This article discusses the cause of economic recessions and depressions.

1. 1/7/14 Aquinum's Razor: A Theoryof Economics: Whyis deflation and depression inevitable in debt based monetarysystem like ours?
aquinums-razor.blogspot.com/2010/07/why-is-deflation-and-depression.html 1/4
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Why is deflation and
depression
inev itable in
debt...
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About Me
MA N SOOR H. KHA N
I am a Pakistani
Am erican im m igrant to
the U.S. I hav e been a
U.S. Citizen since 1 9 7 8. I
am an Electrical Engineer
by training (Bachelor of
Engineering from Stev ens
Institu te of Technology --
Degree w ith Honor). I also
THU RSDA Y, JULY 2 9 , 2 0 1 0
Why is deflation and depression inevitable in debt
based monetary system like ours?
Money is civilization’s most liquid asset. An asset is something of
value. Most liquid means that this is the asset most employees want
to get paid in and this is the asset most vendors demand for payment.
For United States of America most employees demand payment in
U.S. dollars and most vendors price their products in U.S. dollars and
demand payment in U.S. dollars.
The next point to note is that prices of most products and services
(by far) in the United States are determined by:
1) Demand for the product
2) Supply of the product
3) Total Supply of Dollars
The first two items listed above are intuitive the last listed item listed
above (#3) is not intuitive. That is correct: the total supply of dollars
available in the economy has a very, very strong influence on prices.
Let us continue. Total Supply of Dollars is comprised of:
a) Coins - Coins are created by the U.S. Mint.
b) Paper Bills - Paper Bills (like the Dollar Bill in your wallet). Paper
bills are printed by the U.S. office of printing and engraving.
c) Bank Deposits - Bank deposits are created by the banking system.
Any money accessible by “writing a check” counts as money.
Coins and Paper bills are put into circulation by the U.S. government
by simply spending them. How bank deposits are created is the key to
understanding deflation and depressions. Bank deposits believe it or
not rule our world because they comprise 95% of the money
circulating in the economy. Money rules our world. More precisely,
those with the power to be able to create new bank deposits (i.e.,
bankers) rule the world. Even politicians are easily manipulated by
those who hold the power to create money (i.e., bank deposits).
So how are bank deposits created?
A bank deposit is created when a borrower applies for and is
approved for a loan. The actual creation of the bank deposit is
nothing more than a booking entry to a “checking account”. The act
of funding a loan is simply the act of increasing the balance in the
checking account of the borrower. This can occur directly (the bank
can simply increase the balance in the checking account of the
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Aquinum's Razor: A Theory of Economics
In-depth analysis of the relationship between money, inflation, banking, credit, and gold,
production of goods & services and other topics relating to economics.

2. 1/7/14 Aquinum's Razor: A Theoryof Economics: Whyis deflation and depression inevitable in debt based monetarysystem like ours?
aquinums-razor.blogspot.com/2010/07/why-is-deflation-and-depression.html 2/4
hav e a Masters of Bu siness
Adm nistration degree
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w as in Top 2 0% of the
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borrower if the borrower’s checking account happens to be in the
same bank) or the bank can just “write a check” and give it to the
borrower to spend or deposit it in his checking account.
Don’t worry too much about “how the check clears”? This is not
important to understand deflation and depressions. Think of the
newly created bank deposit (i.e., new money) as the loot and clearing
checks between banks is just how the benefits of this loot is shared
among the banks.
Think of the banking system as a one “giant bank” in your mind. Think
of it as one giant ledger which keeps tracks of who has how much
money. As individuals write checks to each other the increases and
decreases are just entries to this giant ledger. All new money (bank
deposit) creation is simply an adjustment to this huge ledger. Nothing
more. Sounds too good to be true. It is true. Banks however cannot
just keep increasing the money supply without worrying about
inflation. Inflation is the balancing force. The central bank can do
various things to reign in bank lending when it is worried about
inflation.
Actually, there is another balancing force. Since new money is
created when a loan is funded a bank must find credit worthy
borrowers in order to increase the money supply (this last point is
not 100% correct, I will explain later).
So far so good. So what is the problem? The problem is that most
money in the economy is born (i.e., created) when a loan is funded.
And the next point is even more important:
Money dies when a loan is paid back by the borrower!
Y es. That is correct. When a borrower uses money (in most cases
another bank deposit) to pay interest and principle to the lending
institution the bank deposit used as payment “dies”. Under normal
circumstances this is not an issue because new borrowings (new bank
deposit creation) normally more than offsets the money (bank
deposits) destroyed when loan balance and interest charges are paid
down.
So do you see that if the net of borrowings (creation of bank deposits)
and paying loans back (destruction of bank deposits) is not such that
more money is being created than being destroyed then we will have
deflation (due to decrease in money supply) and eventually a
depression.
Eventually all debt based money creation systems (like ours) reach a
point where the private sector refuses to borrow more because it will
eventually become too indebted (even at zero percent interest rates)
and the banks will get to a point where they will be too hesitant to
lend because they will see the onset of deflation coming. Some people
call this “Peak Credit”. But it may take a long time to reach “Peak
Credit”. Our current cycle of credit expansion started in 1940 (start
of WWII) and ended in 2007 . Depressions are usually resolved via
resets (massive defaults) and can easily lead to wars and chaos.
So why would we ever design a monetary system which has to end in
a deflationary collapse? The answer is very simple:
It keeps bankers in power.

3. 1/7/14 Aquinum's Razor: A Theoryof Economics: Whyis deflation and depression inevitable in debt based monetarysystem like ours?
aquinums-razor.blogspot.com/2010/07/why-is-deflation-and-depression.html 3/4
Newer Post Older Post
Of course, the resolution to this problem is very simple. Bank
deposits should be born (created) as equity and not debt just like
Coins and Paper Bills.
Mansoor H. Khan
Posted by Mansoor H. Khan at 1:49 AM
2 comments:
greg said...
This is a nice summary. The power of finance is really naked now,
and it is ripe with the stink of fraud. Will the people open their
eyes, or more correctly admit to seeing what has been before
them the whole time?
For a nice video exposition of the problems with the current
system, see:
Money as Debt:
http://www.youtube.com/watch?
v=Dc3sKwwAaCU&feature=related
Or:
http://video.google.com/videoplay?
docid=-25501564537 90090544
And:
Money as Debt II:
http://www.youtube.com/watch?v=rCu3fpg83TY
November 8, 2011 at 1:02 AM
Jannah Delfin said...
Great post. I hope you write more good stuff like this article.
aggregate spend
December 12, 2013 at 2:23 AM
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4. 1/7/14 Aquinum's Razor: A Theoryof Economics: Whyis deflation and depression inevitable in debt based monetarysystem like ours?
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