Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
What Fake UK Unemployment Statistics Predict for General Election Result 2019 - 6th Dec 19
What UK CPI, RPI and REAL INFLATION Predict for General Election Result 2019 - 5th Dec 19
Supply Crunch Coming as Silver Miners Scale Back - 5th Dec 19
Gold Will Not Surpass Its 1980 Peak - 5th Dec 19
UK House Prices Most Accurate Predictor of UK General Elections - 2019 - 5th Dec 19
7 Year Cycles Can Be Powerful And Gold Just Started One - 5th Dec 19
Lib Dems Winning Election Leaflets War Against Labour - Sheffield Hallam 2019 - 5th Dec 19
Do you like to venture out? Test yourself and see what we propose for you - 5th Dec 19
Great Ways To Make Money Over Time - 5th Dec 19
Calculating Your Personal Cost If Stock, Bond and House Prices Return To Average - 4th Dec 19
Will Labour Government Plant More Tree's than Council's Like Sheffield Fell? - 4th Dec 19
What the UK Economy GDP Growth Rate Predicts for General Election 2019 - 4th Dec 19
Gold, Silver and Stock Market Big Picture: Seat Belts Tightened - 4th Dec 19
Online Presence: What You Need to Know About What Others Know About You - 4th Dec 19
New Company Tip: How To Turn Prospects into Customers with CRM Tech - 4th Dec 19
About To Relive The 2007 US Housing Market Real Estate Crash Again? - 3rd Dec 19
How Far Will Gold Reach Before the Upcoming Reversal? - 3rd Dec 19
Is The Current Stock Market Rally A True Valuation Rally or Euphoria? - 3rd Dec 19
Why Shale Oil Not Viable at $45WTI Anymore, OPEC Can Dictate Price Again - 3rd Dec 19
Lib Dem Election Dodgy Leaflets - Sheffield Hallam Battle General Election 2019 - 3rd Dec 19
Land Rover Discovery Sport Brake Pads Uneven Wear Dash Warning Message at 2mm Mark - 3rd Dec 19
The Rise and Evolution of Bitcoin - 3rd Dec 19
Virtual games and sport, which has one related to the other - 3rd Dec 19
The Narrative About Gold is Changing Again - 2nd Dec 19
Stock Market Liquidity & Volume Diminish – What Next? - 2nd Dec 19
A Complete Guide To Finding The Best CFD Broker - 2nd Dec 19
See You On The Dark Side Of The Moon - 2nd Dec 19
Will Lib Dems Win Sheffield Hallam From Labour? General Election 2019 - 2nd Dec 19
Stock Market Where Are We?  - 1st Dec 19
Will Labour's Insane Manifesto Spending Plans Bankrupt Britain? - 1st Dec 19
Labour vs Tory Manifesto Debt Fuelled Voter Bribes Impact on UK General Election - 30th Nov 19
Growing Inequality Unrest Threatens Mining Industry - 30th Nov 19
Conspiracy Theories Are Killing This Nation - 30th Nov 19
How to Clip a Budgies / Parakeets Wings, Cut / Trim Bird's Flight Feathers - 30th Nov 19
Hidden Failure of SIFI Banks - 29th Nov 19
Use the “Ferrari Pattern” to Predictably Make 431% with IPOs - 29th Nov 19
Tax-Loss Selling Drives Down Gold and Silver Junior Stock Prices - 29th Nov 19
We Are on the Brink of the Second Great Depression - 29th Nov 19
How to Spot REAL Amazon Black Friday Bargains and Avoid FAKE Sales - 29th Nov 19
Central Banks’ Gold Buying and Repatriation Spree - 28th Nov 19
Another Precious Metals’ Reversal Coming Right Up! - 28th Nov 19
Stock Market 100% Measured Moves May Signal A Top - 28th Nov 19
Don’t Look for Investing Advice in the Media - 28th Nov 19
Why You Should Buy Trailer Park Stocks - 28th Nov 19
Will YouGov General Election Forecast 2019 be as Wrong as their REAL Forecast was for 2017? - 28th Nov 19

Market Oracle FREE Newsletter

UK House prices predicting general election result

Parabolic Money Supply Growth - The End of Money

Economics / Money Supply Jan 25, 2007 - 10:18 AM GMT

By: Dr_Martenson

Economics

The greatest shortcoming of the human race is our inability to understand the exponential function.
~Dr. Albert Bartlett

While it was operating well, our monetary system was a great system, one that fostered incredible technological innovation and advances in standards of living. But every system has its pros and its cons and our monetary system has a doozy of a flaw.

It is run by humans. 

Oh, wait, that's a valid complaint but not the one I was looking for.

Here it is: Our monetary system must continually expand, forever.


Which means it has a math problem in the same way that a beached whale has a breathing problem. In each case we have a massive organism that was optimized for a very different set of conditions than those in which it currently finds itself.

Our monetary system was conceived at a time when the earth seemed limitless and so nobody gave it much thought when we designed it such that every single dollar in circulation would be loaned into existence by a bank, with interest. In fact most thought it a terribly modern concept and most probably still do.

Since some people might begin grumbling about whether the earth is limitless or not, for the moment let's remove any debates about natural constraints and simply talk about the mathematical evidence that our monetary system is now entering a stage of explosive, exponential growth.

Consider these data:

  1. Money supply growth has gone parabolic. It took us from 1620 until 1974 to create the first $1 trillion of US money stock. Every road, factory, bridge, school, factory, and house built, every unit of economic transaction that ever took place over those first 350 years required the creation of $1 trillion in money stock. But it only took 10 months to create the most recent $1 trillion and I don't recall seeing an entire continent's worth of factories, schools or bridges built during that time.

  2. Household debt has doubled in only 6 years. Think about that for a minute.
  3. Total credit market debt (that's everything) was about $5 trillion in 1975, has increased by $5 trillion in just 2 years, and now stands at over $51 trillion.
  4. The wealth gap between the super-wealthy and everybody else is widening at a furious pace.

What's going on here? Could it be that the US economy is so robust that it requires monetary & credit growth to double every 6-7 years? Are US households expecting a huge surge in wages to be able to pay off all that debt? Are wealthy people really that much more productive than the rest of us? If not, then what's going on?

The key to understanding this situation was snuck in a few paragraphs ago; every single dollar in circulation is loaned into existence by a bank, with interest .

That little statement contains the entire mystery. If all money in circulation is loaned into existence it means that if every loan were paid back, all our money would disappear. As improbable as that may sound to you, it is precisely correct although some of you are going to consider this proof that I could have saved a lot in tuition costs if I had simply drunk all that beer at home.

But with a little investigation you would readily discover that literally every single dollar in every single bank account can be traced back to a bank loan somewhere. For one person to have money in a bank account requires someone else to owe a similar sized debt to a bank somewhere else.

But if all money is loaned into existence, with interest, how does the interest get paid? Where does the money for that come from?

If you guessed “from additional loans” you are a winner! Said another way, for interest to be paid, the money supply must expand. Which means that next year there's going to be more money in circulation requiring a larger set of loans to pay off a larger set of interest charges and so on, etc., etc., etc. With every passing year the money supply must expand by an amount at least equal to the interest charges due on all the past money that was borrowed (into existence) or else severe stress will show up within our banking system. In other words, our monetary system is a textbook example of a compounding (or exponential) function.

Yeast in a vat of sugar water, lemming populations, and algal blooms are natural examples of exponential functions. Plotted on graph paper they start out slowly, begin to rise more quickly and then, suddenly, the line on the paper goes almost straight up threatening to shoot off the paper and ruin your new desk surface. Fortunately, before this happens, the line always reverses somewhat violently back to the downside. Unfortunately this means that our monetary system has no natural analog upon which we can model a happy ending.

When comparing the two graphs above you are probably immediately struck by the fact that one refers to a nearly mythical creation especially revered at Christmas time while the other is a graph of reindeer populations. You may have also noticed that our money supply looks suspiciously like any other exponential graph except it hasn't yet transitioned into the sharply falling stage.

To get the best possible understanding of the issues involved in exponential growth, while spending only 10 minutes doing so, please read this supremely excellent transcript of a speech given by Dr. Albert Bartlett . If, like me, your lips move when you read, it may take 15 minutes but I'd still recommend it. In this snippet he explains all:

Bacteria grow by doubling. One bacterium divides to become two, the two divide to become 4, become 8, 16 and so on. Suppose we had bacteria that doubled in number this way every minute. Suppose we put one of these bacterium into an empty bottle at eleven in the morning, and then observe that the bottle is full at twelve noon. There's our case of just ordinary steady growth, it has a doubling time of one minuet, and it's in the finite environment of one bottle. I want to ask you three questions.

Number one; at which time was the bottle half full? Well, would you believe 11:59,one minute before 12, because they double in number every minute?

Second Question; if you were an average bacterium in that bottle at what time would you first realize that you were running out of space? Well let's just look at the last minute in the bottle. At 12 noon its full, one minute before its half full, 2 minutes before its ¼ full, then 1/8 th , then a 1/16 th . Let me ask you, at 5 minutes before 12 when the bottle is only 3% full and is 97% open space just yearning for development, how many of you would realize there's a problem?

And that's it in a nutshell right there. Exponential functions are sneaky buggers. One minute everything seems fine, the next minute your flask is full and there's nowhere left to grow.

So, who cares, right? Perhaps you're thinking that it's possible, just this one time in the entire known universe of experience, for something to expand infinitely, forever. But what happens if that's not the case? What happens if a monetary system that must expand can't ? Then what? How might that end come about? And when? For an excellent description of this process, please read this article by Steven Lachance .

A debt-based monetary system has a lifespan-limiting Achilles heel: as debt is created through loan origination, an obligation above and beyond this sum is also created in the form of interest. As a result, there can never be enough money to repay principal and pay interest unless debt is continually expanded . Debt-based monetary systems do not work in reverse, nor can they stand still without a liquidity buffer in the form of savings or a current account surplus.

When interest charges exceed debt growth, debtors at the margin are unable to service their debt. They must begin liquidating .

Mr. Lachance reveals the mathematical limit as being the moment that new debt creation falls short of existing interest charges. When that day comes, a wave of defaults will sweep through the system. Which is why our fiscal and monetary authorities are doing everything they can to keep money/debt creation robust. 

But it's a losing game and they are only buying time. How do I know? Because nothing can expand infinitely forever. The evidence clearly points to exponentially rising levels of money and credit creation. As the bacterium example shows, once an exponential function gets rolling along, its self-reinforcing nature quickly takes over requiring larger and larger aggregate amounts even as the percentage remains seemingly tame.

Similarly, our supremely wealthy suffer only from an inability to spend what they ‘earn' on their capital (interest & dividend income) which means their principal is compounding. But, because each dollar is loaned into existence, it means that when Bill Gates ‘earns' $2 billion on his holdings a whole lot of people somewhere else had to borrow that $2 billion. Taken to its logical extreme, and without enforced redistribution, this system would ultimately conclude with one person owning all of the world's wealth. Game over, time for a Jubilee, hit the reset button and start again. 

When we started our monetary system, nobody ever thought that we would fill up our empty bacterium bottle. Nobody really thought through what it would mean to society once wealthy people earned more in interest & dividends than they could possibly spend. Nobody considered if it was wise to place 100% of our economic chips into a monolithic banking system that requires perpetual, endless growth in order to merely function.

So we must ask ourselves; does it seem possible that our money supply can continue to double every 6 years forever? How about another 100 years? How about another 6? What will it feel like when we are adding another $1 trillion every month, week, day, and then finally hour?

Just remember, money is supposed to be a store of value or, said another way, a store of human effort. Currently it seems to be failing at meeting that characteristic and therefore is failing at being money.

Who ever thought that oil production would hit a limit? Who knew that every acre of arable land, and then some, would someday be put into production? How could we possibly fish the seas empty?

We have parabolic money on a spherical planet. The former demands perpetual growth while the latter has definitive boundaries. Which will win?


What will happen when a system that must grow can't ? How will an economic paradigm so steeped in the necessity of expansion that economists unflinchingly use the term ‘ negative growth', suddenly evolve into an entirely new system? If compound interest based monetary systems have a fatal math problem, what will banks do if they can't charge interest? And what shall we replace them with?

Since I've never read a single word on the subject, I suspect there's even less interest in exploring this subject by our ‘leaders' than there is in being honest about our collective $53 trillion federal shortfall.

I am convinced that our monetary system's encounter with natural and/or mathematical limits will be anything but smooth, possibly fatal, and I have placed my bets accordingly.  It seems that our money system is thoroughly incompatible with natural laws and limits and therefore destined to fail.  

Now you know why I have entitled my economic seminar series “The End of Money”.

But the end of something is always the beginning of something else.  Where's our modern day Adam Smith?  We need a new economic model.

The greatest shortcoming of the human race is our inability to understand the exponential function. ~Dr. Albert Bartlett

Best,

Dr. Chris Martenson
http://theendofmoney.com

Dr Martenson is the creator of The End of Money economic seminar series, has extensive experience analyzing and communicating financial information.  Dr. Martenson combines a scientist's attention to fact and analysis (PhD, Duke University, Pathology and Toxicology) with a solid understanding of finance and economics (MBA, Cornell, Finance) with strategic thinking (4 years as a management consultant) to produce an insightful and powerful lecture. He is currently devoted to researching, writing and presenting economic and financial analyses delivering his message via his website, lecture series and is currently working on a related book & movie.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Mike London
13 Jan 08, 15:53
Every Single Dollar is Loaned Into Existance?

"The key to understanding this situation was snuck in a few paragraphs ago; every single dollar in circulation is loaned into existence by a bank, with interest."

The statment isn't true. The world, most of it, creates money from nothing. There is no loan. It only appears that way. When the US, for example, wants to create money, it just springs into existence. What causes inflation is that each dollar is backed by debt (not a loan!) that the US taxpayers pay interest on.


ikenstein
02 May 08, 12:11
Exponential money supply

nice article.

but the focus directrix property is the defining feature of a parapola. so the poarabola can be oriented any way you chose. most often y^2 = nx is used i think, which makes the parabola on its side.

i think exponential is a better way to describe m3 growth. that is, the supply of money grows as a proportion of the amount of money. this fits with your explanation of interest. you should probbaly use the average rate of interest as the exponent.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules