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Margrit Kennedy - If Money Rules the World - Who Rules Money

Margrit Kennedy - If Money Rules the World - Who Rules Money

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Published by Helyi Pénz
Margrit Kennedy - If Money Rules the World - Who Rules Money
Margrit Kennedy - If Money Rules the World - Who Rules Money

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Published by: Helyi Pénz on Jul 11, 2011
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In the late seventies, environmental-ists – among whom I count mysel– were among the rst to questionthe present money system, which – inorder to unction – requires exponen-tial growth returns that the planetcould never sustain. We discoveredthat there was a severe lack o un-derstanding on the most basic actsabout money amongst laymen as wellas proessional economists. Up to thisday, it remains almost taboo amongeconomists, bankers and politiciansto discuss it publicly, as i the globalmonetary system was a undamentalgiven. However, nothing could beurther rom the truth.
I rst discovered that there is a ba-sic antinomy between ecology andeconomy due to a well-hidden prob-lem in our money system. I startedto nd practical solutions, which aredemonstrating how we can nallyree ourselves rom being ruled by ourmoney system – to ruling it.
The hidden problem:compound interest
Money – as one o the most ingeniousinventions o humankind – acilitatesthe exchange o goods and servicesand, thereby, overcomes the limita-tions o barter. It creates the possibil-ity o specialisation as the basis ocivilisation. Taking a more detailedview leads us to a problem that hasbeen ignored or a long time: theavailability o money – based on thepayment o interest – has two sides.The useul side most people under-stand immediately sees interest as theprice or money, which unctions as anindicator or the scarcity o productsor money in our economies – andas such, it is dicult to replace. Theproblematic side, which is rarely dis-cussed, is that interest also creates animpetus or exponential growth. Whatwe call ‘interest’ not only contains thecost o the work o the bank, a riskpremium and an infationary adjust-ment, or example costs, which can-not be eliminated, but also containsthe so-called ‘liquidity premium’. Thisis the reward or the lender who lendshis money to others. Money ownershave the ability to hold money backuntil the ‘price is right’ as it producesalmost no storage costs like all othergoods. Money – in its present orm –thereore not only provides a key, butalso a lock to the market.This possibility or the retention omoney tends to distort all marketmechanisms, and over time, money– and not the provision o goods andservices – becomes the prime ocuso all economic activities. Foreseeingthis in 1936, Keynes wrote: “Specula-tors may do no harm as bubbles on asteady stream o enterprise. But theposition is serious when enterprisebecomes the bubble on a whirlpoolo speculation. When the capital de-velopment o a country becomes a by-product o the activities o a casino,the job is likely to be ill-done.”We now live in a time in which thecapital development o the worldseems to have become a by-producto the activities o a casino.Thereore, the question aris-es: How can we createa money system, whichavoids the compoundingo interest and all its associatedproblems? Thereore, it is useul tounderstand three – out o at leastthirty –misconceptions about money,which almost everybody holds.
Three misconceptions
1. The ‘Growth Misconception’
is basedon the belie that money based oninterest can grow orever – and thisin turn is based on people not un-derstanding two generically dierenttypes o growth.Curve a) represents the normal physi-cal growth pattern in nature in whicheverything stops growing at an opti-mal size. This is the only sustainablegrowth pattern that exists.Curve b) represents exponentialgrowth doubling its units at regularintervals. It may be described as theexact opposite to curve a), in that itgrows slowly in the beginning, thenaccelerates continually aster and,inally, grows in an almostvertical ashion. Based oninterest and compoundinterest, our money ollowsan exponential growthpattern: at 3 percent com-
If money rules the world– who rules money?
A case or complementary currencies
orumCSR international
pound interest it doubles in 24 years;at 6 percent it takes 12 years; at 12percent 6 years.To show the impact on money in thelong run, we may use the amousexample o Josephs’ cent investedat 5 percent interest in the year 0.In the year 2000 this cent would beworth over 500 billion balls o goldo the weight o the earth, at theprice o gold in that year. Withoutthe compounding o interest, thesum accumulated would have been1,01 Euro.This shows that it is not interest thatis the problem, but the compound-ing o interest. Through the use othe ‘discounted cash fow’, however,interest and compound interest pro-vide the basis or all evaluations oeconomic eciency or investmentsin conventional currencies.
2. The ‘Transparency Misconception’
 deals with the second major dicultyin ully understanding the impact othe interest mechanism on our eco-nomic system. Most people think thatthey pay interest only i they borrowmoney. They do not understand theact that every price contains a certainamount o interest, depending on theshare o capital deployed per unit ooutput. This relationship – togetherwith the rate o interest – determinesthe interest component in prices. Forthe three ollowing examples romGermany, it ranges rom a 12 percentinterest component in the price orgarbage collection (because here theshare o capital costs is relatively lowand the share o physical labour isparticularly high) to 38 percent ordrinking water – and up to 77 percentin the rent or public housing (whencalculated over 100 years, which is theestimated time houses in Germany aresupposed to last). On average, peoplein Germany pay about 45% interest inthe prices o goods and services theyneed or their lie.
3. The ‘Fairness Misconception’
isbased on the notion that everyone istreated equally in our monetary sys-tem. We all have to pay interest whenborrowing money and receive interestor savings. However, when we takea closer look, there are indeed hugedierences as to who prots rom andwho pays in this system. Comparingthe average interest payments and in-come rom interest in ten equal partso 2.5 million households in Germany,we can show that 80 percent o thepopulation pays almost twice as muchas they receive, 10 percent receiveslightly more than they pay, and theremaining 10 percent receive morethan twice as much interest as theypay. This last amount is the share thatthe rst 80 percent loses.This illustrates one o the least under-stood reasons why the rich get richerand the poor get poorer – and thatthe economists’ notion that moneyis just a neutral veil or the economyis incorrect.In Germany, in the year 2004, about1 billion Euro were transerred everyday rom those who work or theirmoney to those who can make their‘money work or them’. But moneynever ‘works’. Only people and ma-chines produce real value. Money canonly be re-distributed rom those whocreate that value to those who ownmoney. In other words, we allow theoperation o a hidden redistributionmechanism in our monetary system,which continually transers moneyrom the large majority to a smallminority, creating a social polarisationthat undermines any democracy overtime. An Argentinian banker, who hadworked in the National Central Bankor 36 years, once asked me – in re-gard to this gure: “…and what use isequality beore the law or us withoutequality beore the money?”Even more to the point, PresidentObasonjo o Nigeria stated ater theG8 summit in Okinawa in 2000: “Allthat we borrowed up to 1985 or 1986was about $5 billion. So ar we havepaid back about $16 billion. Yet we’rebeing told that we still owe about $28billion … because o oreign creditors’interest rates. I you ask me what isthe worst thing in the world, I will sayit is compound interest.” At that time,the developing world was spendingthirteen dollars on debt repayment orevery one dollar it received in oreignaid and grants.Many believe that those 10 percentwho prot rom the system are theculprits who will not allow undamen-tal change to take place. However,even the rich are just as helpless tochange it as the poor. The late bil-lionaire Sir James Goldsmith oncesaid: “What use is more money to mewhen I will be surrounded by moreand more poor and suering peoplewho hate me? I eel as i I have won agame o poker on the Titanic!”
     G    r    o    w     t      h
a) Natural / logistic growthb) Linear growthc) Exponential growth
Two Results
Out o the many devastating results,due to this well-hidden mistake in ourmoney system, two are particularlynoteworthy: infation and monetaryinstability.
1. Infation:
Between 1950 and 2001every Deutsche Mark lost 80 percento its value – and this was the moststable currency in the world. For mostpeople, infation seems like an integralpart o any money system – almost‘natural’ – since there is no country inthe world without infation. Becauseit is perceived as a given, economistsand most people believe interest isneeded to counteract infation, whilein act interest is the major cause oinfation. The creation o money iscarried out via bank loans. Whoeverreceives these loans has to repay themwith interest and compound interest.I we consider the world economy, itollows that the amount o moneyin circulation is systematically insu-cient to repay all debt. Leaving asidetemporary contractions, it is onlyby a continuous expansion o themoney supply that economic actorsas a whole can sustain their abilityto pay.So where is exponential growth actu-ally taking place? The asset marketshold the answer. It is in the numbero assets and in the asset evalua-tions – and this is especially true orthe securities market that has grownexponentially over the past decades.However, unless this rise correspondswith a comparable rise in the produc-ing economy their surge is excessive.These overvalued assets serve asbacking or creating loans. But – ithe backing is getting weaker – howis the money not supposed to losesolidity? In a monetary system withcompound interest, infation cannotbe prevented. At best, it can be keptat low levels or a number o decades.Ultimately, a correction – that meansa massive and painul adjustment – isinevitable. We see the beginnings othis process right now.
2. Monetary instability
is a secondresult o the exponential growth pat-tern in our money system. In contrastto measures like the meter or thekilogram, we are used to the act thatthe exchange rate o our currenciesvaries almost daily. Cashing in on thisvariability, the global volume o specu-lative oreign currency transactionsbetween 1974 and 2004 increased to97 percent, with a mere 3 percent othe transactions serving the exchangeo goods and services including tour-ism. Recent gures in 2007 show thatthe daily volume o trading alreadyexceeded $3.200 billion – whereas inthe 1970s it amounted to just $20 to30 billion. Thus, economic instability iscreated on a global scale. Ater specu-lative money fowed massively intoThailand, Malaysia and Korea in theearly 1990s – only to be withdrawn aew weeks later – it let the most dev-astating eects – not unlike war – onthe culture, ecology and society.
Three historical solutions
The religious leaders o Judaism, Islamand Christianity understood the prob-lems o compounding interest and letus solutions how to deal with it:
Sharia observe a complex set orules to prevent interest romcompounding. It orbids not onlyinvestments in morally or sociallyprohibitive activities, but alsospeculation and excessive costs oloans and, consequently, makesthe moneylenders – whether pri-vate or proessional – a part o theproject, which they are nancing.Thereore, they have a strong senseo responsibility or its continuityand success.
o compounding interest by waivingall debt regularly every seven yearsin the so-called “jubilee year”. Aterseven times seven or 49 years, notonly debts were ‘or-given’ anddebt-slaves were reed, but alsoprivate land was given back to thecommunity.
mainly during the Middle Ages be-tween 900 and 1400 AD, imposedstrict interest prohibition laws. Theypunished those who levied intereston loans severely, excluding themrom the Christian community andChristian unerals. Money was keptin circulation by regularly re-callingand re-minting the thin metal coins– in some areas called Brakteaten– every three to our years and bylevying a ee o 30 to 40 percent inthe renewal process. This was – atthe same time – a way o collectingtaxes. The use o the old coins wasorbidden by law and sanctionedby prison sentences. This timerelated charge on money – called‘demurrage’ – acted as a ‘circula-tion incentive’ and meant thatnobody was able to hoard moneywithout risking a loss. Instead ocharging interest, people usuallyaccepted loans that guaranteedthe equivalent value ater somemonths or years – and thus theyeliminated the ‘liquidity premium’,or reward or the lender, whichcauses the compounding o inter-est. In terms o modern bankingpractices, leaving out this share inthe cost o interest would halve thecosts or loans and subsequently –over time – the 45 percent share ointerest in prices.All three historic solutions haveremained alive up to this day: TheIslamic model is nding more andmore acceptance among the Muslimpopulation in view o the ailure othe capitalist money system to provideor systemic stability and airness. TheJewish model o waiving the debtshas been advocated to counteractthe capitalist money systems’ inabilityto deal with social justice – in termso the waiving the outstanding loanso the least developed countries.And many o the complementarycurrencies now running in Germanyare using demurrage as a circulationincentive.Where these solutions have not beenapplied, three historic consequenceshave arisen: hyperinfation (or crash),social revolution and war. However,neither the 87 monetary crashes overthe last 25 years, nor World Wars Ior II, nor social revolutions like theFrench, Russian or Chinese, havechanged anything undamentally interms o the money system.
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