Illusion of wealth creation that underpins capitalist system

IN July 2008, I mentioned to some work colleagues that the world economy was going to collapse. The only response I got was “Oh dear”, as they clearly thought I was being silly.

A few months later when the banking system was on the brink of collapse, I had the dubious pleasure of reminding them what I had said.

After they had watched a few TV programmes on what the big capitalists had been up to, one of them said that they had “created a monster”. When another told me her son was going to university to study economics, 
I replied that they can’t be teaching them right, judging by the state of the economy. I 
didn’t ask which school of voodoo he was attending to 
learn how money is conjured up out of thin air. Maybe it was Hogwarts.

I haven’t read the book Where Does Money Come From?, but I heard the author on the radio say that only three per cent of the money in the world is physical and the rest is electronic and mostly created as credit.

You would think that if you went to someone to borrow money that they would have it to lend in the first place, but that is not the case with banks. They create the money out of thin 
air, based on what they have on their books and what they 
expect to get back from their loans.

It’s theoretical money and they only have to hold a few per cent of real money. If everyone wanted to withdraw their money they would find most of it doesn’t exist and the bank would be bankrupt. This is why goverments guarantee people’s deposits to a degree – which begs the question as to why banks think they have the right to call themselves “private” when they are state-backed?

So it turns out that capitalism is more about money creation than wealth creation as credit goes into the system to stimulate economic activity, giving the illusion of wealth creation. This can be more easily seen in the housing market when some house hunter on TV says a £500,000 house is a “bargain” because it is cheaper than similar properties. But they can’t see when the whole market is inflated.

Likewise, nobody can judge the real value of anything when the wider economy is over-inflated as all manner of credit finds its way into this complex and murky system, whether it be from student loans, mortgages, goverment bonds or anything else.

Even economic “experts” can’t see where all this magic money is going and what it is doing. They have some surface numbers to play with but their forecasts are frequently wrong. They are experts in trees but can’t see the wood for the trees. If this is not true, why didn’t they see the crisis coming? It’s even harder to see with all the games, secrecy, greed, deception and plain poor thinking that goes on in the world of big finance, which is far removed from ordinary businesses that are just trying to make a living producing goods and services. And I can’t see that much has changed.

The only reason the world economy hasn’t crashed is because more created money has been injected into it to keep it afloat.