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Blog Posted in avatar   Alexander Baron's Blog

How Interest Causes Inflation

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By Alexander Baron
Posted Dec 9, 2012 in Politics
I said in my previous blog that printing money wrecklessly causes inflation. This is true, but what is the root cause of the wreckless printing of money? The short answer is usury, ie interest. This is something that your four year old son or daughter can understand but politicians, bankers and especially economists, can't.
This thought experiment has been done before, but consider it again. You are in a nursery with ten pre-schoolers, and the staff ask them if they would like to play a game with coloured bricks. Of course they would, so they receive ten bricks apiece, and they each have to return eleven at the end of the session. How long will it take them to figure out it can't be done?
Now, try the same with ten mainstream economists, only being big boys - or a big girl like Dambisa (Goldman Sachs) Moyo - we don't give them bricks, we give them money, ten thousand dollars apiece, and at the end of the session they are required to repay us with interest. "But I can't make 10% profit in two hours" cries Richard D. Wolff, "that's unfair".
Okay, we will ask that you repay us not $11,000 but $10,001 at the end of the session. Chairman Bernanke takes out his pocket calculator and works out that 2 hours being one twelfth of a day is 1/4,380 of a year, and that 1/10,000 of a percent on the loan for two hours works out to 43.8% simple interest over the course of a year. "That's a high rate", he says, "but it's still only one dollar".
So the economists accept the challenge, and at the end of the session while trading amongst themselves there is a $20 deficit. From whence does this deficit come?
Obviously out of their pockets, but as they are paid mega-bucks for making predictions that are wrong at least half the time - ie you would be better off flipping a coin than hiring an economist - it's no big thing. One of them is $20 out of pocket, or more likely several of them are out of pocket, while the others are ahead.
Now, imagine they were forced at gunpoint to stay in that room for a month and play that game over and over again, 6 sessions a day, 12 hour days, and imagine further that they had no access to their own money, how would they continue in this zero-sum environment?
I discussed this in Gordon Brown's Poker Lesson. Bear in mind that in the real world, compound interest rather than simple interest is charged.
Okay, here is something even simpler: Salvation Island. This was first published in 1933, but mathematics is eternal. The bottom line is that if money is created as an interest-bearing debt, this debt can never be repaid. And if the banks have that monopoly of credit, as Major Douglas called it, then the nation and indeed the world must go progressively in hoc to the banking system. Worse than that, without a continuous flow of new, debt-free money, there will be a continuing shortage of purchasing power. If nothing were done about this, the banks would end up owning everything. Rather than tackle the root cause of the problem - for whatever reason - the British Government and indeed every other government attempts to raise money elsewhere. One way of doing this is by exporting, not simply trading but exporting more than we import. It may be that Britain or some other country, or several other countries, succeed in doing this, and in paying down their deficits, as David Cameron is fond of saying. But think of this like a game of musical chairs: when the music stops, not everybody can sit down.
What the government does in practice is borrow even more money at compound interest, which means the debt is rolled over again and again. Taxation is also increased, indeed must increase, as governments keep finding more and more ways of raising taxes, ostensibly to pay for education, health, national defence or the social security bill, but mostly to service the national debt. We have income tax - a temporary tax introduced to pay for the Napoleonic Wars; National Insurance; VAT; fuel duty; corporation tax...even the dead are not exempt, due to death duties. And there are many more besides. Furthermore, taxation is cumulative, we pay the same tax over and over again. Think about it, you go to the supermarket to do your big weekly shop. Do you drive? So that's fuel duty, tax on your car, maybe a parking charge or ticket, which also has a tax element to it. At the supermarket you buy many things, but let's focus on a can of beans. What is the can made of? If the metal for this can and the paper for the label are imported, there will be some sort of duty to pay, the beans themselves are grown, which means the farmer has to pay his workers, who pay tax. The supermarket pays for deliveries, which is more fuel and more tax, including drivers' pay. There will be rates on the premises, the person who stacks the shelves is paid, and pays income tax, the store pays National Insurance on its employees, and so on. Everything you buy, everywhere you travel, this taxation accumulates, and then disappears down that big black hole known as the banking system.
For how long can this go on? The short answer is for as long as we the people permit it. The reason it has gone on for so long and got so bad is because there are so many parasites battening off the system.
The solution is for Britain and all nations to default; we can then replace this absurd system of ever-increasing debt with a sound, debt-free money system, one that is based on Social Credit principles or Islamic economics in which riba is taboo.
If you still don't understand how bad is the current system, check out this article and consider how much the price of computers has fallen since the 1950s, or even since the 1990s. If exponential advances in technology lead to exponential drops in prices, why are we all paying so much tax? Why is almost every government in Europe and elsewhere strapped for cash? We can't all be in debt. For every debtor there is a creditor, or more precisely, if a government owes £1 billion or $1 trillion, there must be someone or something to whom this money is owed. Once we get rid of this absurd system, money will retain or even increase in value, and taxation will fall, but someone somewhere has to take that first step.

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