Understand Money as Debt Concept

I came across this video sometime ago and personally I found it very interesting that you may want to watch it. This video was created by Paul Grignon in 2006. It is quite a long clip (i.e. 47 minutes) and I think it is worth spending watching it. You may need to watch it few times too because it is kind of difficult to understand.

This movie shows how the basic banking system works and how the money was eventually evolved into no longer represent value but debt. Let's watch it and if you're lazy, you can read my summary below. :)





What are the KEY messages from this video?


Message 1: Money Is Now Backed by Loan or Mortgage

Yes, bank used to create money only if they have the real gold with them or someone deposit the gold to bank. But this is not how the bank operates today. Bank created money as long as you take loan from them and promise to pay back. Money is no longer backed by Gold but backed by the loan or mortgage. In short, bank loans money that they don't have and in reality the money now is actually created out of “Nothing”. Let's see how this works...


Message 2: Bank Can Create as Much as Money We Can Borrow

As soon as we realize the bank creates money out of nothing, a new legal regulation is invented to protect our rights. This legal regulation is called “9 to 1 Fractional Reserve System” to limit how much money the bank can create.

In short, if the bank has $1K cash in hand and they can loan out up to $9K to us based on the 1:9 fractional reserve system regulation. However, does this really limit the bank to create money up to $9K? It seems so but in reality they can create the money up to $90K which is 1:90 ratio. Let's see the following example how this works:

Assuming when the bank started, the bank has $1K cash in bank. This means the bank can loan up to $9K to all of us. So, let's say Person A take the loan of $9K to buy a car from Person B. Based on the person A's promise to pay back the money, bank will create $9K cash and loan it to person A.

The tricky part is the Person B will then deposits $9K to the bank. Based on the 9:1 federal reserved regulation, the bank can then reserve $900 ($9K/10) and loan it out the rest which is $8100 ($90:$8100 == 1:9).

So it moves on to next loan transactions until the bank can't reserve anymore money. See the table below for the subsequent loan transactions until the bank can't reserve anymore money. At that point in time, the bank will have total of $10K cash in hand and the total of $90K loan has been created.







2 very important questions to ask yourself here:

• Initially the bank has $1K and now the total cash in hand the bank has is $10K. Where does the $9K come from?
• Initially the bank can only loan up to $9K. Why now the total loan is $90K?

The answer is pretty simple – the bank create money out of each loan transaction. With just $1K, now the bank can somehow create extra $99K($9K + $90K) out of all the loan transactions. So $1K has been somehow magically becomes $100K ($1K+$99K). Assuming $1K is backed by Gold, then $99K is now backed by loan. It seems like the banks only create $9K but in reality $99K (x10 times) of money has been created out of nothing.

Therefore, bank can create a much as money that you can borrow! As long as new loan agreement is signed, a brand new money is created!


Message 3: Our Monetary System is NOT Sustainable?

In previous example, you will notice that majority of the money that we have today in this economy is created by loan or debt. Therefore in other words, the money supply to this economy is equal to the total amount of loan principal. However, when you pay back to bank, you're paying not only the principal but the interest of the loan.

• Money Supply = Loan Principal
• Money Owed = Loan Principal + Loan Interest

The total of money circulate in this economy is approximately equal to the total of loan principal. So now you need to pay the extra loan interest to the bank, where do you get the money from? There are only 2 possibilities:

• Not everyone will not able to pay back the loan together with interest
  
• To avoid that from happening, bank will supply more money to the economy by creating more loans

In order to sustain this monetary system, more debts needs to be created to make sure the system have enough money supply to pay back the loan interest. The funny thing is when more debts are created, more debt interests are created too. Thus, more money you owe. This is the exponential thing and are fixing the things or making it worse? Will this continue forever or will it collapse one day?


Discussion

Now we know the truth that money is created from debt and the questions to be discussed here are, is that really wrong with this system? What's wrong with creating money as debt? What's wrong to have exponential growth? Is this man made or natural? Who should we blame if this is not right? Is this government fault? The most important question is that shall we even fix this system? If we want to fix this system, can we accept the consequences? Even if we want to fix this, can we?

Malaysia 2010 Budget - What should I do with it?

If you're Malaysian, you may wonder what are the action that you should take with the recent budget 2010 announcement. If you're not Malaysian, you can ignore this post. These are the KEY summary of Malaysia budget 2010 which most likely may impact or relevant to you.


For Credit Card Holders

If you're credit card holder and you've more than 1 credit card, go to bank directly and cancel your credit cards. Keep one credit card will be enough. This is due to the fact that you're now required to pay annual RM50 fees per credit card and RM25 for each supplementary card. What a crap?

My 2 cents: If RM50 is NOT too much for you or you lazy to go to bank, you can just wait and see what are the respond from the bank to play around with our government to waive this RM50.


For Property or Real Estate Owners

If you're the owner of property and this year is your fifth year of your purchase, sell your property as soon as possible before the end of 2009. If you can't sell, you can either sell it with 5% tax starting from Jan 2010 or just don't sell it at all and pray until the next announcement to waive it. Possible?

If you plan to sell your property which is within the 4 years of your purchase, don't sell it until next year Jan 2010 because the tax is more than 5%. Hold it until 2010 only sell your property. :)

Background: It used to tax 30% out of your property gain if you sell your property within 2 years, third year is 20%, fourth year is 15% and fifth year onward is NO TAX at all. With this recent 2010 budget announcement, everything will be stick to 5% regardless of what years you're selling. So it is good for those love to sell the property within 4 years but not good for those who love to sell their properties in long term (i.e after 4 years).


For Broadband Subscribers

If you have subscribed to any broadband services (e.g. streamyx), please keep your broadband bills receipt every month. This is due to the fact that you can get claim up to RM500 for tax relief starting from 2010 to 2012.

My 2 cents: This is probably the best news in this budget 2010 announcement. By the way, for student, there will be some incentive about PTPTN conversion to scholarship and free netbook package which I don't feel any great about it. Do you?


For EPF Contributors

If you're EPF contributors, basically you do NOT need to do anything. Your contribution will be reverted back to 11% if you opted to decrease your contribution previously. Also for 2010 tax filling, EPF and life insurance schemes to be increased to RM7K from RM5K.

My 2 cents: It is clear that this new scheme is good for everyone especially for those who has exceeded RM5K for many years.


For Self-Employed Folks

If you're self-employed, starting in 2010, you can go to the EPF office directly to open an EPF account and the government will top up 5% of every RM100 that you contribute. However the maximum amount that the government will pay you is RM60 which is RM300 for 5 years.

My 2 cents: What so big deal about this RM60 per annum? Isn't that too little? Should I say better than nothing?

p/s: Hope this helps and clear things up on what you should react to this Malaysia 2010 budget announcement. Good luck!

How are people feeling about the economy now?

Indonesians don't see the economy as bad as it is blown up in the news. They still go on holiday, shop in malls, eat in food courts, travel out of down. Is this what is happening in Malaysia too?



Koreans feel quite positive about the economy now due to the stock index for the key companies in Korea (e.g. Samsung, LG and Hyundai) has risen and showed quite positive business result in the first half of 2009.



UK's people seem to be confused due to the conflicting message in the UK media - Things are going to get worse? Things are starting to look more positive? The recession is already over? While many become lost in negativity, there are equally many who have more positive feeling towards the economy.


Australians are caught in uncertain time which binds them into a state of inertia. In short, they don't know what to do to react to the current economy situation. Interest rates are low, services could not be better and etc. Majority of them do not expect economy upturn anytime soon.


Americans have overwhelming feeling of uncertainty and it is unclear what the next is. No one thinks the economy is getting better. 5% of Americans say they're undecided on economy's direction. 13% of Americans say the economy is staying the same. 82% of Americans say the economy is getting worse.


Malaysians are optimistic about the economy. They feel secure, they make plans for the future, they get married, they buy cars and houses, they grow their wealth with stocks, bonds and unit trust. 58% of Malaysians think the economy will get better quickly. Based on my personal experiences (since I'm Malaysian), more than 70% of people around me buying new house and new car. So, are we really optimistic about the economy now?


Summary
As you can see people from Asia are generally optimistic about the economy situation now as compared to American and European. What is your opinion on this?

Source: www.synovate.com

Posts that you may interested:

• Are you ready in 21'st century?
• Should I go for property tax deduction incentive?
• What is subprime crisis?
• How economy works?
  

Are You Ready in 21st Century? Speak Chinese?

19th century belonged to England, 20th century belonged to United State, and 21st century belongs to China. Do you agree?

When I was first graduated around 10 years ago, I were not required at all to deal with China people and today it is almost like day-to-day activities that I have to deal with China folks. It happens to almost anyone around the world. Whether you're from Asia, Europe or U.S, I bet you're some how cannot run away from dealing China. Is that true?

I like the following quote from Jim Roger (i.e. he is an U.S. economist who currently stay in Singapore) who strongly believe that Asia has a strong potential.

"If you were smart in 1807 you moved to London, if you were smart in 1907 you moved to New York City, and if you are smart in 2007 you move to Asia."

I know some of us (probably some of the economist as well) are still denying the fact (maybe not the fact yet to you?) that 21st Century belongs to China. But by the time you realize, will it be too late already? See the following interview of Jim Roger:



The question is are we ready? Have you prepared yourself in 21st century? A very obvious answer is to prepare yourself is to “Learn Chinese”. Therefore, you can see the following trend which is happening today:

• Not so smart people at least send their kids to Chinese school because they think they are probably too old to learn a new language.

• Smarter people take initiative to learn Chinese by themselves no matter how hard the language is.

• Very smart people marry Chinese people to fasten their learning process. That's why you see a lot of western people love Asia's girls. Hahaha... perhaps this not really their intention?

So, how about you? Are you ready in 21st century? We used to proud of speaking English and now we're proud of speaking Mandarin, are we? At least few of my friends in State, they really proud of speaking Chinese and feel really exciting when they learn new words everyday.

Waive Late Credit Card Payment Fees and Charges

Do you aware that we can actually waive the credit card late payment charges? I wasn't aware of this until one day the bank officer called me to remind me that my credit card payment was due. So, I just simply tried my luck and asked him:

Me: I have no idea the payment was due because I have not received any credit card statement in my letter box. Is there a way I can waive my penalty fees?

Bank Officer: Yes, you can waive the credit card late payment fees. Once you receive the statement, you can just give us a call to waive it.

Wow! What a surprise? I think I have been all the while paying these fees due to the following careless reasons:

1. Forgot to make payment on time.
2. Never received the credit card statement.
3. Pay the wrong amount – less than the actual amount that I should pay.

Steps to Waive Your Credit Card Late Payment Charges

1. Once you receive the statement, give them a call. The phone number is usually at the back of your credit card if you're not aware of it.
2. Tell them that you want to waive your late payment charges. If they don't allow, tell them that you're going to use other credit cards and would like to cancel this credit card.

I think they will only do this only if you have good track record and I'm using the HSBC credit card. I believe other banks should the same as well or else you can just tell them you would like to cancel the card. Hope this helps. :)

Related Posts:

• Waive Credit Card Annual Fees
• Use Credit Cards Wisely

p/s: I wonder if I should call them to waive those charges and fees that I have paid in few months back. Maybe I should?

What Determines the Value of Money?

We invented the money as medium of exchange but how are we going to determine the value of money? What do we mean by $1? What do we mean by $100? Who is in charge of determines the value of money?

The value of money has really no meaning at all until we know what is the capability or we call it purchasing power. Technically speaking, only goods or services has value and whether how much the goods or services are worth to you are very subjective from one person to another. Eventually, it is still back to the basic fundamental of economy, supply & demand to determine the value of the goods or services. Let's look at some history how we determine the value of the money...


Very Brief History of Money

Before paper money was introduced, money used to have its value when gold was still used as money (e.g. coins that made by gold). Then later the paper money was introduced to represent the gold. Thus, the Gold Standard Act was introduced, let's say $100 represent 1 ounce of gold. Having $100 is equivalent having 1 ounce of gold. You can basically exchange your $100 with 1 ounce of gold anytime as you wish. This is what it means by “Money is Backed By Gold”. So at that point in time, the value of money is determined by how many the gold you have.

The gold standard was then lasted until 1971 when “Fiat Money” was introduced. The key concept of “Fiat Money” system is money is no longer backed by any commodity (i.e. gold). This is the system that we're still using until today and it is totally based on our confident on the money itself. In other words, the value of money is now determined by your perception, impression or confidence on it. As long as WE THINK, how much money is worth, the money will worth that much. Of course, the “WE” here is not you and me but “EVERYONE” in the globe.


Simple Version (I hope) of Money History

1. Everyone used gold as money (i.e. medium of exchange).
2. Bank came out a standard way to represent the gold (i.e. coins)
3. Coins too heavy to carry around, bank introduced paper money to represent gold (i.e gold standard).
4. Later on, we all confused with this piece of paper is valuable. We forgot that the paper money has value because it is backed by gold. We all started to love money...
5. Bank created more paper money to satisfy our needs even without the actual gold they have.
6. Sooner or later, money was no longer backed by the actual gold. “Fiat Monetary” is born.
7. “Fiat Monetary System” works until today which means the money now gains its value through our impression and perception.

Summary

Money in fact is a very complex topic and until today I'm still learning a very basic question of money: What is money? How money works? I try my best to make it as simple as possible.

To summarize this in few words, the value of money was used to determined by actual gold. However until now, the value of money is getting more complex in a sense that it no longer tights to gold but our impression or perception toward the money. That's why according to economist, only 8% of the world's currency exists as physical cash.

P/S: I talked about perceptive reality few years back and now this topic kind of links it back although my original intention has nothing to do with money. Think of it again, can I say the value of money is perceptive reality?

What is Money and Why It was Created?

In my previous post - simple way to explain the economy, I clearly explained that why people want to trade not only for the benefit of 2 parties but SYNERGY. So, no way we can stop trading. Because of trading, economy exists and so does the money was created too.

A lot of people in fact has already forgotten or have no idea of what money is and why it was created? These are the 2 top answers that I get when I throw the questions out:

1. Money is just a piece of paper.
2. Money was created to make you rich.

I combine these 2 statements and it becomes:

• Money is just a piece of paper to make you rich!

It sounds like money is magic because it is paper that can make you rich. Wow! Don’t you think so? But, are these answers correct? In some ways, perhaps yes?


What is Money?

Money is an agreement by everyone of us to be used as a medium of exchange. If you would like to use stone as your medium of exchange, then you can call the stone as money. Of course if you want to use a piece of papers as your medium of exchange, you can call this piece of paper as money. It was all started with stones, then gold, follows with coins and finally papers. But, why we want this medium of exchange?


Why Money Was Created?

The most direct precise simple answer is – money was created to make our life easier for the following reasons (that I can think of):

• Goods are too Heavy - If I want to trade my cow with your chickens, I need to bring along my cow to you and carry your chickens back. Therefore, money was created to solve this. E.g. I just need to carry a stone instead of cow to make a trade.
  

• Lack for Transferability - I have cow and you have chickens but you don’t want my cow and you want ducks. Then I need to look for people who have ducks that want my cow and exchange with them. Then, I only can use the ducks to exchange with your chickens. It goes very complicated when we involve more and more people. E.g. What if the one who has ducks wants only exchange with goats? So giving all this complication, a medium of exchange is defined which is called money.

• Difficult to Divide - I have 1 cow and I want to exchange 10 chickens with you but the fact that you only have 4 chickens. On the other I want to have ducks as well but the one has ducks agrees only to exchange 7 of his ducks with 1 cow. How can I chop my cow to both you? It is difficult or troublesome to divide my cow. So, a medium of exchange is later invented.
  

To summarize all these, instead of saying money is a piece of paper to make you rich, technically speaking to be more precise - money is an agreement that everyone agrees to be used as a medium of exchange to make your life easier.

P/S: You may also want to read the Financial Big Bang Theory by Michael which I find it quite interesting on how the money was all started. I also like when he described the stranger house as bank.

Having said that, I don’t really sure if I agree when he mentioned the money is born due to the inconsistent trading. Can't we still define or standardize the trading agreement even without money existence?

I think money is born because the goods are too heavy (we don't want to carry them around) and trading with goods (i.e. technical term is known as barter trading) is lack of transferability and ability to divide.