Wednesday, September 28, 2011

Fiat Money System : Money is Debt Part 2.

UPDATE: Today a group of protesters known as Occupy Wall Street[Link] frustrated with the workings of the current financial system protests in USA. One commenter wrote that the video unfairly vilifies banks and bankers when they play an important role in the economy. While that is true, the video warns us not to fall into the trap of de-regulation and always monitor and regulate our financial institutions strictly.  When Franklin D. Roosevelt spoke during his inauguration speech[Link] after the stock market crash of 1929 and the subsequent economic depression, he warned of bankers and their system and how it led to despair in the 1930s - the greed will do us in. 70 years later look around you in the past 4 years -  Goldman Sachs,, Lehman Brothers,, the sub prime crisis, the sovereign debt crisis - which one is not caused by debt...and money is indeed debt.

When you go out to buy your next television set, it is likely that you end up with something better than your existing TV sold for the same price. Like many things around us, man made systems tend to improve over time - if you take Boeing's newest aircraft, The Dreamliner, you will expect that to be build with more safety features than the old Boeing 747.

There is however one exception, our financial system - it seems to get less stable with each passing year and generates crisis, turmoil and recessions much more often that in the past yet we seem to accept this all encompassing system because most of us are born into or do not really understand what goes on in the banking system. Here is an interesting video that explains quite clear how money is created, how it drives the economy and why we are seeing so many crisis and so much in stability in the current system.


Anonymous said...

Mr Tan,

I must say a BIG thank you to you for educating people like us.

You are a ONE-MAN-SCHOOL for people like us. I deeply appreciate it.

Anonymous said...

Very interesting video. Thanks for the lead. I wish you were the President.

Anonymous said...

What a coincident. Earlier today I was day dreaming about the fate of gold. People are putting a lot of faith in gold which doesnt make sense.Digital money is the way to go, I thought. And your timely video has pointed to the inevitable impending changes.

Anonymous said...

It goes to show that the World bank,IMF and a host of international organisations are creations to perpetuate the cycle of debt.

What a wonderful scheme! its a rich man's dream! to earn money without any to begin with!

Now, why didn't I think of that??

Polictics and a host of other activity were merely tools to achieve indebtness. Therefore, there is no such thing as a honourable banker, politician, economist or trader!

Gosh!.. and for centuries this continued.. with people dying in wars that they should not have fought in the first place!

The seeds of truth has been sowed.

Anonymous said...

It cannot work without changing politics

People Abusing Party said...

The pen is indeed mightier than the sword.

Anonymous said...!

Anonymous said...

This video seems very misleading. It unjustly accuses banks of fraud. Banks serve an important function in society as a allocator of capital from those who have it (i.e. savers) to those who need it (i.e. producers). They tend to be highly leveraged and thus need to be regulated properly. The financial crisis we just witnessed is a result of regulation failure. But that does not mean that our banking system is bankrupt or corrupt.

As for the video's claim that money in bank accounts are only promises, well guess what? All paper money or gold or whatever medium used as a exchange of value are PROMISES. An object is only as valuable as how others value it. Paper money is used because it is convenient and backed by the full faith and taxation power of its country or origin. I mean, would like want to go back to barter trade? Or lug around heavy gold bars to place for things?

Anonymous said...

After watching the video, I will never look at the banks the same way again. They obviously still serve a purpose but they seem as vulnerable as anyone else and their failure has much bigger repercussions.

Anonymous said...

Seem like nowsaday banks are nothing but a Ponzi scam? The only diff is that it will nvr fail bcos they are legally allow to print more $$$....If that's correct, then we all are screwed big time....

Anonymous said...

One can be a bankrupt but still can have a lot of money to spend.

As long as somebody still willing to lend or give the bankrupt money.

Not because they are nice or charitable to the bankrupt but because it is in their interest to do so.

Or like the saying "Throwing good money after bad money."

This applies to countries as well as people.

Anonymous said...

The bailout is a lose lose situation. Should not have bailout the banks in the first place, should just have let them go bankrupt. At least, the pain is short termed and limited to the few.
The banks should be taught a lesson and should go back to traditional banking and reduce the exposure of bad credit loans tremendously by setting realistic targets rather than high targets.

Anonymous said...

I think the third world war is coming. when a country cannot pay up, the way is to rob another country.

Anonymous said...

if the poor (western countries) robs the rich (eastern countries), is that still a sin?

rex said...

rex comments as follows,

From the comments it is quite clear that there is a divide between people who studied Pre University Economics and those who dropped off after Sec. 4.

For anyone who has gone through Economics pre-College, it is clear as day CREDIT CREATION is part of normal operation of a bank. If you dont know then you probably failed Economics at PRe U or else didnt study economics.

Banks do create credit out of thin air. Typically, they take in $1000 cash, and they lend out $9,000 to another person. The extend they do this is governed by the Central Bank of a Country. I like the video link of Lucky Tan. The video likened it to "counterfeit" money!

All this works because banks expect that the guy who take the $9,000 - which is of course not physical cash but just a cheque or electronic place holder..."Counterfeit" "money" would likely receive it as a electronic figure and would be accounted back in his bank book, electronically not cash... and... will at any time ask for only about $500 cash (all other transactions of day to day by the guy who received the $9000 are by electronic means or cheque)/ With the original $1000 cash, it is a breeze for the bank to put $500 in ATM machine to allow the $9000 receiver to withdraw without suspicion. Meanwhile the bank is eagerly waiting for the interest money from the borrowers to top up ATM's money supply cash. Tht's the whole idea of CREDIT CREATION.

The system breaks down only when everybody decide to withdraw more cash then expected.

So to make the system more robust, from time to time, banks must receive real cash in terms of interests charged by house loans, or new fixed deposits. The system will continue to work so long as people are encouraged to take loans, buy goods, etc. because with each such transaction there is real cash (small amount in fact!) to feed the banks to feed the ATM machines to depositers who withdraw real cash.

The entire system is based on a belief that people take out no more cash then necessary for day to day transaction.

The system will collapse if banks stop making loans and people do not save physical cash in banks any more. In which case the banks run out of money to stock up the ATM machines!!

To put it another way, the greater proportion of all wealth "money" accounted in anybody's bank account, is Counterfeit. Which is to say, if everybody go to withdraw what is stated in his bank book, THE ENTIRE ECONOMY WILL COLLAPSE.

With this in mind, you will understand why CPF withdrawal limits keep changing. Can we do anything about it ? No. CPF acts in many ways similar to banks. Don't demand the govt that everyone must withdraw every cent, the entire CPF :bank: will collapse. Take it easy. be careful!

The one hour video of lucky tan link was excellent. Those who missed pre universtiy economics should re-watch the video.

It is not a lie. As reviewd in the video, and i also remember studying it in Harvey's "INTERMEDIATE ECONOMICS" , the Bank of England allowed this to happen for banks to create credit in this way since few hundred years ago How do we change something we dont feel good about, 400 years old? In the video, the writer mention a LETS system (Local Exchange Trading System) which was started by some Australian economists. But it is so complicated that i think people prefer to go on the 400 year old accepted system anyway.

Anonymous said...

Rex, I would appreciate that you provide the name of your sec sch so we can spare our kids from wasting their time there.

Thank You.

Anonymous said...

"For anyone who has gone through Economics pre-College, it is clear as day CREDIT CREATION is part of normal operation of a bank. If you dont know then you probably failed Economics at PRe U or else didnt study economics."

I did Economics at University. Just because it's taught in school, that doesn't make it any right; much less morally right.

Here's another point of view.

As long as you base value in electronic and invisible money that don't exist instead of real physical value of items in the natural world, you'll set up a situation in which bankers want to make money out of nothing. Why should they be making money out of nothing?

"To make money out of nothing."

Now, with that leverage, you'll be playing God and they have been; there's no wonder why greed is driving the bankers' motives and why the financial system today in running its course even though it is here to stay for sometime.

It is the financial system that is inherently unstable and creating these vicious cycles of highs and lows. In fact, the financial system is so volatile with loopholes that George Soros could plug and speculate other countries currencies in the Asian financial crisis of the 90s.

Today's world is volatile; precisely because of this system. There is a need for a creative destruction.

Anonymous said...

Economists run their policies on the basis of greed. And the fundamental assumption that they have been operating on for decades is that "man has unlimited wants and limited means".

Just look at what's happening to Mother Earth because of that asssumption.

I agree with the above anon that there is a need for people to relook at our assumptions.

Things does not need to be the way they always have. We should improve once we are enlightened that there is a better way forward. There's no need to be cynical or jaded. How does being cynical or jaded or worst apathetic truly help everyone? Cynicism is just a coping mechanism that has gone wrong.

rex said...

to anonymous at 12.18

if you read my post carefully, i said Pre University.
You dont take Economics at Sec 4 level. You take Economics as core subject in Pre University or JC and i remember very clearly my Economics teacher (RI) Mr Teo Lye Huat explained credit creation to the class and we were all amazed that for hundreds of years, the economy survive on fictitous money that does not exist!!!@ If you have yet to appreciate it, go read any preuniversity econ textbook.
Credit Creation is one of the exam topics which fascinated me.

to anonymous 21.21
Look pal, this is not about "right" or "wrong". It is about creating credit for the sake of creating huge industries for millions of earthlings who are willingly deluded, because if everybody is deluded there is no falsehood.

Lets go back to basics. 400 years ago. Let us say the Bank of England outright banned this "Credit creation". Means if a bank receive $1000 cash deposit, the bank will lend out no more than $1000. The name of the bank is the Singapore Super Kiasu Bank.

do you think that is a good idea? When you are so conservative, everyting grinds to a complete halt. How do you think the millions and millions of earthlings survive on Earth without credit creation and the false sense of hope? The credit creation process may be wrong morally, but in the 400 years of its existence it worked and create huge opportunities on the sidelines of legal businesses buoyed by the confidence of money which is really not money but pretend-money or counterfeits, as the video demonstrates.
So as long as everybody believe the lie and continue, we survived 400 years through the Bank of England principles which are unieversally used in all countries in the world to this very day. Jobs are created, people trade, buy and sell upon the artificial wealth. So long as they dont withdraw more than the usual amount of physical CASH, the accounting system of credit creation will ensure that everybody is happy.

The system fail because of overheating and not enough new money entering the system, and becaue of defaults, i.e. aka 2008 financial crisis of subprime crisis when the banks found that the borrows default and they are not able to generate the interest that is the real modicum of true money (please see the video link of lucky tan). The system fail because too many people take out and not enough people put in. You can call it a ponzi scheme, yes. But it worked for 400 years. Try changing that. But first if you do that let me know, i want to withdraw in physical cash first and jump the queue.


Anonymous said...

err..pls dun gay khiang. dun understand say dun understand

Anonymous said...

another RI kid trying to act smart lol

Veritas said...

we survived 400 years through the Bank of England principles.
it worked for 400 years.

It work for so long is because whenever there is a bank run, the poor got hit or foot the bail to bail out bank some way or another, and the rich laugh all their ways becoming even richer.

There are better ways to finance without fractional reserve banking. I may blog it in future. Unfortunately, anything good is always bad to the parasitic elites.

rex said...

to anonymous@3.30

i'm not sure you digested what i had written about the 400 years stuff. i'll repeat it here/
it is not about whether the Credit Creation Concept is right or wrong. People are using it for 400 years and it had led to an incredible generation of "wealth" albeit not ideally distributed. Without a credit creation system, many countries will lag behind the rest. An economy based entirely on CASH transactions only, will soon run out of jobs, ideas, and resources, to feed its millions of people.
I believe its a difficult balance to change something ingrained for 400 years for the entire civilised world as it is today. Credit creation even if it is "counterfeit" stuff as portrayed in the video link, does have some benefits so long as people don't abuse the system.

CREDIT creation does have its advantages in being able to jump start and economy.

If you run an entire economy on the principle of the Super Kiasu Singapore Bank (refer my earlier post) you will not have any modern Singapore today anyway. The 400 year old practices have many advantages so long as everybody play their game and dont break rules. These days, economies run into trouble because people break rules by making loans when they definitely cannot afford it (remember subprime crisis of 2007 and the greek crisis of overspending)


Anonymous said...

Rex: //If you run an entire economy on the principle of the Super Kiasu Singapore Bank (refer my earlier post) you will not have any modern Singapore today anyway.//

Hi Rex, I don't know about you but I prefer the Singapore that we had 20 years ago.

Young Bankster said...

Well lets keep a closed monetary system where, if there is 100 people, there can only be $100 dollars.( it can be 10,000 if you like)

This money should wind its way through our community of 100 people and someone keeps hoarding it, the system breaks down. But we will know who is hoarding all the cash!

Just think of the game "monopoly"
eventually there can be only 1 winner and one that has gone completely broke.

Fun yah?

rex said...

To anonymous 9.28

I guess i made myself rather ambiguous, as if I prefer the Singapore today than Singapore past.
Like you, i also prefer the singapore of the past.
The point is that EVEN IN SINGAPORE OF THE PAST i.e. 1955 era of David Marshall, Goh Keng Swee, the BANKS POSB, OUB, OCBC, UOB, HAVE BEEN RUNNING CREDIT CREATION system. Still don't believe?
I ask you to read pre-u economics. It has been the practice of Credit Creation since 400 years ago and done in international trade and finance and basic banking system. of any "civilised" country. The only difference is that in different countries the regulator have slightly different rules on the amount of "fake" money allowed by the banks. In actual fact this is two edge sword, as i have explained above numerous times.

What went wrong between the past and the present, is that too much of the borrowing and too little of real goods and real money and over-supply of the fake credits without care for overall balance and scheme of Credit Creation.

A good example is the 30 year loans encouraged by Mah Boh Tan and to this day still accepted. IT IS VERY VERY VERY VERY VERY VERY VERY dangerous to legalise 30 year loans. Singapore will go the way of GREECE one day because of the bad debt problems. THIRTY Years is too much uncertainty. It is no different from USA subprime crisis of bad loans granted to any tom dick harry and if you read the history you know why 2008 crisis happened - it need not have happend if governments take prudence and dont allow the banks to oversell the concept of Credit Creation.. very dangerous.

If MBT cannot solve HDB housing price issue, the solution is not to encourage 30 year loans. It will result in total collapse of singapore due to bad debt and the unstable credit creation system.

In the past, loans were well contained and system is stable.

Today the world is seeing a big mess because banksters get even more greedy and greedier and package things in very complicated ways which are basically pluncing the credit creation system into a black hole!!!! Worst still our super high salary singapore elites banksters dont even care and they just happily proceed as if there is no worries in the world, just because they are able to luxuriate in their own wealth and humongous pensions for doing nothing much but forecasting and making "warnings" here and there when times are bad. Stupid!


rex said...

To Young Bankster.

I guess you didnt see the video. The video is really very illustrative and a must-see for anyone who did not do Pre U economics especially.
The video clearly highlighted that in the old days more than 500 years ago, it was exactly like you described. If there is $100 which has to be backed by real GOLD, the same $100 is to be moved around "like monopoly game". Those were the days when, according to the video, you will be in serious trouble if you lend out $1000 where in fact you hold only cash $10. As technology advanced and population increased, there is no way to feed the growing population other than having this system of credit creation where everything is based on trust (please please see the video). As long as the trust is that the system works, and as long as people don't take out more physical cash then necessary for buying chao guo tiao and cheng tng's and bata shoes, all the rest of the virtual money in bank accounts can be treated nicely in the Credit Creation system, everybody is comfortably deluded.

Today's world money crisis is mainly due to abuse of the system, not so much the system per se. The system has been so badly abused that it is very difficult to repair it. You repair one problem you will cause 10 new problems in other sectors! Obama etc and the European leaders are trying their best to solve these complicated problems.
And by the way our PM is getting salries 5 times of Obama etc., for doing nothing much other than suppress the freedom of Singaporeans and blaming them every now and then when problems come and they themselve "move on" and act as weathermen politicians today's papers, again they said.. future of singapore gdp is going way down, why, because people YOU YOU and YOU getting old. It's never their fault. All the problems is other people's fault, and they take the biggest salary and leave Obama to solve the world's money problems.

C'est lie vie.

Anonymous said...

the credit creation of the past is different from the one today ever since Bretton Woods and subsequent termination of usd's convertibility to gold. lol

Anonymous said...

A system that was/is abused with no correction or containment should not be kept in use.
Let's get back to barter trading before the banksters get away with their loots legally.

Anonymous said...

To Rex 30/9/11 12:06,
Well said. I applaud your patience.
Long live Singapore.

Anonymous said...

When infinite amount of money meets a finite world, something got to give. It is mathematically impossible to continue snowballing more and more debt to create more and more money to resolve the snowballing debt crisis.

Vulture awaiting... said...

So, einsteins.... whats to be done?

Let weak countries collaspe?
Gobble up their resources?
( in Greece's case, I can't think of anything except limestone, olive trees and more limestone )


Print more money ( either way.. create more bonds essentially the same ) and "help" them by giving them more credit when we all know they can never pay!


Follow what the generous 1st world did with Africa... debt cancellation. ( though, some hanky panky behind the scene took place with raw materials! )


Follow the typical Singaporean style:

" wait & see lor "... maybe got chance for 2nd prize... "any clues??"

Anonymous said...


"it is not about whether the Credit Creation Concept is right or wrong. People are using it for 400 years and it had led to an incredible generation of "wealth" albeit not ideally distributed. Without a credit creation system, "

With due respect, see the larger picture instead of just a narrow bubble where your real targeted interest in to be consistently valid in your logic.

There are larger ethical issues that the present banking and capitalism model does not address and is causing elites to be bailed out at the expense of the poor working class.


Anonymous said...

Barter trading had been in practice for donkey years, maybe many thousand years. So, what is 400 years?

Anonymous said...

to anonymous at 19.43

I fully agree with you that the Credit Creation model is not perfect and that it has the potential to lead to the common man's plight at the expense of the weaker man. The little abuses of the system, accumulates with each passing year, and especailly with increasing sophistication in the financial world, the abuses has now snowballed into a catstrophe of sorts. Lehman bonds was a perfect example, more toxic issues will follow in the dark days ahead.

In my quest to be logically consistent, my sole purpose was really to explain to some people here that the video given in the link provided by Lucky Tan is definitely correct, and that CREDIT CREATION out of thin air, is in operation here there and everywhere since before you were born.

I think 90% of people don't know about it and they still believe that if a bank has cash $1000 the government wouldnt let it lend out $5000.

IT is so easy to think this way if you had not taken any lessons in Economics. And there are people here who are still skeptical of this basic structure approved to stimulate economic growth, political points and consumer confidence... that has been in place for 400 years.

How to solve it, the abuse of the system? I have no idea! It is a job for finance ministers.

But at least don't condemn for the sake of condemning, there are people who don't understand the issues and condemn condemn condemn. There are people who even say the CPF money is all not there. OF course it is all not there. . How could it be all there. Even in your bank if everybody withdraw at the same time, you will find the money is not there! If people withdraw a bit at a time, it will be there. This is how financial systems operate since 400 years ago!

So, We first have to understand the issue. My purpose here is not to offer any solution (because i am a nobody) but to generate awareness of the problem and hope that people grow more intellectual when the see a problem, instead of grumbling, or even worse throw stones at me on account of my attendance of school associated with thinkers.


Lucky Tan said...

anon 10:08, rex, anon 19:43,

Although the banking system has existed for many years, it often is the cause of problems. For this reason it is regulated.

If you recall 30+ years ago, many banks were "national" banks owned by govts rather than the private sector e.g. DBS Bank, Austrailion National Bank. The idea of a nationalised banking system has several advantages. The govt gets the loan repayment + interest and can spend this to recycle the money solving one of the key problems highlighted by the banks. With nationalised banks we did see the type of outlandish bank executive pay packages we see today. National banks cannot hide figures, accounting etc. Many nationalised banks were privated in a big deregulation wave in the 80s. After the financial crisis many of these privatised banks went back to govt hands....but not after causing much damage to society and the economy.

Anonymous said...

to lucky tan
you said that with nationalised bank we dont see the xtreme salaries of the executives...
but this is opposite in Singapore..
the nationalised GOVERNMEMT of singapore, the nations' pillars of leadership... you and i know how much they are paid... nationalise it and they get superpay beause the electorate and media is so dumb unlike other countries...ha ha ha..


Anonymous said...

Mr Lucky is idealistic but not realistic, sori, i have to say this becos Lucky does not seem to know Singaporeans well. Singaporeans love the Sin Government, at 60% do.

Levi Garrett said...

Mr Lucky is idealistic but not realistic, sori, i have to say this becos Lucky does not seem to know Singaporeans well. Singaporeans love the Sin Government, at 60% do.

Jasmineuoom said...

Rex, I would appreciate that you provide the name of your sec sch so we can spare our kids from wasting their time there. Thank You.

Blogger said...

If you need your ex-girlfriend or ex-boyfriend to come crawling back to you on their knees (no matter why you broke up) you gotta watch this video
right away...

(VIDEO) Have your ex CRAWLING back to you...?