The Monetary System and The Collective Subconscious

Crises and collapse are built-into the global monetary system

Fri, Apr 1, 2011 - 4:36am

The term “subconscious” is common in psychology. Without unnecessarily elaborating, the topic of the so-called “uncomfortable subjects” falls in the category of the subconscious. Uncomfortable subjects are those that people do not wish to deal with, because they create a feeling of uncomfortableness that fractures peoples’ worldview and forces them to reconsider their beliefs.

As an extension, the celebrated psychologist Carl Jung has further coined the term “collective subconscious”. Here, an uncomfortable subject is one that an entire social group, whether a nationality, a political party, or a labor union, collectively avoid to discuss. Examples would include Germany, where discussions about the causes of World War II can cause feelings of guilt; Russia, which does not know how to face the events of its past; or Chinese intellectuals, who avoid the topic of Tibetan independence.

The term “collective subconscious” could well be extended to the whole world. Most unfortunately, the subject of money is one such topic that currently weighs heavily on the global collective subconscious. Apparently, in all nations and cultures, people are perfectly comfortable with the idea that money is a little colorful piece of paper with a picture of a king or president. People don’t dwell on the nature of money, much less on the nature of our monetary system.

People do not ask questions about how money is created; whether it should be a medium of exchange or a store of value; whether it should be a piece of paper or a commodity. No philosophical articles on the subject, no public discourse; it seems too obvious and self-explanatory. However, the simple fact that a bank can loan out sums that greatly exceed its own capital is virtually unknown to the common man or even to the bank cashier. But everyone who attempts to understand the concept of “deposit multiplier” is shocked at his discovery. How is it possible that if I deposit 1000 euro in the bank, the bank can actually loan out many times more than that? But if the loan is not paid back, then what happens? And this is exactly the situation today in the whole global banking system. Banks around the world have loaned out money that they didn’t have, and these loans have not been returned and cannot possibly be returned. So this has lead to the current global financial crisis. We may call it a lack of liquidity, a lack of capital, insolvency, but we tend to blame the bankers, the regulators, the policy-makers, and so on, but not the monetary system itself.

However, delving deeper and beyond the common simplistic thought patterns and preconceptions, the picture gets clearer; it becomes apparent that the shaky “fractional-reserve” foundation of the current banking system has built-in recurrent banking crises and the eventual collapse of the entire monetary system. History provides hundreds of examples of running the traditional printing press; and history is replete with all sorts of innovative and unconventional ways to creating worthless money; indeed, such opportunities have rarely been missed. The result has invariably been the same: hyperinflation, the collapse of the monetary system, and the loss of peoples’ savings.

Every 35-40 years people in Estonia lose their accumulated savings in the banks. This also happened many times to the Russian ruble: before WWI, after WWII, and again in the 1990s. We see this happen over and over again in Argentina. Should we look at world monetary history, then without exception, no monetary system without a physical backing has survived, while the value of unbacked banknotes has always gone down to their intrinsic value, basically zero (the value of the paper and the paint).

Today, there is a common belief that the Euro, which doesn’t have any physical backing, is an exception. In psychology, this belief falls under the category of “delusional thinking”. No doubt, drastic changes are coming for the Euro that will shake peoples’ worldview and attitude towards life.

Unfortunately, we can’t do much about it; unfortunately, we don’t learn from history either; instead we often learn from painful experience, while ignoring common sense. That’s our nature.

The current crisis is extraordinary, because it spans the whole world and has plunged the global monetary system into a chaos unlike anything seen before. However, as mentioned at the beginning, its discussion is still a social taboo. And the extent of this taboo is so overreaching that the economics profession has completely excluded this subject from its academic research. Economists feel comfortable at exploring the economy and its underlying processes; they understand the economy, analyze it, and comfortably criticize it; but the foundation of the banking system has remained unquestioned and untouched.

Why? The Nobel Prize for Economic Sciences has been handed out to 64 “economists”, but none has contributed to understanding the banking system or has explored the banking processes. Why is that? The answer is surprisingly simple: because the current banking system contradicts the basic laws of logic, nature, and economics; because it is not sustainable in the long run. A financial system with a daily turnover of transactions exceeding annual global trade contradicts common sense and the time-honored principles of traditional banking.

Another topic that isn’t discussed is related to currency and banking crises. Since the USA renounced the gold standard in 1971, the World Bank has identified and “officially” recognized 176 monetary crises and 96 banking crises. How could there be so many crises in only 40 years. Could it be that these crises are the result of the simple fact that the money is not actually backed by anything tangible? As already indicated, both history and common-sense logic tell us that the answer is “yes”; but admitting this would necessarily require changes that are impossible, because they contradict deeply-rooted principles of our collective subconscious. We can’t admit it, because we can’t handle truth.

So, what are the alternatives? We don’t feel comfortable with providing suggestions, because we are inevitably accused of creating panic, of being self-serving, of trying to profiteer. Instead, first and foremost, each person should think for himself. The widespread belief that money is safe in the bank, guaranteed by the government, and protected by the law is unfortunately a delusional thinking.

The reality is that there is no capital and there are no capital reserves to pay for the banking crisis. Unfortunately, people confuse capital with money. Indeed, creating “money” has never been easier. The power to create trillions with the push of a button does not trigger peoples’ emotions. But printing money does not create capital. Capital requires production, saving, and investment. Paying for the banking crisis by printing trillions will eventually lead to hyperinflation that will destroy peoples’ savings.

The only workable solution is age-old. The only form of currency that has survived all crises and held its value throughout history is gold; not a paper claim on gold, not a gold account in the bank, but physical gold, a piece of gold that you can hold in your own hand.

King Solomon once said: “There’s nothing new under the sun.” Gold has survived all crises of the past two millennia, while all the other currencies have been buried in the currency graveyeard. This time it isn’t any different. And many people are up for a crude awakening.

About the Authors

Founder and Chairman
Supervisory Board of the TAVEX Group
alar [at] tavid [dot] ee ()

Associate Professor in Finance
Krassimir_Petrov [at] hotmail [dot] com ()