Money Out Of Thin Air
“Money as wealth is an illusion”
What I find fascinating is that most people naively believe that money — nothing more than a trust-based ticket for acquiring other things of value — is limited in supply and backed by some real wealth somewhere else, like gold. It isn't.
Indeed, in the twentieth century, nation after nation abandoned any remaining gold standard currency straightjacket and liberated their money systems to meet the needs of explosively expanding fossil-fueled economies.
In fact, money in today’s debt-based fiat money system is mostly derived as loans by private banks — it is literally loaned into existence. There is no real value being created anywhere on the planet that backs up that new money!
When the Federal Reserve — a federally sponsored private banking cartel licensed to loan money into existence — writes a check to purchase a ‘debt instrument’ such as a U.S. treasury bond or a mortgage-backed security, it is also literally creating money from nothing.
The main reason our economy is so loaded with debt is because it runs on a money system that is itself debt.
When you walk into a bank to take out a loan, you probably think that the bank is lending you money it has in its reserve. That is, money collected from other people’s deposits and stored in a basement vault somewhere.
But that’s not how it works at all. Banks are only required to hold reserves worth about 10% of the money they lend out, or even less. This is called ‘fractional reserve banking’.
More than 90% of the money that’s presently circulating in our economy is created in this manner — out of thin air.
Think about it: it means that banks effectively sell you a product (money) to us that they produce for free out of nothing with a few keystrokes. And then, we have to go out into the real world and extract and produce real value to pay it back.
So contrary to the common belief that governments create money, virtually all money spent in the economy is created by private commercial banks when they extend credit to borrowers.
Why does this matter? Because private commercial interests, not public benefit, then play an outsized role in deciding which investments to support.
For this reason, investment dollars have historically tended not to flow to projects that would support the long-term protection of the assets on which basic economic services depend, such as low-carbon technologies and commons infrastructure projects, resource productivity improvements, protection of ecological assets, and the maintenance of public spaces.
In other words, when money is created, short-term private gain gets prioritized over long-term common public goods.
At the end of the day, money and finance play a major role in influencing decisions on consumption, production, investment, employment, and trade through careful management of interest rates and money supply and the involvement of central banks, commercial banks and other financial institutions.
And money, as a claim on future energy and resources, is increasing exponentially, while at the same time energy and resources — real capital, real wealth — is actually decreasing.
Indeed, money can be thought of in economic terms as a tertiary good — a pure economic abstraction in the conceptual world of finance. It only has meaning and value as a measure or marker of actual, real-world, non-abstract primary goods (products of Nature useful to humans) and secondary goods (products and services of human/machine labor exchanged by humans using energy and materials from the primary goods of Nature).
These three categories of goods represent three entirely different economies that are not interchangeable. They also operate very differently. Whereas primary and secondary economies of real products and services are naturally self-regulating with negative feedback loops from supply-side limitations, the tertiary economy of abstract 'paper' financial goods is demand-limited with positive feedback loops that lead to runaway bubbles and corrections.
Tertiary goods, from the non-real, conceptual tertiary economy of money and finance, today represent the largest single class of goods by far in terms of monetary value. And today's economists focus almost exclusively on the fit between the tertiary economy and the secondary economy and all but ignore the shrinking primary economy of natural resources at the base of both.
But trillions of dollars of 'credit swaps' and 'derivatives' from the complex, nebulous world of finance will not keep people from living on the streets and starving if there's not enough housing being built, not enough food being grown, or not enough fish left in the sea.
The economy of tertiary goods, it must be emphasized, is nothing more than a means of measuring and managing the distribution of wealth. It has no direct inherent value itself.
Our current extravagant debt-fueled consumption levels in most of the developed world are being temporarily and artificially propped up and supported by banks creating new money (i.e., an economic tertiary-good abstraction) in the form of new debt — and not by the discovery or creation of any new real wealth (primary and/or secondary goods) anywhere on the planet. Tragically, these games of financial abstraction are masking actual real-world negative trends in the primary and secondary economies behind an obscuring fog of 'paper wealth'.
Efforts to maintain an inflated standard of living in the face of a slowly contracting real economy of primary and secondary goods have only heaped up gargantuan levels of debt as we blindly overshoot the carrying capacity of the primary economy.
Tragically, we have become conditioned to believe that with enough money (debt), any primary (Nature-made) or secondary (labor-made) economic good we desire will always be available for purchase. Because money seems to behave as a supernatural force that can conjure resources out of thin air. So resource scarcity will never again be a problem for human civilization — as long as more money can be created. This conclusion is obviously absurd.
And yet it has become very difficult — in this delusional age of financial alchemy — for most people to understand a simple real-world truth: Money as wealth is an illusion!