I have been investing more time into understanding capitalism. Knowing the battlefield makes you an effective leader.  The more you know about any area of importance the more effective your decisions will be in that area.

I believe taking the time to acquire a very deep understanding of capitalism will naturally cause two things. Accumulation of wealth and understanding of its flaws. The first is a personal power to use capitalism as a tool for advancing your intentions in life. The second is an awareness of a system doomed to failure.  Many will argue this second point until they take the time to grasp capitalism from an overview perspective.

Contrary to many ideals – the money supply is limited. This is not ‘scarcity’ mentality. This is self-evident truth. It’s a relatively very large money supply at roughly 13 trillion dollars- but the majority of that money is held by a small minority. This means the actual money supply ‘available’ to the average person is only that money that is in circulation. This is where the distinction of money versus currency becomes so important. Money is the overall pool of available funds whereas currency represents the actual money flowing from hand to hand. Money can be held in savings or assets whereas currency is moving in streams. As a general rule – only currency can be translated into income- unless you inherit assets.

The basic foundation of capitalism money versus currency inevevitably means that most of the money supply will be tied up into assets or savings and a smaller percentage will appear in actual circulation. The greatest form of currency is in the labor market. Money circulates quickly here because most people do not have either the discipline or the luxury of saving or investing at this level. Their need to spend every day keeps currency flowing. They are chiefly responsible for the ‘currency’ that changes hands. From employer to employee to market – the cycle of currency completes itself when the money finds itself back in the hands of the employer.

 The goal of wealth accumulation, which is the goal of every ‘active’ capitalist - is to be profitable and convert that currency into savings or assets like “real” estate. The more money is withdrawn from the currency ‘account” and deposited into the asset “account” the more assets increase in value. This is what happens if many people invest their money into a popular stock the value of that stock goes up. If many people invest their money into homes – the value of those homes goes up.

Where do these assets get their value increase? From the currency that is in circulation or loans that add to that circulation. Loans add to currency and currency is invested into assets. As currency dries up – more loans become necessary to keep the wheel of capitalism greased. This means – debt is necessary for capitalism to survive.

Who is responsible for debt? The banks. Savings which represent ‘real’ money are stored in banks and then loaned out by a ratio of as much as 10 to 1.  This means for every dollar that leaves the circulation pool – ten more dollars are added by banks who then earn interest on the newly circulating currency. (Some may argue the above point is false and that banks only loan out 90% of actual savings. Yes this is true, but a series of new loans and savings can ripple through the banks from that one original loan.)

Someone had to go into debt in order to add that new capital. Who was it? Not the banks – they usually back their loans against ‘hard’ assets. It’s usually an individual or business that took a loan in the hopes they would be able to withdraw more money from the currency account to go from the red (debt) to the green (real money). But this is the largest of all Ponzi schemes – millions of people borrow in the hopes they can replace those loans with ‘real’ money. But that real money can only come from others who have added to the circulating money supply with their own loans in the hopes they too can beat the system and get into the ‘green’. In the end, almost on a 10 to 1 ratio – someone is left holding the debt card.

What happens when someone can’t repay a loan? They default on the loan and go bankrupt. And usually the banks can recover their loan in the form of selling off assets that had been used as collateral or earning interest on other loans. But usually the shock of a few defaulting loans is not substantial enough to shake the system of capitalism thriving on a growing money supply funded by more loans.

When the loans out pace the defaults (bankruptcies), everything is still okay. The banks can still be profitable. Especially when those defaults can easily be covered by selling hard assets that are also growing in value as currency is inevitably being converted into real estate.  In other words – if I work real hard withdrawing money from the currency pool – the first thing I’m probably going to do is invest into an asset (house, etc). (Note: this is a general assumption of the market based on what is being done.) So as long as everyone thinks this way – converting profits into assets, assets are safe and the system of capitalism continues to thrive on loans.

EASY LOANS INCREASES MONEY SUPPLY FASTER

The easier loans are to get – the more the money supply increases.

It’s important to keep loan defaults to a minimum so they don’t shake up asset values too much. When a person defaults on a loan and it cannot be replaced by the sale of an asset that money simply disappears from the money supply. Which means if enough loans defaulted and the value of the assets supporting those loans disappeared – the money supply would shrink – coming out of the pocket of the asset holders.

THE GREAT MOTIVATION

The small minority have every motivation in the world to ensure that asset values increase and more importantly – that loans keep the currency market flowing. If people stop borrowing money the currency market can only be supported by selling assets. Selling assets will inevitably lead to a drop in value of all assets. If asset values drop the money supply decreases – going up in thin air; the same place they started when a loan created them. 

Capitalism has survived only because it has extremley intelligent guardians at the World Bank, Federal Bank and Government levels who know what buttons to push before the majority public canibalizes the system.

 THE IDEAL OF CAPITALISM

 In the ideal picture of capitalism you have a large working class deeply in debt but yet still motivated to pay the interest their debt is producing. To keep them motivated you must keep their spirits high through media and distracted through idle pleasures. Never reveal to them or the majority of small time asset holders what the real picture looks like – otherwise they will see a very top heavy system teetering on the edge of collapse. Fear will be the catalyst that ends capitalism. As long as fear is removed from the system and hopes are high – capitalism will survive.

DOLLAR VALUE IS PEGGED ON SOCIAL DEMAND

The mass demand for money keeps its value in place. The corrective government and bank activities keep it on course. The rich do indeed get richer and the poor do indeed get poorer. Value is roughly affixed to dollar amounts. The current system grossly undervalues things like teaching or spirituality and overvalues things like athletic competition and entertainment. Yet capitalism stands as the lesser evil and it therefore survives.  

USE THE TOOL UNTIL IT IS NO LONGER USEFUL

Knowing how capitalism works will allow you to use it to your advantage while we live under its shadow. And release it from use the moment the first legitimate opportunity arises to do so. This understanding empowers you to live outside a paradigm that is going to shock a lot of people when it collapses.

CAPITALISM THE GOOD

After all this you might presuppose I’m an opponent of capitalism. The truth is capitalism has advanced society faster than any other system and certainly has been a valuable tool over the last several hundred years. When the rich minority uses their resources for the common good and the larger majority strives for daily fulfillment in the form of education, meditation, fitness and contribution- before allowing wealth accumulation and achievement to dominate their focus; they can live their full potential, even if its not possible for everyone to be a billionaire. The end game is not wealth but who you become in the process.

If you are shrewd with your personal pleasures in spite of having great wealth you won’t fiddle it away on temporary ‘things’ that rot and turn to dust, including your own body. You’ll make wise compounding investments in the Soul. Enjoy your money. Enjoy your life. But remember your most important investments.