The Myths about Money, Time, Interest and Inflation

Money, time, interest and inflation have weaved together to become powerful manmade myths.  These myths are now the foundation of our economic systems and have the potential to destroy the world as we know it.  To understand how this could possibly be true, let us start off asking the simple question why the money in our wallet will be worth less tomorrow.  Without doing anything, it will automatically decrease in value over time.  To understand how this might occur, we should take a closer look at time.  This will require a brief journey into physics and relativity.  Time as we use it, is simply the measurement of the movement of objects.  One revolution of the earth on its axis is measured as a day, and one revolution of the earth around the sun is measured as a year.  Einstein called time the fourth dimension.  It is used as a linear measurement, meaning that since everything is constantly in motion, spacial location can only be measured in relation of one object to another at a specific point in time.  It is this relativity between objects that creates the illusion of time.  Time is not a constant, but a manmade tool to help society function in relative space.  Change the physical relationship between the earth and the sun by speeding up the rotation or reducing the orbital radius and you change time.   Both a day and a year will become shorter in length.  So the relative financial question is, why does the money in our wallets become worth less just because the earth rotates on its axis around the sun? Economists have taught us that it is because of inflation.  Price inflation occurs when supply cannot be maintained to keep pace with an increase in demand.  Prices are bid up in the market place by buyers competing for a limited supply.  The Central Bank or Federal Reserve Bank tries to reduce inflation by raising interest rates.  This makes it more expensive and difficult for people and businesses to borrow money so that they will not be able to purchase as much.  The Fed would not be able to do this, if the money supply or amount of debt were not branches of the same tree.  By “tightening the money supply” which means raising interest rates, the Fed is able to reduce the amount of purchases (by reducing the ability of people and businesses to borrow more) until the available supply can catch up to the demand in order to lower prices.  But over time, it should be obvious and self evident that this has not worked.  It never could work because the interest rate mechanism to control inflation is actually what causes it, regardless of the periodic micro-economic fluctuations between supply and demand.

If inflation was just caused by supply and demand, is it not odd that throughout history, overall supply has never caught up to demand resulting in lower prices?  Excluding those recent areas where continuous compounding of technological improvements occur such as in the computer industry, basic prices of real world physical goods and services have never stabilized over time, but have constantly increased despite great technological advances in materials and production efficiencies.

Take a car for example.  Forty years ago in 1970, an average car using many more raw materials weighing twice as much as today and produced in a much more inefficient way, cost $3000 to $4000 dollars.  Today the same car to perform the same transportation function may cost ten times as much, say $20,000 to $30,000.  If you used yesterday’s inefficient manufacturing processes needing the same amount of labor and materials to build today’s car, the same car today might actually costs at least twice as much, say $40,000 or $60,000 – that is twenty times as much or a 2000% increase in 40 years.  That is equivalent to doubling the price of a car every 10 years or having a compound annual inflation rate of approximately 7%.

Yet even though the cost of a car today is almost equal to the cost of a home forty years ago, our auto industry is struggling to survive.  There are many reasons for this.  Too much competition, high cost of labor, pension obligations, rising health care cost, escalation of raw materials prices, cost of capital, etc.  But why did labor costs have to go up so much? Why could not multi-billion dollar pension investments keep pace with its obligations?  Why did raw material prices and energy costs increase so much? Why are health care costs so high?   Even after auto manufacturers shifted the production of many components to cheaper labor markets in foreign countries and at the same time received domestic subsidies from state and national governments through tax abatements and other financial incentives, the cost of a car has just kept climbing.  So has everything else.  It seems that no matter how advanced our technology becomes, how hard most people work or how much we increase productivity, these improvements are never enough to keep costs from rising.  It is not that modern advances have to lead to cost reductions, but why does the cost of just about everything always have to increase over time? What is the relationship between money and time?

In business school and in investment advisor training, they teach about the concept of time value of money.  Money sitting idle is a lost opportunity.  Leaving it in the savings account to generate little interest income does not keep pace with inflation and will leave a person financially further behind.  Leaving money in the cookie jar at home is even worse.  It generates no additional income and becomes worth less over time.

But how is it that money sitting in one place like a bank account creates wealth on its own, and when in another place like your wallet, its wealth decreases?  Does its value ever just remain the same?  Why do people continue to need more money, higher salaries, and greater returns on investments, just to try to maintain the same standard of living?  Yet even after making investments and getting pay increases, many people are still not able to maintain pace with the cost of living.  Some have, but their numbers are dwindling.

These constant price increases alone cannot explain the devaluation of wealth over time.  That’s like saying a disease causes a disease.  There is an underlying force controlling all of this – and it is not inflation.  Inflation is not the cause, but an effect. The cause is the use of debt as the source of the world’s money supply.  The problem is the world’s current monetary system which uses debt, credit, loans, borrowing, or whatever term is appropriate to use, as the primary means of exchange needed for the world’s economies to operate.

It is not so much that lending out money is bad, because it can be a good thing to help a friend by lending him/her money.  The problem evolves out of using lending as the primary way to increase the supply of money coupled with the behavior of charging interest. And interest is justified by the myth of the time value of money, which originally evolved out of the concept of interest.  They both feed off each other in a self perpetuating mythical cycle.  Unfortunately this is not a circular cycle, but a downward spiral due to the infinite effect of compounding debt and interest.  The concepts of time value of money and interest are not natural laws, but manmade concepts that originated out of an effort of people to create wealth at the expense of others without actually providing any real service to society themselves. All major religions warn of usury and the dangers of charging interests, because as it can be shown mathematically, compounding interest eventually leads to infinite debt or wealth depending upon whether you are the borrower or the lender.  As a friend once told me, math is not an opinion.  Therefore, the accumulating effect of compounding debt and interest over “time” is not a myth, but a mathematical certainty which is not physically sustainable or monetarily manageable.  The world is a physically finite place with limitations, but its societies and resources are directed by a monetary system that is based on an infinite growth model of compounding interest and debt.  The initial effects are infinite inflation and consumption, until the world eventually runs out resources.  That’s why there are so many differing opinions between economists.  They can’t think outside of monetary system that has them boxed in trying to find a balance to something that can never be balanced. They haven’t figured out that the monetary system has exceeded its capacity and you can’t stuff the grown elephant back into a jar.

As a society, we have become used to expect interest on our savings.  If it helps pump money into the economy that needs cash, what does it have to do with inflation and the time value of money?  By providing depositors with interest on their deposits, banks in effect are giving their depositors a piece of their revenue to secure their mental “buy-in” into the mythical concept of charging them interest when they borrow.  Most people believe that banks lend out deposits which is not true.  If they lent the money out to businesses, it would qualify as investments in those businesses which accorded to Securities and Exchange regulations, would require your approval.    The interest on deposits is simply a way to attract customers to the bank. But since bankers charge a higher rate of interest on their loans than they pay their depositors, there is never enough money in circulation to pay it all back.  As a result, businesses are always forced to raise prices, cut costs or borrow more, trying to raise revenues needed to pay the loan back.  With not enough cash flow in the economy, businesses must fiercely compete where one company’s gain is another company’s loss.  Price fluctuations may occur periodically in economic cycles, but the underlying impact of charging of interest is the real unstoppable, rising tide of inflation.

Some say that printing money is the cause of inflation remembering stories of the German Marks in WWII or the British trying to wreck the American colonial economy by dumping counterfeit currency.  Today governments like the United States do not print their own currency, but rather print bank notes, a form of debt, for the financial industry which is used as currency.  Currency markets are just another sibling of the monetary system as controlled by the financial industry.  They help investors identify those national economies that are winning and those that are losing in the global economic competition to better guide investment and regulate trade.  Currently there is a very public dispute between the United States and China on the value of the Chinese currency.  Countries try to change their relative currency values in an effort to make adjustments in their levels of international trade depending upon what their national economies need at the time.

The monetary system regulating the world’s money supply is not the only manmade problem, but impacts just about everything else.   The world has reached its breaking point of where the available supply of natural resources is no longer able to keep pace with the level of consumption needed by a growing world population.  And so what happens in this system when these four situations collide at the same time:  1) compounding debt levels reach unsustainable levels; 2) there are real world shortages of material resources not able to keep pace with levels of consumption; and 3) price inflation has placed the costs of essential goods and services out of the reach of many people; and 4) increasing concentrations of wealth are resulting in less consumption – the few cannot consume enough to support the many? What happens is what we are beginning to see – collapses in the worldwide financial industry; the financial industry desperately trying to innovate into new ways of creating false wealth such as the globally trading derivatives back and forth within its own industry to fabricate the illusion of profits; multinational corporations intensely competing to acquire real material assets that represent real physical value like commodities; the push by corporations to relax environmental regulations in order to remain economically competitive; more intense struggles between labor and management; not enough money to invest in public commons such as education and infrastructure despite rising deficits; the accelerated liquidation of the world’s natural assets in the form of the destruction of the planet’s life supporting systems such as rain forest habitat, fisheries and agricultural land; people becoming insecure of their future and fearful of losing their accumulated wealth; greater unemployment, poverty and climates for crime, terrorism and piracy as people become more desperate; an increasingly volatile climate for world unrest and conflict; and more corporate mergers, increasing monopolies and concentrations of wealth and power into fewer and fewer hands while at the same time masses of people falling further behind economically.  These are just some of emerging problems that have economists and governments so worried.

In short, without the world changing its monetary system or the way money and wealth is created and exchanged, the world will continue on its path into a new, perilous and unpredictable period when there will be shortages of essential commodities for those that can afford to buy them combined with not enough wealth in circulation for others to purchase them.  For those individuals and corporations that control the commodities, it could be the beginning of a new golden age of record corporate profits.  Many investors are already salivating at the thought of coming world shortages which will cause rapid spikes in profits as desperate people try to outbid each other for the remaining commodities.  For those that cannot afford to be in the bidding wars, the only alternative might be to go to war to fight to survive.

But the problem is not just with the big investors and bankers.  They are the byproducts of a primitive society using a mathematically unsustainable monetary system that was created decades before they were born.  They are simply trying to succeed within a ruthless economic system that operates a winner take all competition, because in total at any given point in time, there is never enough cash in circulation for everyone to win.  Winning is minimally defined as having a life sustaining job, or being able to maintain a business.

This problem exists at all levels of society.  Whether it is individuals competing against individuals for fewer job openings, communities competing against communities for fewer businesses or nations competing against nations economically, the inevitable and widely pervasive impact of this win-lose or destructive form of competition is relentless. It is weaved into our culture to where it is totally embedded within our collective level of societal thinking, and it effects everything that society tries to do.  It drives consumer habits who know from experience that since their money will lose value over time; it is best to buy now, to consume.  This manmade monetary system encourages mass consumption.  Its enslaved economies absolutely depend upon it to function. As economists summarize it, one person’ spending is another person’s income. But without saving, as people age and are no longer able to work, they become dependent upon government programs to survive.  This creates bigger government and higher deficits. and the need for government bailouts.

As a human society, we are faced with an even more serious economic challenge because as the planetary ecological systems begin to breakdown from overuse, the world needs to start conserving, not consuming.  Failure to do so will be fatal to our species. The economic struggles between conserving and consuming, or not polluting and maintaining profitability is being waged right now on our planet.

The problems within our currently embedded economic culture does not end here either.  Even if people begin to do the right thing and consume less, this will hurt the GDP engines of economic growth.  Economies in developing countries especially dependent upon selling products to wealthier countries will begin to collapse forcing millions of their population back into desperate poverty.  Also as people consume less and save their earnings, they will seek somewhere to protect the value of their savings.  To try to make up for the devaluation of money over time, most people will invest their money in stocks or bonds to seek a higher rate of return than what they would get just leaving their savings in a bank deposit.  They might even seek to invest in those companies or hedge funds that have cornered the commodities markets eagerly hoping for high returns.

These expectations, put demands on companies to increase net earnings by both raising prices and cutting costs through such activities as moving operations overseas to take advantage of cheaper labor rates, fighting new environmental regulation that would cost money to implement, decreasing health insurance coverage for their employees or improving technical automation to reduce labor and operating costs.  Most of the worldwide focus of developing new technologies is devoted to addressing this competition between private businesses, not to solving the world’s problems.  Sure there might be some positives like installing new technologies to reduce energy consumption, but the overall effects on society are negative.  We are so caught up in this way of thinking that even our education systems use the need to compete economically as it primary motivation to improve. If it sounds like we are repeating a pattern, we are – because of a ruthless, insane system where doing what needs ends up hurting others.  Whether it is generating a return for their shareholders, earning enough profits to pay back the interest and principle on their debts, businesses must constantly find new ways to generate more wealth for their lenders and shareholders.   And the amount they expect is always more than what they originally invested.  Unfortunately, money in the form of equity investments can actually be more costly to society than debt.  While we are all guilty of playing our part in our eventual economic and environmental collapse through our savings and investment accounts where we expect others to work for us by providing returns on our investments and loans,  we don’t see it this way.  Entrenched in using this monetary system, we can justify our actions through such thinking as “If it was not for investors making investments, the average worker would not even have a job.” Just like economistswe believe it cannot be any other way.

This is why the current system is so insidious.  Trying to do the right things like consuming less, sharing, caring and saving, ends up making things worse.  Behaviors like gluttonous consumption, greed, materialism and ruthless competition are not only tolerated and supported, but are monitarily rewarded in this system.  Only a primitive species would continue to use as system that encouraged behaviors that are counter to its most sacred spiritual beliefs.  There are only three choices moving forward.  Either the monetary system must be realigned to be in economic harmony with planetary sustainability, or it must be changed completely.  The first may not even be possible, though immediate steps can be taken to minimize its effects.  The third choice is to do nothing and stay on the same downward spiral until there will be nothing left.

It can be very depressing to understand that humanity is caught within an unsustainable economic spiral cycle of constant inflation, dependent upon increasing consumption to function.  It is even scarier knowing that the world does not even realize that it is living within this cycle.  But the good news is that since this monetary system is simply a manmade process built on the foundation of false myths about money, time, interest and inflation, it can be changed. Humanity will only be subjugated to the system for as long as we allow ourselves to be.  To change it, it will require growth in human consciousness, a willingness to share resources in a more democratic way and a great deal of courage to go in an entirely new direction.  Imagine a world without interest where wealth never decreases in value.  The need to increase prices would be minimal, temporary or nonexistent.  There would be no more extracting wealth by those that do not add value from those that do.  Consuming less would not threaten, but enhance world economies and standards of living.  The pressure to liquidate the world’s resources would decrease significantly. People could focus on their work, their chosen method of contributing value to society and earn their wealth without someone having to go into debt.  Trade would flow freely and unrestricted within communities and around the world.  People would live and work free of stress without constant fear, subtle or obvious, that their wealth will automatically erode overtime. or be lost in a psychotic market.  Businesses could easily afford converting to new environmental technologies and the planet can begin to rejuvenate itself.  With a new monetary system, one that works for everyone in the world, we can rise to new levels of living together in harmony with greater peace and prosperity for all.

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