Posts Tagged ‘debt’

There is lots of people out there who do not understand what this crisis is all about. They have no idea what fractal reserve banking is, why banks can make billions of profits and all of a sudden be bankrupt one year later. Well, fractal reserve banking means the bank is not obliged to keep your money when you bring it to them but they can spend it. This usually means they will lend it out to someone else against a higher interest rate than they give you, and the difference is their profit.

However, when stuff got deregulated banks could not just lend out your money to someone else, they could also start to gamble with it on the stock markets. This is where things went wrong. Banks bought giant amounts of mortgage-packages that were promised to be good and they turned out to be bad mortgages that do not return any profit, at least not yet. They’re problematic. So they have spend lots and lots of our money on bad investments. This means that
the profit figures they have flaunted last years, based partly on these investments, were fake. They made it look like they were growing and growing, just to be able to cash in more money at the stock counter.

So now they’ve got called on, they have a huge cash flow problem. These bad debts are made of your money, and when too many people start asking their money back: euh, its just not there. In fractal reserve banking the bank keeps just a small amount of money inside to be able to pay direct transactions. For that reason they have put caps on daily withdrawal amounts too, too high caps would bring them into trouble.

That’s one side of the story: they wasted your money on bad loans and don’t know how to pay it back. But there is more to this crisis. The whole American economy and partly European economies and other economies are debt-based. The American national debt has risen in the last eight years from 5 trillion dollars to 10 trillion dollars. So it has doubled under the Bush administration. This is all borrowed money. It has to be paid back. And every time the amount gets higher, it gets harder to pay back because of the interest issue. So what we see here is a debt figure that has risen to such an astronomic amount it has become virtually impossible to pay it back, or maybe even to stop it from growing. This is the core phenomenon we are dealing with at the moment: Crisis which will return at accelerating speeds, like this debt money is accelerating in size all the time. The effect of this in the long term is an economy in perpetual crisis. There will no longer be good times, bad times, depressions or recessions. People who believe this is a returning pattern in our economies are right, but they forget that we already had a major crisis in this decade: this is the second one. The crisis is a circular pattern but its exponential: it will keep coming back at a faster and faster pace, because debt is an exponential phenomenon.

The American author Gore Vidal wrote a book called ‘Perpetual War for Perpetual Peace’. In it he suggests that America has to stay in a state of Perpetual war to afford their lifestyle – there is much true about that, and what we will now see is that the economy more and more will follow a Perpetual Crisis model: faster and faster will these Crisis return. Either that, or there will be a total collapse. I’m not sure which option is the worst one. In the long term a collapse might be much, much more healthy. The 700 dollar bailout plan is of course ridiculous: more debt, to keep ‘things running’.

There is no quick fix, this time around. It’s pretty hilarious to see McCain and Obama talk of nothing but tax cuts.

Martijn Benders, Dutch writer and Freelance Economist