Credit Contractions and the Consolidation of Wealth

The wealthy love credit contractions and they use their banks to facilitate them. Here why and how:

It is an axiom of human psychology that people will fall victim to easy credit. I chalk it up mainly to the inevitable fact that young people with the keenest need for status displays have the least available savings. For that and no doubt other reasons, people are happy to go into debt to get something today rather than wait until they have saved to afford it.

Easy credit serves to consolidate wealth in the bankers’ hands in two ways. For one, there is a systemic shortage of dollars to pay off loans. Because we operate under a debt-based money system, collectively, there is not enough money. In short, money is created is based on the value of loan collateral, but there is no extra money created for the interest payments.

Thus, there is a mathematical shortage of money relative to outstanding debt owed, which guarantees a constant percentage of loan failures. A loan failure means a permanent transfer of wealth into banking hands.

This constant transfer of wealth into banking hands is a low-level phenomenon under the normal conditions of an expanding credit supply, but undergoes a massive spike upward when credit conditions tighten, which is the second reason why the wealthy love credit contractions.

The conditions of easy credit create a greater demand for credit, because the easy credit drives up prices. For example, if housing has to be paid for in cash, there will be less ability to afford houses, i.e., lower demand. On the other hand, if housing can be 100% financed with loans, more people will be in the market for housing, the greater demand driving up prices. The higher prices then mean that fewer can afford the prices, driving up the need for credit. Rising prices then drag in speculators hoping to ride the upward tide of prices. Thus, as you can see, easy credit and higher prices form a feedback loop, producing what are commonly known as price bubbles.

The wealthy love price bubbles because they know exactly when they are going to pop. They know this not because they have psychic powers or are economic geniuses, but because they themselves cause the bubble to pop. The wealthy pop the bubble themselves by removing their own investments, known as profit taking.

Profit taking is happy enough for them, but it gets even better, because after taking their profits, they also tighten credit availability. Tighter credit, combined with their initial burst of selling, produces a bubble collapse. Masses of common people are left sitting on devalued collateral but overvalued loans, resulting in mass defaults and panic sales at low prices.

Now, of course the wealthy love getting to repossess and resell the collateral, but even more than that, they love swooping in and buying up the goods at ultra-cheap prices from distressed sellers.

It is really the simplest game in the world for the banking class: pump up prices with easy credit, take profits, pop bubble, acquire cheap assets, repeat.

But you object, banks get hurt in the process too, don’t they? Well, the big ones don’t, not at all, they are “too big to fail”, remember? But even more importantly, you are confusing banks with the banking class. Sure, some banks fail, but that is part of the process of tightening credit and lowering asset values. A bank may “fail” but the bankers are still getting rich. A bank is just a legal fiction, so the bankers are not actually going broke when a bank fails. Their personal assets are squirreled away and safe, sitting in cash and other valuable goods. Remember, they are the ones who know exactly when to cash out, because they caused the bubble collapse themselves.

When you are rich enough, you are not riding the market, you are moving the market. The common investors are just along for the ride, hoping for the scraps that fly down from the feast. Additionally, this banking class is in contact with one another, so they have the ultimate insider information. Because they themselves move the market, and are in close contact with others who do the same, their trades will always occur before the masses. Its like the built-in house advantage at the casino. Just enough commoners make money to keep the whole operation going, but it is the house that is always getting rich.

Unfortunately, our debt-money system is structured so that you are forced to play at their game. They create the money, so they get the goods, it’s really that simple.

For the common people, the main solution is to get the base of our money supply off the debt system. People will always be going into debt to banks, but the government should be putting debt-free money into the economy to counteract the money shortage.

Government can also prevent asset bubbles by regulating interest rates and bank charges, as well as guaranteeing consumer rights (rather than bank rights). These government actions would not regulate bank credit creation directly (which would be almost impossible), but would effectively control bank credit creation by squeezing its profitability.

Government can also go into the banking business itself. Much government revenue would be created through interest charges, and even loan failures would go to the public good. Competition with government would also drive down the costs associated of the private bankers and decrease their overall power. Government directly banking could also be used to finance crucial government infrastructure functions, debt free, saving us all money.