Ignorance, disinterest or head-in-the-sand syndrome: the Ponzi scheme that is our financial system

I’ve come to realise people don’t really understand how the economy works and often aren’t really that interested. Look, I know why — I mean, I wasn’t either until a few years ago, when it became clear to me that maybe it was something I should be interested in. I suppose in a way, it’s easy to feel like it doesn’t affect you (which I think is crazy, but what do I know?). I suppose that’s what happens when people feel alienated from the systems that govern their world. Anyway, I suspect a lot of people think:

  1. It’s the government’s job to know about these things, so why should they bother, and
  2. The government always has their best interests at heart, right?

Maybe it’s naïve (it certainly seems so to me), but I can understand why people might not be interested in getting involved; we have enough to think about already, what with choosing what kind of car to buy, getting other people to think we are cool, and (on a more serious note) trying to make ends meet. Not everyone has the inclination or desire to know about these things.

But for those who do care, and don’t know, let me give you a quick rundown. This is the super-simplified version, and I’m going to be up front with you and admit that my own knowledge on these things is limited and basic.

So, most people think that money is made by our governing bodies. That’s not really true. I think that maybe it used to be true, but since the advent of computers, most money is in fact not physical at all, and exists simply as a series of numbers in a shared database, created by banking systems. Of course we still print real money. That’s what the federal reserve, treasury, or reserve bank is for (among other things). But most money is not created this way.

Instead, the majority of the money in the world is brought into existence only when a loan is taken out from a bank. So, in this way, most money created is actually a negative balance and is actually fictional. Seriously, when you go to the bank and get a loan, that money doesn’t really exist, but is simply some digits typed into a box, which then appear in your account. You can then give those digits to others.

Okay, so far so simple? Here’s where the catch comes in. Because this (majority of) money comes into existence as debt, as a negative balance, it means effectively that all the debt (or fictional money) really grossly outweighs all the real money in the world. So, while it might be possible for an individual to pay back their personal debt, it not possible for everyone in the world to pay back their debt. Because there just isn’t as much real money as there is negative money. This is a little tricky to get your head around, so let’s check out this video (it’s a little cheesy and not the most sophisticated but it explains the origins of this system quite well):


This is basically fractional reserve banking in a nutshell (only a fraction of the deposits a bank holds are required to be held in reserve = fractional reserve banking). And this is why everyone’s gotten so upset since the global financial crisis; because they realised our global financial system was basically the world’s biggest Ponzi scheme. What makes it even worse, is that the only thing that keeps this scheme going, aside from ever-increasing debt, is people believing that the system is stable. Which is the very thing that people are now beginning to question.

But wait, there’s more! The other thing this system relies upon is ever increasing consumption of resources. Capitalism is a system that relies upon infinite expansion, infinite growth, infinite increase. The problem there being (if you hadn’t spotted it already), we live in a finite world. Furthermore, we’re starting to realise that we’re actually going to have to consume a little less pretty soon, because our (mis)management of resources has been, to put it lightly, unsustainable.

The problem is that a lot of people seem not to care; if they can still make lots of money and feel safe, then why should they? And, dear reader, we’re almost back in the bubble we were in pre-meltdown five years ago.  Not too many people saw the bubble itself as the problem, what was a problem was the chance that the bubble might burst. In other words, living in a dream world is okay, as long as no one wakes me up from that dream.

Welcome to the 21st Century; don’t look too closely and you won’t notice the cracks in the system.