Saturday, August 02, 2008

Correlation is not causation

Sometimes people replace correlation with causation. Here's an example of this which I think is appropriate for these days. Consider the following assertion.

The issues with the credit markets have helped make the US financial system insolvent.

Really? Is that causation? Or is it a simple coincidence that both the credit market problems and the insolvency of the US financial system happened at the same time? Could it be that there is a deeper truth that caused both?

Well, to begin with, I know of no modern financial system which is solvent. From the moment that banks can lend more money than they have, then by definition all the emitted debt cannot be paid back at once, and therefore banks are insolvent because they loan what they cannot possibly have.

In other words, every single bank is technically bankrupt. And, by extension, every single party who has any amount of debt is also bankrupt to the extent that the money needed to pay back the obligations does not exist.

An apparent exception to this is when more money is created out of thin air via inflation. However, it is my understanding that in the US the taxpayers guarantee such money creation. So really, this is just a replacement of debt with other debt, and as such it does not address insolvency.

Then, when we consider interest, we further realize that debt simply cannot be paid because the interest and the principal quickly outstrip the available supply of money. Recurrent credit problems are just a mere consequence of this.

Therefore, credit issues and insolvency go hand in hand, because they are a direct consequence of the setup of the system itself. Furthermore, they are a constant, not an exceptional event. What is more, at the end of the cycle the remaining banks will own most of the property and we will have the majority of the cash which by then will be worthless thanks to inflation.

I hope this makes it easier to enjoy the illusion that salaries are worth something.

1 comment:

Victor Rodriguez said...

Right you are.

Here is a video, "Money as Debt", that does a good job at explaining the monetary system:


Victor Rodriguz.