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Let's abolish money!
Taking ADVANTAGE of money supply inflation
By Colin Smith, Glasgow
"If you understand what money is, how it works. If you understand what the monetary system is and how money is created you have a significant advantage over the overwhelming majority of the population.. You can insulate your self financially from the effects of the manipulation of the money supply.
What can you do?
Well. It's rather simple really. First, you pay off any debts you owe. Then you do what the wealthy do. You get rid of your cash as well. You move your money into investments which increase with the inflation of the money supply. You take advantage of inflation instead of being it's victim.
If the money supply is increasing at about 14% per year and the real rate of growth of the economy is about 3% per year, there is around 11% of inflation which is partially unaccounted for… Well we see this inflation in a couple of areas.
» There are a number of investments which increase with the money supply inflation.
» There are a number of investments which only make sense if the money supply is contracting or reducing.
Investments which increase with the money supply
Types of investment which are not cash and which appear to increase in value as the increasing money supply devalues the currency.
The stock markets increase as the money supply increases. Unit Trusts or funds can be good ways to access the inflation of the stock market without having to risk picking individual stocks. The risks are spread over hundreds of company stocks if you use a unit trust like a FTSE 100 tracking unit trust.
Commodities like gold, silver and platinum appear to increase as the currency devalues.. They are often a “bastion of value” if the currency is devaluing particularly quickly. There are “Exchange Traded Funds” which are available on the stock market for this purpose.
Inflation of property prices are the single most obvious, noticeable and talked about sign of increases of the money supply.
Investments which make sense when the money supply is contracting
The corollary of an increasing money supply is one which is actually contracting, this is one when the interest rates are high or have been high for a while and loans are therefore not being taken out. In this case, the value of cash increases relative to the commodities you can buy with cash, this is called deflation.
Deflation is politically undesirable for governments because people think they are becoming poorer as the stock markets and house prices fall, in fact the opposite is generally happening, their cash wages and savings are increasing in value. Because it is politically undesirable, deflation is a relatively rare occurrence, inflation is the norm.
When the money supply is deflating, the value of individual pounds increase relative to other assets and prices appear to fall. When prices of assets are apparently falling then it's obviously best not to own them. Instead it's better to invest in either:
» Cash, in a bank account.
» Bonds. Bonds are simply IOUs, basically they are debts which pay a set level of interest for a set period. The most common are government bonds, also known as gilts or gilt edged securities. Bonds should be purchased when interest rates are relatively high.
How do you know what the money supply is doing?
The money supply figures are published by the central banks. The Bank of England, the European Central Bank and the Federal Reserve in the USA. All of the central banks try to use interest rates to manage the level of the money supply. Obviously when interest rates are high, fewer people will take out loans and more money will be paid in debt interest payments, removing it from the economy.
» The Bank of England money supply figure is the M4 lending figures, published monthly.
» The European Central Bank publishes M3 money supply figures, monthly.
» The US Federal Reserve used to produce M3 figures, but recently stopped. The closest officially available now is the M2 figure.
All the figures are available on the web sites of the organisations and I strongly suggest you keep a very close eye on the money supply figures for each month.
Flip flopping your money
By moving your value out of cash when the money supply is increasing and into cash when it's decreasing you can take advantage of inflation and the manipulation of the supply by banks and governments. You avoid having your savings devalued.
However, you have to be sure when selling assets for cash that you are not going to pay more in Capital Gains Tax than you would be saving over any fall in the asset's apparent value. CGT is soon to be a flat 18% of any gain in value, which is a significant percentage of any gain.
Inflation is more common than deflation, which is very uncommon, but which can arrive as a “market crash”, so generally keeping your investments where they are is safer than flipping back and forth between cash and assets and paying the tax. It may be more worthwhile doing this if you invest using a TESSA or ISA which exempt you from Capital Gains Tax. You would have to talk to a tax expert on this particular aspect of money.
The true state of affairs
The true state of affairs when investing in the stock markets or property market is that you are really avoiding the devaluation of the currency. Your investments are not generally really increasing in value at all (unless they happen to beat the rate of money supply). So in reality you are avoiding losses rather than making gains. Though almost no-one sees it this way.
Debt based money; The BOOM and the BUST
By Colin Smith, Glasgow
"To understand how using Fractional Reserve Banking; a debt based monetary system creates booms and busts you have to understand that the level of debt quite naturally increases exponentially with the interest. That paying the debt actually removes money from existence and that changing the interest rate on the debt determines two things.
1. Whether or not people want to take out new loans. If the interest rates are high, people won't want to.
2. How much interest is paid on the existing debt and therefore how much cash is actually removed from the economy as the interest and debt is paid.
When interest rates are low, people are quite happy to take out new loans. They can afford the interest payments easily. So, lots of loans are taken out which generate lots of new money for the economy. This basically increases the money supply, generates lots of buying and selling activity and causes the rest of the money in the economy to devalue. We see this devaluation as price increases; Inflation.
On seeing that inflation is increasing, the central bank correspondingly increases the interest rates, and gradually all of the debt holders find their interest payments a bit of a struggle.. Fewer people take out new loans as the rates go up. The debt payments are also taking cash out of the economy and the supply of money is decreasing.
Now, if the central bank do nothing with high interest rates, the debt payments will simply continue removing cash from the economy eventually leading to zero money, so long before there's even a hint of something like that happening, the central banks lower interest rates again in order to entice people to take out new loans. They always have to overcompensate so that the money in the economy is always growing rather than shrinking. This is rather a political decision.
Because the central banks can't have foreknowledge of the level of inflation, their information always lags the real state of affairs. Therefore there are always, overcompensations when there are high levels of inflation and also when there are risks of recession.
Basically central banks meddling with interest rates cause booms and busts we see in our economy, but there is no choice but to meddle, the debt based nature of our money requires that people be encouraged to take out new, larger loans to pay off old ones.
This is a problem which is relatively unique to debt based money.. The nature of debt is that it introduces exponential growth to the system.. Other monetary systems don't have this built in growth and crash cycle.
You might think that the central bank could set the interest rates such that there is a balance between new loans and old loans being paid off, and yes they would love to be able to do so, but unfortunately, even then, the exponential growth required by the debt is simply unsustainable in the real world. It would require increasing numbers of people to take on increasing levels of debt for ever. We are seeing the result of this issue at the moment.
As time passes and more and more time on the growth side of the money equation continues the banks eventually run out of people who can afford to pay for debt. Eventually they start selling debt to people who can't really afford to pay for it. This is what the "sub prime" crisis in America is. We have similar "self certified" people here in the UK, When additional debt cannot be created, the existing debt simply continues sucking money out of the economy as it always has and what was a long and large boom turns into a bust of potentially similar magnitude.
So, no matter what Gordon Brown says. Boom and Bust are here to stay as long as we use Fractional Reserve Banking. Whether he simply doesn't understand the nature of the system or has other motives for saying so is for you to decide.
So, you THINK you know where money comes from …
By Colin Smith, Glasgow
"Yes? So where? Where does the money you have in your pocket and in your bank account come from?
Who created it?
It comes from the Government! … Nope. It doesn't.
It comes from the Treasury! … Nope. And that's part of the government.
It comes from the Mint! … Nope. It doesn't, though they do print some.
It comes from the Bank of England! … Generally Nope. Though they do have the ability.
Of all of the money we have, almost all of it is created by your local bank. Yes, created.
In the UK, the system of banking we use is called Fractional Reserve Banking. This is a system whereby the government allows the bank to hold a small reserve of any cash it has been given, and then loan out up to the value of the rest. They have to hold on to, on average, about 3% of the cash as "reserves".
The act of loaning out the cash literally creates new money. This is where all of our money comes from. I can feel the scepticism from here. The bank just loans out your money doesn't it, that doesn't create new money…
Well…. This is how Fractional Reserve Banking creates new money. Lets pretend the reserve ratio is 10% for easy calculation.
1: The mint prints £100 and gives it to you (Person A).
2: You (Person A) take it to Bank A. They now have £100 in your bank account…
3: Someone else (Person B) goes to Bank A and borrows £90 at 5%. Bank A legally has to hold on to £10 as reserve.
4: Person B sticks the borrowed money into their bank account in Bank B. Bank B now has £90.
5: Person C comes along to Bank B and borrows £81 at 5%. Bank B holds on to £9 as reserves.
6: Person C sticks the £81 money into his account at Bank A..
Now…
Bank A now has 181 pounds in their accounts, Bank B has 90 pounds in their accounts…
That does not add up to the 100 pounds the mint originally printed. There is now, £271 worth of cash in our economy. There is £171 worth of new money.
Person A still has £100
Person B now has £90
Person C now has £81
Now, I don't know if you noticed, but as well as the £171 of money which has been created from nothing by the banks when the loans were taken out, there has also been £171 worth of debt created at exactly the same moment.
So there you have it. Almost all of our money (97% of the money in circulation) was created by your friendly local bank, wasn't that nice of them.
But wait.
They don't create this money from nothing for the good of their health. They are slaving over those hot books 8 hours a day to loan you that money they just created… from nothing… They charge interest on the cash which they created from nothing for your loan. They charge interest on the debt. But… if they charge interest, and 97% of our cash comes from loans, how can we repay all the debts?
I've established that almost all of our money is "borrowed into existence"… But if that's the case and the banks charge interest on it that means that more must be repaid than was ever created.
A £100 loan at 5%.
£100 cash and £100 of debt.
1 year later.
£100 cash and £105 of debt. Pay off £20.
1 year later.
£80 cash and £89 debt. Pay off £20.
1 year later.
£60 cash and £72 debt. Pay off £20.
1 year later.
£40 cash and £54 debt. pay off £20.
1 year later.
£20 cash and £35 debt. Pay off £20.
1 year later.
£0 cash and £16 debt…
Oops. No money left in the economy, there is none in existence but we still owe a debt of £16.
What's the solution? Well… What happens at the moment is we simply take out another larger loan to pay off the existing loan and interest and postpone the problem. The debts get larger every year and the amount of money and debt in the economy grows every year.
This is where all the money in our economy comes from and it is also where all the debt in the economy comes from. Our monetary system is debt based, we have trillions of pounds of money and even more trillions of pounds of debt.
So, our money is created by the high street banks; Abbey National, Alliance & Leicester, Barclays, HBOS, HSBC, Lloyds. It is created from debt we owe to these banks, it is not created by the government.
The value of money CHANGES
By Colin Smith, Glasgow
"I stated previously that money was just a commodity like any other. Nothing special about it at all. It's simply used to exchange for other goods. However there is one aspect of money which is very misunderstood generally…
Money is subject to the rules of supply and demand. Just like any other commodity. That means that when there is too much money around, it's value falls, and when there's not enough money around it's value increases. How can there be too much money around?
Well. Imagine everyone is suddenly given a million pounds, sitting there in their wallets and purses. How much is that million pounds worth now?
So. If somehow you increase the supply of money to the economy, the value of the total amount of money stays the same, but the value of any one piece of money decreases. If you remove money from the economy, the total value stays the same but the value of any one piece increases.
How might this behave?
Well, on a desert island, everyone has £1 for food, and a potato costs £1. Now everyone is given another pound so everyone has £2. How much are those potatoes going to cost? The price will very quickly become £2…
This is the nature of the increasing supply of money, as any one piece of money decreases in value, the price of other commodities appear to increase. The supply of money doubled, the money halved in value because there was twice as much of it around. The prices doubled compared to the previous price.
This is inflation.
Inflation is a measure of the devaluation of a currency. It isn't simply the increase in prices, but the money is actually becoming worth less.
When you see prices round you increasing, it's because someone somewhere is increasing the amount of cash there is around, and therefore reducing the value of the individual pound
First of all, what IS money?
By Colin Smith, Glasgow
"People think money is Pounds, Euros or Dollars, but no. They are simply types of money.
Money itself is simply a medium of exchange, it could be anything at all; beads, shells, circles of gold or little green rectangles of paper. The key defining feature of money is that people accept it in trade for some other commodity. It has no use of itself other than as trade for something else.
Historically people would barter the trade of one commodity for another. Chickens for sheep, skins for beads, beads for firewood, firewood for chickens, chickens for coffee, coffee for oil etc. The complex arrangements of the relative values of the commodities increases geometrically with the number of items. Money is the solution to this complexity, everything is traded with respect to the value in money. However the key feature remains whether bartering or trading using money. You are exchanging one commodity for another.
That is… Money is just another commodity, exactly like coffee, like oil, like chickens, like beads.
Money is a commodity who's usefulness is that it can be traded easily for something else. And it behaves just like any other commodity, it is subject to the laws of supply and demand in exactly the same way.
Inflation: The poor poorer and the rich richer
By Colin Smith, Glasgow
"So you can manipulate the value of money by changing the supply up or down.
When you devalue the money by increasing the supply, you are making it worth less relative to everything else. Everything appears to become more expensive. However, some goods are more in demand than others and so their price appears to increase more than others.
We have two things going on here when prices are inflating. Assets and commodities hold their value, they after all, remain as useful as they always were, and cash decreases.
Lets take an example.
One person (A) has £100 in cash. Another (B) has £100 worth of gold in a gold coin. The value of the coin and the value of the cash are equal.
Person A has 50% of the value in the economy; £100.
Person B has 50% of the value in the economy; £100 coin.
If however, we introduce another £100 of cash into this fledgling economy in the hands of a third person (C), the total cash in the economy has doubled. There is now £200 of cash and one coin. The value of the individual pounds halves… This is important.
1: The gold coin holds the real value it originally had because it's supply is the same.
and
2: The original holder of the cash, person A still has £100 of cash in his pocket. But it's value has halved. Person C has the other half of the value which used to be in Person A's wallet. Both their holdings of cash have dropped value individually.
Person A now has 25% of the value in the economy; £100
Person B has 50% of the value in the economy; £200 coin
Person C has gained 25% of the value with £100.
If we continue this, Person C is given another £100 so he has £200, Person A has his £100 and Person B still has the gold coin the situation is now as follows..
Person A now only has 16% of the value with his original £100
Person B still has 50% of the value in the economy, the coin is now worth £300.
Person C now has 33% of the value with his £200.
You should be able to see how the value in the society is being moved. Originally Person A could have purchased the gold coin but as the supply of money increased, the cash he owned became valueless. The value was transferred to Person C. Only Person B retained the wealth he originally had and that was because he didn't have it in cash..
Items which tend to increase in price most as the money devalues include things like property; houses, stocks and shares and commodities like gold, silver, oil. They retain their value in the light of increasing money supply. Cash, does not.
Unfortunately for the poor, and even the working classes, their wages and savings are usually denominated in cash, not in assets or commodities. Therefore they slide down the economic ladder at an exponentially accelerating rate. It is the rich who move their value into property, commodities, stocks and shares which essentially sidestep the effects of inflation, or even take advantage of it.
In terms of the magnitude of the effect of inflation. Accordin
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