29 June 2013

Interest, the self-destructive component of the system

Interest is like the self destruction button in a James Bond car but within a currency. A currency is a widely accepted medium of exchange. A currency should be backed by something of intrinsic value, such as gold and silver.

In today’s worldwide currency systems all we have is paper-currency, backed by a promise of the government. The government is a reflection of its people. And how much these people can possibly earn in the future to pay back the debt. The system works because everyone believes that the paper Euro, Dollar or whatever currency you hold in your pocket will be accepted by the shop owner you like to buy a loaf of bread of.

Currency is born through debt. With debt comes interest. Interest will be paid on deposits and charged on loans. The Central Bank regulates and figures out the interest rate.
If the interest rate is high, you’ll have to pay a higher rate on loans and will receive higher pay outs on your deposit and vice versa.

The original idea was by changing the interest rate Central Bankers can regulate the amount of currency that floats around in an economy. This is to insure a country has a stable currency. But the system is flawed because historically the track record of Central Banks is very poor in achieving this goal.

Therefore we can say: Low interest rates mean a higher amount of currency floating in the economy, higher interest rates less currency floating around as loans are expensive.

This chart shows how interest on a deposit works:


The longer you have your money in the bank and the higher the interest rate is, the more and quicker your deposit increases in numbers.

If you invest 10,000 for 50 years with 6% interest per annum the result will be:

10,000 invested
30,000 interest plus
144,000 compound interest

From where does the 30,000 and 144,000 come from? Accurate, from debt someone else has. The bank lends your savings to the corporation, state or foreign country and the money comes back with interest. The borrower pays the interest either through cutting expenses or with continued growth (earnings).

Meaning the company who has the loan needs to sell more products with more profits. Everyone that has a loan is under a constant pressure of growing in order to pay the interest. The growth needed for the total economy to pay the debt is minimum the percentage of the interest rate.
The complete picture looks like this:


The vertical line shows total money supply. The upper graph ‘GV’ shows the total savings and the lower graph ‘VS’ shows the loans. On a long enough time line ‘Zeit’, both graphs go to infinity as the formula that compound interest is based on is y=x2.

The above mentioned mechanism is the classical theory they teach us in school.

Let’s conclude: If you receive interest on your saving, someone else needs to have debt and pay for it.

Ok, let’s dive a bit deeper into the creating of debt based currency.

For example, the Federal Reserve prints and creates all the US-Dollars, these Dollars are lent to the American government at 5% interest per annum.

Let’s say all the dollars created are 10,000 at 5% = 500 dollars in interest per year.

From where does the 500 dollars come from? Did the Federal Reserve create the 500 in the first place? No.

The first point is: The currency to pay back the loan to the Central Bank was never created. If the state owns the Central Bank, all well and good but this is not the case of the Federal Reserve as it’s a private corporation owned mainly by 10 families.

The question is ‘How is the interest paid back?’ It is paid back in a way that the state who owes the interest starts to tax people. If you have to pay a fee or tax that means you have to work more or spend less in other areas. In these days the state requests more loans just to pay the interest.

Knowing the currency to pay the interest was never created implies every citizen of the state needs to make up for it. In the beginning of a currency system no one notices as the workload to pay the interest is very, very low. But overtime it increased and now we have to work more than 6 months just to pay taxes; which is interest to the bank.

Secondly interest creates inflation and nothing else.

It is said that fluctuations of markets, offer and demand, unemployment cause inflation but this is not accurate.

The annual average inflation over the last 500 years:

What happened in these time frames? In the years from 1500 to 1799 there was gold and silver used as money. In 1913 the Federal Reserve went into business creating all the Dollars.

Saying the there was always inflation is not accurate according to the latest economic research.
Thirdly every price you see and pay is artificially higher caused by interest.

68% of the total price of German council water is interest. The total price on your water bill contains the interest the council pays to a bank. Taxes are nothing more than state interest handed over to the ordinary man or wife.

One litre of petrol at German gas stations contains between 80 and 90% taxes. Prices could be 80% lower than today if there was no interest to pay.
Point number four is interest creates interest.

Let’s look at the example of Germany. You can easily do this with the country you live in:

Database 2010:
Income through taxes: +474 billion EUR
State expenses  -  451 billion EUR
Interest   -    66 billion EUR
Deficit:        43 billion EUR

The missing 43 billion will be issued in government bonds that either the Central Bank buys or foreign and/or domestic investors purchase. An interest rate will be paid.

This is a vicious circle. From a newly created paper-currency based economy it takes about 45 years to come to the point of no return, whereas the government needs to find more and more investors just to pay the debt. In the case of Germany this point of no return was in 1990.

When an economy reaches this point there will be all sorts of ‘clever guys’ inventing taxes upon taxes. So let’s raise the tobacco tax a bit and therefore we have more vat. Tax upon tax creates accelerate inflation. To where we come back to: State interest is handed over to the citizens in form of taxes.

Here’s the historic price example of a pack of cigarettes (19 cigarettes/pack)

1953  0.97 EUR
1972  1.07 EUR
1982  1.85 EUR
1992  2.20 EUR
2002  3.00 EUR
2012  5.20 EUR
Reading this little chart here; the question is: How much did the raw commodity tobacco rise from 1953 to 2012? According to the research of ‘Campaign for tobacco free kids 2001:6’ the commodity tobacco has not risen in price since 1960.

Which is another example of how the real world does not see inflation. So where’s the money going? It goes to the government to pay interest.

In addition and let me explain the governmental system of tax upon tax.
Let’s say one litre of ‘Unleaded super’ at the gas station would be without any taxes and customs duties:

1 barrel of oil = 159 litre makes 50 litres of ‘Unleaded’ at the gas station. One barrel (extracts 50 litre of ‘Unleaded’ costs $118, so one litre without any taxes cost $0.424 or in Euro 0.323.

One litre ‘Unleaded’ at the gas station costs between 1.60 Euro to 1.80 Euro – depending where you are in Europe a mark up of 556% or looked at it from the other side 82% of the total price are taxes.

Ok, say you’re in the government knowing these figures and your task is to invent higher earnings. Or in other terms your job is to creatively milk people without them knowing it.

One litre costs Euro 0.32, you raise petroleum tax from say 457 to 470%. In the eyes of the taxpayer you easily can justify this ‘tiny’ 2.8% raise. But the truth of it is, on top this ‘tiny’ raise there’s vat. And vat will be charged on top of the higher net price.

Let’s look at the numbers:

Because of the vat system you are charged 23% (or what the vat rate in your country is) on top of the petroleum tax raise. In this case it’s an additional 1 cent per every litre. Now that does not sound like very much but if you think about 171 million litres of unleaded petrol that cars registered in Germany consume every day, times 365 days per year, that makes a lot of extra cash.
It’s 624,150,000 EUR (624 million Euro) every year just with this little trick.

The bottom line is we’re milked mercilessly with these tricks left and right all the time. Now knowing this – let’s accept it and move on. We’ll continue with interest and inflation.

Point number five is: As interest creates inflation, inflation destroys purchasing power.

Money per definition is something of intrinsic value. It can buy you something. Currency is a medium of exchange and as said backed hopefully by something of intrinsic value = money.

I look at money as stored labour. You go out to work and create value and get paid. You have 100 (whatever currency) leftover after the month has ended. That’s surplus.

It’s a result of you working and having a bit of cash left. It’s surplus labour. If you put this surplus in the bank because you don’t need it, you store your labour.

Now, after a while of accumulating surplus labour in your storage place called bank you think about having a decent holiday, time-off. So you take some of your stored labour and invest in a holiday.

That’s the system. Now, here comes the trick. Are the hours you worked to create your surplus worth more or less in one or ten year’s time?

You bet, an hour is an hour and therefore you should be able to have stable – not growing or falling– purchasing power in one or ten or 20 years time.

But because of interest the value of this stored labour namely money in the bank gets destroyed as the money mass needs to increase to pay all the debt. And in these days the market gets flooded by way more than 10% of freshly created currency every year that dilutes your bank account.

You don’t see it as the numbers on your account statement indicate an increase but the truth you can buy less stuff with the same amount of money than you could even two years ago.

That destroys your stored labour – you’re loosing by keeping the money in the bank. Don’t blame me, it’s the system we’re in.

Point number six is: The interest formula goes mathematically to infinity

Looking at the chart from page 4 that we all know from school you can see an exponential function. Mathematically an exponential function goes to infinity. Here is another lovely example on how destructive compound interest works.
If you would have invested $1 at the time of the birth of Jesus with 4% interest until 1950 you would have a total balance in your account of $1,64 * 10^33. This is 1,64 and then 33 zeros.

Or, estimated in gold with $52,500 per kilo you would receive 1,003 planets of earth size made of pure gold. This little example just shows that interest goes to infinity.

Let’s summarize:

#1 There are as much savings as there is debt
#2 A monetary system based on interest leads to destruction as the currency is created on debt. Debt implies interest which leads to pressure of constant growth. It magnifies greed which historically leads to war and social unrest.
#3 A monetary system based on interest leads (if not war) to a default of the currency – on a long enough time line. The point of no return in an interest based system will be reached after 45 years in average.
#4 Taxes have been invented to pay interest for state debt
#5 Interest goes mathematically to infinity – it is unnatural.
#6 Interest based currency creates inflation – nothing else.
#7 Inflation destroys your purchasing power

What to do? – A few suggestions:

We live in this system and there is a lot of movement and information circling. Many are well known economists, professors, respected authors that try to teach politicians about the nature of interest and systemic risks.

For now, with no success. Historically there have been only small timeframes known as the golden age where there was no currency devaluation, fraud and manipulation going on. So we have to live with it as we can’t change it.

Every situation provides huge opportunities. So the solution is to:
• protect yourself against inflation, own physical gold and silver
• become more self-sufficient,
• change your car into a smaller one that consumes less gas as in
addition oil prices drive inflation,
• grow your own veg it’s much cheaper and much more fun,
• reduce debt as best as you can and
• spend less

As usual when an interest based system starts to accelerate it turns into currency devaluation which may lead into hyperinflation once the trust goes.

Author: celticgold.eu

Older All Ireland Gold Tour – Road Diary Newer Goldandsilveruk.com interviews Stefan from CelticGold