Date: 2024-07-17 Page is: DBtxt003.php txt00018678
Thought Leader
Umair Haque
Why You’re Going Broke While the Rich Get Richer ... (How Coronavirus Teaches Us) What Money Really is, and Why it Should Belong to All of Us
Peter Burgess
A fine gentleman named Nigel — not Farage, don’t worry — wrote to me recently to ask a question that’s probably on a lot of minds:
“Why is ‘printing’ money out of thin air the only solution to governments in the face of this crisis?”
Now, I want you to really understand “money” once and for all — and why we need to reinvent it. So I’m going to try to really explain it to you. Bear with me — this might get a little tedious, but I promise, by the end, you should understand the mystery of money in an entirely new and clearer way.
Money is a little bit like sex. It’s not good on your own. Having too little will drive you crazy, having too much will leave you bored, and yet it makes the world go round. I’m not being facetious — I’m making a technical point: money is so mysterious because it’s both a private and a public good, and there are very, very few things like that at all, hence it confounds us.
Now. The way that most of us understand “money”, and the reason I put it in quotes, is that we have a capitalist notion of it. Don’t worry — I don’t mean your local butcher and brewer and baker, I mean a system in which everything is done for profit by giant corporate monopolies, traded on stock markets, owned by hedge funds. The way that money works in this particular system is the way that most of us think about money at all — the only we can imagine it, really.
What precise way is that?
Think about your local not-so-friendly bank. Here’s a thing you don’t know, but should. It has an account at the central bank. That’s where the government banks, too, by the way. So here’s the first thing to note about money in our broken system: banks have an account at the central bank — but you don’t.
Do you see what I mean by “money in a capitalist system”? They’re private, profit-seeking corporations, after all — at least most banks, especially big ones. Why should they have accounts at the central bank — but not the average person? As usual, capitalists reserve a certain degree of socialist privilege for themselves — but not for anyone else. The central bank should be a public institution — but in our broken system, it’s a club, a weirdly private institution, where you can’t have an account, only banks can. What the?
Now. How is “money” then created? Here’s the next thing you should know about money in our broken system: money is debt. Nearly all of it. Here’s a chart of America’s money supply. Here’s a chart of America’s national debt. Do you see how the amounts are almost precisely the same? That’s not a cosmic coincidence — it’s a relationship. Money — the vast, vast majority of it — is just debt.
That has to do with how money is created. The bank lends you money, as some multiplicative proportion of it’s “reserves” — if it has $10 in reserves, it can lend maybe $100. Hence — and this is an obvious point that mainstream economics refuses to admit — money is just debt.
Here’s the third thing you should know about money. If money is debt, the (conservative) notion that debt must always be repaid is a myth. All that happens is we do that in a modern economy is that the money supple shrinks, massively — only to expand once again. What would happen if we all paid off our “debts” tomorrow — in some beautiful and wonderful even? Well, the money supply would shrink massively…until banks lent again. This was once known as “the circuit of capital”, if you’re a reader of Marx — money becomes debt becomes credit becomes money again, and on and on. Money and debt are inseparable precisely because in our broken capitalist system, money is debt. Therefore, paying off debt, too, is a capitalist notion — the yoke that keeps the proles on the wheel of labour their whole lives long.
What has this system ended up in? A society of people working ever harder to pay off unplayable debts…because money is debt…because banks lend fractionally against their reserves…because only they get accounts at the central bank.
Do you see what a bizarre, twisted mess this system of money has become? It’s baffling because — just as you suppose — it doesn’t make sense. If, like many, you suspect it’s a trap…you’re right. You can’t win in this system — it really is rigged against you, from the very genesis of money itself.
What’s the solution to this mess? There is one, and it’s a simple one — but to really understand it, we have to go even further, to the very Big Bang moment of money.
How does money work, at an even deeper level? Here’s a very, very good quote: “The Federal Reserve, also known as the Fed, is the central bank of the United States…when the Fed purchases [government bonds], it doesn’t have to print money to do so; it issues a credit to its member banks that hold the Treasuries by adding funds to reserve deposits.”
Wait — did you see that sleight of hand? That hidden, invisible magic trick? The one no one knows is even there…happening right under their noses…every single day…every minute of every day? The Fed buys “bonds” from the government. The government should now have money, right? It’s sold off a debt, after all — just as if you were to agree to repay someone in ten years, and they gave you $100. But instead of the government getting money, what happens is that the Fed gives a credit to it’s member banks.
See that? Banks get free money…in perpetuity. No wonder hedge funds and private equity funds are so loaded, and buying up everything in sight. No wonder, too, the average person is growing poorer in real terms by the day, even before the pandemic — because they’re the ones eventually paying for all that “free” money. Let me say it again, so you really understand one of the things that I mean when I say “capitalism is failing”, and why I don’t mean your butcher and brewer and baker, but the system.
If Marx, Karl and Groucho, and came together to write a satire about capitalism, they could hardly do better than this — in our modern system, the idea that it’s rigged is so true that banks and hedge funds and private equity funds get free money…from the government, which is you and me…forever..every single day…and yet, nobody much really knows.
The system really is fixed — and, weirdly, most people don’t have a clue as to how deep it really goes: it’s obscure, complex, and invisible by design, so that the machinery above stays hidden well out of everyday sight. Endless free money — for everyone but the average person, family, wife, child, husband, daughter? Wait, I’d like endless free money, too. I’m sure you would. What the? But that’s capitalism — it’s surreal hidden truth — and it’s also why capitalism is failing as a socioeconomic system.
That free money — the magical credit that suddenly appeared — is counted as reserves for those “member banks.” Because they have more reserves now, they can lend even more. Debt becomes money again. But again — did you see the magic trick of this system? The weird, bizarre disappearing act? The money went from the Fed to banks…instead of to the government. Or instead of to you.
Remember when I said you should have an account at the central bank? Now you see how and why. The government could simply sell the Fed “debt”, which it could credit you with.
What’s the point of that, you might ask? Good question. The point is that we’ve begun to solve the real problem — which is that most money is debt. Remember the tiny sliver of money that’s not debt? That’s effectively bank reserves. That is the “fraction” in “fractional reserve lending” — the amount that new debt is created against.
The solution to all the above — how to reinvent money — is to vastly increase the proportion of non-debt money in the system. Non-debt money: money that isn’t created through this bizarre, broken capitalist system of the central bank giving your bank money which then becomes debt. If you had an account at the central bank, which reflected a credit from the government…we’d be creating non-debt money…and the mess above would be averted.
Think about it. The government is selling the central bank debt, which it credits you with, not the government — just as it does banks. Do you see how this is immediately fairer? Now we have given you “reserves”, instead of…banks. No, you can’t lend against them — but that’s the point. We are now making a far stronger and more robust financial system.
You see, when most money is debt, we have created a system that’s immensely fragile to every tiny shock — and which is torn apart by big ones. The moment that you stop spending, the process of debt becoming money becoming debt stops…and the economy grinds to a sudden, screeching halt. That is exactly what’s happening now, during the pandemic. And it’s going to keep happening. What happens when megafires burn continents? When floods ravage whole regions? When ecosystems implode? You stop spending — bang! The system crashes, because it’s not built to weather any real shocks. Is your head spinning? Take a second to think about all the above. It’s not complicated — in fact, we’re uncomplicating a system that’s broken because it’s too complex. That’s the only hard part in thinking about the above.
Now. You might say something like: “But now the government has more debt!!” Does it? Let’s think about what’s happened above. You have an account at the central bank. It’s credited with money which is created through a government “debt.” Who does the government owe that money to?
Well, who has lent to it? The answer is: nobody and everybody. The government has to pay that debt with future tax receipts, it’s true. But who do those come from? Not China. You. The government has simply borrowed from you tomorrow to lend to you today.
What kind of sense does that make? Every kind of sense.
Now, if that money is spent on, say, casinos and Facebook ads — you’re right, it’s squandered. But if it’s invested…then we are all better off. Let’s say that as a result of that “borrowing”, we’re able to build new hospitals, schools, universities, fund research, science, art, literature, keep families together, and create millions of new jobs. As a result — and here’s the crucial part — our standard of living rises.
If we borrow from ourselves tomorrow, to invest today, then we are making a very wise choice. Because we will grow richer, in a kind of virtuous cycle. Tomorrow, we will have even more to borrow from ourselves the day after tomorrow, to invest — and so on. That doesn’t mean our level of debt rises: what it means is that our level of debt stays stable, but we have more of a surplus as a result, more hospitals, schools, parks, libraries, jobs, and so forth.
Remember when I said money is a private and a public good? That’s why we can do this strange, mysterious thing: borrow from ourselves tomorrow, to invest today. It’s why money has these seemingly magical properties.
But it’s also why we are not using money itself optimally: in the wisest, most creative, most intelligent, most powerful way.
The way we use money in our broken system is the above: your bank has an account at the central bank, and it lends to you against its reserves, which are credited from, of all things, the government issuing debt — that’s the capitalist sleight of hand. All that is done for one reason: to maximize profit: the bank can then “exercise discipline” over corporations and household spending and so on. What that means in practice is that the imperative of maximizing profit trickles down — and comes to permeate the economy wholesale.
But the profit motive is not a very good one. It’s crushed American life like a tin can. All those weird new forms of debt that Americans have to pay? Lunch debt, medical debt, student debt? They reflect a system in which money has to be debt, so profit can be maximized on the other side of the equation.
The way that we have to learn to use money in the 21st century, by contrast, is very different. You should have an account at the central bank — a household account, and a business account, too, if you want. When the government sells bonds, it shouldn’t (just) credit banks, in that weird, clever, hidden capitalist sleight of hand — it should credit you. You should get that money, and be able to spend it in ways that equal lasting social investments — starting that business, paying for that medical bill, sending your kids to college, and so on.
That kind of financial system is robust, strong, powerful. It’s the one that’s going to be able to survive the coming age of shock after shock, from climate change to ecological collapse. Because in it, the proportion of non-debt money — money you don’t owe to the bank, that nobody owes to the bank — is reduced, year after year. That makes a financial system resilient — and it makes an economy post-capitalist, able to survive and prosper person-to-person, instead of only through capital-hoarding and profit-maximizing intermediaries, like banks and megacorporations.
Whew. That was a lot.
Reread all that if you have to. Come back to it if you need to.
One thing this pandemic should teach us, once and for all, is that our economies are badly broken, in the most fundamental ways of all. One of those ways is that money itself is being badly underutilized. We should take this as an opportunity to start reinventing money. Like I said — why is it that banks and hedge funds have accounts at the central bank — which are credited with free government money…but you don’t?
The perverse answer to that question is that capitalism is a Soviet system for those at the top. That is why it has failed everyone else, more or less. The question, then, is when we start creating the future.
Umair April 2020 Eudaimonia and Co Eudaimonia & Co Follow 3.8K WRITTEN BY umair haque Follow vampire. Eudaimonia and Co Eudaimonia and Co Follow Eudaimonia & Co See responses (48) More From Medium