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Why does the credit-based system enable governments to run their economies like Ponzi schemes?


Every country on Earth runs its economy on a credit-based system. The credit-based system is a system in which the value of money is backed by nothing tangible such as an asset class (gold, silver, oil, soybean, minerals…etc.). In the credit-based system, the value of money is backed by debt.

Debt is a financial instrument based on the promise to pay back an obligation. Its value is backed by the real value of future resources. In our economies, the currencies we use as money have value because government decreed that they are valuable. Their value is not based on any real finite resource. It is arbitrary, based on political will.

Prior to 1971, most economies were backed by commodities such as gold and silver. This means that government couldn’t spend the way it wanted. The central characteristic of commodity-backed economies is that government couldn’t run the economy on a budget deficit.

There are two ways for a government to raise money for its operations. The first way is through taxes, and the second way is through borrowing from the central bank by issuing bonds. In a commodity-based system, the ability of the government to borrow was extremely limited. Government couldn’t borrow more than the quantity of gold backing the money supply. This prevented politicians from wasting taxpayers’ money and accumulating deficits. Thus, in a commodity-based system, government was confined to only using taxes as its tool to generate revenue.

In the credit-based system, government is no longer constrained. It can increase its spending as much as it wants, and the central bank can loan as much money to government by printing as much as it wants. The problem is that it enables the orchestration of a Ponzi scheme.

A Ponzi scheme is a fraudulent system that involves paying existing investors in a non-existent enterprise with the funds collected from new investors. Ponzi schemes are doomed to fail because instead of using the money collected from the new investors to create wealth and using that income from the wealth created to pay back old investors, it uses that money directly to pay out old investors.

As a result, the person running the scheme is forced to keep attracting new investors to his fraud in order to pay out the old investors. But eventually, the scheme falls apart because there are no new investors, and the new investors who came in are now old investors and claim their money back. Thus, how do governments and central banks operate legalized Ponzi schemes on ordinary people?

The credit-based system allows the government to borrow as much money as it wants from the central bank by issuing bonds to it. The central bank then sells these bonds at an auction to other central banks, financial institutions, and individuals. Government pays its obligations back by borrowing even more money. Thus, it uses new loans to pay back old loans, the same the promoter of a Ponzi scheme uses new investors’ money to pay back old investors.

The new loan issued to pay back the old loan erodes the purchasing power of the consumer because any additional currency injected into the economy depreciates the value of the existing currency in circulation. As a result, the government does not create wealth since the money it borrows is used to pay back old loans, and as the new loan becomes an old loan, it has to keep borrowing from the central bank to pay back that old loan. This then becomes a vicious cycle.

Purchasing Power of the U.S. Consumer

Source: U.S. Bureau of Labor Statistics


When observing the purchasing power of the U.S. Dollar, for example, we clearly see that it dramatically depreciated over the years. And this depreciation accelerated after 1971, when President Richard Nixon took the United States off the gold standard. Today, the national debt of every country on Earth is heading upward rather than nosediving. This means that governments use the real value of future resources to fund the expenses of today. This means that government debt engineers a decline in expected revenues, which then becomes insufficient to back the outstanding level of debt.

Since the credit-based system is an unchecked system that grants governments unlimited power over the money supply, the result is constant inflation pressures over the quantity of goods and services being produced. Zimbabwe and Venezuela are extreme cases of what the government can do to its people under a credit-based system.

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