Chapter 5 - It Costs Nothing to Create Money

Interest Expense
Greece Interest as a percentage of Revenue. Creative Commons Attribute - Andy Chalkley.

Money is a freely created commodity. It costs nothing to create money. It is printed on paper or entered into computer registers. When the nation-state was invented, it was the king who was given the authority to create the money of the nation. Since the power of the kings was removed and in some cases, the head of the king was removed, the authority to create the money of the nation was given to the government. However, governments have given away the authority to create money to institutions that are independent of government. The usual political slogan is along the lines of “Keep the central bank free from political influence”. Democracy disappeared from money creation and the central banks became controlled by bankers. This is a workable solution except for some minor issues:

Where the Money Comes From

Governments borrow money by creating bonds. The bond is an IOU. A million euro bond is an IOU with a fixed repayment date. A million euro bond is a promise to repay one million dollars on a set date in the future and to pay interest on the million euro at regular intervals. Bonds are auctioned on a regular basis. The auction process sets the interest rate. The lender transfers ownership of one million euro of pre-existing bank credit into a bank account of the government. The government pays the agreed interest at set intervals. This is a worldwide phenomenon and bonds are popular investments with people with ‘more money than they can spend’. To the investor, a bond has three important properties: duration, yield, and risk. The bond is thus both a way of storing wealth and a speculative item. The gains are a tribute to those with the money and a loss to the nation. When the million euro bond is auctioned, investors anywhere in the world, type their bid into a keyboard. Their bid is the amount of interest they demand on the million euro bond. If the loan is risky, the interest rate is higher to compensate for the possibility of failure to repay. Bonds are bought and sold and may change ownership many times during their life. The selling price may be a discount or a premium over the original price depending on how the market perceives the risk. The current selling price of previously issued bonds is constantly being updated giving an indication of the perceived risk involved in the bonds.

Most of the architecture of the current financial system was constructed at Bretton Woods at the end of World War Two. Bonds are a way of moving money from those that have ‘more than they can spend’ to those that wish to do something useful with it. Ironically, the money is held by corporations and individuals acting through a corporation that they own and is lent to governments who have to beg for money. Originally, governments created the money and the availability of money for circulation depended on government spending. This has turned round and governments have to borrow from private corporations. Unfortunately, this gives a level of power to the private corporations. If the ratings agencies that the lenders of credit follow perceive that the government is not acting to the benefit of the lenders, credit dries up for that nation. The interest rate on the bonds rises to make it impractical for the government to borrow that which was originally created at no cost. For Greece, this occurred in 2011. The Greek government was borrowing money at 4.6% in 2009. By the beginning of 2012, this had risen to 29%. Why would anyone borrow something at 29% that cost noting to create? In 2012-03, The Greek Government bond 10Y reached an all time high of 48%. [3] No government is going to borrow at this rate and so we effectively have a corporate environment that denies the essential circulating medium to a nation. The various nations of the world have conceded the privilege of creating the money supply of the nation to private interests. Nations no longer create the circulating medium. The circulating medium is borrowed into existence. Private interests then refuse to lend circulating medium to nations. Private interests have the audacity to suggest that it is the fault of the government. Many years ago, private interests removed the money creation procedure from government. Many years later, private interests refuse to supply credit to government.

From the graph of ‘Interest as a percentage of revenue’, at the start of this chapter, one can see that the people pay heavily for the privilege of using credit provided by private entities. They get punished if they don’t give enough to the moneyed class that believes it is appropriate to treat nations as cash cows.

Greece Bond Yield. Creative Commons Attribute - Andy Chalkley.

There are investors that believe that Greece should not have been lent any money. They fail to realize that it is the government that is responsible for operating the nation and part of that involves ensuring that there is an adequate supply of tokens. To these parasites, 'making money from money' has become more important than the circulating medium needs of a nation. These parasites forget that money was invented to enable trade. It was not invented so that the well off could accumulate more of the essential circulating medium.

At the height of the time that punishment was being given to Greece, investment advice sources had bizarre comments similar to these:

Greece is being treated as a sharks feeding frenzy whilst being denied access to circulating medium that cost nothing to create. Money was not invented for profiteers. It was invented to circulate.

In 2001, Goldman Sachs was paid hundreds of millions to assist Greece with some complex financial arrangements to secure its position in the euro single currency system. What the Goldman Sachs experts did was to hide some of the Greek government debt. Some believe that Goldman Sachs made as much as half a billion euro from the arrangements that involved ‘swaps’. These swaps appear to have made around two percent of the national debt disappear from its accounts. The ingenious swaps were not recorded as debt as they were effectively a future expense. With subsequent changes in world interest rates and a changed financial climate after 911, Greece lost heavily from the Goldman Sachs’ deceptive procedures. Greece had problems recovering from this bank shakedown.

As it became difficult for Greece to beg money from the speculative sharks of the world, it turned to the source governments turn to in times of stress. It turned to the creators of credit in the money system, the banks. The banks cannot afford to allow a big creditor to go bankrupt even if the credit was borrowed from a third party. All credit originates from bank lending. The generated credit is passed from entity to entity by bookkeeping entries in the banks. Any major default anywhere has the potential to crash the system. Although the banks scream and yell, they have to provide credit to prevent a crash of their virtual money system. Their virtual money system runs parallel to the Cash Currency system operated from the ECB.

The banks give bailouts with conditions with the implication that the government is at fault. The bailout is a bailout for the bank system.

In late 2009, ratings agencies downgraded the credit rating for Greece. This caused a crisis of confidence in the bond market affecting Greek government bonds. Credit Rating Agencies greatly influence investor perceptions of the creditworthiness of governments. Greece then suffered the most expensive debt in the EU. There have been heavy criticisms of the ethics of the corporate sponsored rating agencies and the harm they are capable of inflicting. These ratings agencies are wide open to claims of conflict of interest. Many have accused the ratings agencies of exacerbating the financial crisis. In April 2010, Standard & Poor graded Greece's debt with a junk status. It became inappropriate for Greece to obtain money from the speculators on the world bond market. Within months the Greek government was asking the IMF for money. This might seem strange to many as the ECB was set up to supply the euros of Europe. Don’t forget that the ECB website states: “The ECB has the exclusive right to authorize the issuance of banknotes within the euro area.” Deceptive wording allows banks to create substitute money. Greece was soon begging euros from the IMF. Due to a quirk of history, banks create credit, but treasuries do not create credit. If a nation cannot get credit from bond purchasers, it goes to the original source of the credit in our society, banks. The nation does not print some notes, it borrows credit. Another quirk is that a treasury issues a one million euro bond that is passed from holder to holder. The one million euro bond has a ‘promise to pay’ on it. The treasury does not issue currency notes with ‘promise to pay’ on them. The ECB issues notes with an implied promise to pay on them. The Greek treasury could issue one thousand euro bonds at zero interest rate to pay its bills.

Government bonds are usually considered to be a safe investment. They are considered boring and safe and are usually bought by pension funds, central banks, and insurance companies. Stock markets tend to be volatile. They even collapse on occasions. A stock market collapse is recoverable. A serious bond market crash may be unrecoverable. Many consider a bond market crash to be an opportunity to accumulate great wealth at the discomfort of others. A bond market crash is much more painful than a stock market crash. It affects the pension savings and the wealth of nations. A major bond crash may bring down the money system of a nation or a few nations. It may bring down the world money system. The financing of the nations of the world relies on the ability of nations to borrow credit from well-heeled holders of excess credit. If the bond market has a major crash, it may be the end of life as we know it.

With the bailouts of 2009, the investment climate changed. There was a new perception that the holders of government bonds would be bailed out. Thus we have compensation for bond holders but misery for the Greek people. The high bond interest rates also represented a high transfer of wealth from the suffering citizens of Greece to those with ‘more money than they can spend’. The use of money to make money was altogether more important than the purpose for which money was invented. Never forget that money was invented by one of our predecessors to assist with the trade that enables civilized life. Those that betted profitably in the bond casino kept their money. Those that failed got bailed out. Both the winners and the losers profited handsomely at the expense of the working public. Money was not invented so that those with ‘more money than they can spend’ could make even ‘more money that they can’t spend’. Their money is a fantasy. They cannot spend their accumulated wealth in the real economy because any significant movement from hoarded wealth to circulation in the real economy would crash the real economy and bring down the financial system. Every euro ever produced, whether it be paper or credit, relies on the ability of a ten euro note buying ten euro worth of goods at the corner store. If the corner stores, the farmers, and the small business people are crashed, there is no goods for the ten euro note to purchase. All euro become worthless, including the stacked wealth of the mega-rich. There will be no food supply for the mega-rich to purchase. Not at any price.

Bill Clinton raged: “You mean to tell me that the success of the program and my reelection hinges on the Federal Reserve and a bunch of fucking bond traders?” [1]

Clinton realized how his fate was in the hands of the unelected Alan Greenspan and ‘the bond market’.

Thomas Friedman, New York Times columnist: “There are two superpowers in the world today in my opinion. There’s the United States, and there’s Moody’s Bond Rating Service. The United States can destroy you by dropping bombs, and Moody’s can destroy you by downgrading your bonds. And believe me, it’s not clear sometimes who’s more powerful.”

Governments no longer create and spend the money of the nation into circulation. The money of the nation is borrowed into circulation. The borrowed money passes from person to person, but it is still borrowed money. Every cent in circulation was borrowed into existence and someone is still paying interest on it. The borrower no longer has the money. He passed it on and the new owner passed it to another who passed it to another who passed it to another who passed it to another.

The banks suggest that they are helping us, but they inflict devastation and harm. They progressively persuade the people to use their brand of bank issued credit. When we are hooked on their credit, they dry up the supply which causes a serious shortage of circulating medium. This brings serious harm to the economy and misery to the people. They create 'credit' out of nothing, and lend it to us, expecting more in return than was lent. They are the only source of credit so a perpetual debt machine is created. We are the hamster in the wheel. We are on a bicycle that goes nowhere. It is impossible to pay back more than was lent. We become trapped in a money system that requires ever greater quantities of debt. The bank lends billions. The citizens have to pay back billions plus ten percent. But the ten percent does not exist. When citizens and nations fail to pay back the unpayable, the citizens and nations get asset stripped. Moses advocated this to subjugate foreigners. We need to ban Moses and his teachings.

Moses usury Creative Commons Attribute - Andy Chalkley.

A scan from my family bible of 1878 [2]

When citizens and nations fail to pay back the unpayable, the assets of the citizens and the nations are passed to the corporations that have similar owners to the banks. But we can live under this tyranny of credit, if we make a few adjustments to the tax system.

A Bond Market Crash

A bond market crash can starve economies of credit and throw nations into debt crises. A big crash could bring the world finance system down. In our modern financial system, the health of nations depends upon whether big time speculators are making a quid. These speculators and their talking heads have conditioned themselves to believe that government debt is a safe bet. What they fail to realize is that the mountain of debt far exceeds the volume of money available to repay the debts.

World Money and Debt. Data: BIS. Creative Commons Attribute - Andy Chalkley.

These people are disconnected from reality. The backing for money is the goods that can be purchased. There are insufficient goods to match their virtual billions. The investments in the bond market are lucrative for the speculator provided the volume of debt increases. A decrease will crash the system. The crash of any major bond issuer has the potential to crash the bond market and bring down the financial system. The system generates vast profits that are virtual and cannot be realized. Any significant spending of their hoarded wealth into the real economy will destroy the system. For that matter, any attempt to spend the money in tax havens into the real economy will crash the money system. The only solution it to return to a system where each national treasury creates the money of the nation and spends it into circulation. This system needs to be backed by a public bank to ensure adequate funding of infrastructure and business. The public bank also analyses the desired spending of government to ensure commonsense use of public money.

At present, your nation can only obtain the credit to operate a nation by dealing with this den of vipers. Many of these speculators do not realize the immense harm that their activities create. This is some of the gibber jabber from the speculators that hold your nation’s destiny.

A Greek Public Bank

A public bank would be one solution that would work for Greece. A public bank is a bank owned by the government. The public bank extends credit for the benefit of the nation. It ensures that all levels of enterprise have adequate finance. Every nation should have a public bank. They give such wonderful boost to the economy of a nation. The public bank is not prone to the stop-start lending patterns that the private banks inflict on nations. When a public bank lends to the government, the government owes money to the government making the debt somewhat irrelevant. If the Greek government is to owe an unpayable debt, it might as well be to itself. Public banks make sure that finance is available for public infrastructure as well as ensuring that adequate credit is available at all levels of business.

The private banks operating under the ECB are unlikely to tolerate competition to their money creation monopoly. A public bank is a luxury that is unlikely to occur in Greece. The existing private money creation monopoly could feasibly work but the existing private group monopoly has demonstrated that it is incapable of maintaining a steady flow of credit to maintain a steady Money Supply. Many countries have run public banks with startling results. The economic rise of China is largely due to the operations of the China National Bank and the China National Development Bank. A Greek Public Bank would repair the damage done to the devastated Money Supply very quickly.