Fractional Reserve Banking. An Attempt at Demystifying.

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FRB is a technique where a bank can lend more money than it has itself available (‘deposited’ by clients). Normally, a ratio is 9:1 is used, money lent vs. the base product of banking.

This base product used to be gold. So, a bank could issue 9 times more ‘bank notes’ (‘rights to gold’) than it had gold in its vault. Imagine, a person comes with a sack of 1 kilo of gold. This person gets a note from the bank saying “you have deposited 1 kilo of gold in my bank. This note can be exchanged for that 1 kilo of gold any time you want”. But it can legally give this same note to 8 more people! 9 notes that promise 1 kilo of gold for every kilo of gold deposited. Banks are masters of promising things they in no way whatsoever can ever fulfill. And, everybody knows it. And, still we trust the banks. It is an amazing mass denial effect. We trust it, because it gives us wealth. This confidence in the system is what is, actually, essential in the economy. Our civilization depends on the low-morality of the system and our unwavering confidence in it. You are allowed to lie even if the lie is totally and utterly obvious and undeniably without a shred of doubt a lie.

In modern times, the gold standard has been abandoned, because it limits the game. Countries with the most advanced financial structures are the richest. Abandoning the gold standard creates enormous wealth. Rich, advanced nations, therefore, have abandoned the gold standard. In modern banks, no longer gold, but money itself is the base. That is, the promissory notes promise promissory notes. It is completely air. Yet, it works, because everybody trusts it’ll work.

Moreover, banks no longer issue bank notes themselves, except the central bank. The ‘real’ money of the central bank is called ‘base money’ (M0 or ‘Tier 1’) and serves as ‘gold’ in modern banks. The ‘bank notes’ from the bank promise bank notes from the central bank.

Banks use this base money no longer to directly print money (bank notes), but something that is equivalent, namely to lend money to their clients by just adding a number on their account. This, once again, works because everybody trusts it works. But is has become even thinner than air. It is equal to vacuum. There is no physical difference whatsoever anymore between having money and not having it. If I have 0 on my account, or 10000000000000000 rupees, I have the same size information on the computer of my bank. The same number of bytes (however many they may be). I just hope that one day a tiny random fluctuation occurs in their computer and sets me the first bit to a ‘1’ (unless it is the ‘sign’ bit, of course!). Nobody would notice, since there is nowhere money disappearing in the world. Simply more vacuum has been created.

But, it gets even worse. This newly created ‘money’ (the number on an account of bank A) can be deposited in other banks (write a cheque, deposit it, or make a bank transfer to bank B). In this other bank B, it can again be used as a base for creating money by adding a number to peoples’ bank account. As long as a certain amount of base money (M0, or ‘Tier 1’) is maintained. As a side mark, note that bankers do not understand the commotion of the people in calling their rewards astronomical, since they know – in contrast to the people that think that money represents earning based on hard work – that money is vacuum. Giving a bonus to the manager in the form of adding a couple of zeros to her account in her own bank is nothing but air. The most flagrant case of self-referential emptiness is the bank that was bought with its own money.

In this way, the money circulating in the economy can be much larger than the base money (of the central bank). And, all this money is completely air. The amount of money in the world is utterly baseless. Since it is air, moreover an air-system that is invented to facilitate the creation of wealth, we can intervene in the system in any way we want, if we see that this intervention is needed to optimize the creation of wealth. Think of it like this: the money and the money system was invented to enable our trade to take place. If we see that money no longer serves us (but we, instead, seem to serve the money) and decide to organize this trade in another way, we can do so without remorse. If we want to confiscate money and redistribute it, this is morally justified if that is what it takes to enable the creation of wealth.

Especially since, as will be shown, there is no justice in the distribution. It is not as if we were going to take away hard-earned money from someone. The money is just accumulated on a big pile. Intervention is adequate, required and justified. Not intervening makes things much worse for everybody.

Important to make this observation: All money thus circulating in the world is borrowed money. Money is nothing less and nothing more than debt. Without lending and borrowing, there is no debt and there is no money. Without money, there is no trade and no economy. Without debt, the economy collapses. The more debt, the bigger the economy. If everybody were to pay back his/her debt, the system would crash.

Anyway, it is technically not possible to pay back the money borrowed. Why? Because of the interest rates.

Interest is the phenomenon that somebody who lends money – or actually whatever other thing – to somebody that borrows it, wants more money back than it gave. This is impossible.

To give you an example. Imagine we have a library, and this library is the only entity in the world that can print books. Imagine it lends books to its customers and after one week, for every book that it lent out, it wants two back. For some customers it may still be possible. I may have somehow got the book from my neighbor (traded it for a DVD movie?), and I can give the two books the library demands for my one book borrowed. But that would just be passing the buck around; now my neighbor has to give back to the library two books, where he has none. This is how our economy works. And, to explain you what the current solution is of our society is that the library says “You don’t have two books? Don’t worry. We make it a new loan. Two books now. Next week you can give us four”. This is the system we have. Printing money (‘books’) is limited to banks (‘libraries’). The rest borrow the money and in no way whatsoever – absolutely out of the question, fat chance, don’t even think about it – is it possible to give back the money borrowed plus the interest, because this extra money simply does not exist, nor can it be created by the borrowers, because that is reserved to the lenders only. Bankrupt, unless these lenders refinance our loans by new loans.

When explaining this to people, they nearly always fervently oppose this idea, because they think that with money new wealth can be created, and thus the loan can be paid back including the interest, namely with the newly created wealth. This, however, is wrong thinking, because wealth and the commodity used in the loan are different things.
Imagine it like this: Imagine I lend society 100 rupees from my bank with 3% interest. The only rupees in circulation, since I am the only bank. Society invests it in tools for mining with which they find a mother lode with 200 million tons of gold. Yet, after one year, I want 103 rupees back. I don’t want gold. I want money! If they cannot give me my rightful money, I will confiscate everything they own. I will offer 2 rupees for all their possessions (do they have a better offer somewhere?!). I’ll just print 2 extra rupees and that’s it. Actually it is not even needed to print new money. I get everything. At the end of the year, I get my 100 rupees back, I get the gold and mining equipment, and they still keep a debt of 1 rupee.

A loan can only be paid back if the borrower can somehow produce the same (!) commodity that is used in the loan, so that it can give back the loan plus the interest. If gold is lent, and the borrower cannot produce gold, he cannot give back the gold plus interest. The borrower will go bankrupt. If, on the other hand, chickens or sacks of grain are borrowed, these chickens or grain can be given back with interest.

Banks are the only ones that can produce money, therefore the borrowers will go bankrupt. Full stop.

To say it in another way. If we have a system where interest is charged on debt, no way whatsoever can all borrowers pay back the money. Somebody has to go bankrupt, unless the game of refinancing goes on forever. This game of state financing can go on forever as long as the economy is growing exponentially. That is, it is growing with constant percentage. The national debt, in terms of a percentage of the gross domestic product (GDP) remains constant, if we continuously refinance and increase the debt, as long as the economy GDP grows steadily too. The moment the economy stagnates, it is game over! Debt will rise quickly. Countries will go bankrupt. (Note that increasing debt is thus the result of a stagnating economy and not the other way around!).

The way the system decides who is going bankrupt, is decided by a feed-back system. The first one that seems to be in trouble has more difficulty refinancing its loans (”You have low credit rating. I fear you will not give me back my books. I want a better risk reward. It is now three books for every book borrowed. Take it or leave it! If you don’t like it, you can always decide to give me my books now and we’ll call it even”).

Thus, some countries will go bankrupt, unless they are allowed to let the debt grow infinitely. If not, sooner or later one of them will go bankrupt. In other words, the average interest rate is always zero. One way or another. If x% interest is charged, about x% go bankrupt. To be more precise, y% of the borrowed money is never returned, compensating for the (100 − y%) that do return it with x% profit. In a mathematical formula: (1 − y/100) × (1 + x/100) = 1, or y = 100x/(100 + x). This percentage goes bankrupt. For example, if 100% interest is charged, 50% goes bankrupt.

To take it to the extreme. If the market is cautious – full of responsible investors – and decides to lend money only to ‘stable’ countries, like Germany, which lately (times are changing indeed) has a very good credit rating from the financial speculators, even these ‘stable’ countries go bankrupt. That is, the weakest of these stable countries. If only money is borrowed to Germany, Germany goes bankrupt. Apart from the technical mathematical certainty that a country can only have a positive trade balance – essential in getting a good credit rating – if another country has a negative trade balance (the sum, being a balance, is always zero). Germany needs countries like Greece as much as it despises them.

Well, in fact, this is not true. A country does not – nay, it cannot – go bankrupt for money borrowing. Not if it is an isolated country with its own currency, being also the currency in which the money is borrowed. It can simply print money. That is because the money is their own currency based on their own economy!!!

Archivals. NRx Corporate Serfs.

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Even if ‘The Road to Serfdom‘ by Friedrich von Hayek was a warning at one point, it has nor become a fact of history. Take the example of US, which is becoming more and more of a corporate serf to be exact, since the US is nothing but a big corporation, a formal structure by which a group of individuals agree to act collectively to meet some desired result. In the words of Mencius Moldbug,

It is not a mystic trust consigned to us by the generations. It is not the repository of our hopes and fears, the voice of conscience and the avenging sword of justice. It is just an big old company that holds a huge pile of assets, has no clear idea of what it’s trying to do with them, and is thrashing around like a ten-gallon shark in a five-gallon bucket, red ink spouting from each of its bazillion gills.

So what is needed is a reactionary or a radical to bring about social justice to confront us from becoming corporate serfs. Well, neither gets us any closer to achieving social justice, since we might be equal and still not more equal than others, the catch is we are not onto designing any abstract-utopia, but trying to make head and tail of the world that is screwed up. Can this be done via Formalism, which draws out a matrix of who has what, rather than who should have what, since the ‘ought’ alluded to in the latter is a simple recipe for violence. The matrix could at least draw attention to identify the real shareholders and stakeholders (The ‘We’, 99%, or what have you?), and in the process help reproduce the distribution as closely as possible to reach autonomous public ownership and eventually mitigate the risk of political violence imagined through either reactionary or radical means. Libertarianism it is.

Genesis and Evaluation of Political Philosophy of Thomas Hobbes. Part 1.

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The following five processes can broadly characterize the genesis of Hobbes’ political philosophy:

  1. The moving away from the idea of monarchy as the most natural form of State to the idea of monarchy as the most perfect artificial State.
  2. The moving away from the recognition of natural obligation as the basis of morality, law and the State to the deduction of morality, law and the State from a natural claim; thus denying every natural obligation.
  3. Moving away from the recognition of a superhuman authority; whether that being revelation based on Divine will or a natural order based on Divine reason, to the recognition of an exclusively human authority of the State.
  4. Moving away from the study of past and present States to the free construction of the future States.
  5. Moving away from honour as principle, to fear of violent death as principle.

 These movements have an inherent inner connection and the explanations of these connections are to be sought after for a proper analysis of Hobbes’ political philosophy. It becomes clear explicitly that the philosophy is rather an homogenous connection between the final stages of the movements mentioned. The unity of this connection is a derivative from the unity of Hobbes’ moral attitude.

The resulting political philosophy is the unfolding of the moral attitudes to its universal significance, thus bringing in, in its league the whole nexus comprising of its presuppositions and its consequences. Thus it seems that his moral attitude is not only objectively ‘prior’ to the argument and presentation of his political philosophy, but it precedes his pre-occupation with mathematics and exact sciences. However, there remains a fundamental question concerning the addition of ingredients thus furthering his political philosophy to take its final form.

Before Hobbes discovered Euclid, his belief lay in the Aristotelian moral and political philosophy. His investigation deals not so much with the essence of ‘virtue’ and avoiding ‘vice’. With the pre-supposition that reason is, in principle, impotent, the problem of application which took a back seat in the form of being secondary, itself became the central problem. Thus Hobbes turns to history. And in this, he is constantly taught by tradition about what man is, what man should be and what forces really determine him and in the end his endeavour to discover passions. Among the discovery of passions, the ones he pays strongest attention to are vanity and fear. According to him, vanity is the force, which makes man blind and fear, is the force, which makes him see. By emphasizing the antithesis of vanity and fear of violent death, Hobbes was already beyond the traditional horizon.

Apart from the historians and the poets that Hobbes had at disposal for the study of passions, he already knew of the passions in Aristotle’s ‘Rhetoric’, to which his political philosophy owed so much. Hobbes had an early scientific ambition whereby he would perhaps write on passions, in concomitance with the style of the ‘Rhetoric’ to further the theory of the application of the moral precepts. Hobbes’ approach to passions was divergent from that of Aristotle’s. For Aristotle, honourable and estimable passions are emphasized as base and culpable ones, Hobbes from the very beginning held ‘dissembled passions’ in condemnation. Aristotle was concerned with passions which ‘carry the greatest sway with men in their public conversation’, but for him the positive connection of a passion with public life does not mean a criticism of that passion, since passions in public life can be both estimable and despicable. Hobbes, on the other hand, finds from the beginning that the passions which counsels men well is hardly or at times not at all displayed in public. Such characteristic deviations from the rhetoric are found in the few sentences of the introduction to the translation of Thucydides, which touch upon themes of the Rhetoric. Some of the changes that Hobbes makes in Aristotle’s assertions cannot be explained by the influence of mathematics and natural sciences; these divergences may be taken as original reservations on Hobbes’ part against Aristotle.

A large part of the changes which Hobbes makes in his model stems from his fundamental opinion that fear of death, is the force, which makes men blind. This change in the estimation of fear is shown by the fact that Hobbes in his enumeration of good things mentions life as the first good in the first place, whereas on the other hand Aristotle mentions happiness in the first place and life only in the penultimate place. Hobbes speaks of good things as good because they serve as the protection of life, whereas Aristotle stresses good things which produce good, rather than good things, which preserve good. Hobbes declares the regaining of a lost good to be better than the undisturbed possession of that good; the memory that, that good was once imperiled is the condition of a sound estimation of it, just as the frightfulness of death rather than the sweetness of life reveals the value of living. The change in the estimation of vanity is shown by the fact that Hobbes in his discussion of emulation and envy makes no mention of the difference in the value of these two passions, according to which emulation is more nobler than envy. Besides, he traces the pleasure of victory to vanity, whereas Aristotle characterizes the reason for this pleasure as a conception of superiority. According to Aristotle, shame is no virtue, but a passion, but, nevertheless, it is that passion which holds noble youth in check, whereas according to Hobbes, shame, as confusion arising from disgrace endured, is only the opposite of satisfied vanity. According to Aristotle, the typical example of what is pleasant is the ease which constitutes a customary state; thus everything which one can do with ease and convenience, counts as pleasant, like, freedom from care, idleness, sleep, play, laughter etc. In his enumeration of pleasant things, Hobbes names in the first place progress; ease of any kind, in his opinion a state neither desirable nor attainable: ‘continual delight consisteth not in having prospered, but in prospering’, not in possession and enjoyment, but in successful striving and desiring. Thus, diverging from Aristotle, Hobbes names in his enumeration of pleasant things, work or occupation. According to Hobbes, the pleasant is not so much what is naturally pleasant, as the ‘pleasant’ movement from one pleasant thing to another pleasant thing.

Hobbes’ break with tradition was doubtless the result of his turning to mathematics and natural sciences. Precisely for this reason he became conscious of the antagonism of the new moral attitude of the whole tradition. Before turning to Galileo and Euclid, he in principle kept to the traditional political philosophy. It wasn’t the idea of political science, but its method that became a problem through the study of Euclid. This however, shows that the might of the scientific tradition is the reason why the need for a reform in political philosophy comes into being primarily as the need for a new reform in the spheres of political philosophy. This explicit break, which the whole tradition of political philosophy makes, thus becomes possible only after ‘Euclid’. Hobbes himself admits in his own view that the application of mathematical method to political philosophy elevates it for the first time to the rank of a science, a branch of rational knowledge the reason for this is that in politics up to that time, it was not reason but passions that held sway. The only completely passionless, purely rational science, and therefore the only science, which is already in existence, is mathematics; thus only by orienting oneself by mathematics, i.e. by progressing as mathematicians do from self evident principles by means of evident conclusions, can politics be reduced ‘to the rules and infallibility of reason’. Exact passionless mathematics is indifferent to passions; exact passionless political philosophy is in conflict with the passions. The need for exact political philosophy is justified by no means less only in reference to the failure of the old and traditional political philosophy, but especially in reference to the wrongness of opinions, which is betrayed first by the fact that most opinions are wrong. Now, since all opinion is as such wrong, the true knowledge of the good must be opposed to all opinion, must have exact knowledge and must be completely free of the character of opinion. Thus Hobbes’ political philosophy is against every system of morals, which is popular and pre-scientific. The ideal of exact scientific philosophy is thus asserting the fact that only science discloses to man the obligatory aims of his volition and action. One must try to define the philosophical meaning of turning to ‘Euclid’ on the basis of what that turning means to political philosophy.

During his humanist period, wherein Hobbes tried to remedy Aristotelian moral philosophy by studying history. Hobbes moved towards an exact moral and political philosophy. The confusion with regard to the good, the just, and the beautiful, which caused Aristotle to acknowledge and maintain the peculiar lack of definiteness of these subjects, which explain these confusions; this for Plato was a reason for transcending the whole field in which such confusion was possible. Whereas, Aristotle’s political philosophy is and means to be in harmony with the opinion as to the just, the beautiful and the good, and with political experience Plato’s political philosophy is in principle with full readiness to make demands, which cannot be fully justified by political experience. Thus, when Hobbes, stimulated by mathematics, demands an exact political philosophy, he is departing from Aristotle and going back to Plato. The most profound expression, which Hobbes finds for the difference between Aristotle and Plato, is that Plato’s philosophy starts from ideas, and Aristotle’s from words. But as for the difference between Plato and Aristotle, which develop in the course of an approach, which was common to them both, it consists rather in this, that Plato, much more than Aristotle, orientates himself by speech. When Hobbes says that Plato philosophizes not from ‘words’, but from ‘ideas’, he fundamentally misunderstands him. However, as Plato turns away from things, not to speech in itself, but to speech in its contradictoriness, it is certain that it is just the apparently pedantic allegiance to speech, which he observes, that brings him in opposition to what men usually say and believe. And, thus Hobbes’ conception of Plato is to a certain extent, justified. Let us first recall the significance of Plato’s moral philosophy to the antithesis between true and pseudo-virtue. True virtue has as its basis a complete change of objective, whereas pseudo-virtue is based entirely on ordinary human aims and interests. True virtue is essentially wisdom. True virtue differs from pseudo-virtue in its reason. Pseudo-virtue is pseudo virtue because its aim is not virtue itself, but the appearance of virtue, reputation for virtue, and the honour, which results from that reputation. In other words, it can be said that pseudo virtue seeks what is imposing and great, while true virtue seeks what is fitting and right. Thus, according to Plato, courage, the virtue of the warrior, is inseparable from military glory. No virtue seems more brilliant, more worthy even of reverence than courage; for courage is the standard ideal of the Lacedaemonian and Cretan laws. And yet it is the lowest virtue. Its problematic nature expounds itself in full clearness only when one considers it not in its archaic form, in which its sense is, narrowed and limited by obedience to law, and in which, for that very reason, it is hidden wisdom, but only when one considers it apart from its limitations, in itself. Courage, as it is usually understood, is the virtue of the man, his capacity, without fear or effeminacy, to help himself, to protect himself from injustice or injury, to assert and save himself. If we take this ideal, then the perfect man is the tyrant, who disposes of the greatest possible power to do what he will. In limitless self-love, in frenzied arrogance, the tyrant seeks to rule not merely over men, but even over Gods. It is not courage, which is the highest virtue; self-mastery stands higher, and higher still than self-mastery stand wisdom and justice. In itself wisdom stands supreme. Aristotle teaches that the ethical virtues, headed by justice, are available to men, whereas his true happiness, which to a certain extent transcends human limitations, consists in philosophy. Plato denies that the philosopher has a right to seek its own happiness, without a thought for the unphilosophic many. The law of the ideal State compels the philosophers to take thought for other men and to watch over them and not ‘to turn whither each will’.  Since the pursuit of philosophy as a human undertaking is under a higher order, justice, with regard to men, stands higher than wisdom. Whereas Aristotle, by unreservedly setting theoretic life higher than ethical virtue, unconditionally oversteps the limits of the State and thus indirectly attains the possibility of recognizing virtues, which are not really political virtues, but virtues of private life, for Plato there are only political virtues, i.e. to characterize popular virtue.

Kōjin Karatani versus Moishe Postone. Architectonics of Capitalism.

Kōjin Karatani’s theory of different modes of intercourse criticizes architectonic metaphor thinking that the logic of mods of production in terms of base and superstructure without ceding grounds on the centrality of the critique of political economy. the obvious question is what remains of theory when there is a departure not from the objective towards the subjective, but rather the simultaneous constitution of the subjective and the objective dimensions of the social under capitalism. One way of addressing the dilemma is to take recourse to the lesson of commodity form, where capitalism begets a uniform mode of mediation rather than disparate. The language of modes of production according to Moishe Postone happens to be a transhistorical language allowing for a transhistorical epistemology to sneak in through the backdoor thus outlining the necessity of critical theory’s existence only in so far as the object of critique stays in existence. Karatani’s first critique concerns a crude base-superstructure concept, in which nation and nationalism are viewed merely as phenomena of the ideological superstructure, which could be overcome by reason (enlightenment) or would disappear together with the state. But the nation functions autonomously, independent of the state, and as the imaginative return of community or reciprocal mode of exchange A, it is egalitarian in nature. As is the case with universal religions, the nation thus holds a moment of protest, of opposition, of emancipatory imagination. The second critique concerns the conception of the proletariat, which Marxism reduced to the process of production, in which its labor force is turned into a commodity. Production (i.e., consumption of labor power) as a fundamental basis to gain and to increase surplus value remains unchanged. Nonetheless, according to Karatani surplus value is only achieved by selling commodities, in the process of circulation, which does not generate surplus value itself, but without which there cannot be any surplus value. Understanding the proletariat as producer-consumer opens up new possibilities for resistance against the system. In late capitalism, in which capital and company are often separated, workers (in the broadest sense of wage and salary earners) are usually not able to resist their dependency and inferiority in the production process. By contrast, however, in the site of consumption, capital is dependent on the worker as consumer. Whereas capital can thus control the proletariat in the production process and force them to work, it loses its power over them in the process of circulation. If, says Karatani, we would view consumers as workers in the site of circulation, consumer movements could be seen as proletariat movements. They can, for example, resort to the legal means of boycott, which capital is unable to resist directly. Karatani bases his critique of capitalism not on the perspectives of globalization, but rather on what he terms neo-imperialism meaning state-based attempt of capital to subject the entire world to its logic of exploitation, and thus any logic to overcoming the modern world system of capital-nation-state by means of a world revolution and its sublation in a system is to be possible by justice based on exchange. For Postone Capital generates a system characteristically by the opposition of abstract universality, the value form, and particularistic specificity, the use value dimension. It seems to me that rather than viewing a socialist or an emancipatory movement as the heirs to the Enlightenment, as the classic working class movement did, critical movements today should be striving for a new form of universalism that encompasses the particular, rather than existing in opposition to the particular. This will not be easy, because a good part of the Left today has swung to particularity rather than trying to and a new form of universalism. I think this is a fatal mistake.