Friday, June 12, 2009

Where is all the money going?

As one reads the various financial bits Out There in medialand (blogger too!), one gets the distinct impression that this community still has no flippin' theory of money creation as it currently exists. And THAT is a serious problem for our everyday lives and for a more humane society.

Take this little bit from yesterday posted by Rolfe Winkler at Option ARMageddon. Rolfe's concern is that
The Fed published its latest Flow of Funds report today. One key takeaway: While total debt is growing more slowly, it is still growing. Since Q3 ‘08 households have cut their debt (slightly), but the federal government is borrowing so rapidly, overall debt continues to expand.

The only way to climb out of a debt-induced depression is to pay down debt or to write it off. Levering up only delays the inevitable.

Unfortunately Americans, and lately the Obama administration, have shown absolutely no political will to do this. Republicans decry growing deficits, but do you ever hear them enumerate cuts they would make? Clearly our plan is to keep borrowing until our lenders cut us off.

Check out this nice graphic that Rolfe has nicely posted to give us an idea of what he is on about.

Now, to be sure, Rolfe is right about total debt still rising, and is doing so largely because the Federal Government is trying to fill in where businesses and consumers once led. But, the idea that paying off this debt or just allowing unmanageable debts to be written off would not be a nice tonic for our current malaise, it would be (it in fact is) a disaster for you and me.

Why, well, Rolfe has no idea where most of the money you and I earn and spend each day comes from. In short, that money (about 95% of it anyway) has come from all of that debt listed in this picture. What's worse is that that money/debt is both created and destroyed each and every day that you and I breathe. So, if new money/debt is not created to replace the money that is destroyed, the net amount of money available for you and I to earn and spend goes down and down. Meaning: you and I have less and less money to earn and spend (in the aggregate). -- This is a bit of an oversimplification, and I am not even mentioning the problem of compound interest that we all pay in addition to the actual money that we borrow when we pay off our debts!

Well, to those of your brave enough to take a look, I urge you to watch Paul Grignon's excellent animation that explains the whole process.

Some of you might also check out Chris Martenson's "Crash Course" which covers some of the ground for exponential growth as a practical impossibility in a world of physical limits; though I don't think Chris has a very clear understanding of the theory of money as debt, either.

Once you have enjoyed these must see presentations -- I particularly like Paul's animation because gives us all a sense of what we might be able to do about this situation in the long run -- let's reconsider Rolfe's graph above. Clearly debt is no longer growing exponentially. THAT is a problem for you and me. What's worse ... much of the new debt being invented by the Fed and the Treasury as we speak is NOT coming back to you and me in the form of new debt/money that you and I can earn and spend. It is going right into banks around the world, where it is being horded to allow them to gamble and pay their bookies in the World Casino called the global financial marketplace.

Net result to you and me, there's not enough money to service our debts AND buy the stuff you and I need each week, month, and year to get by and raise our families (hence all the foreclosures and bankruptcies and plummeting tax receipts). So far this money crunch is slamming some business sectors (e.g., autos & real estate) ... if the curve on that graph above turns down (as it inevitably will as the vicious cycle of debt destruction continues to accelerate in the coming months and -- yup, I'm going to say it -- years) expect the money crunch to hit more and more of those parts of the economy you and I depend upon for our more basic needs.

Not that I want to scare the hell out of anybody, but driving with our eyes shut hasn't worked out so well so far, now has it?

Well, what can we do about it? Now that is the conversation EVERYONE should be having. People will find alternative economies to get their basic needs; but ultimately we need to think more broadly, both in terms of ethics and in terms of politics.

Having a shared understanding of Money as Debt is a great place to start -- not to mention understanding how the current banking/global financial system is both amoral and inefficient -- promoting as it does stupid inequality and wasteful accumulation at all levels of society (yeah, that's right I am implying there can be smart inequality -- given the division of labor) .

Now, let's have some F'in Pink Floyd!

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