|A lot of people have
asked for a short and simple explanation of
the Compound Interest Paradox. I'm
planning an updated version my Compound Interest Paradox post, scheduled
to be posted in a few weeks. (Now that Blogger offers "scheduled
posting", I'm queuing up posts ahead of time. I have 3 months' worth of
nearly finished drafts queued up, and I schedule posts a week in advance
There's a fundamental structural flaw in debt-based money. Money is only
created when someone takes out a loan. However, only the principal is
created and not the interest payments. For example, suppose a bank
borrows $1B from the Federal Reserve at 5% interest for 1 year, either
directly at the Discount Rate or via the Federal Reserve "monetizing
the debt". In a year, the bank must repay $1.05B. The $50M
required interest was never created or put into circulation. Therefore,
there's a permanent money supply shortfall. Everyone is enslaved under a
crushing debt burden.
The key step in the money creation process is when banks borrow from the
Federal Reserve to create new reserves. Only the Federal Reserve can
create new money, and all the money it creates has debt strings are
attached. For each $1 the Federal Reserve creates, the financial
industry can create $9 more via fractional reserve banking. This new
money is recycled. The interest payments on the extra $9 are recycled as
bank profits and expenses. Banks always are "loaned up" to the full
reserve ratio allowed by law. Surplus bank reserves are loaned to other
banks, or (rarely) back to the Federal Reserve via reverse repurchase
agreements. However, the interest payments on the $1 created by the
Federal Reserve are *PERMANENTLY* destroyed as the loan is repaid. Total
debt is always greater than total money.
When the Federal Reserve creates new money, the Compound Interest
Paradox operates with the full force of law. The general public does not
have the financial industry's money-printing power, and their access to
money is always limited by the Compound Interest Paradox. Banks don't
need to collude to cause economic booms and busts, because Fed Funds
Rate changes force them to collude. Before the Federal Reserve was
created, large banks colluded to create economic booms and busts. The
usual "Problem! Reaction! Solution!" scam led to the creation of the
Federal Reserve. It was State regulation of banking in the first place
that allowed large banks to collude to cause economic cycles, which then
allowed them to lobby for the creation of the Federal Reserve.
Consider a quantum mechanics analogy. In quantum mechanics, a proton and
anti-proton can be simultaneously created. They later collide and are
destroyed, for no net effect. Similarly, dollars and anti-dollars (debt)
are always created in matching pairs. However, the anti-dollars multiply
via interest, whereas the dollars do not. Therefore, when the dollars
and anti-dollars collide and cancel, there always are surplus
anti-dollars left over.
In the USA,
monopolies are openly discussed as immoral. The Federal Reserve is the
biggest monopoly of all. The Federal Reserve's monetary monopoly is more
valuable than the monopoly of the State itself. By delegating its
money-printing power to the Federal Reserve, the State has delegated
most of its power to the Federal Reserve.
There are a lot of consequences of the Compound Interest Paradox.
Boom/bust cycles are not an economic law of nature. They are a
consequence of an unfair monetary system. The people who control
large corporations love this arrangement, because their smaller
competitors are bankrupted during the bust phase; large corporations
can withstand the cycle.
Boom/bust cycles encourage consolidation of industries. Large
corporations are the most common business, because they can most
effectively withstand boom/bust cycles and lobby the State for
Real interest rates must be negative, to ensure any money is in
circulation at all. Negative real interest rates provide a massive
subsidy to the financial industry and large corporations, paid by
everyone else as inflation. Banks and hedge funds can borrow the
cheapest, followed by large corporations. Individuals cannot borrow
on favorable terms, or cannot borrow at all.
Without a gold standard (sound money), individual savings are
stolen by inflation.
Income taxes and regulations prevent people from boycotting the
Federal Reserve and using sound money instead. If you develop an
on-the-books alternate monetary system based on real money (gold or
silver), the taxes and regulations make it impractical. Whenever
Federal Reserve Points must be
paid as taxes/tribute.
Negative real interest rates mean that the cheapest way to finance
a business is via the financial industry/State. With fair
market-determined rates, growing a business via reinvested earnings
is comparable/preferable to borrowing. This places individuals on an
equal footing with large corporations.
Individuals cannot easily accumulate capital to form their own
businesses. Their savings are eroded by inflation.
The stock market doesn't earn a positive
inflation-adjusted return. Politically connected insiders
can start businesses, because their connections allow them to get
funding from the financial industry. In a communist society like the
USA, connections are more
important than talent.
Individuals cannot profitably loan each other money. If you loan
money to your friends at 6%, that isn't keeping up with inflation.
If you make a gold-denominated loan, that has an implied interest
rate of 20%-30%; it would be cheaper to borrow from a bank.
Individuals don't have the magic money-printing power that banks
have. This means that they will always be slaves of the bankers.
The financial industry has a unique perk. They get to print the
money that everyone else uses to trade. This guarantees that the
financial industry will *ALWAYS* be about 10% of the economy.
Large banks become "too big to fail". If one is forced into
bankruptcy, then a bailout is *NECESSARY*, because otherwise the
financial system starts to unravel. In a free market, one business'
bankruptcy does not threaten the stability of its competitors, if
they are prudently managed. There is no need for financial industry
insiders to be concerned about negative consequences of bad
decisions; there will *ALWAYS* be a Federal Reserve bailout, either
directly as was the case with JP Morgan Chase and Bear Stearns, or
indirectly in the form of a Fed Funds Rate cut.
With the ability to (literally) print money, the financial
industry can lobby the State for perks. They can guarantee that
reform will never occur. The insiders bought out all the TV stations
and newspapers, guaranteeing their abuses will never be exposed.
(The Internet is changing the equation somewhat. I predict that the
Internet will enable an
agorist revolution.) The
financial industry insiders bought control of schools and
universities, guaranteeing that only fake economics (Keynesian
economics) and fake politics ("Taxation is not theft.") will be
taught in schools. The financial industry insiders arranged for
everyone else to be educated/brainwashed as slaves ("good
citizens/consumers"). (Most politics courses don't even ask the
question "Are taxes different from stealing?" It's an undiscussed
axiom that taxes are morally acceptable.)
With negative real interest rates, the incentive is for banks and
hedge funds to maximize their use of leverage, because this
maximizes their profits. Only politically connected insiders can
start a hedge fund. There is no true "free market" for hedge fund
managers; they are merely a group of people highly skilled at
lobbying the State for favors.
When inflation occurs, wealth is stolen from one group of people
and transferred to another group of people, the people who print the
new money and spend it first. Most new money is created by the
financial industry, rather than by Federal deficit spending.
Therefore, the primary beneficiary of money supply inflation is the
financial industry insiders and not the government.
this explanation is still too complicated, let me know. Once you
understand the Compound Interest Paradox, a lot of economic problems are
easier to understand. The Compound Interest Paradox is a key concept,
and I agree that it should be my #1 most popular post by a wide margin.
I try to answer are serious reader questions. Pro-State trolls get
annoying after awhile. Fortunately, most pro-State trolls get disgusted
and leave. I'm continuing my policy of pointing out and ridiculing