"Exponential economic growth required by the mathematics of compound interest on a money supply based on money as debt must always run up eventually against the finite nature of Earth's resources." - British financial analyst Chris Cook.
"The most powerful force in the universe is compound interest." – Albert Einstein.
Aristotle (384 – 322 BC) wrote about a philosopher called Thales " who was very poor." People reproved Thales, saying that his poverty, was proof that philosophy was a useless occupation and of no practical value, or, 'If you're so smart, why aren't your rich?').
Aristotle doesn't say, but Thales obviously knew a little about olives, figured the next harvest would be pretty good and cornered the olive press market by making agreements with the olive press owners that, with a little down payment now (all he had) they would give him exclusive use of the presses when the harvest came in.
He did well with the negotiations because who knew what the harvest would bring? The press owners were quite happy to hedge against the possibility of a poor yield and took Thales' money.
You guessed it: In Aristotle's own words, "When the harvest-time came, and many presses were wanted all at once and of a sudden, he let them out at any rate which he pleased, and made a quantity of money.
"Thus he showed the world that philosophers can easily be rich if they like, but that their ambition is of another sort."
The sort that wasn't greedy, I'd say, but that was the first known options contract made almost 2.5 thousand years age. Being a knowledgeable man (and a philosopher) he thoughtfully did not oblige himself to exercise the options had the olive harvest failed, in which case he would have let the option contracts expire unused and limited his loss to the original deposit paid for the options.
But a bumper crop came in, so Thales exercised his options and became one of the richest philosophers in Greece. Last month (Witness, September 18) I outlined the underlying structures of the sub prime (SP) contracts that brought about the beginning of the current financial fiasco:
"Approach as many people as possible who are paying low rentals on the properties they live in after you have bought all those properties (speculatively, but cheaply because of the many rental defaults at that level). Then offer them an opportunity they can't refuse: ownership of those properties at a rate lower than the rental they are paying (sub-prime) and then lean on them until they sign the mortgages.
"The deal you offer includes a no-deposit clause as a sweetener but the fine print that outlines the Adjustable Rate Mortgage (Arm) conditions of the sale is not brought up for in-depth discussion during the deal making.
"These were loans made to people with less than good credit, marginal ability to pay and who were using the purchased house as security.
"Let's keep the maths simple, too. Let's say our home loan deal yields R20 billion profit during the 20 years over and above the original investment. But you want your money now. So you call this "money", this 20-year profit something else, you call it a "leveraged commodity". For leverage read risk. You are lending money over 20 years and taking the financial risk that the loans carry."
We've all heard that the U.S. government-backed seven hundred billion dollar Wall Street 'bailout' didn't make any difference at all.
Why? This time, the olive crop failed. When the SP mortgage repayments climbed to higher than prime (to make up for the losses on below prime payments), people just ducked – or burned the house down for the insurance.
But that's not all you get when you buy into capitalism! You also get (at a slight extra cost) a 'fractional banking' structure which is what the U.S. Federal Reserve bank practices: A bank borrows $80 from the FED as collateral on money it lends out, $1 000 on every $80 borrowed.