This is a post I've been wanting to write a long time ago. A few months before the current world financial crisis.
Money creation
The process by which banks create money is so simple that the mind is repelled -John Kenneth Galbraith, Economist
Now let's see this video: Money As Debt (or this link with Arabic subtitles); a must see before you do any bank transaction (at least watch the first 20 minutes).
The video explains how Money today -instead of representing value like in the past- represents Debt. It shows how money is 'created'. In the past, for more gold/siver money to be created, more gold/silver had to be dug out. But in the present, -simplifing a complex operation- banks create money (out of no where) whenever anyone signs a loan from the bank. A loan is a promise to repay from the loaner's side, allowing the bank to conjure into existance the amount of the loan. The bank then collects interest on this amount. That's just it. The bank does not have the money it lends out. The system works because not everyone go remove their money at the same time (called a run on the bank), and because bank systems are like closed loops; money loaned from one bank is deposited in another.
95% of the money in our world is created by banks. This means that almost all of the money we deal with is fictional. It does not really exist.
I'm afraid that the ordinary citizen will not like to be told that banks can and do create money -Reginald McKenna, past Chairman of the Board, Midlands bank of England
Every single dollar in circulation is loaned into existence by a bank, with interest -Chris Martenson
Paying debts... Settling accounts?
One would be enticed to think that if all debts were paid, there'd be more money. Like in the case of personal loans. But the truth is: If all debts (of governments, businesses, and individualts) were paid off, there'd be NO MONEY. So our economies are totally dependant on this money creation process.
If the value of loans is P, then we need P + I money to repay the debts with interest (where I is the Interest value). But knowing that the amount of money in existance is P (because nearly all money is created by loans), where can we get the money to repay the interest I?
The answer is we need to create more money/debt. The system needs debt to continously expand just to function (have an acceptable percentage of foreclosures).
One thing to realize about our fractional reserve banking system is that like a child's game of musical chairs, as long as the music is playing, there are no losers -Andrew Gause, Monetary historian
But will the music stop?
We have seen how the money supply keeps expanding, but since the volume of production and trade does not grow at the same rate, we get this terrible monster called Inflation.
Our monetary system has to infinitely keep growing the amount of money/debt. But this exponential increase can't go on for ever.
Let's leave it to the scientists to explain.
"The greatest shortcoming of the human race is our inability to understand the exponential function." This is the opening line of a talk I have given over 1500 times since 1969. In this context, the exponential function is used to give a quantitative description of steady growth of, for example, a population. As we all know, quantities that grow steadily, at even modest rates, quickly become impossibly large. Yet non-scientists in the business and government communities continue to fight for "sustainable growth" of the U.S. economy and population. What are scientists doing to increase public comprehension of the impossibility of "sustainable growth?" The main role of scientists seems to be to avoid calling attention to the impossibility of continued growth of populations and of rates of consumption of resources and, instead, to focus on minor aspects of the related problems. In so doing, we are complicit in making the problems worse. For scientists, this opening line should be revised to read: "The greatest shortcoming of scientists is our unwillingness to apply our knowledge of the exponential function to the great problems that are facing the human race."
Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist -Kenneth E. Boulding, Economist
So instead of asking Will the music stop; we should have asked When will the music stop?
Current crisis
The current crisis that started in the U.S. ows its roots to the fact that banks became too lenient in giving mortgage loans, which led to a high percentage of foreclosures. But does not the code read that this should be no problem because banks will just take over the mortgaged property? Well, given the large number of foreclosures (and real estate properties for sale), real estate prices plunged downs. Banks did not get back the expected values. Also, too many properties for sale meant slower sales. And banks became short of liquidity -unable to fulfill their commitment. Multiple runs on banks happened. The domino effect started.
You must have seen that coming, right? After knowing how the system works. The contemporary monetary system is built and compelled on Greed. Therefore, the needed hard-to-reach balance to cover the fictional money was doomed to failure. It was blind greed of bankers and borrowers that caused the current mortage crises. The greedy 'continous expansion' can never work (see section “But will the music stop?”).
I related to how tricks of loans and interest have been used to control nations in this interview with John Perkins, author of Confessions of an Economic Hit Man.
Now read this
“Allah obliterateth usury, and increaseth the alms. And Allah loveth not any ingrate sinner” The Quran: 'The Cow' chapter: verse 276
“Those who devour Usury Shall not be able to stand except standeth one whom the Satan hath confounded with his touch. That shall be because they say: bargaining is but as usury whereas Allah hath allowed bargaining and hath forbidden usury. Wherefore Unto whomsoever an exhortation cometh from his Lord, and he desisteth, his is that which is past, and his affair is with Allah. And whosoever returnoth --such shall be the fellows of the Fire, therein they shall be abiders” The Quran: 'The Cow' chapter: verse 275
You can't just leave like that
Chris Martenson puts it this way: 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.
This is a time when we could really use the concepts of Islamic Economy that thrived the economy of Muslims for hundreds of years in an area that stretched from Spain to the borders of China. It is worth mentioning that Musim traders (with their morals and fair dealings) carried Islam to countries that are now predominantely muslims like Indonesia.
While muslim scholares have yet to formulate (and then implement) these concepts in our modern world, here are some resources:
Eid al-Fitr 08 Khutbah (sermon) by Shaykh Hamza Yusuf [YouTube video that touches on the current crisis]
Understanding Islamic Finance (The Wiley Finance Series) by Muhammad Ayub [Book -link given on Amazon]
Islamic Finance in the Global Economy by Ibrahim Warde [Book -link given on Amazon]
