Ask an economist “What is Money?” and the answer will likely be: “A medium of exchange, a unit of account, and a storehouse of value.” As a unit of account, money is useful in facilitating the market exchange of goods and services. Used for this purpose, money is one of humanity’s most important and beneficial inventions.
Misused, it becomes an instrument for reducing the whole of human society to a condition of wage and debt slavery to the bankers and financiers who control its creation and allocation. These are elements of the money picture most economists do not understand and few mention.
…a Unit of Account and a Storehouse of Value
A key to understanding money is to recognize that it is an abstraction, of no substance or intrinsic worth. Its only value depends on our willingness to accept in exchange for things of real value like our land and labor. It has no meaning outside the human mind and nature has no equivalent. It is a meaningful unit of account only for those things that have market value, which leads to serious distortions. Diamonds are rare and command a high market price. Air is freely available and has no market price. But in terms of which we can do with out, air wins hands down.
Failure to recognize the critical distinction between a substanceless token of exchange and that which has real value, economists habitually treat them as equivalent. This feeds the illusion that the financial slight of hand that produces profits without creating anything of corresponding value creates a net benefit for society. This illusion in turn facilitates what is actually an act of theft and a global tyranny that reduces the majority of humanity to lives of wage and debt slavery.
Economists who refer to money as wealth—rather than emphasizing the distinction between real wealth and the account chits we use to facilitate exchange of things of real value—facilitate the illusion and its use to facilitate systemic theft and tyranny. They do us a further disservice when they refer to money as a storehouse of value without clarifying that while money can serve as a storehouse of wealth for an individual, it serves no such function for a society. For example, storing dollars on a computer hard drive in a financial asset account labeled social security, will not meet the needs of future retires in a society that lacks the necessary health care facilities, housing stock, and food production capacity to meet the specific needs of retirees.
…a False Measure of Personal Worth
We are taught that money is an objective measure of value. We may say “My time is worth $30 an hour” to refer to the worth of our labor; or “He’s worth several million dollars” to refer to a person’s financial net worth. I recall my dad making it very personal when he said,. “You are worth what someone is willing to pay you.” Is the banker who takes home a big bonus for foreclosing on the homes of mortgage holders he has cheated really more valuable to society than the janitor who cleans the bank’s toilets? Which could we more easily live without?
Rather than speaking of how our work contributes to society, we reduce our labor to the making of money. But of course, unless we are a bank or the Federal Reserve, we are not literally making money. We rarely ask, “Why should I allow money to define my self-worth?
…a Phantom Wealth Illusion
Real wealth has real intrinsic value: land, labor, food, and knowledge are all examples. The most valuable of all forms of wealth are those that are beyond price: love, a healthy happy child, a job that provides a sense of self-worth and contribution, membership in a strong caring community, a healthy, vibrant natural environment, peace.
None of these most valuable forms of real wealth find any place on corporate balance sheets or in our calculations of Gross Domestic Product. Therefore, they rarely receive explicit consideration in most institutional resource allocation decisions. This is why we so often make decisions as a society we believe will make us richer, yet diminish our real well-being.
Modern societies confuse money, a mere number, with the things of real value that money will buy. Under the spell of this enchantment, money itself becomes the object of our desire. We pursue monetary gain in disregard of the impact on real value—such as the health and well-being of people, community, and nature.
Money created out of nothing unrelated to the creation of anything of corresponding value, is phantom wealth. Phantom wealth appears or disappears as if by magic as a result of accounting entries and the inflation of asset bubbles unrelated to the creation of anything of real value or utility.
Phantom wealth also includes financial assets created by debt pyramids by which financial institutions engage in complex trading and lending schemes using fictitious or overvalued assets as collateral for loans in order to feed and inflate asset bubbles to create more phantom collateral to support more borrowing to further feed the bubble to justify outsized management fees.
When the bubble bursts, borrowers default on debts they cannot pay and the debt pyramid collapses, along with the bubble, in a cascade of bankruptcies. The perpetrators walk away with “performance” bonuses pocketed as the bubble inflated. Those who had no part in creating or profiting from the scam are left to absorb the losses and to sort out the phantom-wealth claims still held by the perpetrators against the marketable real wealth of the larger society. It is all legal, which makes it a perfect crime.
The details of how Wall Street creates phantom wealth are highly complex. But it all depends on illusion. Much as the stage magician makes things magically appear and disappear, Wall Street bankers make money appear and disappear. And in the process it seems almost inevitably to move from someone else’s pocket to their own.
…an Instrument of the Perfect Crime
Let’s start with the basics. Wall Street banks borrow from the Federal Reserve and each other to inflate the value of securities—basically pieces of paper that represent ownership shares in real assets, but can easily and instantly be traded in global financial markets. Using the borrowed money to buy these pieces of paper inflates their value, creating additional collateral to borrow more money to further inflate the market value of the collateral…. You get the picture.
But it doesn’t stop there. Wall Street discovered that it could create wholly fictitious derivatives—pieces of paper that are backed by other pieces of paper—illusions based on illusions—creating phantom financial assets that in total exceed by many times the value of all the world’s real wealth. The ultimate pyramid scheme.
When the pyramid collapses, as it did in 2008, the bankers walk away with their bonuses and the banks bear the liabilities. It government allows the big banks to fail, the money stored in their computer memories disappears, economic activity stops, and political order disintegrates. Government, therefore, is forced to step in with a public bailout.
It is a form of theft. Wall Street gets away with it in part because the crucial distinction between phantom wealth and real wealth is rarely discussed, so the public is largely unaware of the distinction. Their control of the creation of phantom wealth gives the bankers a nearly unlimited ability to buy the politicians to make the rules that allow bankers to create and profit from thier scam.
Meanwhile the corporations these same bankers control, are outsourcing jobs, pushing down wages, and foreclosing on the underwater properties of small borrowers. The bankers become richer. Workers, the unemployed, and the disabled fall ever further into debt. Prison and homeless populations grow.
Those engaged in creating phantom wealth collect handsome “performance” fees for their “services” at each step and walk away with their gains. When the bubble bursts, borrowers default on debts they cannot pay and the debt pyramid collapses, along with the bubble, in a cascade of bankruptcies.
Those who had no part in creating or profiting from the scam are left to absorb the losses and to honor the claims of the perpetrators of the fraud against the marketable real wealth of the larger society. It is all legal—the perfect crime.