We are mindful of the budget out of basic human respect, but also because avoiding loans is a service to the whole society. Here is why:
Money is a clever invention that allows us to trade products and services efficiently, over distances of space and time. But money isn’t just a neutral tool for exchange. It comes with a set of rules about how it’s created and what can and cannot be done with it. These rules change over time. You might, for example, remember when the US, under president Nixon, finished dismantling the link between money and gold reserves, a change of rules that was subsequently made across the world. You might not think that these rules make a difference in your life, but of course they do. They shape economies we’re all part of, and affect the flow of money, wealth and power in our societies.
This text is about a money rule that effectively turns our economies into Ponzi schemes. It sounds shocking, and it is shocking. Even hard to grasp. Actually, hard to admit it’s true. But the way it works isn’t hidden. No conspiracy theory is needed to explain it. You just have to pay a bit of attention to see it. So here it is:
The overwhelming majority of the money circulating in our economies has been created by banks issuing loans. Today, if you go to your bank with your business idea and ask for a 100k-euro loan, the bank will create a new 100k euros in the economy by the very act of giving you a loan. Banks are authorised to create money like that, and they do it all the time. So you get your money, run your business, and gradually repay the loan. But the amount you have to repay isn’t 100k. Due to interest, it might for example be 150k. So where do the extra 50k come from?
If your business is doing well, they come from the buyers of your products or services because you’ve included the cost of the loan in your price. But where do they get that money from? If they only take it from their savings, they’re going to go bankrupt in a while. So, ideally, they will try to get it from somewhere else, either by earning a wage or selling a product or service of their own. And thus starts the chain of normal economic activity. But there is a problem: When the bank gave you the 100k, you used the loan to cover various costs of starting and running your business, meaning you spent the 100k, putting them into circulation, and through the chain of economic activity, you gradually collected 100k from your clients and turned them over to your bank. But you didn’t put the 50k worth of interest into circulation. So, if you want to repay the interest, and if you don’t want your clients to go bankrupt by paying you from their savings and not earning as much, and if you don’t want their clients/employers to go bankrupt in the same way, someone needs to put an extra 50k into the economy. Think about it. If we don’t want to see everyone lose all their savings, and at the same time we want your company, and other companies, to survive and fully repay their loans, someone needs to create a lot of extra money to cover the interest on those loans.
Now, since the legal way to create extra money is through new loans, this is what will happen. In order for you to repay the interest on your loan, someone somewhere is going to have to take out a new loan. Those 50k will enter the economy as a loan. But that loan will come with interest, too. And the only way to repay that interest will be through yet another loan. It would be even worse if the sum of the interest were greater than the principal, which often happens with long-term loans. For example when you buy a house with a 100k loan, and over the period of 30 years pay 220k to the bank.
The banks are fine. They don’t have to have the entire loan-money in their reserves when they give us loans. They just create the rest. And when the loan is repaid, they get the money they created as real value, plus the equally real interest. The banks, i.e. their owners, are at the top of this pyramid. In the meantime, we are constantly looking for people who will take out loans in order to buy what we sell allowing us to pay the interest. Then they have to look for people who will take out new loans. And so on, and on, and on. It is a Ponzi scheme in which our ability to repay our debts depends on someone else getting indebted. We just don’t see it, because that someone doesn’t have a name. That someone is somewhere down the chain of economic activities. That someone is not one person, but multiple persons taking out multiple loans. That someone is us, as individuals, companies, cities and countries.
Some people say that there is no greater business incentive than having to repay a loan. Perhaps it’s a uniquely strong incentive, but it’s not so great when you look at the big picture. It means that the imperative is to sell, at all costs. Whether or not someone really needs what you sell is not as crucial. Whether or not what you sell is good or not is not as crucial. Whether or not the making of what you sell was fair and sustainable is not as crucial. The single most crucial thing is the steady, unyielding rhythm of your loan payback instalments, which makes sure that the Ponzi scheme of money goes on. And entire economies are hooked on it, obsessed with GDP growth, because the economy must grow faster than the debt. Whatever the cost to societies and nature.
So what can we do about it? Many things! Obviously, we shouldn’t take loans if we don’t really need them, which is much easier if we also don’t buy stuff we don’t need, despite the marketing industry that tries to convince us we’re worthless if we don’t buy it, and a consumerist culture that judges us accordingly. Then we should become aware of complementary currencies that don’t play by the same rules, i.e. don’t create money via debt. Such currencies exist and can be legal, and they are used as local currencies or digital ones. Some are indeed making the world a better place, while others are repeating the mistakes of fiat (state) currencies. Contact the Transition Network in your region and get informed about what is going on close to you. Or create a new local currency with your network.
Finally, instead of conspiracy theories, check out economists like Bernard Lietaer who propose concrete ways to constructively change the rules of money for the benefit of the whole planet. Vote wisely and be wary of politicians who put growth over sustainability, as well as those who propose anarchist “alternatives” that don’t work. As for the part of your earning and spending that happens within the Ponzi scheme of your state currency, don’t feel guilt when earning money. Be honest, earn heaps and put it to good use, to make the world better than it is now.
P.S. If the Ponzi scheme mechanism still causes shock and disbelief, and a need for additional explanations, here comes one: I take a 100-euro loan – money that the bank created in order to lend it to me. I invest the money in my business and earn 100 to give back to the bank. Where do I get the extra 50 for interest (50 euros that weren’t put into circulation by the bank)? Those 50 euros are sucked out of the circulation (out of the money that had already existed) and turned over to the bank, which returns a portion into the economy, while depositing a significant part onto its owners’ bank accounts. Who is going to replace the sucked-out money, needed for the economy to function? The only one who can: the bank, in the form of a new loan. And so on, and so forth...