Understand Money as Debt Concept

I came across this video sometime ago and personally I found it very interesting that you may want to watch it. This video was created by Paul Grignon in 2006. It is quite a long clip (i.e. 47 minutes) and I think it is worth spending watching it. You may need to watch it few times too because it is kind of difficult to understand.

This movie shows how the basic banking system works and how the money was eventually evolved into no longer represent value but debt. Let's watch it and if you're lazy, you can read my summary below. :)

What are the KEY messages from this video?


Message 1: Money Is Now Backed by Loan or Mortgage

Yes, bank used to create money only if they have the real gold with them or someone deposit the gold to bank. But this is not how the bank operates today. Bank created money as long as you take loan from them and promise to pay back. Money is no longer backed by Gold but backed by the loan or mortgage. In short, bank loans money that they don't have and in reality the money now is actually created out of “Nothing”. Let's see how this works...


Message 2: Bank Can Create as Much as Money We Can Borrow

As soon as we realize the bank creates money out of nothing, a new legal regulation is invented to protect our rights. This legal regulation is called “9 to 1 Fractional Reserve System” to limit how much money the bank can create.

In short, if the bank has $1K cash in hand and they can loan out up to $9K to us based on the 1:9 fractional reserve system regulation. However, does this really limit the bank to create money up to $9K? It seems so but in reality they can create the money up to $90K which is 1:90 ratio. Let's see the following example how this works:

Assuming when the bank started, the bank has $1K cash in bank. This means the bank can loan up to $9K to all of us. So, let's say Person A take the loan of $9K to buy a car from Person B. Based on the person A's promise to pay back the money, bank will create $9K cash and loan it to person A.

The tricky part is the Person B will then deposits $9K to the bank. Based on the 9:1 federal reserved regulation, the bank can then reserve $900 ($9K/10) and loan it out the rest which is $8100 ($90:$8100 == 1:9).

So it moves on to next loan transactions until the bank can't reserve anymore money. See the table below for the subsequent loan transactions until the bank can't reserve anymore money. At that point in time, the bank will have total of $10K cash in hand and the total of $90K loan has been created.







2 very important questions to ask yourself here:

• Initially the bank has $1K and now the total cash in hand the bank has is $10K. Where does the $9K come from?
• Initially the bank can only loan up to $9K. Why now the total loan is $90K?

The answer is pretty simple – the bank create money out of each loan transaction. With just $1K, now the bank can somehow create extra $99K($9K + $90K) out of all the loan transactions. So $1K has been somehow magically becomes $100K ($1K+$99K). Assuming $1K is backed by Gold, then $99K is now backed by loan. It seems like the banks only create $9K but in reality $99K (x10 times) of money has been created out of nothing.

Therefore, bank can create a much as money that you can borrow! As long as new loan agreement is signed, a brand new money is created!


Message 3: Our Monetary System is NOT Sustainable?

In previous example, you will notice that majority of the money that we have today in this economy is created by loan or debt. Therefore in other words, the money supply to this economy is equal to the total amount of loan principal. However, when you pay back to bank, you're paying not only the principal but the interest of the loan.

• Money Supply = Loan Principal
• Money Owed = Loan Principal + Loan Interest

The total of money circulate in this economy is approximately equal to the total of loan principal. So now you need to pay the extra loan interest to the bank, where do you get the money from? There are only 2 possibilities:

• Not everyone will not able to pay back the loan together with interest
  
• To avoid that from happening, bank will supply more money to the economy by creating more loans

In order to sustain this monetary system, more debts needs to be created to make sure the system have enough money supply to pay back the loan interest. The funny thing is when more debts are created, more debt interests are created too. Thus, more money you owe. This is the exponential thing and are fixing the things or making it worse? Will this continue forever or will it collapse one day?


Discussion

Now we know the truth that money is created from debt and the questions to be discussed here are, is that really wrong with this system? What's wrong with creating money as debt? What's wrong to have exponential growth? Is this man made or natural? Who should we blame if this is not right? Is this government fault? The most important question is that shall we even fix this system? If we want to fix this system, can we accept the consequences? Even if we want to fix this, can we?

Malaysia 2010 Budget - What should I do with it?

If you're Malaysian, you may wonder what are the action that you should take with the recent budget 2010 announcement. If you're not Malaysian, you can ignore this post. These are the KEY summary of Malaysia budget 2010 which most likely may impact or relevant to you.


For Credit Card Holders

If you're credit card holder and you've more than 1 credit card, go to bank directly and cancel your credit cards. Keep one credit card will be enough. This is due to the fact that you're now required to pay annual RM50 fees per credit card and RM25 for each supplementary card. What a crap?

My 2 cents: If RM50 is NOT too much for you or you lazy to go to bank, you can just wait and see what are the respond from the bank to play around with our government to waive this RM50.


For Property or Real Estate Owners

If you're the owner of property and this year is your fifth year of your purchase, sell your property as soon as possible before the end of 2009. If you can't sell, you can either sell it with 5% tax starting from Jan 2010 or just don't sell it at all and pray until the next announcement to waive it. Possible?

If you plan to sell your property which is within the 4 years of your purchase, don't sell it until next year Jan 2010 because the tax is more than 5%. Hold it until 2010 only sell your property. :)

Background: It used to tax 30% out of your property gain if you sell your property within 2 years, third year is 20%, fourth year is 15% and fifth year onward is NO TAX at all. With this recent 2010 budget announcement, everything will be stick to 5% regardless of what years you're selling. So it is good for those love to sell the property within 4 years but not good for those who love to sell their properties in long term (i.e after 4 years).


For Broadband Subscribers

If you have subscribed to any broadband services (e.g. streamyx), please keep your broadband bills receipt every month. This is due to the fact that you can get claim up to RM500 for tax relief starting from 2010 to 2012.

My 2 cents: This is probably the best news in this budget 2010 announcement. By the way, for student, there will be some incentive about PTPTN conversion to scholarship and free netbook package which I don't feel any great about it. Do you?


For EPF Contributors

If you're EPF contributors, basically you do NOT need to do anything. Your contribution will be reverted back to 11% if you opted to decrease your contribution previously. Also for 2010 tax filling, EPF and life insurance schemes to be increased to RM7K from RM5K.

My 2 cents: It is clear that this new scheme is good for everyone especially for those who has exceeded RM5K for many years.


For Self-Employed Folks

If you're self-employed, starting in 2010, you can go to the EPF office directly to open an EPF account and the government will top up 5% of every RM100 that you contribute. However the maximum amount that the government will pay you is RM60 which is RM300 for 5 years.

My 2 cents: What so big deal about this RM60 per annum? Isn't that too little? Should I say better than nothing?

p/s: Hope this helps and clear things up on what you should react to this Malaysia 2010 budget announcement. Good luck!