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Page added on August 4, 2014
Money Creation – “So Simple The Mind Is Repelled”
As John Kenneth Galbraith famously stated, “The process by which money is created is so simple the mind is repelled.” As Peak Prosperity’s Chris Martenson explains (as part of his excellent Crash Course), essentially, money is lent into existence though fractional reserve banking. The dollars you deposit at the bank? They turn into nearly 10x that amount as your bank subsequently makes loans using that money as collateral. As simple as the process is, nearly every American remains ignorant of it and its massive implications. At the heart of the matter is this: our money supply and its related debt obligations MUST continue expanding (thereby devaluing the purchasing power of each dollar ad infinitum) — forever — or the entire system collapses upon itself. Prepare to be repelled…
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The full suite of chapters in this new Crash Course series can be found at www.peakprosperity.com/crashcourse
And for those who have yet to view it, be sure to watch the ‘Accelerated’ Crash Course — the under-1-hour condensation of the new 4.5-hour series. It’s a great vehicle for introducing new eyes to this material.
10 Comments on "Money Creation – “So Simple The Mind Is Repelled”"
Peter Vesborg on Mon, 4th Aug 2014 8:26 am
As a long-time lurker on TOD and similar places, the perpetual-exponential-growth which fractional reserve banking necessitates (unless everyone would accept negative real interest rates)is the main reason why I think that Bitcoin, despite all its problems, is the single most important “technical solution” to the peak oil (and peak everything) problem that we face.
Since bitcoin is *equity* money that bears no interest, it (like gold), can function in a steady state economy – or a shrinking economy. Bitcoin (unlike gold), it is very practical to use so it could work on a global scale.
Bitcoin or otherwise – we absolutely must come up with a monetary system that is at least theoretically capable of working without exponential growth. Before we have that, all “technical solutions” merely kick the can down the road and ultimately make the problem worse.
louis wu on Mon, 4th Aug 2014 8:55 am
Bitcoin still requires a high degree of trust since there is nothing any more intrinsically real about it than our current money and also requires a functioning telecommunications system and reliable access to it.
ghung on Mon, 4th Aug 2014 9:19 am
Peter: “I think that Bitcoin, despite all its problems, is the single most important “technical solution” to the peak oil (and peak everything) problem that we face.”
There is no ‘solution’ to overshoot, per se. Contraction is the inevitable result at some point. Every bargain we strike with this reality eventually furthers the condition of overshoot, leading to proportional contraction.
Question: What is the purpose of currencies, virtual or hard coin, other than to facilitate consumption? The predicament lies in the levels of consumption (and resulting waste streams); not the method by which we accomplish said levels of consumption.
Too many claims on too few resources, whatever the medium of exchange.
Davy on Mon, 4th Aug 2014 10:19 am
From a systematic point of view bitcoin relies on energy intensity, complexity, and confidence of exchange. All these things will wither with the end of BAU. People can’t even begin to fathom what it means to descend the energy gradient and follow complexity spiral down instead of growth and innovation. It is a complete reversal of our normal thinking yet it does mesh with our common sense if it could be properly explained without the constant MSM narrative clouding people’s judgments. Talk about a fog it is thick and limits normal human visibility. Our kids are being fed (mentally) digitally before they are out of their diapers and our last breaths are many times with wires and ventilators. What have we become? We are surely not human anymore. Humanity is lost and may never be recovered. I call it the mechanization of Evil. In this sense it is the brittleness and disequilibrium of a complex system far from its normal stasis. Since we are now the largest impactor of the earth ecosystem the rest of life on earth is in a state of disequilibrium. We are a curse and I would think nature has natural remedies for species like us.
How did you like that a bitcoin discussion leads to a spirituality statement.
henriksson on Mon, 4th Aug 2014 2:30 pm
There is a “bit coin mine” in Reykjanesbær, Iceland. Bitcoin is a digital currency, whose value is hard to explain but has to do with people being ready to buy bitcoins because they think others are ready to do the same. It’s some kind of virtual gold: one can dig up bitcoins, that is creat new ones, by solving problems of high complexity. This assumes high computer specs and consumes a high amount of electrical energy. And because Iceland has cheap electricity and cold air to cool the computers, it is an ideal to “dig” bitcoins.
Maybe gold bugs like this comparison, but I can’t say I have much confidence in these digital currencies.
Peter Vesborg on Mon, 4th Aug 2014 4:03 pm
henriksson – Don’t get too caught up in the “mining” system. What bitcoin mining does is to verfy transactions.
Please read the original bitcoin whitepaper https://bitcoin.org/bitcoin.pdf
and you’ll understand how clever the system really is.
guhung – clearly we are already way, way over the carrying capacity of the earth and no technology can solve that. Not even Bitcoin.
On the other hand, Bitcoin does offer a monetary system which can function during a well-behaved decline. Debt-based money cannot because deflation is self-accelerating in a debt-based system.
A functioning money system is not just to “facilitate consumption” – a money system is THE critical technology which allows, the specialization of labor which any society beyond hunter-gatherers need in order to work.
I’m a pessimist, but not so much so, that I think reverting to hunter-gathering is all that is left for humanity.
Hopefully, we’ll arrive at some form of steady state economy over the coming two centuries – and Bitcoin is currently the only game in town as far as steady-state/decline compatible monetary systems go.
Peter Vesborg on Mon, 4th Aug 2014 4:09 pm
Davy – I find that Bitcoin-related discussions (once you get past the “It is only for drugs” and that the “I heard that CEO of bitcoin got arrested” -nonsense) often does get very philosophical. Everyone *thinks* they understand how money “works” – but still object when you explain even the basics of FRB.
And after they reach the eureka-moment and “get” how the Bitcoin block chain solves the Byzantine Generals problem, https://en.wikipedia.org/wiki/Two_Generals'_Problem , you see in their faces that they’ve entered a new world.
GregT on Mon, 4th Aug 2014 4:48 pm
GOOD MONEY MUST HAVE SEVEN CHARACTERISTICS:
1: It must be durable.
2: It must be divisible
3: It must be convenient
4: It must be consistent
5: It must possess value in itself
6: It must be limited in the quantity available
7: It should have a history of acceptance
Bitcoins only meet two of the 7 above criteria, and once oil is no longer available, will meet only one. They will be limited by the quantity available, which in post modern industrial society, will be zero.
Davy on Mon, 4th Aug 2014 5:49 pm
Peter I think Bitcoin is great for the here and now. I like listening to Max Keiser sometimes and I have heard many of the experts in the field. There is no denying bitcoin’s need in today’s BAU. The arguments in favor of Bitcoin are especially true considering all the abuses from spying to debasement. As a doomer (mild) my point is focused on energy intensity, complexity, and exchange mechanisms. Energy intensity will limit its life span and affordability. Complexity is a problems because complexity is facing diminishing returns now and decline is very near with PO dynamics. Will we still have effective computing in a few years let alone powerful computing? The means of distribution will be effected by whether we will have a web to distribute the money. When our system bifurcates the essence of bitcoin is no longer reliable and affordable. High tech, high energy intensity, and hyper distribution/exchange will be unstable to unavailable. The confidence of exchange will also be suspect at the slightest hint of the system going unstable. One could easily loose a fortune in the clouds of today’s computing. You can bury gold. We are adding a layer of complexity to “money” instead of simplifying and localizing. If we do have to go into extreme localism (by today’s standards) then money closer to barter levels will be needed. But hey, dance next to the cliff in the here and now. Bitcoin is probably better than many other stores of wealth currently. All digital wealth is in the same position with having no future in my doomer mind when we are all forced to jump. Bitcoin lifespan 3-5yrs maybe 5-9yrs.
GregT on Mon, 4th Aug 2014 5:59 pm
@Davy,
Completely agree.