Debt In America
Recently I have been doing a lot of thinking and research about debt in America. I came across a very interesting video called “Money As Debt.” Basically, I just looked up the word “Debt” in the Google video section. The first question the video asks is, “Where does money come from?” These days, most money comes from banks creating money from a borrower’s promise to pay (i.e. a mortgage). That means that the bank gets to conjure money into existence (up to 9 times more than they have in reserve), based on you signing your name on a promissory note. This is an interesting concept that many people don’t understand or even know about. So think back to the scene in “It’s A Wonderful Life,” where there was a run on the Savings and Loan, and George said, “You’re thinking of this place all wrong, as if I had the money back in the safe. The money’s not here. Your money is in Joe’s house and in the Kennedy house and a hundred others…”
That’s just not the case anymore. Banks don’t lend money; they create it out of debt. I’ll try to make this concept easier to understand. Marriner S. Eccles, former Chairman and Governor of the Federal Reserve Board, said, “That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.”
So Mr. Chairman, what you’re saying is, if all debts were paid off, our society would have NO money? That means we are totally dependent on bank credit for ANY money to exist.
The scary part, however, is that banks only create the amount of the principal. They don’t create the interest that is owed. In essence, it is theoretically impossible for us to ever pay off the total debt that is owed. It’s a game of musical chairs; as long as the music plays, everyone is okay. When the music stops… well, you know what happens.
Quote from “Money As Debt” Film
“The only place that borrowers can go to obtain the money to pay the interest is in the general economy’s overall money supply. However, almost all that overall money supply has been created exactly the same way – as bank credit that has to be paid back with more than was created. So everywhere there are other borrowers in the same situation, frantically trying to obtain the money that is needed to pay back both principal and interest from a total money pool that contains only principal. It’s clearly impossible for everyone to pay back the principal plus interest because the interest money doesn’t exist.”
How does this relate to mortgages?
In a 30-year mortgage loan it’s even worse because, many times, over the 30 years, the interest far exceeds the principal. Think about all the interest-only loans out there or the negative-amortization loans, where the minimum payment doesn’t even cover the interest being charged. There should be no surprise at the amount of foreclosures we have today. When credit tightens up, there simply isn’t enough money in the economy left to pay the debt. Hence job losses and cutbacks, foreclosures and bankruptcies.
When you begin to really understand this, it’s frightening. But it’s also reassuring for many of you reading this, who may be struggling, because you’re not alone. It’s clearly not your fault. This was going to happen with or without you. I know what you are thinking, “What about those who were irresponsible with their money?” Well, it seems they are not alone either… just look at Washington and Wall St.
In Conclusion
Debt has become the American Way. Debt is a form of slavery. Something is seriously wrong.
The Outstanding Public Debt as of March 18, 2009 at 06:37:56 AM GMT is:
$11,038,307,882,341.04 (More than 11 Trillion!)
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{ 5 comments… read them below or add one }
Well said… I think it’s fair to say that aside from all the irresponsible lending and borrowing practices, corrupt rating system for the mortgage backed securities market, and general attitude that a person’s happiness was measured by the size of their house, or what car they drove, that became so prevalent for the years leading up to this economic meltdown, that a large portion of the mess we are in came from the fact that America stopped producing anything except DEBT.
Think about it – the rise of the US economic system came as a result of industrialization, productivity, and innovation on the part of US based business. The fall (maybe fall is a bit drastic, let’s call it decline for the time being) of the US economy has basically come to us as a result of lazy, overpaid American workers and corporations trying to get as much money out of as little work as possible. Jobs were shipped overseas to countries without unionized labor, unsafe working conditions, etc for the sake of corporate profit margins. Illegal labor was brought in to squeeze more work for less than minimum wage, no taxes and no benefits to employees.
The vast majority of Americans borrowed way more than they could afford – houses, cars, toys, etc, with the attitude that the housing market, stock market, etc will never go down, then acted completely surprised by the fact that an unsustainable rise in prices finally started to correct itself.
Another one of the saddest parts of the puzzle is that the few people who were responsible – didn’t use their homes as ATM’s, didn’t max out credit cards to buy flatscreen TV’s, and didn’t speculate on prices going up forever in the stock and real estate markets – are now being asked to pay for the irresponsibility and greed of businesses and individuals alike.
This will no doubt be a long time in fixing, just as the events leading up to this were a long time in the making. I just hope that we as a society can learn to be a little more fiscally responsible moving forward, making the silver lining to this dark cloud the fact that we all learn to start living within our means, and being happy with what we have. As a good friend and mentor of mine once said, in comparing taking losses stock trading to surfing:
“You don’t drown because you fall in the water, you drown because you don’t swim back to the surface.”
Let’s make sure to swim to the surface, and to learn from our mistakes so we don’t repeat them in the future.
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AlexAxe
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