The Color of Money
Australia is yet again in the process of deciding who will be our overlords for the next four years and so the jockeying for the political high ground has taken on a renewed vigor as the prize is now clearly visible for all to see. Neither side has a particularly sound fiscal record with the incumbent lefties having spent all of the money that was in the bank and the hoping-to-soon-be übermenschen of the right simply planning more taxes and more service cuts.
Both sides are secure in the knowledge that whatever happens the expensive plans that they present during their meaningless electioneering will be financed because the banks will let them print as much money as they want to spend. The fiscal projections of the rival parties has very little to do with how much money they possess, that is relatively immaterial. Their projections are based on how much they can reasonably overheat the economy before there will be too great a burden on the people to sustain.
Bucks for Burgers
A recent report by the Deutsche Bank1 indicated that Australia has become one of the most expensive places in the developed world in which to live. The article hints that this may have something to do with the strong Australian dollar- in the cross rates against the value of US and European currencies. It then goes on to list the variance in value of a number of domestic commodities as if the strength of the Australian dollar accounts for the increased price of a Big Mac down under2.
According to figures a Big Mac in Australia is worth an average of $4.75 which at today’s cross rates is US $4.90. In contrast, a genuine American version of this culinary masterpiece purchased in downtown USA will set you back US $4.373. This is a clear indication that the Australian dollar has less domestic spending power no matter how strong it is on the international money markets’ cross rates. While this is a rule of thumb measure, when the same pattern is repeated across the whole range of domestic consumer commodities it becomes very compelling evidence of gross fiscal mismanagement on the part of both sides of the Houses of Parliament.
Government- Dissipating the Value of Your Money
Given that production methods for consumer commodities has generally improved a great deal in even only the past couple of decades why are prices continuing to go up? Even accounting for increased labor and energy costs how can it be that inflation continues to outpace the real financial growth of such well managed national finances (according to all of those who warm a bench in the houses of government- they only argue about who does a better job of managing them)?
Of course the political players in all of this don’t want Joe Average to focus on this. To avoid this discomfort they have occupied themselves with pointless debates about the legal claims of refugees that wash ashore in a remote corner of the continent and ridiculous disagreements over the value of installing a national network of optical fibers to support broadband internet use. Even though these have been the topics of debate for many years now, neither side seems to be getting any better at resolving these issues, nor do I imagine that they ever will. They want these things to distract the voting public from the real issues that genuinely impact on daily life and for which all politicians, past and present are responsible.
We are reaping the rewards of three decades of debt based currency- rampant inflation, global fiscal depression- and money has lost all of its value.
Money vs. Value
Cash money has no intrinsic value- it is a measure of comparative value. That comparative value is determined by the commodities that it can be traded for. Commodities are reasonably finite and so any pool of cash (printed or minted currency) divides the value of the supply of commodities into currency units. Making more cash, or just printing more money, merely reduces the value of each of these currency units- devaluing the money.
This is how the banks have stolen the value from your money.
The most basic misapprehension that most people have about money is that their currency bases its value on gold. In fact, nothing could be further from the truth as its commodity value is based on debt. When a bank loans money to a customer they take money from the bank’s reserve (in theory anyway) and transfer it to the customer who usually has to back it up with some asset and an agreement to a repayment schedule. So when you take out a mortgage the value of the house that you buy is the asset that backs up the value of the loan and you agree to make the monthly repayments.
Through a mystical piece of bookkeeping the banks turn that debt into an asset. The value of the property and the guarantee of regular income allow them to create a product that they can sell and therefore it has a monetary value and is an asset rather than a liability on the bank’s balance sheet, which it is as they have invested in their customer.
In order to monetize these investments it becomes necessary to sell those assets and the banks do this by bundling the loans that they have made into bonds and offering them for sale on the bond markets. The cash that is raised by these sales is then loaned out again, bundled into bonds and sold on and so it goes on. All of this would be perfectly equitable if it wasn’t used to leverage fractional reserve methods for generating currency.
Printing Money with Fractional Reserve Banking
Currency can be based on debt- that is, the value of currency can be based on the equity that is financed by debt, because it has a commodity value. Debt based currency isn’t specifically the problem with modern monies. It is how that debt is processed by the central banks of the world that has destroyed the value of the world’s currencies.
The real problem with our current currency models is the practice of fractional reserve banking that turns $1 of assets into $10 of equity. The central or reserve banks do this by a subtle piece of trickery that is worthy of Mercury the god of commerce.
The money that people invest in securitized mortgage bonds returns to the banks’ reserve to be loaned out again and they can be sure that those investors won’t be coming to draw on their money in the short term future. As this is so, the bank only needs to keep as much currency on hand as they will need to fulfill the demand for cash at any given time. The industry wide standard figure for this demand is 10%. That is, in order to be able to cover all of the demands for hard currency the bank only needs to retain one-tenth of the money that is invested with them on hand at any given time. For every $10 that is invested with a bank they only need to keep $1 in currency in case you want to draw it out of the bank.
This situation isn’t new and it was a rush on the fractional reserves of the banks in 1929 that precipitated the Great Depression. The current Global Financial Crisis (GFC) is due to the value of the equity behind the debt that currencies are based on crashing as people defaulted on their loan repayments which reduced the value of the securitized bonds and destroyed the value of the money invested in them. Because the value of our currency is based on the value of those bonds when they crashed so did the value of the money that they backed. The reason for this is because of who buys these bundles of bonds and what they use them for when they have got them.
Mammon Inc.- The Central Banks
The banks don’t just sell their bonds to anyone- they sell them to the central banks. These banks then use the fractional reserve principle to create $9 for every $1 of assets that they hold on the basis of the assumption that the banks won’t want more currency than that at any given time. This makes every mortgage an opportunity for the banks to inflate the amount of currency that they hold by going to the central banks, selling their bonds to them and then borrowing the fiat currency that this generates (by the fractional reserve method) and then loaning it to their customers at a higher rate of interest. These loans are then monetized, generate even more fiat currency, make even more loans and so on.
With the development of e-money the central banks don’t even have to go to the expense of printing this fiat money anymore- they simply transfer the required amount of digits to an account and hey presto!- the money is there. The banks use this three card trick in order to be the first to use the cash that they print to create money out of thin air. As the value of currency is based on a limited supply of commodities (whatever those might be), adding more pieces of currency to the pool devalues them all- eventually.
Addicted to Fiat Money
Anyone who lives within their means suffers from a lack of imagination.- Oscar Wilde
The first to use the newly printed cash benefit from its spending power before the new addition has influenced the whole pool of money. As the currency filters into the greater economy it adds more pieces of currency to the pool but there is no corresponding increase in hard commodities to match the increase. As there is more money in the pool for the same amount of goods more of it is required in exchange for the same amount of commodity value. As the fiat money dilutes the pool of currency it continues to have incrementally less and less spending power until the last user of the cash has only the real commodity value left.
The banks are addicted to printing money as it allows them to conjure huge profits out of thin air. Of course in order for this to work (for the banks) the governments of the world have to play along. The first step in the process was convincing the government treasuries of the world to hand over the responsibility for printing currency to the central banks.
The second step was to ‘float’ currencies on the cross markets and to no longer base their value on the gold that was held in the treasury. It was this that freed governments to create their own money out of thin air by selling government bonds, reselling them to the central banks and borrowing at a low-low rate of interest. Having first use of their new currency allows the governments to float their overinflated budgets while it still has all of its spending power. This makes it very unlikely that any government of any political persuasion will want to address the real causes of the world’s fiscal problems- they are complicit in them.
History is littered with examples of previous abuses of currency with fractional reserve banking. It has taken a few different forms over the centuries from clipping coins or making them from cheap alloys to just blatantly printing cash. The Roman Empire endured many economic crashes and Carthage was defeated more by their own fiscal mismanagement in fabricating currency to pay for the Punic Wars than by the efforts, however effective, of Scipio Africanus. China has a long history of destroying the value of their currency in this way and the Mongol Empire of the Khans was eventually brought crashing down by the overheated economy that was created by printing cash4.
We seem determined to repeat the fiscal disasters of the past simply because we haven’t bothered to learn our history.
1. Deutsche Bank says Australia is one of world’s most expensive countries- Stephen McMahon
2. The price of a Big Mac varies depending upon location and the average price of $4.75 is based on figures from the Daily Telegraph:
3. For an explanation of the Big Mac Index see:
4. History of Monetary Systems- Alexander del Mar
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