Fractional reserve banking is a given in most discussions on the topic of money, lending, and Central Banks. Central Banks are lenders of last resort, “designed” by their architects to stabilize the financial system. The oft quoted ratio is 10:1, which means banks can lend out to customers ten times the amount of money they hold in reserve. The money lent out is of course not taken directly from their safes -- how could it be? you can’t lend out 10x more than you have! -- but created “out of thin air.” That this happens is non-controversial and neither good nor bad in and of itself. The system “works” in the way all games work; people agree to play along. Should there be a flaw in the design, the game will become unplayable at some point, and people will take a fresh look at the “rules of the game.” I think that’s where we’re at right now.
The dry theory is that commercial banks are fed money by Central Banks, and then lend on that money at a 10:1 ratio. Money is first created by the Central Banks, then pumped through the economy’s veins at a speed of 10:1 by the commercial banks we all know and love. Please read Steve Keen’s analysis of this process, which shows, contrary to the dry theory, that in fact the reverse is true. Commercial banks lend to customers first, creating money as debt into the system, then the Central Bank reacts later on, feeding money to the commercial banks as they see fit. This is a very important piece of analysis which tells us a lot about the system, which is nowhere near as neat and tidy as theory suggests (quite a shock!).
Of course, I’m looking at this through the eyes of someone who believes a resource-based economy is now the only logical direction to follow for humanity. That’s my agenda, which I make no attempt to hide. For me therefore, the most vibrant and bright aspect of the nature of money is it’s insoluble bond with scarcity. This fact has unavoidable consequences, one of which is hoarding, otherwise known as greed. This dynamic explains how it is that the dry theory of money creation is at odds with the dirty, messy, day-to-day reality of life on the ground. There is demand for money, commercial banks are where one gets this money, commercial banks must make increasing profits, they have a quasi-legal right to create money, hence they do so, even advertising to encourage customers to borrow more and more.
So the pressure in any socioeconomic system built atop the presumption of permanent and unavoidable scarcity -- which engenders money -- is towards debt-fueled growth, as people compete to “succeed” demonstrably in material terms, always seeking to outdo each other. Money cannot be other than a symbol of success, and must be scarce, therefore the inescapable pressure within monetary systems tends strongly to unsustainable “growth,” and cyclical boom and bust. Fractional reserve banking's history is littered with this pattern.
Again, I see this as neither good nor bad. Nature is cyclical. There are seasons, forest fires, extinctions, and other longer cycles, which need not be regular or predictable to be cyclical. However, there is are two unnecessary negatives in money cyclicality (if I may call it that), and they are entrenched divisions along rich and poor lines, and too much fear. In other areas of nature, change is freer in its scope, and no sticky divisions seem to arise. Humans can “artificially” maintain a particular, preferred balance, via law and governmental institutions, and solidify a status quo in such a way that change is slowed down and impeded, dangerously so. This system-calcification is enabled by many things, in my view though, scarcity is chief among them.
As I have argued elsewhere, scarcity is part perception, part fact. Hunter-gatherers confirm this, as did the islanders of St. Kilda. In perceiving abundance, one is prompted to share and cooperate, and deal with hard times with cooperative tactics, not competitive. Bernard Lietaer is very good on this point. Money exists as a tool to deal with scarcity, to enable complex trading of scarce goods and services, and by design encourages competitive and hoarding behaviours, fearful behaviours, inspires fear of want, of material poverty, etc. This dynamic leads to calcification of whatever status quo emerges out of the struggle to find balance -- all systems, human or otherwise, constantly seek balance (though never achieve it). This scarcity based, calcifying dynamic impedes change.
Change, however, is unstoppable, is the only constant. Everything is in a constant state of dynamic flux, never achieving a settled equilibrium. The less able we are, culturally and societally, to appreciate this, the more damaging and disruptive change becomes, and this is magnified further still as our culture becomes global. Part of the thesis which argues a resource-based economy is the best way forward for us all, is that it copes better with change. In that the direction seeks to end material divisions and make all mediums of exchange redundant, in that it calls for cooperative, not competitive behaviours, calcified divisions are less likely to emerge. Money is a tool, a lever for enforcing fixed divisions, and is therefore deployed by the “successful” against the “unsuccessful.” A resource-based economy is absent such a lever by design.
Meanwhile, change -- in the form of technological development -- continues apace even within the calcifying status quo, but our many, similar, worldwide Central Bank Fractional Reserve systems fail to adapt to it, seem incapable of understanding the consequences, refusing to look openly at the data, the technology, the mood, the slowly shifting paradigm. Technically speaking, how hard would it be to keep drinking water clean and abundant for everyone? Certainly not impossible. Sadly, in financial terms it makes next to no sense to do so -- the more scarce a resource is, the more money can be made from it, assuming demand. Is it technically impossible to prevent the further erosion of top soil? Not at all, but financially speaking, chemical fertilizers make sense, regardless of the consequences. Permaculture, hydroponics, organic farming techniques combined could provide sufficient food for all of us, in abundance, but, of course, this makes no financial sense. The solutions to the energy crisis are a concerted effort away from being ours, yet the resultant clean energy abundance makes little financial sense. Saving the ecosystem which supports us makes little financial sense, or at the very least threatens the current status quo.
We have unwittingly forced ourselves into a corner. Money and scarcity are locking us in. The solution is abundance and the cooperation this necessarily inspires. We are our own enemies here, because we have been socialized for centuries, maybe millennia, with a world view based on scarcity. If an uneducated schmuck like me can take a fresh look, we should all be able to. But that’s up to us, no one else. We are each of us obliged to make the effort to take on new and challenging ideas openly and unprejudicedly, if we want to minimize the damage the coming collapse will cause.
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