This is an interesting and intriguingly simple way of explaining the debt-deflation cycle:
The scientists at CERN can create matter from nothing only if they also create its offsetting opposite anti-matter. Similarly banks are only able to create money from thin air provided they create, at the same time, the offsetting opposite amount of anti-money, otherwise known as debt.
In short our modern banks are the particle accelerators of the financial system. They conjure money and anti-money, fortunes and debts, from nothing.
It is informative to extend this analogy a little further. When particles and anti-particles are created from nothing energy is ‘consumed’ and when they later recombine to annihilate one another this energy is then re-released. There is an analogous, though opposite, process of energy capture and release associated with the creation and destruction of money and debt.
When a bank makes a loan it splits zero into a fortune (money) and its equivalent debt. This process releases new spending power into the economy producing a burst of economic energy. Conversely when, at a later date, the money is recombined to annihilate the debt, both money and debt vanish and an equivalent amount of spending power, economic energy, is withdrawn from the economy.
At any given time, if the amount of credit being created roughly balances with the amount being destroyed the spending power within the economy will remain roughly constant and the economy will be stable. On the other hand, if there is an imbalance between credit creation and credit destruction the economy will be unstable. An excess of credit creation – new money and new debt – will amplify economic activity. Conversely an excess of credit destruction – repaying old debts – will attenuate economic activity.
From the remorseless logic of Brahmagupta’s mathematics it follows, any economic boom generated by high levels of debt creation will have the seeds of its own destruction within it. These credit-creation fuelled booms will inevitably lead to their partner, a credit-destruction driven bust – otherwise known as a debt deflation cycle.
This simple way of thinking about how our monetary and banking system works helps explain what has gone wrong with monetary policy over recent years… Our own voting patterns have trained our political leaders, like Pavlov’s dog, to seek a relentless but ultimately unsustainable credit expansion. However, when policy makers seek to engineer an economic boost through credit expansion they are also, due to the mathematics of Brahmagupta, engineering a future economic slump. This helps us understand where the deflationary forces currently taking hold in the Eurozone have come from. These are, in large part, the inevitable consequence of previous monetary policy designed to engineer credit expansion.
The next time you see the term ‘Money Supply Growth’ it may be worth pausing for a moment to reflect on the ideas of an obscure 7th century Indian mathematician and think instead of the term ‘Debt Supply Growth’.
This should help explain why you simply cannot borrow or spend your way out of debt. It’s like trying to dry yourself off by jumping in the pool. It’s a logical contradiction, no matter how convincingly economists like Ben Bernanke and Paul Krugman manage to dance in circles, draw epicycles, and dazzle you into thinking they are speaking anything but utter nonsense.
I think I can explain it even more simply, however. Money is a measure. And no matter how you may redefine the “inch” by making it increasingly smaller on the ruler, you do not make the object measured any longer.