Friday, July 04, 2008

Money as debt

This 47 minute animation is a cute but informative video on the nature of money, what it is, how it is made, and what it represents.

I completely agree with its straightforward explanation about the entire banking and monetary system being based on credit on issue, instead of the more ancient practice of using money as a store of value.

I don't agree one bit about some of its conclusions and suggestions. It suggests the current monetary system is unsustainable because it will require an economy to consume more and more resources each year.

I don't agree with the suggestions about getting government to stop the charging of interest. The video seems a bit too obsessed with attacking the concept of interest, but there is absolutely no decent reason why a lender cannot charge a borrower a premium for his time preference.

But money, as we know it today, is not a store of wealth, but a claim on the debt of other people.


Checking the Australian Bureau of Statistics figures on the supply of money shows some wild wild inflation (defined as expansion of the supply of money) in recent years:



Money base
38 678
41 278
43 735
678 360
747 280
867 883
Broad money
764 467
841 183
961 046

Source: Reserve Bank of Australia.

Are we supposed to believe inflation is being contained when the government-manufactured CPI figures are roughly 3% each year ? Or do we get a little alarmed when we see the supply of money explode by over 10% each year ?

UPDATE: This gem of a quote from Atlas Shrugged says it all regarding the nature of money. And it was written 50 years ago !

"Destroyers seize gold and leave to its owner a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it."