Money is created in two ways, fractional reserve banking and quantitative easing.
The Federal Reserve, in the case of America, and reserve banks in general, lend money to financial institutions, i.e. banks and the banks take the money and loan it out keeping about 10% on deposit and loaning out 90%. So if someone deposits $1,000 in Bank of America, BofA keeps $100 and lends out $900, which is eventually deposited somewhere else, where $90 is kept on deposit, and $810 is loaned. At the end of the cycle, the $1,000 deposit becomes $10,000.
There is also the concept that the economist Herman Daly discusses which the absurdity of compound interest is. Simply put, if someone borrows $20,000 to buy a new car, they exchange the money for its equivalent in a machine. But as the years go by, the debt multiplies, while the car depreciates. Why? Nothing else in nature multiplies like that, except money. Gold doesn't, oil doesn't, and computers don't? There is an intrinsic absurdity in compound interest that is rarely addressed.
As mentioned before, total world yearly GDP is $60 trillion, total world debt is about $150 trillion, and world wealth is about $160 trillion. If we assume, and it is a big assumption, that the debt lent and borrowed is evenly divided, if upon creating a new currency we simply payback 50% of what is owed in the new currency and cancel all debts public and private, current liquidity levels would stay more or less the same, and we should have no inflation.
Banks and other financial institutions would have to be re-stocked with currency, enough to keep them, or at least some of them, open. There would be an important loss of equity in financial institutions, but the world would be free of debt, and a new World Reserve Bank would manage future lending to banks, but now the banks would only lend what they have on reserve, fractional banking would end. The extra liquidity in the market would have to be compensated with very high initial interest rates, and taxes would be placed on all commodities, an Eco Tax, to promote sustainability and new energy sources. The big trick would be keep the interest rates and new taxes at the right levels so that inflation is kept under control. This would obviously be extremely difficult to calculate, but that is why we have super geeks and super computers.
Big bummer if all you did was lend money, but then again, at
least you are getting 50% back in a new stable currency, and you are helping
the world.Â
For developing countries, this would mean an instant increase in living standards and quality of life. New infrastructure projects, schools, hospitals etc, must be part of the swap. In exchange for no debt, out goes cronyism and corruption. For the first world, the deal must be a significant decrease in military spending, and big sustainability projects to tackle the coming challenges of a world consuming more than it can possibly produce. We must first get our financial house in order before we can take on the challenge of creating a sustainable world.
The cycle of debt and consumption has turned into a modern slavery that now begins as soon as many young folks step on a college campus, and ends with a reverse mortgage when there is nothing left but equity in their house. Debt is slavery to consumption, multinationals, banks, and spiritually bankrupt advertising, media, and Hollywood culture. Its time to lose the chains.
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