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Our Funny Money

November 20, 2009

Atif F. Qureshi | Senior Editor, PKKH

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” – Henry Ford

The curse of price inflation haunts us. There seems to be no respite for the common man. Everything is becoming more and more expensive and yet nobody can come up with a satisfactory explanation. This phenomenon is causing acute pain to millions of households who are struggling to survive on what little money they have. We are finding that our static incomes are failing to keep up with the massive increases in the cost of living. The price of food, fuel, energy, housing and everything else is rocketing far beyond our means to keep up. The middle classes are being wiped out. God help us, the poorest are in an even worse state. But why does this happen? Why don’t rupees go as far as they used to?

It is really much simpler than most people imagine it to be. The rupee, like the dollar and every other currency in existence, is a mere political currency, unredeemable for any real asset. The rupee is not a certificate of real wealth, but a ‘note of credit’, based on a trust and promise from the central bank and politicians that it will retain its future value. The currency is not based on any real and valuable commodity like gold or silver. It is based on nothing.

Depending on the whim of the State Bank of Pakistan, extra rupees are printed and issued to pay for shortfalls in the government budget or to pay off debt. Remember, these notes are just pieces of paper with ink designs on them and for the State Bank to print more is an easy matter. But every extra rupee issued diminishes the value of every other rupee in the economy and thus weakens its buying power for the public.Hence goods and services become more expensive with time.

In effect, this ‘fiat’ monetary system destroys the wealth of the poor and middle classes who suffer most from price rises. When this inflationary money is created out of thin air, it is injected into the economy through private and government owned banks in the form of credit and new paper notes. Through the ‘fractional reserve banking’ process, the new money is multiplied even further and lent for bank profits based on interest rate returns from borrowers. These credit markets keep business and consumer activity churning over. The key to the manipulation of the system is the ability of the State Bank of Pakistan to artificially price the base interest rate.

A low interest rate means cheap credit, an increased money supply, more borrowing, and a consumer boom. A higher interest rate results in more expensive credit, a contraction in the money supply leading to less borrowing, and a slowdown in growth. ‘Monetary policy’ comes in the form of central bank decisions that are euphemistically known as ‘loosening and tightening’, where interest rate cuts mean loosening and hikes mean tightening. It sounds eerily similar to having a noose around someone’s neck.

It is not such a bad analogy. By changing base interest rates, the State Bank of Pakistan can constrict or ease the financial situation for the entire country. Thus an immense amount influence over the lives and properties of hundreds of millions is vested into the hands of a tiny group of individuals who are politically motivated in their actions. It is no surprise then, that prior to elections, politicians will pressurise the State Bank governor to lower interest rates to supply cheap credit to the masses and thus fuel an artificially generated ‘feel-good’ boom.

The problem is that inevitably, every boom eventually turns to bust, causing havoc for millions of ordinary families. But since when did the interests of the ordinary people ever get in the way of short-term political expediency? In The Communist Manifesto, Karl Marx laid out his ten tenets of extreme socialism. His fifth is especially relevant: “Centralization of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly.” Why the global monetary system is based on the degenerate ideas of this man is a complete mystery. Yet here we are.

When interest rates (the price of money or credit) are changeable at the whim of the central bank, booms and busts are the unavoidable result. No matter how hard the State Bank tries to engineer ‘safe landings’ for the economy and avoid recessions by tinkering with the base interest rate, they always happen. The problem is that there are too many variables involved and these people are only under the illusion that they know what they are doing, besides which, when the economy goes awry they can always pass the buck and blame ‘external factors’ or ‘global conditions’.

Interest rate cuts and cheap credit is always seen as the quick and easy answer. When interest rates are artificial and credit is distributed according to a arbitrary rate that is lower than a ‘natural’ equilibrium market rate, i.e. if monetary policy is ‘loosened’, excess credit often engulfs the economy, creating ‘bubbles’. This gives the illusion of prosperity. But in reality the new found wealth is concentrated in the hands of very few through the ‘bubble’ stock market, ‘bubble’ house price increases, and the profiteering corporations who have direct credit lines with the government.

Only a minority of the population benefit through cheap loans, stock market bubbles, or corporatist subsidies. The vast majority only suffer the consequences of the profligacy. The apparent new-found prosperity in the form of shiny new cars on the streets and new shopping malls is therefore not based on real production and wealth but in fact on mountains of cheap debt, and as every debtor knows, the bills always catch up with you in the end.

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7 comments

  1. well done Atif… really a nice read.

    the money created out of thin air is what is really gripping us by our necks and suffocating us to death…. the majority doesnt realize and those who do realize dont really care..
    this article is for all those who dont care while they shud! REJECT the western failed economic system…. we shud straight away implement Islamic economic system to escape collapse which is now becoming inevitable…


  2. Easy said than done.

    There is a small booklet named”Islam ka ma’ashi nizam”.It is the collection of various lectures delivered by Dr.Israr and compiled by his students,more than 40 years ago.Recently at a religious gathering,I asked him,that by now your vision about both systems should be much higher,do you intend to write anew,he flatly said”Economics is not my subject”.

    Imagine that the prevailing system has become so much complicated that such a learned person is so cautious.Prof.Khursheed has been dragged by Jama’at into dirty politics.

    Only sincere effort is being done by Mufti Taqi Usmani and we pray for his success,but it is going to be very slow.

    Simply wishing for an Islamic system is not enough.We must support by patronising a true Islamic bank.


    • It makes perfect sense for DR Israr to say so. He is not a Prof of Economics. He can only list the constraints that Islam put on you. It’s the job of people how know Economics to design a system that is bound by those constraints.

      Besides its not rocket science.. Really.

      There has been a lot of work done by Islamic Ideology Consul for so long and a lot of reports and papers have been written but the will to implement is no where to be found in people as a whole and in particular people in power.

      We the people of Pakistan as a whole don’t really think it is important to implement the Islamic economic system, then why should we deserve to eat the fruits of it? Why Allah should let a people enjoy the Islamic economic system when the people don’t give a dam.

      If you think other wise about the people of Pakistan as a whole then let me know one political party which in its manifesto says that they will implement a system which is interest free?


      • I agree with u on this.

        No one Really wants an Islamic economic system in Pakistan. We talk about it but we do not want to implement it.

        I did a research on this subject in my time and in my observation, the system can be implemented BUT it will take everyone’s effort to make it run. Many many investers will lose their investments and there will be other problems. But in the end, the resultant system will be very stable and fair for all.


  3. cool. good luck with that problem


    • @ Sal

      No one is buying man …care to share some more spex ?? 😀 😀 😀

      lol lol lol

      ehh malooooooooooooo


  4. Good read. One of the key things to notice here is that all the money in the system has been created as debt. The principal amount is pumped in the system through fractional reserve banking but the interest isnt created at all. That means that any given time, the money created in the system is never enough to fulfill all financial obligations.

    The fact that this system prevails throughout the world validates the following hadith:

    Abu Dawud Book 016, Hadith Number 3325.
    “There will come a time,” said the Prophet, “when you will not be able to find a single person in all of mankind who will not be consuming Riba. And if anyone claims that he is not consuming Riba then surely the vapor of Riba will reach him.” According to another text “the dust of Riba will reach him.”

    I found Shaikh Imran Hosein’s work to be very helpful in understanding why Riba is banned in Islam and how Islamic economic principles are based on justice and how they offer protection from usurpers.



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