This article was written by Charles Hugh Smith and originally published at his Of Two Minds blog.
Editor’s Note: Privately issued money controlled by a secretive and ruthless cartel just isn’t the formula for success. The problem is pretty simple, or would be if we weren’t drowning in a sea of ignorance and confusion about the issue.
Even those who understand the inherent problems of the Federal Reserve are distracted by the other intriguing and corrupt problems of the world, which are in fact symptoms of the root problem. That problem will take an enormous amount of political courage on the part of Americans, who must awaken and focus first, then amass and wield a collective energy with immense testicular fortitude.
If We Don’t Change the Way Money Is Created and Distributed, Rising Inequality Will Trigger Social Disorder
by Charles Hugh Smith
Centrally issued money optimizes inequality, monopoly, cronyism, stagnation, low social mobility and systemic instability.
If we don’t change the way money is created and distributed, wealth inequality will widen to the point of social disorder.
Everyone who wants to reduce wealth inequality with more regulations and taxes is missing the key dynamic: the monopoly on creating and issuing money necessarily widens wealth inequality, as those with access to newly issued money can always outbid the rest of us to buy the engines of wealth creation.
Control of money issuance and access to low-cost credit create financial and political power. Those with access to low-cost credit have a monopoly as valuable as the one to create money.
Compare the limited power of an individual with cash and the enormous power of unlimited cheap credit.
Let’s say an individual has saved $100,000 in cash. He keeps the money in the bank, which pays him less than 1% interest. Rather than earn this low rate, he decides to loan the cash to an individual who wants to buy a rental home at 4% interest.
There’s a tradeoff to earn this higher rate of interest: the saver has to accept the risk that the borrower might default on the loan, and that the home will not be worth the $100,000 the borrower owes.
The bank, on the other hand, can perform magic with the $100,000 they obtain from the central bank. The bank can issue 19 times this amount in new loans—in effect, creating $1,900,000 in new money out of thin air.
This is the magic of fractional reserve lending. The bank is only required to hold a small percentage of outstanding loans as reserves against losses. If the reserve requirement is 5%, the bank can issue $1,900,000 in new loans based on the $100,000 in cash: the bank holds assets of $2,000,000, of which 5% ($100,000) is held in cash reserves.
This is a simplified version of how money is created and issued, but it helps us understand why centrally issued and distributed money concentrates wealth in the hands of those with access to the centrally issued credit and those who have the privilege of leveraging every $1 of cash into $19 newly created dollars that earn interest.
Imagine if we each had a relatively modest $1 million line of credit at 0.25% interest from a central bank that we could use to issue loans of $19 million. Let’s say we issued $19 million in home loans at an annual interest rate of 4%. The gross revenue (before expenses) of our leveraged $1 million would be $760,000 annually –let’s assume we net $600,000 per year after annual expenses of $160,000. (Recall that the interest due on the $1 million line of credit is a paltry $2,500 annually).
Median income for workers in the U.S. is around $30,000 annually. Thus a modest $1 million line of credit at 0.25% interest from the central bank would enable us to net 20 years of a typical worker’s earnings every single year. This is just a modest example of pyramiding wealth.
Next let’s say we each get a $1 billion line of credit which we leverage into $19 billion in loans earning 4%. Now our net annual income is $600 million, the equivalent income of 20,000 workers. We did nothing to improve productivity, nor did we produce any goods or services. We simply used the power of central banking and fractional reserve lending to skim $600 million in financial rents from those actually producing goods and services.
Note that we are not uniquely evil or avaricious in maximizing our private gain from the central bank system; we are simply responding rationally to the system’s incentives.
The system concentrates wealth and subverts democracy not because participants are different from the rest of us but because they are acting rationally within the system. Would you turn down $600,000 a year? How about $600 million a year?
It makes no sense for banks and financiers not to maximize their gains in this system. Those who fail to maximize their gains will be fired.
I hope you understand by now that the current system of issuing money and credit benefits the few at the expense of the many. The vast privilege and the equally vast inequality it generates is the only possible output of the system.
This inequality cannot be reformed away; it is intrinsic to centrally issued money and private banking.
The problem isn’t fiat money; it’s centrally issued money/credit that is distributed to the few at the expense of the many. If we want to limit the subversion of democracy and reduce wealth inequality, we must decentralize and democratize the issuance and distribution of money.
In the current system, money isn’t created to reward increasing productivity. It is created to increase the wealth and power of the privileged.
If we want to connect the creation and distribution of money/credit with productivity, we must issue new money directly to those creating value and boosting productivity, bypassing the privileged few in central and private banks.
By concentrating wealth and power, centrally issued and distributed money doesn’t just subvert democracy. It also optimizes inequality, monopoly, cronyism, stagnation, low social mobility and systemic instability.
This entry is drawn from my new book A Radically Beneficial World: Automation, Technology and Creating Jobs for All: The Future Belongs to Work That Is Meaningful. Get a 25% discount on my new book this week only (ends 11/15/15).
This article was written by Charles Hugh Smith and originally published at his Of Two Minds blog.
THE LAST EUROPEAN COUNTRY WITH COMMON SENSE?
Social disorder RIGHT now, in Paris; as explosions and a mass shooting…presumably 35 known to be killed.
BTW..”Testicular fortitude”, is a good way to say it, Mac.
Many will need mucho/mucha for the ladies) grande ball-istic attitudes to handle the coming storms.
It’s only a matter of time till it hits America too!!
“we must issue new money directly to those creating value and boosting productivity, bypassing the privileged few in central and private banks.”
We’d have to slip in and cut all of their throats while they slept — and they’d kill us all if we failed.
How would the new system be determined? Putting it into “productive” hands sounds like creating a new elite just like the old elite. Why not hand it out per capita since it everyone’s money? The money spent would keep the engine running and shift into the hands of productive people.
“Rising Inequality Will Trigger Social Disorder”
This articles title is making an argument for socialism. Income inequality is the battle cry from the progressive liberals.
But in the end the math doesn’t lie. Looking at the charts when working people (I didn’t day welfare people) got a piece of the pie things were better.
Free Trade complements of a “trickle down” game plan didn’t work.
You are presupposing that this gift of trillions is somehow capitalism when it is not. It is plutocracy pure and simple.
Number dead in Paris is over 60 now, with over a hundred held hostage.
As we switch back and forth between currency’s, I am sure bullets will be exchanged at fair value or spent in the correction of the banking system.
The bankers know it’s coming and they want to ride this pony as far as it will go.
They all have escape plans for when the pitchforks come. Bunkers and such in the mountains with full time caretakers. They may find that their caretakers own them.
Hollande has stated France has CLOSED ITS BORDERS!
Guess the E.U. is going to war. Hahahaha!
Well the pyramid of wealth distribution does have some eye opening stats, but most of us “watchers”, have know that for some time.
Another eye opening pyramid is the ratio of CEO to average worker salary.
At the bottom of the pyramid is the year 1965. A CEO/executive level worker, made about 20% more than the average worker/employee.
In the middle, about 1980 that rose to about 30%.
In 2014, near the top of the pyramid, the CEOs/executive level, earned about 300% more than the average payroll to other employees.
So…when you here that Wallymarket and Mc E D’s business is down and they are hurting, don’t wonder where all the profits went.
There are hundreds of thousands of other corporations out there in the same situation. Follow the money trail, and it always goes into the upper echelons pocket, while throwing out chicken scratch to the workers.
Phuck the CEOs. Let them eat fatback awhile, and give the workers a damn raise.
I’m a great fan of both Henry Ford creating wealth and Walter Reuther who risked his life to form the UAW ensuring that the working man got a piece of the economic pie.
Trickle Down Hasn’t Worked.
For the anti union, anti labor people that will say high US wages chased jobs out of the county remember that the US Textile Industry, largely non union and even if union low paid at $15 / hr still fled to Asia for 50 cent virtual slave labor.
For the Democrats who claim that their party is the savor of the working class Bill Clinton signed NAFTA, China Free Trade and de-regulated the financial “industry” with the demise of Glass-Steagall. Your no more of a friend of working people than the Republicans and far more dishonest regarding your loyalty and intentions.
Albert Einstein said, “An empty stomach is not a good political barometer”. His analytical skills went beyond physics.
We need to quit bickering about money, social just and income inequality and start a return to the days when we were productive and created new wealth instead of whining about how to redistribute the wealth we created then but no longer do.
Yep we need the Henry Fords and a sustainable economic and foreign policy that:
1. Puts the American People first (The Corporations are Multinational)
2. Creates wealth here
Putting the two above in effect fixes the majority of other problems (useless banker wars, public assistance, crime).
I agree. One can succeed in this world but it has to be earned.
Under our current structure, we are creating wealth for the top. They say minimum wage is too high because slaves in other countries can starve to death and so should we. It is not wealth creation but denying the production units a share of what they created. Contrary to yap… robots and machines are not cheap… do they think the machines will go home at night and buy the products? Of course this will take one of their own like FDR or bullets to correct. Fools abound especially when they are psychopaths in the one percent and no one to commit them as insane.. I envision a billion people creating a different type of economy that ignores and collapses the existing juggernaut of doom. Go online and see the massive number of people going alternative economy. There are alternate money systems showing up because corporate owned money is about as worthless as corporate-owned media and corporate-owned government.
Borders closed here yet?…….sarcasm….
We can only hope.
I work hard for my $$ and do not need the gubmint to give it away to some slacker because he feels he deserves it. No where does it state that i have work hard so someone else can be on easy street.
I hear your fear. To some extent we all have it and it is less scary to kick someone further down than confront those at the top who have stolen our country. I hope you get hope soon.
TPTB would rather blow up the world and have refugees flood Europe rather than surrender their control of the currency. The dollar will have to fail before there’s any meaningful change and then the citizenry will be pissed off enough to do these financial terrorists in themselves once they know they just lost everything to these crooks. Between these criminals and the coming robots taking over all the jobs out there I just can’t imagine an armed populace that just lost everything is going to look to kindly on these scumbags and their continuing looting activities while the robots drone on working while the majority isn’t. I just don’t believe it’s going to get that far before matters are solved in a way TPTB can’t yet imagine.
TPTB would institute a scorched earth policy before they would loose control. Like a spoiled child they would rather break all their toys before sharing them. They’re multi generational bred sociopaths devoid of empathy for their fellow man.
With the above in mind the only reason nuclear weapons haven’t been used by TPTB post WWII is that there is a high probability that the retaliatory reply might get some of them. They’re not immoral, they’re amoral. Morality has no part in their thought process.
K2. I agree.
K2, I agree.
Gee, ya think???
Off topic- President obama said tonight that if France just had stronger gun control laws, they wouldn’t have had tonight’s workplace violence…
I bet Heraldo will have a change of heart about gun control, his kid was lucky and got out of
That concert. If she had been trapped I’m sure he would wish her to be armed or have an armed
Escort. How can they have a concert like that with no armed guards on duty?…..
I imagine he will be calling for expanded background checks on terrorists purchasing machine guns and hand grenades instead.
It would be keeping with character for him.
Correction guess she was at the stadium…….
That book says one reason for the tribulation is the inequity of man.. We have no idea how much these people really have . If we liquidate them all maybe enough to give every human on this planet a million dollars each? Will that ruin everything ? Or is that Gods plan?
No matter what system you have, someone will try to rig it in their favor. In 1913 the Fed was given a 100 year contract to head the economy. A change needs to be made and now it would be legal.
Money creation has nothing to do with prosperity. Peak after tax earnings peaked in 1974. Cars were cheap despite the fact that all car jobs were union jobs. You could either go to a 4 year college or get a factory job and make the same amount of money if you were willing to work overtime. Those high paying factory jobs don’t exist anymore for kids coming right out of high school. Now it’s 2 year colleges or working retail.
IVAMU FIXES the Economy~!!!
~>No retensionn of the purported “debt.”
~>Ends the Perpetual Debtor (non)Federal AND (no)Reserve Paper Note System.
~>Stablizies prices and markets.
~>Restores Freedom and Liberty
~>Reduces the size of government to within the US ~>Constitutional parameters and Limits
~>STOPS illegal border crossing, all nations by treaty, will have the SAME purchasing powers
~>ENDS incentives for WAR
paying clueless, unwed teenage mothers with no parenting skills whatsoever will lead to social unrest when the animals t raise grow to “adulthood”.
That problem is insignificant compared to our corporate-owned government, corporate-owned media, and destruction of the global economy by the banksters. Best we don’t worry too much about it until we get the biggest destroyers in hand. My dead husband called it stepping on a fifty dollar bill to pick up a nickel.