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Debt Money – The Ultimate Ponzi Scheme

It’s a fact that all the money we have is debt.

Fiat money – that is, paper currency declared money and created out of thin air by the banks under government-mandated monopoly – is issued as debt. As the money supply grows, so does the debt.

In times of economic growth this debt does not appear as a problem, as production increases, generating profits to service such debt. But in times of economic recession, as now, such debt starts to eat away at the economic foundations of our society.

You can see this in the logical fallacy of attempting to get out of a debt by issuing more debt. For that is essentially what governments and their central banks are doing – as a means of attempting to reflate the economy. Trouble is, a situation of over-indebtedness cannot be cured by more debt. The very idea is ludicrous – at least to those of us not in government!

This reality is most obvious when you consider your own life. If you were to over-extend yourself and max out your credit cards, then the only way out of your situation would be to tighten your belt and pay off your debts. But what would you think of some charlatan who suggested you simply keep getting more credit cards and transferring your old debt onto them? I’m sure you can seen the miserable end-game in store for you, if you followed such advice.

But government is not rational like you. They have a constituency to consider – those people whose lives have been continuously supported by benefits financed by ever-increasing debt. Such a government cannot countenance the idea of paying off such debt – as this would force it to cut back on the payments it makes to its voters, and likely see them thrown out of office.

Money is created as debt. When debt is repaid, money is destroyed. So the logical consequence of any attempt to repay all the debt in the world would be to eliminate all the money. Hardly a cure to our ills I’m sure.

And it is this apparently ridiculous situation that marks the debt-money system as a ponzi scheme – a fraudulent system is that is bound to fall over in the end.

What is a ponzi? It’s normally understood to be an “investment” where those who participate are actually paid out ‘profits’ from the money brought in by new investors – not from any productive enterprise. In other words, it’s not an investment at all, but a fraudulent scheme to con those whose greed exceeds their judgement and common sense.

Every ponzi scheme must fail, as money from new investors dries up and old investors are then unable to be paid. Once that happens the game is up and the ponzi collapses. Those who got in early sometimes make a killing, while those who came in late lose their shirt.

Debt money is like a ponzi scheme, in the sense that the more indebted we are, the more debt we need just to keep going. Each year the debt goes up, in order to ward off the terrible consequences of a debt-induced deflation.

Right now, governments around the world are trying their hardest to avoid the reality of this debt trap – the fact that we cannot proceed to borrow more in order to service the ever-increasing debt.

The end result will be that governments will simply “print” money to cover the gap – the gap between their expenditure and their income – and in so doing will lay the foundation of a hyper-inflation to come.

Reality demands that the debt be unwound, but political reality will stop that from happening. The end result will be the same as for all victims of a ponzi scheme. We will all be defrauded by the device known as inflation – the devaluation of money in order to make the repayment of debt easier. For, as you can imagine, it’s much easier to repay a trillion dollars if such dollars lose half their value (and devalue your holdings of dollars in the process).

At the core of the money-debt fraud is the very banking system itself – what is termed “fractional reserve banking”. This sleight of hand enables banks to effectively (and collectively) lend up to 10 times the money on deposit. The essence of the fraud is that banks are allowed to lend out money that is on demand from the original depositors.

In other words, banks take in money from depositors, but instead of locking it away, or only lending out money on fixed time deposit, they create two demand deposits from just one. How? Simple really. Person “A” makes a deposit of $1,000 into their cheque account. This new deposit enables the bank to lend out 90% of it (under a 10% reserve system). If the borrower of this money deposits it in another bank, that bank can now lend out 90% of that – in an ever-increasing spiral of new debt creation.

Fractional reserve banking is fraudulent because it creates two legal owners to the same funds – the person who makes the original deposit, and the person who borrows 90% of that money in the form of a new deposit to his bank account. Thus there are two claimants to essentially the same money.

And this is the reason banks fail. They fail because they can never honour all the outstanding deposit claims. If every depositor walks into the bank and withdraws their money, the bank must fail – precisely because they do not have the money. It does not exist.

We have now arrived at a financial “Armageddon”. Since going off the gold standard (which was a monetary form of discipline), governments the world over have enjoyed enhanced popularity by bribing voters with money they did not have. But this is no longer financially feasible.

We’re about to find out, over the next year or so, exactly what it’s like to be on the victim end of a ponzi scheme. Hold your hats!



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  1. vivian taylor
    May 31st, 2010 at 07:04 | #1

    thanks David, for this succinct explanation of our current economic plight. I am keeping it for passing on to others in hopes of promoting better understanding. But it’s hard to face up to the logic you describe, even though I know you are absolutely on the mark. You stop short of offering any solution. because there is none really.

    I don’t see any solution to the loop we’ve created other than some catastrophe (natural or human-made) that forces the whole house of cards to come crashing down. It happens on a micro-scale moment by moment, and on a scale sufficiently large to affect many of our species and rivet our attention temporarily over and over. But only when it is truly encompassing will it end our ponzi scheme.

    Then, as the surviving life forms slowly begin all over, the cleansing catastrophe becomes legend, then myth. We’ve peered and probed and discovered the evidence that it’s all happened before. And even without that proof, we all share this knowledge deep in our DNA, along with all other life. I, for one, am grateful for the fact of mortality that removes me from the endless spiral at some point. Sounds fatalistic? Yep. And so we talk on and on because it entertains us and keeps us busy. And being alive feels good, when experienced moment by moment.

  2. June 12th, 2010 at 17:19 | #2

    Economic plight? Are you joking? We just built a billion dollar embassy in England (After all we have to represent to good ol US of A right)

    If we are in economic plight, how can we afford that? After all we could just get a modest building……got you guys!

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