If you read the title and have no idea how your money is actually debt, you are not alone. Money is no longer based on any hard commodity like gold, but rather as a promise from the government. Its journey to you was through a series of loans from various banks, starting with the central bank. This means that all money in circulation has been created from a bank loan and therefore represents a debt by someone, somewhere.
This principle underlies every aspect of our financial lives and we’re completely unaware of it. Yet it is arguably the single largest influence on your life, your health, your wealth and your future.
The principles of money and its lack of any real value are so tightly interwoven through the fabric of our society that to imagine our lives without it is a challenging exercise in abstract thinking.
You may think that I have received a knock to the head by a blunt instrument, since you’ve never heard of any of this before. But therein lies the innate intelligence of the system – it sits right under our noses and the only reason it persists is because we’re all ignorant of it.
The meaning of money as we’re taught it
While growing up, you and I were both indoctrinated with the monetary system as we know it today.
From the beginning we were taught that as we work, or provide a service or product, we receive money, with which we can go on to buy a product or service of our own desire- namely food, drink, gadgets, houses etc.
So the meaning of the money we learned was simple:
money represents the value of the products/services you provide which can then be exchanged for someone else’s products/services.
You never questioned it. Why would you? Why would anyone question something so integrated with every facet of life – no-one else questions it, so why should you?
Where the meaning of money begins to shift
So you start earning, but you soon find after a time your spending power has slowly and steadily decreased. You don’t think of it as spending power exactly, rather you comment to yourself and others how things just seem to get more expensive.
Your earnings are unchanged, but the goods you are buying are a little harder to afford. Gradually. At first it didn’t seem so significant, but now you look to get a raise in allowance/earnings to compensate.
You just had your first direct experience of inflation.
Inflation is simply the devaluation of money.
The same product/service hasn’t increased in value per se, but the amount of money required to purchase it has increased. This can only mean the value of your money has decreased.
And how does your money’s spending power mysteriously decrease? Because of the way the money/banking system is structured. It is actually built-into the system.
The cause of inflation
So what exactly causes the value of money to go down? The explanation is long and complicated, and I don’t fully appreciate all the complexities of it. But I’ll take a stab at it.
Let’s start with the Federal Reserve in the US. This private agency is responsible for the creation of all money supply in the US.
Read that again. It’s important.
How do they create money in the system?
They loan it to the U.S. central bank. All money in the system today has been provided through a series of loans to the central bank. When the central bank (government) needs more money for the economy, it requests a loan from the Federal Reserve (typically done in the form of government bonds).
The money then gradually enters general circulation through private/corporate and inter-bank loans from the central bank.
This means that all money in circulation today is actually debt. Whichever way you look at the money in your hand, you can trace it back to a loan taken from a bank, perhaps by your employer.
It must all ultimately be paid back to the bank, with the final stop being at the Federal Reserve.
So what if all debts were paid off?
…there would be no money.
Each time more money is magically introduced into the system by the central banks, it isn’t based on anything except the “need” to have more. If all the available goods and services remains constant, but the amount of money in the system increases, surely then the value of each dollar must fall as it is diluted.
It used to be different. When we lived with the gold standard, the amount of money in the system was backed by the value of gold – a hard currency/commodity that cannot be forged (and thereby compromised). Now, with the fiat system (i.e. not gold standard) money is created out of thin-air. It doesn’t represent more monetary value, but less. Take the following illustrative example, where the orange juice concentrate represents the value of the goods and services, and the water is the money in the economy.
You are making an orange drink from concentrate. You pour in the orange concentrate and add water. But you’re thirsty and want more orange to drink. So you put what you have into a bigger glass and just add more water. This doesn’t provide you with more of the actual orange juice (the good stuff) that went in to making the original drink. You will just have to drink more in volume in order to have the same quantity of orange you would have had.
That’s basically how inflation works.
You have more money (water) in the economy than before, so now you have to spend more for the same product (orange concentrate). The products and services didn’t get any more expensive than before, your money just lost some real world value after dilution.
The conclusion
The value of the money that you earn is constantly at risk because it isn’t backed by anything real (e.g. gold). It is a figment of the government’s imagination and prone to devaluation on a whim. If a government requires more cash to spend, it borrows and thereby pushes down the value of your money.
But we haven’t actually touched upon the sinister aspect of the banking system, but if you’ve understood this so far, you’re in a good position to continue.
Please visit the follow-up article ‘Your interest in Interest‘ to see just how precarious our monetary system is and why our economy is collapsing around us.
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