I have to admit, the current system is quite ingenious and has managed to be more robust than expected. The ingenuity lies with its wizardry – creating money out of nothing and charging interest for it, triggering a perpetual motion machine of debt that drives the banking system, and economy forward. The wizards behind this system can bring entire nations to their knees at the stroke of a pen. The robustness is a bit of an illusion too, – the system has become very rigged and manipulated post-2008 by coordinated institutional action, which only proved how much gross market failure had occurred. The world’s biggest central banks have been systematically rigging financial markets in an effort to prop up the illusion of wealth and health in the system. It’s been over 10 years since the crisis and the deep, structural flaws are still not fixed. The costs of this system to society are taking their toll, as the world plunges into deeper debt and inequality; the adverse consequences that naturally follow from this model. The system gives rise to a powerful Plutocracy, which captures the political system, erodes democracy, distorts capitalism and stymies any attempts to effectively reform it. A deeper spiral into debt is a tax on society; debt is a tax on society – taxing future generations for the spendthrift habits of the present generation. The problem is, there is too much debt. And its excessively benefiting an increasingly smaller cabal of people. Remember, under fractional reserve banking, money is debt and debt is money.
So here lie some ways we could start tackling the problems previously outlined in Part 1:
1) Problem: There is way more electronic money than physical cash
Solutions: Digital cryptocurrencies
With the world heading towards evermore digitisation, cash may eventually become outdated. The advent of decentralized cryptocurrencies, or digital money, potentially offers a solution to bank runs. “Bank runs” generally happen when there are too many claims on hard assets. In other words, bank runs happen when one major medium of exchange, whether the gold-backed US dollar of Bretton Woods or any odd fiat currency of today, multiplies out many times over above the very thing supposedly ‘backing’ it. In the Bretton Woods financial system, this was the US dollar being carelessly printed so much that the gold redeeming each dollar became scarcer and scarcer. In modern fiat currency systems, the tendency for the banking system to create too much debt, leaving physical cash relatively more scarcer, builds up the conditions for modern day bank runs. The trigger point arrives once a debt crisis ensues and shatters trust in the system, forcing people to rush and redeem electronic money for cash, – a hard asset that is dwarfed by a sea of debt.
Lets imagine for a moment the world in its current form, but without physical cash, only electronic money. In this world, a wide variety of digital cryptocurrencies exist alongside government-issued fiat currencies. These digital currencies complement central bank issued currency. When a debt crisis plagues any given fiat currency, it will rattle faith in the affected currency and perhaps some others which the market deems susceptible to a similar crisis. This is just the way financial markets operate – speculative fear-based human psychology at play during periods of uncertainty. Capital flight will ensue, – out from those currencies, but into what? Since cash is no longer around, all those other digital cryptocurrencies will act as shock absorbers in this crisis, absorbing the flight of capital out from the collapsing currency. This assumes that humanity has moved past cash, hence no need to withdraw money, – keeping it in electronic form is enough to ride out the crisis. The technology by this stage will have to be rock solid and battle-tested, but I believe we can get there. I definitely see potential in decentralized cryptocurrencies acting as a solution to this problem, as long as they are liquid enough and their digital architectures are stable enough.
Cryptocurrencies are not backed by debt, they have limited supply, but a whole universe of them can be created online to meet the complex needs of people. This is a field where government, or any central planners, won’t be leading in. Instead, innovation in digital currencies will be decentralised, where the free market reigns. However, governments and central banks will try to jump in on the bandwagon and carve out their own cryptocurrencies in this market space, which can then be used to pay for taxes and government services. Supermarket chains, airlines, pharmacies etc… could also issue their own cryptocurrencies, similar to the concept of loyalty points, which can be used for online payments or redeemable for other cryptocurrencies. This is an exciting field that holds great potential.
2) Problem: Charging compound interest on money created out of nothing is fraud
Solutions: Outlaw fraudulent interest; new transparent money creation for gov-central bank on the blockchain; digital cryptocurrencies; lower taxation
By now we hopefully have understand how paramount debt is to the current banking system. Well, instead of charging fraudulent interest that compounds into decades, on money created out of nothing, I suggest that banks instead create the principal amount only and demand only the principal in return, at no interest. To cover overhead, they can instead charge a % fee on the principal loan, lets say something like a 5-10% fee upfront, and then for the life of the loan, the borrower repays only what is fair, – the principal amount in instalments, without any interest. This solves the problem of the bank having to cover overhead and enables it to function as a profitable business, but not making grossly unfair, fraudulent and criminal profits off people for a service that involves minimal effort at no justifiable opportunity cost– i.e. creating money at the stroke of a keyboard. Commercial bank lending would thus be able to occur in the economy without excessively burdening borrowers for it. But now that we have taken the key ingredient out from the equation, that is, – fraudulent interest charged on newly created money, how will money supply increase in this system?
If banks are loaning the principal and only asking for the principal in return whilst charging a small upfront fee for the service, this would technically shrink the money supply over time. So I propose the following: whenever the government draws up its budget according to economic growth projections and needs funds to meet the shortfall, the central bank should create interest-free money out of nothing, and credit the government’s account, without the need for issuing government debt (bonds). This money won’t be required to be repaid, hence the money supply will increase, in a fiscally sound way in line with economic growth, with strict oversight. If the government becomes wasteful, the central bank should then seek repayment on the funds as a cost. The central bank in this instance should have a new charter and be strictly accountable to the people and the national welfare, and remain independent of the government. The central bank would definitely be a different institution than what currently exists; it would need to be publicly audited, unlike central banks of today. And what better way to do this than harness blockchain technology and smart contracts, – the brainchild behind cryptocurrencies like Bitcoin and Ethereum. Transactions on the blockchain are on a visible public ledger and cannot be forged. The new central bank money that funds the government can operate on this public ledger (the blockchain) for all to see. Blockchain will thus help to keep government-central bank spending transparent and add a new level of checks and balances to this system. For this to happen, the government-central bank funds which grease the wheels of the official money creation system, obviously must be tied to the blockchain.
Our aim however, is not to centralise power, and so decentralized digital currencies also come into play. They can also be regarded as legitimate money, once regulatory frameworks are in place, so if problems with the centralised system arise, citizenry can side-step that system by using digital currencies, – an alternative supply of money. If too much official currency is created, causing inflation, in order to absorb excess currency out of circulation, the central bank can demand repayment of funds or even charge the government interest, – until inflation subsides. Furthermore, in this new system, income taxes won’t be justified as much, so we can reduce taxes drastically. The government-central bank mechanism will be responsible for money creation, as will digital cryptocurrencies. The need for burdensome taxes won’t be needed, unless of course, the electorate decides they want extra services and are willing to pay for them.
3) Problem: Exploding debt and increased social stress
Solutions: Debt forgiveness and deep changes in Western values and ways of life
I believe that the political systems in their current states are unable to reform the system; therefore what will likely happen is that this slow motion train wreck will be milked right until the very end until it collapses, and reform becomes the only way out. In the meanwhile though, decentralized solutions will spring up in the free market, seeing that central authorities are failing. The emergence of cryptocurrencies has been one such development. So the least we can do is psychologically prepare for change; those who will, will be further ahead than the vast majority who do not understand where this is all heading.
On a national (sovereign) level, as the debt-based banking system approaches bankruptcy, which is the long term trend, we will need to start considering debt forgiveness, or quite simply wiping off excessive debt rather than asset stripping nations. This will usher in very tough times for all, however, its either this or debt serfdom.
And perhaps the most difficult changes to make for society on the whole, would be to address the root causes for holding the system in its present form; the values, beliefs and ways of life are unsustainable and need to change. The obsessive focus on consumerism, materialism, greed and decadent lifestyles are only accelerating the debt bomb, and social stress. While material wealth is correlated with happiness, it does not cause happiness in itself. Money should be a means to an end, not the end itself. Anybody who thinks money is an end, rather than a means to an end, needs to reassess their moral calibre. People need to understand the distinction between turning over a new phone, fridge, car, house every few months to years, to a more durable lifestyle content with less. While this may be hard for a lot of people now, if people don’t start making adjustment to their lifestyles from now, they will be in for a rude shock later on, when it will be too late.
The high-turnover economy of today caters to the whimsical demands of a fickle customer base that is focused on instant gratification and one-upmanship. The fraudulent interest at the core of modern fractional reserve banking is what pits most people in permanent states of anxiety, having to go deeper into debt in order to sustain this acquisitive system. As a result, corporations are pursuing aggressively consumerist and materialistic outlooks, products and marketing campaigns, giving rise to a low quality, high turn-over economy, to satiate the appetites for endless debt. This system eventually eats itself, and burdens the world with too much waste and pollution. The sad truth is that not everybody in this world will enjoy Western lifestyles; we simply cannot afford it. A re-calibration of socio-economic values and lifestyles is ultimately needed, to a more sustainable, simpler existence that derives happiness and contentment from less consumerism and acquisition.