Money as Debt

I assume a lot of you may have seen this short documentary…


If you have n’t it is well worth watching - its fairly short 47 mins but you will think a lot longer about it afterwards.

In this doc Paul Grignon (not an economist) gives his take on how the modern money system works. I was always under the impression that banks lent out money form deposit (subject to fractional reserve requirements and its multiplier effect). Turns out modern money creation is purely created out of debt. Its not backed by anything other than the debtors promises to pay. This leads to all sorts of crazy situations such as where will the interest money come from? Answer: the generation of more debt. Its a real Ponzi scheme scenario. Naive me is fairly shocked as clearly this is unsustainable! It also means if we have no debt then we have no money - this is counter-intuitive to me. This seems to also explain why Q.E by the government is so necessary - it now makes sense to me as a policy (sensible within the current money model). If everyone is striving hard to pay off debt as they are then money supply is going to dry up and well the whole system grinds to a halt and businesses will close for certain and the system collapses. So given this treadmill to catastrophe the government needs to step in and literally print the goddamn stuff which only just staves off the inevitable!

Anyway did anyone else see this documentary? Is it right on the money or bogus?

He has the general idea correct, yes. Gets some of the details a little mixed up, but generally right on the money.

Banks through fractional reserve lending create new money through debt. Central banks can and do create new money directly through the use of debt.

To be honest, I’m not really going to watch another conspiracy theory type “shocker” on how fractal reserve banking works.

However, not all money is debt. If I borrow money from a bank, that usually ends up as a debt for me, and a deposit for someone else somewhere else e.g. another bank. However, there is still some real money in the system.

Further, supposing I borrow 10k, make 20k from my furniture business and pay 10k plus 5k interest back to the bank, I now have a deposit of 5k which in one sense came out of nowhere, but in another, very real sense, came from my hard work and enterprise in making good furniture. Fractal reserve banking does work, so long as the additional deposits created are representative of the additional wealth of the country, then there is no problem.

The problem comes when money is borrowed in excess of what is actually being produced and instead is put into speculative bubbles i.e. an increase in the money supply without an increase in wealth/productivity. If anything, quantitative easing only worsens this as it increases the supply of money without any increase in wealth/productivity i.e. free money.

So QE is one route, the other is to permit credit to shrink in the economy. Neither is particularly pretty, nor are they mutually exclusive. In fact, it looks like both the US and Europe are going to be hit by both. However, while the US favours more QE and minimal shrinkage, Europe seems to be going headlong into a shrinkage/rationalisation process. I don’t think this has ever really been done before (it has been tried and given up on before we could really see the results). It will be interesting to see, but to be honest, I would prefer a system which is vigilant about the value of the currency rather than one which favours the pass go and start again type approach.

Yeah watched it recentley. There’s a whole lot of information out there ( via internet) that most people are not aware of. Its good for people to start to learn. I agree the whole banking scene is one big scam and yes, its a ponzi scheme that goes right to the top and the heart of most governments. There’s some excellent info out there on sovereign debts, defaults and adjustment. Also on International law, Odious debt, etc. Also you might like to do a bit of research on who owns what banks, specifically in ireland. Ireland Incorporated, yes, you read it right, did you also know each of the ministers is a ‘corporation sole’ ( same as queen elizabeth), There’s all kinds of funky knowledge that could end up having an intertwined relationship of sorts. :wink: This is an interesting read on sovereign debt issues

Anyways, keep looking and learning :smiley:

… and there is Money as Debt II - Promises unleashed.

This is an updated version made in response to the current debt crisis. Again absolutely fascinating and thought provoking.
I should add that I am not a conspiracy theory person. I am more an Occam’s razor kind of thinker and the explanations given in these documentaries are the simplest explanation of how our non-gold standard currency system must work.

I’m not criticising the content - far be it from me to prevent people learning about how fractal reserve banking works.

I haven’t even watched those particular videos - unless there is something particularly unique or interesting in them, I don’t fancy wasting 2 hours while they labouriously tell me about how the world they think I’m living in is a lie and such.

The way they are put together is very much of the youtube chemtrails are going to get you type. Fractal reserve banking can be explained in a few short sentences, But too much is made of the type of conclusion i.e. it’s all a scam, it’s fake money, it’s all based on debt, not wealth etc.

If you want to explain briefly what those videos say we can discuss it, but I wouldn’t be going out and buying gold just yet (however, feel free to read through the gold price thread).

On the subject of fractional lending. I was talking to some old guys who did business in the 1950s over Christmas.
They said it was impossible to sell a house in the 1950s in Dublin and houses would stay on the market for years. Raglan road was mentioned. (there was none of this dropping it to the market clearing price mallarkey back then either :smiley: )

Their explanation was that “the building societies had to get money in before they were able to lend it out” And it was all on a branch by branch basis too!

Also, in those days, banks did not lend mortgages, other than in exceptional circumstances i.e. to bank staff or companies. So if you wanted a home loan, building societies were the only way to go. In fact, AFAIK that was true up until relatively recently.

As I understand it, that’s why fractional reserve lending makes sense. It brings forward future earnings, greasing the wheels of the economy and allowing them to turn much faster than if you had to wait for money to be generated before reinvesting it. But it only makes sense in an environment of population and resource growth. If the economy goes into reverse, then the future earning potential – which has already been spent – may not materialise.

That the key issue, the chances of real growth in the future is now very much in doubt. Outsourcing to Chindia, peak oil (high energy costs in general) all act as a very powerful brake on future growth.

I don’t think the documentary has a problem with the fractional reserve system (FRS). FRS seems to work. The main problem according to the documentary is that something like 95% of the money supply is debt-generated, i.e. money = debt.

In summary (and I am rehashing summaries elsewhere) the situation is this.

  1. Money is very predominantly generated out of peoples ‘promises to pay’. When you take a loan from a bank, the bank takes your signed promise to pay back the loan and deposits it in their vault. This is the new gold. They then create your loan amount out of thin air through entering some figures in your ledger. There is no value behind it other than your ‘promise to pay’ and these promises can be cut into ‘tokens’ which we are legally bound to settle debts with, e.g. for exchange for goods and services, i.e. things in the real world. So promises are mapped on to things in the real world through a concept of money. Thats fine and dandy although gold was used in the past because it was immutable - promises are shakier foundations upon which to build anything. As a result of this power to create money out of thin air we have the FSR system which puts a limit on the process however …

  2. …it turns out that the banks can create as much money as we can borrow. While the FSR system limits how much they new money they can generate based on the banks own deposits funny things happen when the loaned money is put out there into the real world. If Person A who got the loans buys a new car from Person B then when Person B lodges that money in their account the bank can take that money and create new money again out of it based on the FSR and loan it out to Person C. Person C passes the money on until it seems we approach an actual FSR that is way greater than the initial 9:1 ratio, something like 90:1. Increasingly the FSR limits have been severely reduced and weakened further strengthening the banks ability to generate new money. While the banks initial deposit with the central bank may have actual value and backs that amount of the money generated the vast majority of the rest is just backed by people’s ‘promises to pay’.

  3. So now we have a situation where most of the money out there is backed by debt or promises to pay. So the money out there is approximately the sum of all the loans generated. So its the sum of all the prinicpals of the loans. However all the interest must be paid back too and in terms of mortgages that is as large if not larger amount of money than the principal. So the question is where will that money come from? That is the money that represents the interest. Turns out there are only two ways out of this; either some people will not be able to pay back loan plus principal, i.e. default OR the banks generate a whole lot of new loans to generate money to push into the system that people can acquire to pay back their loans. Unfortunately the latter leads to an exponential growth problem in debt and which is only solvable through inflation and the former is pretty miserable socially.

So thats more than a few sentences but thats my take on it. I found it really interesting and enlightening. From subsequent reading of more mainstream online resources this picture seems accurate but few of these sites extrapolate to the implications.

Gold is not immutable if anything it’s malleable and it’s value is equally only based on a concept and a “promise to pay”…

Get comfortable with the idea that the world is only numbers on an excel spreadsheet kid…


I don’t see that money could ever be anything other than debt, as TUG and the edge are alluding to. Money to me is a means of exchange of debt, rather than debt itself. At the most basic level, it is a transferrable promise. So, I owe you four hours labour digging a ditch, I could carry that around or I could give you a token that values it (money). You owe the butcher the cost of a leg of lamb. He owes the cost of the whole lamb to the shepherd. Money makes the transfer of those obligations easier.

If you want to object to something, object to the price differentials that are put on those obligations. Or that some of the obligations are derived from other obligations and then constitute a life of their own as ‘money’.

Giri, life is about giri…

i am not so worried about the promises to pay bit and indeed Gold only has value because we have faith in to do so but 24kt gold is 24kt gold and promises range in quality, integrity and value as the sub-prime debacle tells us. However I am most curious about Point 3 above which I ll reword below:

Nearly all money is generated from debt.
Total money out there is approximately the sum of all the loans principals.
People are expected to pay principal plus interest though.
Q: So where will the money to pay interest come from?
A: Either from the bank generating new loans to new players in the system or it doesn’t get paid and default results.

If people wanted to watch just a small piece I would suggest this 9 minute segment
for those of you very impatient fast forward to 5 minutes and 8 seconds in. you only have 5 minutes to watch then - classic ‘man hit in groin by football’ youtube length.

This is a very interesting explanation of the boom and bust cycle.

I agree with you, but I think where the problem comes in is that the banks have the ability to create money, through the creation of debt. That’s fine, until everyone starts trying to pay it back, and money in itself becomes a form of pyramid scheme. The only way you can pay off debt is to persuade people on the level below you to take some on.

Money as a standard, set amount, e.g. gold doesn’t work too well either. How do you decide how much money is the right amount? As the population of the world increases, you’d get massive problems if the amount of money available stays the same.

Every hour that passes is an hour that 7 billion people can do or produce something of value, an expanding money supply seems like the right idea, but the current systems for expanding it seem ridiculous to me. Banks are private institutions, why do they get to be the one’s who create money from nothing and then earn money by charging interest for it? They also seem to be the one’s who’ve been deciding how much money it’s appropriate for there to be in circulation, not based on any idea of what might be a good idea or a bad idea economically speaking*.

There has to be a better way, but what the fuck that is, I don’t know.

*I also think we need to reevaluate what we believe is a good and bad idea economically, I’m increasingly doubtful about the whole continuous growth idea, but that’s for another thread.

Thats the problem alright as ridiculous as the current scheme is it’s hard to come up with an alternative. Society never fixes anything until absolute catastrophe hits and that has not happened yet. I expect the Wests problems regarding money will be solved by the 2.5 billion Chinese and Indians being encouraged to consume with their consumption driven by new credit.

Well if you have interest bearing debt that is paid off by non-interest bearing labour, then you are reducing your future obligations. Generally, though, I agree with you. I think this is the main reason that Central Banks like to have positive, though not out of control, inflation. In aggregate, the value of money is diminished. If it was not, as you say, everything would be overwhelmed by debt eventually.

What I object to really is secondary debt - debts created from other debts or from tracking other debts. Derivatives and futures trading (as opposed to hedging) for example, seem to me to be at the same time debasing money and increasing indebtedness.

Debts based on debts can make your head spin and apparently the figures involved with such exotic financial entities currently dwarf by many orders of magnitude the current value of world output. It’s one of those situations where you feel like it might be better if we just reset everything to zero and start again but this time really concentrating on what’s going where! :slight_smile:

As a purely abstract way of thinking about it, there is a certain logic to this. As a means of exchange, money can represent either of two things:

  1. a promise to dig a ditch in the future (i.e. an IOU type debt); or
  2. the proceeds of the ditch dug last tuesday (i.e. calling in an existing debt).

In the sense that debt is what people owe to another, and a means of exchange is a way of transfering what we owe to each other, then money could be seen as debt.

However, that is not the point of the video. That implies that all money is created by the promise to pay back other loans (i.e. 1 above). The video ignores that we have already dug many ditches. For example, if a farmer takes out a mortgage on his farm, he will pay that mortgage back from future earnings, so in that sense it could be considered money from a future promise to pay. On the other hand, however, the farm is already set up, with many ditches dug and crops planted. So in another way, that money could be backed up by the work already put into it.

So really, money as debt is an interesting, but slant, way of conceptualising our system of banking. In an ideal world, the fractal reserve paper money banking system would work best if the total supply of money is equal to the total wealth already accumulated plus an acceptable level of additional money based on the liklihood of future growth. The problem only comes in when the additional amount is too risky.