Frackin’ Reserve – Compound Interest as Invisible Slavery (5/6)

But if you want to continue to be slaves of the banks and pay the cost of your own slavery, then let bankers continue to create money and control credit. — Josiah Stamp

Ryan Smyth, Contributor
Activist Post

In Part 1 we looked at the mechanics of fractional reserve banking. In Part 2, we looked at money vs. wealth. Part 3 looked at how and why fractional reserve banking is fraudulent, and illustrated how it is structured like a pyramid scheme. Part 4 looked at 2 basic ways in which the system falls apart, either through a run on the banks, or the banks forcing depressions on the people and then stealing their wealth. Here in Part 5, we look at compound interest and how it is an invisible form of slavery.

Compound Interest Mechanics

In addition to simulating fractional reserve banking, the Frackin’ Reserve program also illustrates simple and compound interest. Simple interest is calculated by setting the interest periods to 1, and the compounded method to “Annually”. Setting “Compounded” to any other option shows compounded interest, the formula for which is:

Where:
Amount = the final amount to calculate
Principal = the initial, borrowed principal
Rate = the interest rate as a decimal (not a percentage)
Periods = the number of times to calculate the compounded interest in for the term (e.g. 12 for a term of 1 year when compounding monthly, or 365 if compounding daily)
Term = the total length of time for the loan in years

Interest is an Invention of Satan — Thomas Edison

While Thomas Edison may have pioneered douchebaggery, he was at least smart enough to know just how sinister interest was. And this is another predatory hallmark of fractional reserve banking.

While a state may issue its own currency at zero interest, banks do not. Rather, they artificially inflate the money supply through fractional reserve banking as illustrated in part 1 and through the Frackin’ Reserve! program. The key point to understand here is that states have no reason to operate a fractional reserve banking system because they can legitimately print money whenever they wish to (which leads to hyperinflation if too much money is printed, e.g. Zimbabwe). Fractional reserve banking is exclusively for private banks.

In that process, they charge interest on other people’s money, not their own money. That is, when you deposit money, the bank makes money with it by lending out your money to other people. (And don’t forget the fees… you pay the bank to take your money, but that’s just one more way for the banksters to prey on people.)

The following table illustrates how the banks charge interest on money that they do not own:

If you live in Canada, Australia, New Zealand, or Sweden where there is no reserve requirement at all (apparently it is possible to divide by zero there), then that table looks like this:

Without interest, the fractional reserve banking can be “rewound” or undone, and eventually everyone can get their money, as long as it is done in reverse sequence and with enough time for people to properly comply. Theoretically that is. In practice, it’s virtually impossible to unwind as you can borrow money and deposit money in a matter of seconds, but loans can take many years to repay.

(Remember back to the pyramid structure and “float time” from part 3.) So while the first 10 iterations in the 2 tables above could happen in less than a week, the repayment of the loans could take years or decades. Remember, the core problem with a “run on the banks” or a “run on the people” is the time involved, which is a determining factor for interest.

However, with interest, that money cannot be paid back. Ever. Interest effectively prevents “unwinding” the fractional reserve banking. The interest is purely imaginary and has no basis in the real world. For it to be given “reality”, real wealth in the real world must be surrendered.

If you take the default values in Frackin’ Reserve!, then change the “Interest periods (in years)” value to 15 or 16, you will see that the interest is then greater than the value of all deposits (“What customers think they have”). A higher iteration value only exacerbates the problem. Going back to the default values and entering an interest rate of 0.08 (8%) similarly eats up all the deposits, with more iterations of the fractional reserve system again making the situation worse for people.

Is it any wonder than that banks love to offer 30 year mortgages?

Play around with the values in Frackin’ Reserve!, and you will quickly see how compounded interest very quickly eclipses the value of all deposits in the system. This is functionally equivalent to the bank gaining control of all assets or wealth.

Interest then acts as a vampire, draining wealth from the people as a vampire sucks the blood from its victim. It forces people to labor to produce wealth for its repayment. Interest is invisible slavery.

The rich rule over the poor, and the borrower is the slave of the lender. — Proverbs 22:7

For money was intended to be used in exchange, but not to increase at interest. And this term interest, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. Wherefore of all modes of getting wealth this is the most unnatural. — Aristotle

The most powerful force in the universe is compound interest. — Attributed to Albert Einstein

The true insidious nature of interest lies in the fact that it is compounded. If interest were simple in nature, i.e. at 5% on $100, the total interest being $5, then it would be less insidious, and it would be possible to reduce debt much more reasonably. However, as interest compounds, it grows ever larger at an ever increasing rate. 

For example:

• The interest at 5% interest on $1,000 after 1 year of simple interest is $50
• The interest at 5% interest on $1,000 after 1 year of compound interest is $51.16
• The interest at 5% interest on $1,000 after 10 years of simple interest is $500
• The interest at 5% interest on $1,000 after 10 years of compound interest is $647.01

$647.01 is certainly much more than 10×$51.16. It’s $135.41 more. The compounding and exponential nature of interest virtually guarantees that the interest alone will eventually engulf and consume the entire world.

This same exponentially increasing rate of growth isn’t realistically possible for the growth of real wealth as real wealth relies on human labor for its production. i.e. If you are a waitress, you can hardly expect that your wages and tips will grow exponentially over time as compounded interest does. The same goes for almost any occupation – wages (or productivity) do not increase exponentially. Well, except for banksters that is….

The question then is whether or not the production of new wealth by people is greater or less than the rate at which interest accrues, and whether or not at any point in the future it is possible for the rate at which interest accrues to outstrip the pace of the production of new wealth.

Now, it is possible for productivity to accelerate, however, this acceleration of productivity invariably leads to price reductions, which implies that no increase in production can ever meet the exponential growth of interest. 

In other words, the law of supply and demand for real wealth in the marketplace dictates that as the supply increases, prices drop. The key factor in increasing supply is productivity. Productivity has skyrocketed since the advent of the industrial revolution, and has only accelerated in many areas. The consequence is that prices for “wealth” drop.

While this does not hold true for everything, e.g. precious metals and real estate, it holds true for virtually all consumer products, e.g. computers and cars. While previous cars were available, Henry Ford rolled the Model T off his assembly production lines at the low-low price of $825 at a time when the average household pulled in about $574 (source), or 144% of the average household annual income. Today a new car that outperforms the Model T in every way imaginable can be easily purchased for under $10,000, with the Tata Nano costing around $2,000 to $3,000 at a time when the average household income in the US is around $50,000 per year.

There are countless numbers of similar examples where market, workforce, and technological productivity have skyrocketed over the last century, and even when looking at just the last decade. e.g. Compare storage prices per GB or TB in hard drives and flash NAND memory.

In other words, while people’s productivity may increase linearly, exponentially, or even geometrically, the prices of the products of their labor do not increase at that rate, and in fact, tend to decrease.

This does not happen in banking. The compounding nature of compound interest guarantees that the price of money will always accelerate upwards. This stand in stark contrast to virtually all other products and services in the market where the price comes down.

A Touch of Modern Cynicism…

Where all virtually all industries, except for financial industries such as banking and insurance, make incredible advances in productivity and generate new wealth virtually beyond imagination, the finance industries create nothing and add no value. They are purely administrative in nature. They are overhead. Nothing more.

Rather than actually create any kind of wealth, produce anything of value, or offer a genuine service, they opt to simply manipulate the instruments of trade, i.e. money. Through the manipulation of money, and primarily through compound interest, they effectively swindle the rest of the world into surrendering everything they have, including their labor, and the promise of future labor.

What is the job of the insurance industry? To get money from people, and then figure out ways not to pay it out.

What is the job of fund managers? To gamble with other people’s money, and pay them back a small portion of the profits if they win. And tough luck for clients if the fund managers lose their money. i.e. Let me gamble with your money and assume no risk, and you pay me for gambling, and I take a portion of any profits. Wow! What a deal! Where do I sign up?

What is the job of finance in general? To manipulate money in order to swindle people out of their wealth.

It is reasonable to assume that compounding interest will always outstrip the production of new wealth, and will eventually engulf and consume the entire wealth of the world. Indeed, this is a mathematical certainty.

One need only look at the growth of the financial sector to see that it is slowly engulfing more and more of the economy. In 2010, the US financial sector was responsible for a third of all profit among US corporations (source, source).

Money is a new form of slavery, and distinguishable from the old simply by the fact that it is impersonal – that there is no human relation between master and slave. — Leo Nikolaevich Tolstoy

Read other articles in the Frackin’ Reserve Series:

Part 1: The Mechanics of Fractional Reserve Banking 
Part 2: What is Money? 
Part 3: How Fractional Reserve Banking Creates Money, and Why It is Fraudulent
Part 4: Run on the Banks? Or Run on the People? 

Ryan Smyth is a Canadian expat currently living in Australia. He works in software, but is passionate about many current issues and the impending demise of freedom and privacy. He can be found blathering on (and sometimes ranting) at his blog, Cynic.me.

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