The Compound Interest Paradox

I ended my last post with "Why does debt spiral out of control?"

I believe the answer is in the Compound Interest Paradox. I'm convinced the monetary system is fundamentally flawed. Whether it's a conspiracy or not is irrelevant in proving the Paradox's existence.  The Compound Interest Paradox is a mathematical paradox that proves that the total debt can never be repaid.

In a nutshell: Only the Federal Reserve and banks have the authority to create money. Whenever they create money, it is loaned. At the time of creation, it needs to be repaid with interest. Because they do not create the money for the interest at the same time, this interest will only come from someone else who himself has taken out yet another loan (also with interest, of course). Where else will the interest money come from? Every new dollar created needs to be repaid, plus interest, which didn't exist yet at the time of that dollar's creation. The total money in circulation is not enough to cover all the debt. And as the economy grows, the debt grows even larger. This paradox guarantees spiralling debt.

Sound strange? Others have written about it much better than I can, so I will provide links:

Here is FSK's blog. I've known about this paradox before his blog, but his blog is the first place I saw it with a name. He's the scientific, mathematical type, so his writing and reasoning about the Compound Interest Paradox appeals to nerds like me:
http://fskrealityguide.blogspot.com/2007/06/compound-interest-paradox.html
 
He has a bunch of other entries which I also like. Some of his other blog entries are "fruity". However, do not make the logical fallacy of assuming that because his other blog entries are fruity, that all his entries are false. He talks about that exact fallacy here: FSK on the Strawman Fallacy.  Fear of others using the Strawman Fallacy against you, is a form of self-censorship. It makes people tend to fear saying things that are against "mainstream thought" or against "commonly accepted wisdom".

Here is an excellent allegorical tale that leads up to the Compound Interest Paradox, though again it isn't named as such. It is easy to read, and is illustrated. This is where I first heard of the Paradox, and was dumbfounded when I realized its overwhelming significance:

I Want the Earth Plus 5%

And here is an excellent 47-minute animated video presentation about the banking system, and includes the Compound Interest Paradox, though again it isn't given a specific name. At the end of it is a proposed solution for the Paradox.

video: Money As Debt

If your interest is truly piqued, here is a 3.5 hr documentary shown on PBS more than 10 years ago. I watched the whole thing. It's very long and detailed. It covers the history of money and banking from more than 2000 years ago. It also has a proposed solution for the Paradox, in this case Milton Friedman's (the famous economist). Copy and paste it into your torrent client:

torrent: "The Money Masters"

and here is a book by Murray Rothbard about the subject. His proposed solution is different.
 
book:  What has the Government Done to Our Money?


And if you think that "I don't live in the USA, it doesn't apply to me"... virtually all the central banks of the world have the same system.

What is the consequence of this? Two things: that there will always be boom and bust cycles, and that during a bust cycle, the inevitable foreclosures on loans mean that the banks can confiscate hard assets, and the wealthy (who can ride the bust cycle) can buy hard assets, at pennies on the dollar. Every time there's a bust cycle, huge swaths of real wealth transfer hands from the middle class to the wealthy.

This is part of the reason that since the 70s, the American middle class have had a slight decline in real incomes, while the top 1% now earn 3x as much. (This particular topic will be discussed in another blog entry.) The increase in GDP in the economy since the 1970's BTW, have all been going to the wealthy. The richest 1% have 80% of the world's wealth.