I attempted to explain how money is created through debt in this post - Somtimes videos work better, This one is a good example, he focuses on the Fed, the US Central Bank but all lending banks create money in the same way. People tend to think of Central Banks as "good" things. Even lending banks are seen as positive, today in the Telegraph a reporter talked about "our once proud banks" - I guess he didn't understand how the fleecing system works, it always amazes me how few understand...

A brilliant critique of multiculturalism and cultural relativism

Relativism is the idea that some element or aspect of experience or culture is relative to, i.e., dependent on, some other element or aspect. Some relativists claim that humans can understand and evaluate beliefs and behaviors only in terms of their historical or cultural context. The term often refers to truth relativism, which is the doctrine that there are no absolute truths, i.e., that truth is always relative to some particular frame of reference, such as a language or a culture.

lets replay that...

truth relativism, which is the doctrine that there are no absolute truths

but if there are no absolute truths, then the statement "There are no absolute truths", cannot be an absolute truth...

Last week we looked at Fiat Currency – I doubt that I told you much you didn't already know. What I’m going to tell you this week will probably be a surprise and shock to many people (some of you won’t believe me!).

The Bank of England is the only institution that prints money but not the only institution that creates money. Lending banks literally create money out of thin air. And each time they do this they are skimming off the rest of us.

Banks are not like any other business – most businesses make something or provide a service that they sell for money – Lending banks create money. Every time a loan is taken out, be that a mortgage or credit card loan, money is being created.

Watch the magic;

Sally has £20, Joe has £10 – there is £30 in the system. Sally deposits her £20 into shatwest bank.

John Jones wants to build a house, he needs £15 to pay Berttie the Builder, he borrows the money from shatwest and pays Berttie, over 25 years he will repay the money. There is now £45 in the system. Sally believes she has £20, but Berttie has also been paid his £15.

Notice something – because there is more money in the system Joe’s £10 is worth less after the transaction than before – before the transaction he has 33% of the money in the system – afterward he has only 22%. Notice as well that Joe did not take part in the transaction, he got skimmed and he didn’t even know it - this is immoral.

The “bit of magic” is that sally believes she still has the £20 – if all the savers demanded their money back at the same time the bank would be rumbled, they do not in fact have her money, this is why a bank-run is pretty much the worst thing that can happen to a bank.

Most of the time however the smoke and mirrors work, the effect being that lending banks are constantly increasing the money supply, this is why western economies are “debt driven” – it’s not just that we love credit cards, our economy is litterally driven by debt, the vast majority of our money supply is a result of debt creation.

There are some rules: the banks cannot lend everything out that they get in, they have to keep a bit of the deposit back. However the amount of money created is actually much more than in my simple example because Berttie will take John’s money and deposit it in another bank, which will (after keeping x% back) lend it out again, creating more money – a single £1 deposit creates many ££s of debt.

Should this even be allowed? I don’t think so. It seems to me to essentially a fraud. I’m a big fan of capitalism and I’d like to point out that you could have capitalism without allowing this parasitic activity.

People spend their whole lives working for it ... what is money?

There is Wealth and there is Money – they are not the same.

Wealth is the stuff we produce – cars, cows, computers, etc.

Money is a granular, fungible token representing wealth, it’s purpose is to make trade efficient.

All societies engaged in the trade of produce – I give you 10 sacks of grain for 1 cow. Clearly this was inefficient, what if I only wanted 5 sacks of grain? I can hardly sell you half a lamb.

Initially the tokens were metal coins, often gold was used.

I sell my lamb for 10 gold pieces and pay you 5 gold pieces for the grain. Much better.

Already in this simple situation there is scope for things to go awry. After a while people believed that the tokens (money) itself had value. Well, it kind of did, gold can be used for stuff like jewellery but ultimately the value of gold relative to everything else depends on how much gold is around. The less gold the more it is worth - the more gold, the less it is worth. A long long time ago, when Spain used gold for currency, some explorers found lots of gold in Peru, they brought it all back for the royal coffers – all they achieved was to increase the amount of tokens in the system, real wealth had not changed, prices went up.

These days we have Fiat Currency, money that is worth what it is because the government says so, i.e. “by fiat”. Clearly the notes in your wallet have zero intrinsic value – they are just bits of paper. Their value depends entirely on how much money is in the system, the “money supply”. And that is determined ultimately by the government.

When the token was a physical commodity it was possible to produce more– as in the Spanish example – however there was a natural restraint, there was only ever going to be so much gold around. With Fiat Currency – the money is printed entirely at the behest of governments.

once you have Fiat Currency there is much more scope for funky stuff to start happening.

First - a commodity like gold has some intrinsic value – the bits of paper in your wallet only have meaning while the power and institutions of the issuing government exist. Fiat Currency is always under this risk, sudden severe political instability can render an entire currency worthless in surprisingly short periods of time – But lets be clear, this risk is rare in western countries.

Second - The theoretical maximum amount of money is infinite! And there are so many reasons why a government might print more than it should. For example – to pay it’s bills – say the government needs to pay it’s employees but hasn’t got the cash - Just print some more and pay them with that.

Historically governments have always increased the money supply - often rapidly – what this means in effect is that they are skimming from everyone with money – by producing more tokens, they devalue the worth of all the tokens.

So why have a Fiat Currency?

+ Because it allows an economy to grow rapidly, why be constrained by the supply of gold.

+ Maybe because you need more money than you have gold (Britain came off the gold standard to fund WW1).

+ Politically it's clever, it can make people feel good – people mistake more tokens for more wealth - so print loads of tokens – salaries are rising year on year - let the good times roll!

Now of course the actual wealthy of the country is (probably) increasing too. But the amount of tokens (money) is increasing faster that the wealthy is increasing – We know this because economists measure inflation, positive inflation means that the tokens are increasing faster than the wealth is increasing.

The UK Money supply - M4 “broad money” in £billions – all coins, notes, bank deposits - BoE.

Like the last posting, this example is reasonably well known in maths type circles.

There is a quiz show on TV. In this quiz show there is a quiz show host, a contestant and 3 doors.

The doors are closed and the contestant cannot see what is behind them. But the contestant knows that behind 2 of the doors is a goat, and behind one of the doors is $1,000,000

The quiz show host asks the contestant to choose one of the doors by standing in front of it. The door that the contestant thinks has the prize behind it.

After suitable bla bla and building up the tension the quiz show host opens one of the other 2 doors to reveal a goat.

The quiz show host then tells the contestant he has a “special offer”, he has a choice, he can stick with the door he is at – Or he can swap to the other unopened door.

Massive tension…

After the contestant makes his decision – the door he has chosen is opened – and he gets whatever is behind it – be it a goat or the $1,000,000

Now here is the question, when the quiz show host asks the contestant if he wants to stick with the door he’s already selected or swap to the other unopened door – What should he do??

- He should stick
- He should swap
- It makes no difference

Don’t read further unless you want the answer.

Don’t read further unless you want the answer.

He should always swap. The odds of winning the $1,000,000 are much higher if he swaps.

Yet not a single person I have ever told this to has initially realised it.

Every one (including nuclear physics Phds) have insisted (sometimes for hours!) that it’s 50/50 – And it doesn’t make any difference if he sticks or swaps.

I said exactly the same the first time someone asked me.

In this posting and next, I am going to give 2 examples that show the brain is not wired to intuitively understand complex scenarios.

There are 34 people at a dinner party. How likely is it that 2 share a birthday?

Our intuition says – It is very unlikely – If we were at such a dinner party and we happened to discover that two of the guests shared a birthday, we would probably be quite surprised. “What are the chances”, we’d say to each other.

The chances are pretty high – Over 75% in this case.

And yet the much lauded “gut feeling” and intuition that so many people swear by would take us completely down the wrong path. Our brains aren’t wired for reasoning or maths, just another thing to be careful of as we try to tell the shit from the shine.

In case you were wondering;

At 23 guests it’s about 50%
At 58 guests it’s over 99%

(moved!!! I had this on the personal blog whoops!!!)

We reason using deductive or inductive logic.

In deductive logic the conclusions are *necessitated* by the premises...

All men are mortal (premise),
Socrates is a man (premise),
Therefore Socrates is mortal (conclusion).

Inductive reasoning is what you might call common sense, it's our life experiences.

Jack runs around in the snow for the first time, it's cold. Next time he sees snow he "knows" that it's cold, he doesn't need to bother touching it again.

This often works for us. After all empiricism is the basis of science. However it is flawed, because the conclusion is not certain and can never be certain.

Jack has seen thousands of crows in his life, every one has been black, therefore all crows are black..... Until he sees an albino crow.

The problem is that you have to observe every crow (and know that you have observed every crow) to know that all crows are black. A single exception disproves the rule.

This is a difference between maths and science. I would not expect a mathematical theorem to ever be disproved (excepting that there was an actual error constructing it).

Scientific knowledge is on a much shakier foundation.

I remember reading this somewhere on the web, don't know who said it first;

There are two types of scientific theory, Those that have been disproved, And those yet to be disproved

I think that's pretty much spot on.

Have you ever noticed how good people are at explaining why something happened AFTER the event.

Turn on a finance TV channel and you'll hear detailed explanations of why the FTSE has done this, or why company X is up etc... It all sounds so plausible and commonsense. The reality however is that these people are completely clueless. Typically 75% of fund managers under perform the market. They don't know what's going to happen next week, never mind next year. But they are good at making up a story after the event that retro-fits the facts.

This isn't just in finance, it's everywhere. Sociologists talk about social trends as if they actually knew what is going to happen. They don't. They study the past, find the relevant facts and construct a story. They distil some "rules". They expect the rules to be followed in the future. They won't be.

The softer the science the more of this we have going on. The reason is that in these fields we don't know what we don't know. And it's harder to know that when a system is messy. Any day something new can come along and blow everything apart -- And when it does, the story tellers quickly incorporate the novelty into their framework, now we know everything, they will say. Until the next time!

Donald Rumsfeld was ridiculed when he came out with the following a few years back. I think he was onto something.

As we know,
There are known knowns.
There are things we know we know.
We also know
There are known unknowns.
That is to say
We know there are some things
We do not know.
But there are also unknown unknowns,
The ones we don't know
We don't know.

Is the universe real?
What is real?
Is it a binary concept anyway?
or more like shades of grey?
could you test for it, since you are by definition entirely enclosed.

The line of thought, that our reality is sitting on top of another (realer) one is very old. It has gained popular currency with the recent Matrix film.