Curvy Mathematics

Modern Monetary System, by G. Karakatsanis (04 Jan 2018)

Tribute to G. Karakatsanis

 Our monetary system creates money via debt. In the midst of the recent financial crisis which started back in 2008, the idea that the current model is no longer viable gains more supporters every single day. The perpetual financial development required to repay debt is not always possible. Debt is steadily being accumulated and its repayment becomes impossible.

 The counter-proposal is that money should be minted by a public, central authority which would decide on the necessary quantity of money for the economic state to function properly. Additionally, money would be injected into this state on public expenses, free of any charge or debt. This way the state would become more independent and the dead-end where the current economic state is led to, would be avoided.

 Supporters of the current monetary system claim that the quantitative control of money from a central authority has failed in almost all cases throughout human history. Since the Roman times, emperors who were in desperate need of extra money in order to further support their armies, were just minting more money to pay their soldiers' wages.

 Money is just a means to exchange materials and store wealth. Whenever the amount of circulating money increases without its matching in gold or any other valuable material being increased simultaneously, then this causes circulating money to lose its value. Whenever new money is minted without any matching to gold or any other valuable resource, then money owners are being robbed as their money loses its value. Such a financial instability caused by many Roman emperors resulted in the collapse of the entire empire.

 On the other other hand, nowadays, a decision to mint new money is taken every time a bank approves of a loan. The bank judges whether the new money will contribute to creating enough wealth so that the initial loan can be repaid. Obviously, the bank's evaluation is vital as in case of a mistaken evaluation, wealth will not be enough for the initial loan to be repaid and the bank will suffer some loss.

 Theoretically, the modern monetary system is far better than the Roman one. There is no general rule or law to "enforce" the minting of new money but this decision is utterly dependent upon the given circumstances. The one who takes the decision ought to do one's best, differently the consequences may be disastrous. Still, there are some vulnerabilities inside this system. The decision to grant a loan is based on the bank's "bona fide"(good faith) that the borrower will repay the debt. If this faith fades away, then the entire system collapses. This is what happened back in 1929 when at least a decade plus a world war were required for the monetary system to recover.

 There are many people who claim that such a crisis is necessary to occur occasionally. Such situations assist in distinguishing weak monetary units from the powerful ones. The weak ones will disappear and new ones will arise. Banks with bad judgement will sustain heavy loss or they will go bankrupt. Following the financial crisis of 1929, more than 4000 banks closed in the USA during the next decade.

 The depression of 1929 is slightly different from the one of 2008. Banks are not local and in vast numbers anymore. Contrary, they are significantly fewer and consist of big organizations. Bankruptcy of any of them can cause the entire monetary system across the globe to shatter. This is what happened with the collapse of Lehman Brothers in 2008. No other bank or financial institution has been left bankrupt since then. Their survival is considered of vital importance and all governments "inject" money to them derived from taxation.

 Such a privileged manipulation of the banks and financial institutions cancels the biggest advantage of the current monetary system. Banks do not put any effort at all to evaluate loan applications properly. Huge flows of money are created on enormous mountains of debt. Obviously, such a debt cannot be repaid and the borrower has no consequences to fear as the taxpayers will cover the bank's loss as a result of improper loan evaluation and judgement. Legislation carries the banks' incapability to properly evaluate a loan application to the taxpayers, so they will suffer the loss.

Moderator: Gauss, Overseers.