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The danger of the virtual economy is that it creates a state of delusion in the economy, which can deceive senior economists and politicians, and drives them to undertake projects larger than their real wealth. There could be a temporary positive effect from this delusion, especially when competing with others for large projects. America has benefited greatly while in a conflict with the Soviet Union during the cold war era, where the Soviet Union used real money to finance its projects, and America used the virtual economy for its own projects. But when a state is exposed to a financial or political crisis larger than the size of its real economy, the illusion may push the state into a losing gamble. The current wars in Iraq, Afghanistan, Somalia and the devastating effects of hurricanes in the US must have contributed to the recent financial crisis in the west. Some countries may sometimes intentionally create real crisis for other countries that depend on the virtual economy, in an attempt to push them to the limits of their real economies. Note also that a sudden collapse of the virtual economy brings the economy to levels much lower than the real value of the economy.
2- The Usury and the Virtual economy
The objective of the financial policy in the capitalist economy, as stated by the bylaws of the Federal Reserve Bank in the USA, is to maintain the highest return on production and labor and to sustain price stability. This objective will be achieved through a mechanism that controls the value of usury (interest rate). During a recession in the economy, the state reduces the value of usury in order to encourage borrowing and increase the demands on goods and services. Conversely, the value of usury would be increased to curb inflation. The point here is to recognize the importance of usury for the capitalist economy as the most important tool to control the ups and downs of the economy. This explains the wide spread of financial institutions that offer loans to individuals, companies, institutions and even governments themselves.
Within this usury based economy, the money flows in two directions. In one direction, the money flows from the investors towards the bank in a form of deposit payments. The other direction is from the banks to the investors in a form of loan payments. Except for cases where the inflation rate is higher than the interest rate during the repayment period, the amount of money going towards the bank is steadily more than the amount of money going towards the investors. If the real money is the money which the investors deal with to increase production and to maintain price stability as required by the fiscal policy, this money will certainly be less than the money that accumulates in the banks. This is the main reason for the difference between the real money and the virtual money. And there are two cases that lead to this phenomenon.
The first case is when the bank performs the lending process. Let’s assume that the bank provided a loan of 100 million dollars with 5% usury for 1 year. Let’s assume also that the inflation during this period was 2%, the real interest rate becomes 3%. Now presume as well that the borrowed money (100 million) was spent on profitable projects and the total profit was 2%. Now the total value to be paid back to the bank = 103 million dollars, while the real money which is the sum of the initial money and the profit is equal to $102
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