In beginning Economics, students are taught about discounting the future. The argument is as follows: Would I rather have $100 today, or a year from now? If I get the money now, I can either spend it, or put it in the bank where it will draw interest without risk. If I put it in the bank, at the end of a year it will be worth more than $100 by the interest rate, say 5%. So the $100 received a year from now in this example will be worth only $95 since it didn't get interest. Therefore it is better to get my money now, than in the future.
What is usually not inferred is that if money will be worth less in the future, it is best to think short term. Any investment that doesn't maintain its capital value and provide income greater than the interest rate will have very little value when it does pay off, because the same money could be multiplying without risk if just put in the bank at interest. Thus, a major driver of short term thinking in the corporate realm is the function of interest in the money system.
Business cycles
Interest is also the cause of boom and bust business cycles. In boom times, sufficient new money is created to keep up with the need for growth in the money supply to pay accrued interest. However there comes a time when growth outpaces demand, inventories expand, and banks decide not to make as many loans. At this point, borrowers don't have sufficient money to pay their existing loans to the banking system, and some are forced into bankruptcy - the down side of the economic cycle.
While the US dollar has been immune to breakdown during downturns because of our position of having the dollar be the unit of account for international transactions, numerous countries have seen their money systems break down in the last 60 years as a result of the operation of the current money system. viii Business cycles and potential system breakdown are artifacts of our particular money rules. They are not necessary with a properly designed money system.
Government deficits
It is often thought that our Federal Government creates money. No. If the government wants money, and decides it needs more than Congress has decided to take in through taxes and fees, it borrows it from the banking system, by selling bonds to the Central Bank to get those funds, trading anticipated future tax income for money to use now. In more simple terms, the government makes out an IOU, and the central bankers -- the house in the casino metaphor -- use their seigniorage to create money out of thin air to pay it. The cost to the banks of these loans is minimal, and the return is guaranteed by the government. This makes them into a cash cow for the central bankers. Main street traders - us taxpayers - pay the interest on these loans, for the right to have money for our government to spend.
A complicating factor is that if the private sector doesn't borrow enough money to maintain growth, as happens in the down side of the economic cycle, the government has to become borrower of last resort, and borrow money from the central bankers to put enough money into circulation to keep up with the exponential need for new money so the system won't break down. Again the traders on Main Street pay the interest on this money to keep the system afloat, and to have money to trade with. To expect the government to not run a deficit over the long term with our present money system is simply not an option.
A number of economists claim that it is possible to put any amount of credit money into circulation without detriment to the economy. This is not so. What is currently being done is diluting the currency, and creating money that ends up in the hands of the banking sector as phantom wealth, increasing the wealth divide.
The combination of these practical structural problems is the basic driver of our monetary cliff. The politician's and economist's advice in recent years for traders to borrow and spend has been an attempt to put off government borrowing and the day of reckoning when the system will break down. However we are approaching a point where interest cannot be paid, and breakdown is approaching. It would already have happened if China and other countries had not bought our deficits and the Fed had not continually created new money. But breakdown will come, as continued exponential growth is not feasible, and it is indeed a monetary cliff that we are approaching.
Money - the moral implications
As a society, we have not really considered the morality of our money and financial systems. Do these systems embody values that are consistent with the values necessary for democracy to thrive? A place to start is to ask what is the purpose of money in a democracy?
I would propose that the proper purpose of money in a democracy is simply to facilitate the fair interchange of the productivity of the citizens.
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