Citizen: $0.3 million unpayable debt
His $1 million property is in foreclosure by the bank.
The bank says "Let's auction off the $1 million property to pay this $0.3 million debt." Any bids? No! Nobody has any money right now except for the bank. We're in the bust phase of the business cycle. The bank writes off the $0.3 million unpaid debt and takes possession of the $1 million property, planning to sell it later.
Now the bank has to repay its loan to the Federal Reserve. The bank only has $1 million in cash, but it owes the Federal Reserve $1.08 million! This is a serious crisis.
The balance sheet is:
Federal Reserve: $0.08 million (owed by bank)
Bank: $0 cash
$0.08 million (owed to Federal Reserve)
$1 million in property (confiscated from one citizen)
9 Citizens: $0 in their bank account
$0 debt
$1 million property
1 Citizen: $0.3 million unpayable debt
His $1 million property is in foreclosure by the bank.
This citizen has a bad credit rating and can no longer borrow.
1 new citizen: $1 million property, representing the work of the other 10 citizens in the past year.
Look at the above balance sheet snapshot. All outstanding loans have been repaid, but there's still a $0.08 million debt that the bank owes the Federal Reserve that cannot be repaid. This is a demonstration of the Compound Interest Paradox in action.
However, this bank is the only bank. It is "too big to fail". The Federal Reserve doesn't demand immediate payment of the remaining $0.08 million. The Federal Reserve cuts interest rates to 3%. The bank lowers the interest rates it charges to 5%. The bank now offers 2% on deposits.
Besides, the bank isn't insolvent yet. It still owns a property valued at $1 million. That's another loophole in the financial system. The current market price of the property is $0, but it was valued at $1 million a year ago. Banks are allowed to value their assets as the purchase price or current market value, WHICHEVER IS GREATER. The bank is allowed to carry the property on its books at a value of $1 million, because that was the value when it issued the loan. The bank is not always required to mark to market. In this case, if the bank did a "mark to market", it would be insolvent and the economic system will have collapsed; that is never allowed to happen.
To keep the total number of citizens at 10, suppose that one of the 9 citizens had a child and he inherited $1 million of property. This represents the wealth created by those 10 workers in a year.
Interest rates have been slashed from 10% to 5%. The citizens say "Interest rates are half as much now; we can borrow twice as much!" Each citizen borrows $2 million at 5% interest for a year. The bank borrows $2 million from the Federal Reserve at 3%.
The balance sheet is:
Federal Reserve: $0.08 million. (owed by bank from before, now charged 3% interest)
-$2 million (money it just created)
$2 million. (owed by bank, newly issued loan, charged 3% interest)
Bank: $2 million cash
$20 million in loans, earning 5%
$20 million in deposits, earning 2%
$1 million in property (confiscated from one citizen)
10 Citizens: $2 million in their bank account
$2 million in debt
$1 million property
[citizen count includes one new citizen]
The bank says: "Let's auction off the $1 million property now!" The money supply is twice as big as it was before, so the property is sold for $2 million even though it was worth $1 million before, and worth $0 at the bottom of the recession.
The balance sheet is:
Federal Reserve: $0.08 million. (owed by bank from before, now charged 3% interest)
-$2 million (money it just created)
$2 million. (owed by bank, newly issued loan, charged 3% interest)
Bank: $2 million cash (just borrowed from Federal Reserve)
$2 million cash (sale of confiscated property)
$2 million (owed to Federal Reserve, just borrowed)
$0.08 million (owed to Federal Reserve, old balance)
$20 million in loans, earning 5%
$20 million in deposits, earning 2%
9 Citizens: $2 million in their bank account
$2 million in debt
$2 million property [formerly valued at $1 million]
1 Citizen: $0 million in his bank account
$2 million in debt
$4 million property [formerly valued at $2 million, includes property confiscated and sold]
The bank now pays back its $0.08 million loan to the Federal Reserve, which the Federal Reserve spends on its own expenses and turns over the rest to the Federal Government. The bank has $1.92 million in profit, which it retains for further investment or pays out to its owners.
In other words, almost 10% of the wealth of society, in one year, has been transferred to the banks. This is the 10% interest rate the bank was charging on its loans, which is no surprise.
There was an aggregate money supply deficit of 10% on the part of the "rest of society". They lost 10% of their wealth to the banking cartel. This money is paid out to the banks' owners, so their books balance. In the meantime, the rest of society still is in a debt hole. There has been a huge transfer of wealth from the "rest of society" to the banks.
The bank's operating expenses are probably much less than $1.92 million, so there's a huge unearned profit for the banks. You can correct this example to adjust for the bank's operating expenses. You can adjust the extremity of the boom/bust cycles. The principle is the same.
Also notice that the Federal Reserve showed a profit of $0.08 million, which it turned over to the Federal Government. This is negligible compared to the $1.92 million profit earned by the bank.
Also notice that the person who lost his $1 million property wasn't stupid or lazy. He was the least efficient worker. There was a fundamental structural flaw in the monetary system. It was guaranteed that at least one person would be unable to pay his debts. The media will say "That person lost his property because he was stupid or lazy." They will never say "There's a fundamental structural flaw in the monetary system."
The actual reality is even worse than the example I gave above. For example, suppose Federal income tax rates are 25%. In that case, as people trade, 25% of the money supply is drained and goes to the government. This makes it even harder for people to pay back their debts.
The income tax is a fundamental part of this scam. The people can't get together and say "We're going to trade with silver; forget about the Federal Reserve and banks." The government demands that people pay income taxes whenever they work, and income taxes must be paid in Federal Reserve Notes. It is impossible to obey the law and live a morally just life. I can't work, trade with Federal Reserve Notes, and pay income taxes without supporting the Federal Reserve and other things I find objectionable. The current economic and political system is one of absolute perfect enslavement. That isn't an accident. It was designed that way on purpose by the Supreme Leader of Humanity.
Also notice that, by adjusting interest rates, the Federal Reserve can adjust the rate at which the Compound Interest Paradox enslaves the rest of society. The Federal Reserve can adjust the rate at which the financial industry confiscates the wealth of everyone else. By calibrating the wealth confiscation rate, the Federal Reserve ensures that the average person has enough wealth that they don't revolt, but not so much spare time that they can figure out what's going on.
The above example is a simplification of what actually happens. However, even that simplified example was very long. It illustrates the Compound Interest Paradox exactly as it occurs in the real world. You can adjust that example to correct for all the variables I omitted: the Federal Government, Treasury Bonds, Federal deficit spending, Federal Reserve "monetizing the debt", bank expenses and profits paid to shareholders, new wealth created by workers, the Federal Reserve raising/lowering interest rates, boom/bust cycles, and expansion/contraction of the money supply. If you want an example with all of those factors, and you understand my example, you should be able to create it.
Summarizing, to understand the Compound Interest Paradox, you can't just look at the balance sheet of banks and the Federal Reserve. From the point of view of an individual bank, its books balance and you don't see the Compound Interest Paradox. You also need to look at the balance sheet of the "rest of society" (i.e., everyone who isn't a bank).
Redpillguy asks again:
Flaherty's assertion below sounds like a load of crap. He says "The system necessarily creates an amount of "debt-free" money equal to the interest on its loans. It does this whenever it pays operating expenses, dividends, or purchases assets". That implies that the banks create interest-free money with no debt attached when they pay expenses, dividends, or purchase assets, equal to or greater than the interest owed on loans. This doesn't sound like it could be true at all.
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Myth #11: The Antidote to the Debt Virus
Hypothesis: All money is created only when someone takes out a loan. Therefore, there can never be enough of this debt-money in circulation to repay all principal and interest. This imbalance causes inflation, financial crises, social maladies, and will eventually destroy the economy unless there is a massive injection of "debt-free" money. This idea is from Dr. Jacques Jaikaran's book, The Debt Virus.
Facts: The hypothesis shows an incomplete view of how the banking system interacts with the economy. The system necessarily creates an amount of "debt-free" money equal to the interest on its loans. It does this whenever it pays operating expenses, dividends, or purchases assets. As a result, there is more than enough money in circulation to retire all bank-related debt.
I think I correctly answered Flaherty's argument above. If you only look at the balance sheet of a bank, everything balances. You can't see the Compound Interest Paradox by looking at the balance sheet of a single bank.
To see the Compound Interest Paradox, you have to work through an example where "the rest of society" has a balance sheet. "The rest of society" is everyone who isn't a bank. If you work through an example and look at "the rest of society"'s cashflow, you'll see the Compound Interest Paradox.
The government does not collect or publish a balance sheet for "the rest of society". It's practically impossible to collect such information.
Look at the example I gave above. It doesn't fully model the economy. It illustrates the point.
Let me know if you still don't understand the Compound Interest Paradox after reading my detailed example.
On the Ron Paul Forums, someone asked:
Why can't the Fed just keep raising interest rates to get rid of inlfation? Why not have them slowly raise interest rates to the point where no one will borrow from them anymore?
If the Federal Reserve jacked up interest rates, there would be hyperdeflation and another Great Depression.
In a hyperdeflation scenario, the large banks who support the Federal Reserve would start failing.
On the Ron Paul Forums in that same thread, someone asked:
Why would there be hyperdeflation? There wasn't hyperdeflation before the Fed. Banks would simply start lending cash from other customers deposits. I should have specified in my original question that the Fed would also forgive debt owed to it, so it wouldn't lower the money supply via repayment to the Fed.
Before the Federal Reserve, there was credit-based money based on a gold standard. It's hard to have hyperdeflation under a gold standard, because the money supply can't be reduced below the amount of physical gold.
Even before the Federal Reserve was created, most gold was under the control of banks. Anybody who wanted gold had to borrow it from a bank. The Compound Interest Paradox still operated at that time, but it didn't have the full force of law yet.
There's another "flaw" with a gold standard. Under a gold standard, you can't have negative real interest rates. With fiat money, the Federal Reserve can expand M2 at a rate of 6% or more, while keeping interest rates at only 5.25%. A gold standard is a check against inflation.
Under a gold standard, a person can take possession of their physical gold. Under a gold standard, if a person is concerned that the government will devalue its currency and default, a person can defend themselves by hoarding gold. That is the reason President Roosevelt demanded people turn over their gold, and the media at the time decried gold hoarders as criminals.
When the Federal Reserve was created, the USA shifted from sound credit-based money to debt-based money. Debt-based money has an intrinsic structural flaw, which I call "The Compound Interest Paradox".
After the Federal Reserve was created, there was hyperdeflation during the Great Depression. In the 1920s, the Federal Reserve slashed interest rates, causing a huge expansion in the money supply and in the amount of debt. In 1929, the Federal Reserve jacked up interest rates. This shrank the money supply, because people stopped taking out loans. More loans were repaid than new loans issued.
With debt-based money, the Federal Reserve can shrink the money supply by raising interest rates. During the Great Depression, many banks who weren't Federal Reserve cartel insiders started failing, because they didn't know interest rates were going to be raised. At the bottom of the Great Depression, the banks who supported the Federal Reserve received a massive bailout in the form of interest rate cuts and a default on the gold standard.
The Federal Reserve never forgives debt owed to it. Instead, it issues new money directly to banks in the form of interest rate cuts. Under the Federal Reserve, large international banks are not allowed to fail. The bailout of large banks is paid by everyone else as inflation. That's what's happening right now with subprime mortgage lending.
On the Ron Paul forum, someone asked:
Whether it be the Federal Reserve, Federal Income Tax, Distrust of Government, Corruption, etc, why is it that some people have to turn these cockroaches into 50 foot monsters from outer space?
We deal with cockroaches every day. Americans are fully capable of dealing with the problems as they exist. We don't need to scare people and make the world of hyperbole seem like the world in which we exist.
Every issue that has a conspiracy tied into it takes a problem that needs a solution in and of it self and makes it into something much larger than it really is. Is propaganda the only way to get someone interested in an issue? Or can we present the problem to people in truthful terms and let them know the impact that has on their lives?
The problem with the Federal Reserve, Income Tax, and Government is that they're inescapable. If I don't like cockroaches, I can kill them, hire an exterminator, or move.
If I don't like the Federal Reserve, I have no other options. I can't use a competing monetary system, because I still have to pay income taxes in Federal Reserve Notes.
If I don't like the income tax, I have no other options. Every time I work, I have to turn over 40-50% of what I produce to the Federal government. The income tax makes me a government slave. The very act of working supports government and the bad guys.
If I don't like the government, I have no other choices. Other countries are as bad as the USA or worse. If I think the government's police are being abusive, I can't hire my own private police force to protect me from them. If I think the government's courts are unfair, I can't go to a competing court.
Government is bad because it has a legally unbreakable monopoly.
If I think that Wal-Mart is being unreasonable, I can shop at another store. If I think the government is being unreasonable, I am stuck.
The defects in the current economic and political system aren't an accident. They were put there on purpose by the Supreme Leader of Humanity.
On the Ron Paul forum, in that same thread, someone said:
But, in a representative government, WE'RE the exterminator. We can get rid of the cockroaches if we're tired of living with them. WE put the cockroaches in our house and WE put out milk and cookies for them every night.
No. Voting is just a sham. Voting gives people the illusion they have power and influence. With a corrupt media, educational system, and voting system, it is impossible to achieve meaningful reforms by voting.
The good news about Ron Paul's campaign is that around 1-5% of the people are becoming aware of the major structural flaws in the economic and political system. There is going to be reform and improvement, but it isn't going to be achieved by voting.
On the Ron Paul forum, in that same thread, someone said:
You just have to love how much easier it is to call corruption out than to be the person in the classroom teaching, the creator of content, or at the voting booth ensuring the security of the process.
Calling out corruption is the first step of the process. I do have a recommended solution, but it doesn't involve government. I'm looking to move on to the next step, building a solution, but I need people to trade with.
I am a creator of content. I have my own blog. I am teaching that way. I figured out that the path to academic freedom does not lie in a government-funded university or in a school.
It's pointless to teach in a classroom, because schools are designed to enslave people and turn them into obedient workers. Voting is pointless, because the choices offered are meaningless. In a truly fair election, one of the choices on the ballot is "Should there be a government?"
In a classroom, I only can teach 30 people at a time, and must follow a curriculum chosen by someone else. I don't have the opportunity to select the students most ready to hear the truth, nor the time to teach what I think is needed.
I feel that the above poster is being unreasonable and it isn't worth my effort trying to enlighten him anymore. I figured that it was worthwhile writing a response since I'm posting it here.
Also on the Ron Paul Forum:
What caused the Great Depression?
The Great Depression was 100% caused by the Federal Reserve.
The Federal Reserve slashed interest rates in the mid 1920s, causing a vast expansion in the money supply. This encouraged everyone to load up on debt and mortgage their property to the hilt. The insiders who control the Federal Reserve knew that interest rates were going to be jacked up in 1929. They stopped issuing loans and sold their stock shares a few months before the crash. The bankers cleaned up by issuing loans and stock during the economic boom, and then buying assets cheap after the crash. The bankers issued loans to themselves to buy up property cheap at the bottom of the Depression. When Roosevelt confiscated the gold in 1933, defaulted on the dollar, and devalued the dollar, all those loans could be repaid in devalued dollars. The international banking cartel cleaned up on each leg of the boom, bust, and default on the dollar.
The Great Depression caused banks to confiscate a lot of property that previously belonged to farmers and small business owners. The US was turned from a nation of farmers and small business owners into a nation of wage slaves and welfare recipients. The welfare state was created to compensate for the damage caused by the Federal Reserve.
Only the banks that were insiders to the international banking cartel made a huge profit. All the small independent banks were wiped out.
The mainstream idea that the Great Depression was caused by greedy speculators and economic excess is a lie. The Federal Reserve's loose monetary policy in the mid-1920s encouraged speculation and the use of leverage. The speculators were merely following the rules of a corrupt monetary system. The insiders knew when the rules would change form easy money to tight money, and they cleaned up.
Redpillguy says:
A user “cjhowe”, on ronpaulforums.com, keeps on quoting Flaherty.
Here’s a sample post of his, in post #8:
I've already identified him as being a clueless fool. I'm still at least one step ahead of you.
As I said before, I'm not interested in wasting my time debating clueless fools.
If you feel like educating him, you can forward him to this post and my blog. If he isn't capable of understanding, or not interested in trying, then I can't help him.
I think this is another logical fallacy. "Some clueless fool is disagreeing with me and debating me loudly. What should I do? I can't convince him; therefore my argument must be wrong!" I have enough confidence in my reasoning ability to not be distracted by clueless fools. I need to think of a good name for this logical fallacy. How about "The Stubborn Clueless Fool Fallacy"?
Now that I think about it more, The Stubborn Clueless Fool Fallacy is a serious problem. I'm nearly convinced that the government plants spies in citizen activist groups. The Stubborn Clueless Fool Fallacy enables these government-planted spies to do considerable damage. By being loud and unconvinceable advocates for a specific viewpoint, they are able to reign in those with marginal viewpoints. The Stubborn Clueless Fool Fallacy, combined with The Strawman Fallacy, prevents marginal ideas from being discussed.
Of course, many people are sufficiently brainwashed that they'll play the part of stubborn clueless fool without further prodding. Stubborn clueless fools on TV are incredibly effective. It is only necessary to place of few stubborn clueless fools in select locations to prevent logical debate. Stubborn clueless fools tend to be the loudest advocates of The Strawman Fallacy.
It is well known that the government plants spies in citizen activist groups. It isn't too hard to also plant spies in online discussion forums. In fact, it's very easy to do that on the Internet, because one person can pretend to be hundreds of people. This “cjhowe” seems somewhat suspicious. Ron Paul has already said he want to abolish the Federal Reserve. Why would an aggressive Federal Reserve apologist be trolling the Ron Paul discussion forums? It's most likely that "cjhowe" is merely a stubborn clueless fool. It's possible that he is a spy, planted to disrupt the debate on the forum. It's impossible to tell, but the possibility is worth considering. In either case, I'm not interested in wasting time on him.
Inronically, within a few hours of redpillguy's complaint about cjhowe, another user on the Ron Paul forum, Mike Mitrosky, also complained to me about cjhowe. I am convinced that cjhowe is a troll or possibly even a paid disinformation agent.
Again on the Ron Paul Forum, responding to cjhowe:
The Fed's GOAL on the other hand is maximum employment.
That Wall Street is more concerned about next quarter's income numbers rather than the viability of a company, kind of shows that the free market generally takes a shorter term outlook.
The Fed's goal is 5% unemployment. The explicitly state this from time to time.
The Fed lies and says that 0% unemployment is "inflationary". What is really happening with 0% unemployment is that workers start having bargaining power for higher wages, which is a situation the Fed wants to avoid.
If the unemployment rate starts to get too low, the Federal Reserve jacks up interest rates to "cool down the economy". Workers are laid off, the unemployment rate rises, and workers lose their bargaining power.
The USA is not a free market. The USA is a communist dictatorship. Wall Street is primarily concerned with the next quarter due to the structural flaws in the economic and political system.
Anyone who cites Wall Street and the stock market as an example of a "free market" doesn't know what a free market is. Extensive government manipulation prevents a free market from existing. The Federal Reserve, income taxes, and government regulations all prevent a true free market from existing.
I am seriously considering the possibility that cjhowe is some sort of paid disinformation agent, hired by some financial PR firm or the government. It is also possible that he actually is a stubborn clueless fool. He may truly lack the intellectual capacity to understand that these frequently cited false arguments are false. I'm not really interested in wasting my time on him anymore. However, whenever he makes a false argument I've seen elsewhere, I feel that it's worthwhile to respond and also post the response here.
On the Ron Paul forum, I'm still wasting my time on cjhowe:
I said that banks don't take on risk when they borrow from the Federal Reserve at 5.25% and lend at 6-8%. Then, cjhowe says:
Banks are taking on the risk of default from the people they loan it to...foreclosure, bankruptcy, etc. It's not exactly zero-effort, as you say.
Banks that are "too big to fail" are taking zero risk. As soon as they get into serious trouble, they receive a bailout in the form of an interest rate cut. Small banks are allowed to fail. The big banks who control the Federal Reserve are not allowed to fail.
When the "subprime mortgages" lose their value due to defaults, the Federal Reserve will lower interest rates. That will make all those outstanding mortgages worth more.
The bailout is not free. The bailout is paid by everyone else as inflation.
Even though there are defaults, the amount the large banks lose on the defaults is far, far less then the profits they make the rest of the time. When defaults start happening, the Federal Reserve slashes interest rates to allow others to refinance, and increasing the money supply increases the value of the assets confiscated in bankruptcy court.
At this point, I'm only bothering to answer cjhowe because he repeats false arguments I've heard elsewhere. I don't expect to actually educate him.
I can't prove that cjhowe is some sort of paid disinformation agent. He may sincerely be stubborn and clueless. It even appears he has a sockpuppet now: sickmint79. It's hard to tell if they are working as a team to spread disinformation, or if they are genuinely clueless. In either case, I'm not interested in wasting time on them.
On the Ron Paul forum, I'm still wasting my time on cjhowe:
Enslavement is used as hyperbole in the real world discussion. In the kook discussion, enslavement is used as fact.
Why is it wrong to say "the current economic and political system is one of absolute perfect enslavement"? The current economic and political system actually *IS* a system of absolute perfect enslavement.
The monetary system is hopelessly corrupt. The income tax means that people need permission from the government to work. Income taxes force people to use worthless Federal Reserve Points as money. Meaningful reforms cannot be achieved by voting. Schools train people for a life of wage slavery, rather than true independent action.
The illusion of choice in elections is a false choice. The illusion of choice when looking for a job is a false choice, because the basic rules of the economic system are corrupt. You can say "we have choices, so I am free". However, when a third party is using coercion to restrict your choices, you aren't really free. The coercion is incredibly well-hidden, but it's still there. Everyone who attempts to expose it is labeled as insane, which guarantees that the abuses are never fixed.
That sounds like absolute perfect enslavement to me.
1 comment:
"After receiving the $50 million in interest payments, the Federal Reserve uses it for its own expenses or turns that money over to the Federal government. However, the "rest of society" still has a money supply shortfall of $50 million."
Uh... when either the Fed or the government incurs expenses, that $50m would go back to "the rest of society" of course.
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