How on earth did we get here?
How is it possible to owe more money than there is in the system?
Well, let's think about it a bit.
Let's imagine that there was a day when the money supply was created in one day. Someone waves a wand, and the banks have the $68.3 trillion that is currently in the system. They then start lending the money into the economy. They lend the money to individuals to buy houses and that money gets used to pay the builders to build houses. They lend the money to businesses who invest in new plant and distribution networks. They lend the money to governments who use the money to build schools, hospitals, transport systems etc etc. All the money that goes to individuals, businesses and governments gets into the economy. All is happiness and light.
On day one, the size of the money supply (lets call it M3 for the sake of argument) is exactly equal to the amount of debt that individuals, businesses and governemnts have taken on. No problem with that. After all, when some people have money that they are not actually using, it is normal that they lend that money to those that need it. And the banks are just trying to do their job of making sure that the money goes to the places where it is needed, right?
Yes, but there is a slight problem. The banks that lend the money into the system feel that they should be able to charge interest for making the loans. Thus, while there is $68.3 trillion in the system on day one, after one year, the amount of debt is no longer equal to $68.3 trillion. It is equal to $68.3 trillion plus the interest. Let's assume that the banks are charging 5% interest per year - very reasonable compared with the rates charged by credit card companies, or payday loan outfits. After one year, the amount of debt has now increased to $71.7 trillion.
With compound interest at 5% per annum, it is not difficult to see that after a 14 years and 11 weeks, the total amount of debt in the system will have more than doubled.
So, hopefully you can now see how it is possible that with €68.3 trillion of money creation, you only need to wait a bit, and the amount debt will be double that amount. And it's not going to stop. Assuming 5% interest, we can safely conclude that in another 14 years or so, the amount of debt will have doubled again.
Of course, the banks won't let that happen - if that continued, there soon would be four times as much debt as money in the system. Then 8 times, then 16 times.
Fortunately, the banks are there to help. They will be happy to create yet more money (read debt) to keep the system going. I think we can confidently predict that by 2027, the money supply will have doubled to $136 trillion. But the amount of debt will have reached twice that - namely, $272 trillion.
I'm pretty confident about that because when I looked at how the ratio of debt to money supply in the Eurozone has changed over the last decade or so, I was intrigued to see that the 2.5:1 ratio has stayed constant. Here are the actual figures.
The net result of this is exactly what we currently have. A situation in which we collectively owe twice as much money to the banking system than there is money in the entire system.
So what needs to be done?
Actually, lots of things. But one would be to make money creation with debt associated a criminal offense. In a sense it is the worst form of usuary. Lending money with a high interest rate is bad enough. But lending money that you don't have and charging a high interest rate can not be described as anything other than a criminal racket - at least as bad as Madoff's famous Ponzi scheme.
And that's precisely what commercial banks are currently allowed to do.
But Bernie Madoff only ripped off his clients for $50 billion. The current banking system has allowed us to be ripped off to the tune of $68.3 trillion.
We need 100% reserve banking. And we need it now....
