The first observation is: We live in a debt
based, fiat money system, where money - any
form of money be it base money or book money
- is always created out of debt and is - in
a sense - destroyed when that debt is repaid.
Because of interest and compounding interest
the amount of debt far exceeds the amount
of money in the system. Therefore if everybody
started paying down their debts and creditors
did not immediately spent their interest payments
back into the economy, all the money would
be gone from circulation long before all debts
are repaid.
Another important concept is fractional reserve
banking - which is pretty much only a fancy
way of saying: Lending money you do not have
for interest that does not exist. Fractional
reserve lending makes banks vulnerable to
panics but also makes banking potentially
a very profitable business.
And finally, unless absolutely all actors
in the economy circulate their money perfectly,
exponential debt growth is a necessary result,
if defaults are to be avoided. So the system
can sustain itself without collapse, be it
either through wide spread default or rampant
inflation, as long as economic growth can
keep pace with debt growth.
With all these reason in mind it might become
understandable why some people refer to our
current economic system as a ponzi-economic
system. Because similar to a ponzi scheme,
it needs perpetual growth every year and even
a relatively small number of people who become
distrustful of the system can cause great
instability due to fractional reserve banking
and high leverage in general.
In future installments of this series I am
going to present the mechanics of inflation
and deflation and why the Fed's Quantitative
Easing programs - QE - did not cause the levels
of price inflation that many people were looking
for. I will also explain how foreign exchange
works, how it fits into the bigger picture
and why governments, attempting to grow their
economies by increasing exports, might cause
a self reinforcing devaluation cycle for all
currencies.
Finally, I want to acknowledge two people
who really stoked my interest in macroeconomics
and thus led me to make this video, which
is in no small part a synthesis of their lectures:
Salman Khan quit his well-paying job as a
hedge fund manager to create literally thousands
of excellent videos teaching topics ranging
from basic math to history, biology, cosmology
and also finance and economics and providing
them to the world, completely free of charge.
With the help of the Bill and Melinda Gates
foundation he has since founded the Khan Academy
- a non-profit organization with the goal
of providing a free world class education
for everyone everywhere. Much of the style
and my explanation on the evolution of banking
is taken from his lectures on banking and
money. If any of the concepts I presented
in this video are still unclear to you, you
will probably find a better explanation on
khanacademy.org.
The second person I want to acknowledge is
Chris Martenson of peakprosperity.com who
has created a video series called "The Crash
Course" in which he integrates various concepts
into a bigger picture. He looks at energy,
the environment and the economy, shows how
we have been living in exponential times in
the last few decades and why this is likely
to change. I found the crash course incredibly
interesting and quite unsettling and I can
only urge you to watch it.
We have reached the end of the first installment
of this series - I hope you found it worth
your while. Thanks for watching and see you
next time.
