Money As Debt: An Unsustainable Future?
Posted by Lise on 05 Feb 2009 at 10:49 am | Tagged as: economics
Has anyone watched “Money As Debt” by Paul Grignon?
This video was recommended to me by a friend when TARP was passed as a way of understanding the crisis. I just got around to watching it, and I’m not sure what to make of it.
The basic thesis of the 47-minute video (divided into five parts on Youtube) is that in today’s world, money = debt, and bankers can basically “conjure into existence” money based (loosely) on loans they’ve made. With that understanding, Grignon explores what this means: an exponentially-increasing economy based purely on debt, where only bankers profit, which will eventually become unsustainable. He also discusses some alternative systems: he rejects returning to a gold or silver standard, but favors more nationalized banking.
I’m understandably incredulous (appropriately enough: the video features a quote, near the end, about big secrets being kept from the public by incredulity) but I don’t think I know enough about economics to judge the truth or accuracy of this video.
Anyone have any insight to share?
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Wow. What a load of half-truth hogwash.
The truth is, yes, banks lend out money they don’t actually own. This is called leveraging. In principle, if they have 1000 dollars, they can fairly safely make two 1000 dollar loans, especially if they are lending you money that you will give to another person that saves at that bank. Bank gives money to person A, person A gives money to person B, Person B gives money to the bank as a deposit. There’s still only $1000 when you go looking for actual currency, but there is now $2000 in assets, half of which is in debt from person A.
This surprises _no one_ who has had a basic econ course. We don’t usually teach basic econ in grade school or high school (just personal finance type econ), so it might surprise a lot of people.
This is also not a bad thing. Economies grow because there is capital flowing. Companies survive by taking out a small debt today to cover expenses, then paying it back tomorrow when they get their incomes. (The corporate paper market, which you might have heard of).
This is not a license for banks to print money and become fabulously wealthy. They’re always risking that the person they gave money to won’t pay them back. In fact this is what happened. Banks went out of business, or were taken over by the government. If all they did was make money, they’d never o out of business.
Now, the past 25 years _was_ a good time for the financial industry. This is because they’d managed to hide the risks from even themselves (credit default swaps).
The video does show what happens when you are on the gold standard, and have a bank run, ut that’s _not_ the problem we’re having now, that’s the problem they had in the 30s.
I recommend NPR’s Planet Money. I listen to the podcast version, but their blog is pretty good as well. It’ll give you a much better hold on how things actually work these days, why they work that way, and what’s going wrong this time around.
Thanks for your insight, and for the recommendation of Planet Money. I will look into that.
http://www.angryflower.com/buyeve.html