The Law Humanity Defies

John had a great day and was paid a large bonus at work. He took the money, brought it to the bank, and deposited it on his account. The bankers cheered. They knew exactly each dollar deposited means to the bank 5-10 dollars in extended credit. The bank kept some small part of John’s deposit, and lent out the rest to another institution. That next institution deposited the money in yet another bank, and the latter did the lending again. At the end of the day, everyone was happy; John and the bankers all drank beer that night.

They all enjoyed the blissful ignorance until the news came that, all else being equal, the house prices all over the country fell simultaneously, and it became extremely beneficial for everyone to buy houses. John and all the non-financial institutions immediately rushed to the bank where they deposited their money. The bankers didn’t see that coming and apparently didn’t have enough reserves to cover the immediate demand. But since they’re bankers and they know life tends to treat them well, they didn’t worry much, and called another bank to borrow federal funds. However, the bankers soon recognized that all banks in the country were experiencing the same problem and didn’t have enough cash on hands. The banks called the Fed, the lender of last resort. Suddenly, an asteroid came out of nowhere and hit the Fed’s building so that the printing press was destroyed. That really gave the bankers heebie jeebies.

They called London to borrow money from there. But the British bankers said they were indeed gobsmacked, as their national bank’s printing press was attacked by evil clowns and went out of order. In fact, for some absolutely random reason, no printing press functioned in the world that day. Then people started trading their commodities in order to get the worth they were entitled to. In very economic terms, the aggregate world demanded access to what is called M3 money supply (in very human terms, it’s ALL the money one can think of). Too bad only M0 was available, that is, printed currency plus coins, and there were just not as many commodities as their assigned value.

(http://news.goldseek.com/GoldSeek/1231778551.php)

It wasn’t too long until our friend John realized that everyone was entitled to more than his or her assets were actually worth. The world’s aggregate net worth  just didn’t cost that much! John very soon discovered that paper greenbacks were worth just the paper they were printed on. One way to drive at everything’s fair value would be to go back to barter trade, that is, trading goods for other goods. Or one could trade for gold, since everyone throughout the world could have a relatively easy access to it. But even if all the gold in the world were to circulate as our currency today, there STILL wouldn’t be just enough gold to match our net worth, since the world’s net worth increased 30+ times from what all the gold cost when the US abolished the gold standard in 1971.

Humanity thereby went against the nature and the laws of physics. Any physicist will admit what the bankers do is nonsense, since, according to the law of conservation of energy, NO energy can appear out of nowhere. ‘Nowhere’ is exactly where our money and assets come from. Put it this way, nothing in the world can physically cost more than the world itself; otherwise, how can one pay back?

I told my fiancée about this, and she actually called me out on it. She asked, Why is it bad? This is a truly interesting issue to discuss, so I must thank her for the contribution. In fact, I’ll let you leave your opinion.

Is it good or bad that the value of things is inflated? Is it good or bad to have a never-ending business cycle and inflationary tendencies? It’s highly unlikely for this story to unfold in reality, and it’s more likely that John will get his money anyway. But how are we so comfortable to live in the world where the value is created out of thin air and continues to grow in volume at a rapid velocity? My view is that this system is unsustainable in the long run. The physicists will agree. Apparently, the bankers are driven by other laws we’re not aware of.