Money

So I watched a clip about money that seriously attacked our current system and decided that it should be torn to shreds so here goes.

A bit more than halfway in they ask four questions that I'll go ahead and answer:

1 - Why do governments choose to borrow money from private banks at interest when gov't could create all the interest-free money it needs, itself?

Ok. Imagine the government just spawning more money whenever it needed it. If the total value in a system is unchanged and more money is introduced, all the money will be worth less. In the extreme, governments using arbitrarily created money lead to hyperinflation and disastrous consequences.

So why doesn't this happen with money that private banks create? Private banks create money when an individual makes a contract to repay it and collateral exists. The money does have real-world value - the property that would be foreclosed.

2 - Why create money as debt? Why not create money that circulates permanently?

This kind of money system would work.

But it would work more slowly. The ability to get a loan lets people gain more leverage and be able to accomplish more with the same original amount. Using a dynamic system instead of a system of permanent circulation allows greater value to be created from the same initial monetary investment.

The concept of a static money supply is silly. Suppose a static money supply. Assuming that humanity is productive (which is, I hope, a fair assumption), the value of money would be forced to increase. With a static money supply, money represents a fraction of the world's value; in other words, increases in global value would lead to runaway deflation. If humanity is productive and deflation is steady, the best way to amass value would be to simply sit on your money. Deflation would pretty much serve as an interest payment - talk about the rich getting richer.

The whole concept that our system is broken because it is independent of permanent money is flawed. It's true that it relies on debt; our system relies on a constant flow of paying loans and getting new loans. This common event, called equilibrium, is ubiquitous. It's found in everywhere in nature and it also dominates the structures of man. Supply and demand; debt and money. Everything balances.

3 - How can a money system dependent on perpetually accelerating growth be used to build a sustainable economy?

This part is, in my opinion, the only fair concern in the film. If humanity as a whole ceases to create value at an exponential rate everything will break. We must continue to create value faster than we create debt - and we have been.

To be sustainable we don't need to be using up less than or equal to the amount of resources that are produced in a specific period of time. We can afford to use some non-renewable resources because we are counting on becoming independent of them before we run out of them. As long as this is true, it is irrelevant that we may have used up of our non-renewable resources if they are no longer needed. In short, we are betting on technology. The bet seems OK to me though; technology also advances exponentially.

As a short response to this question, I will use my favorite quote from the clip itself:

One thing to realize ... is that, like a child's game of musical chairs, as long as the music is playing, there are no loser.

Simple. If we can continue to play the game (create value), our system will run smoothly.

4 - What specifically needs to be changed to allow the creation of a sustainable economy?

Things could certainly be improved by change, but it the monetary system itself is not inherently broken.

This post is getting really long so I will satisfy this question by saying that my previous arguments make the question invalid in the spirit that it was originally presented. If I were to write about my none-too-solidified opinions on our government and economics, this rant would become a paper that I don't have the inclination to write at the moment.

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These are just a couple of moments in the movie that made me angry that I couldn't work into the post well:

• Money earned from lending money is not the act of a parasite or a thief. Money is gained by creating value - the use of fungible money is hugely valuable. Lenders do not leech from the system; they make it more efficient.
  

• I think the worst one IMO was at 23:08. The clip says that individuals have more money to spend when they've paid off their debts - this is false. If I take out a loan, I'll have more fungible money available. It's the same on an individual and national scale.

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Please feel free to correct whatever I messed up and contribute opinions. ...I know this blog is read by at least one econ major.