This is a subject that I've been thinking about for a while. I don't normally write about conspiracy theories, for two reasons: 1) I don't believe in any particular conspiracy theory and so has no reason to promote one and 2) There are so many more interesting and useful things to talk about.
Now I'm going to make an exception from my own rule, which I am sure I'm going to regret once the comment field gets invaded by crazy libertarians and similar.
There just isn't time to discuss all conspiracy theories, but I will explain the theory that made me write this post: the "Debt virus hypothesis", or "Money as debt". Basically, this was a conspiracy theory invented by a plastic surgeon (ever noticed how none of the conspiracy theorists are experts in their fields?), stating that the monetary system is unsustainable due to the fact that money can be created out of thin air, and then lended out for interest. Their most basic argument goes something like this: Start in a world with no money. A banker creates 1000 dollars, and lends it out for 1 year, charging 10 % interest. Now, how is the poor borrower going to be able to pay back the money? Remember, there's only 1000 dollars in the whole economy, but he owes the banker 1100 dollars. Therefore, at the end of the year, he'll have to take another loan and then another one, just to keep paying off the interest. There will never be enough money in the system to pay off all debt.
This, of course, is confusing the difference between real and nominal interest rate. The nominal interest rate is 10 %, yes, but what the banker really cares about is that he gets his 10 % in REAL interest.
Let's say the borrower uses the money to start a factory or something else that increases output in the economy. The money will now be worth more than it was before. Assume he manages to double output in the economy. What will he do? He'll go to the banker, pay him 550 dollars, and still have 450 dollars left over. Since output is now doubled, the money is worth twice as much as it used to be, so the banker gets his 10 % interest, and there is still money left over.
But wait, says the conspiracy theorist, loans are set in nominal terms, aren't they? So bankers DO care about the nominal interest rate? Well, maybe but only maybe. In times of deflation, it is very common for loans to be renegotiated (something banks would never do if they were as evil as the money-as-debt theory claims they are). Why? Well, because banks don't really want people to default on their loans. It's bad for business. And if too many people default at once, property prices will crash - as happened in Ireland when borrowers defaulted and had their homes repossessed and put out for sale, and the sudden increase in supply of houses led to a sharp decrease in house prices that still hasn't stopped. This has made it impossible for banks to conduct their most profitable business: Lending out money for interest. So hardly a good thing for them either.
Next, they claim that the bankers can create money out of nothing, interest-free, and then lend it to our governments for interest. By doing so, they control the governments of the world and pocket a risk-free profit.
There are some very big flaws with this argument: 1) Government debt is far from risk-free. Some of it is (think; treasury notes), but far from all of it. It depends on the maturity of the debt, and which government issued it. 2) The banks themselves have to pay interest to the central bank. Right now, this interest stands at 0.5 % in the case of the Federal reserve. "But the interest rate on US bonds is 2 %!" the conspiracy people yell. Well, yes, but this hasn't always been the case: Quite often, the federal reserve rate has been higher than the US government bond yield, meaning no risk-free profit can be made. The reason why it is so low right now is because the Federal reserve is trying desperately to stimulate the economy by pumping more money into it. I'm in no way uncritical of this and I believe monetary expansion to be a risky way of boosting the economy, but the reason why the gap between the Fed rate and the US government bond yield exists is because of a deliberate Keynesian policy from politicians, not bankers.
While we're at it, let's set one thing straight: The banks themselves cannot create money. They can borrow money from the central bank, which in turn can create money. And 97 % of the money the central bank receives from interest goes to the treasury. The amount the banks can borrow is not unlimited; there is a reserve requirement (typically around 10 % though it varies by country), meaning the amount the bank can lend out depends on the amount of money people save.
Also, in the example above, I wonder why none of these conspiracy believers ever asked themselves: Who would ever take that loan? Who would be stupid enough to borrow 1000 dollars, knowing there isn't a chance in the world they would be able to pay them back because there isn't enough money in the system? Sure, there are examples of people doing this in the real world, but do you seriously believe the whole monetary system could be built on that? It falls on its own absurdity.
One final nail in the coffin: You have to ask yourself, somewhere along the line, why if this conspiracy exists have no economic researcher ever told us about it? After all, there are tens of thousands of Economics PhDs, many of whom have specialized in the area of monetary economics. You'd think one of them would have found out.
Of course, the obvious answer from the conspiracy believers is "There's a cover-up! They're being silenced! No-one dares to publish anything about this!".
Now, let me explain one thing to you all, very very clearly: There is no freaking way you can silence a researcher in economics (or any other field) who has made a discovery. That's because, in real life, research is really, really boring and uneventful. Being a researcher in real life is not like being a researcher in CSI or something; you don't actually make amazing discoveries every week (and even when/if you do, it takes longer time to confirm and prove them than just 30 minutes minus the time for commercials).
99.9 % of economic researchers will never discover anything significant. Yes, they'll publish papers (mostly) confirming and (sometimes) rejecting existing theories, but there are thousands of papers published each year; a single researcher normally doesn't make that much of a difference and doesn't get that much attention unless they discover something that is truly significant.
When the average joe thinks of researchers, he thinks of people wearing lab coats, with glasses that protect their eyes from radiation. They picture researchers finding cures for cancers, or solving global warming, or similar.
I just finished writing my undergraduate thesis, and while writing an undergraduate thesis is far from being a researcher, I dare to say I've gotten a taste of what research is really like: Staring at Excel sheets, trying to make sense of numbers, worrying that you'll discover that one figure that will ruin your hypothesis. Wondering why the World Bank database is so incomplete, and why the numbers from the OECD contradict the numbers from Eurostat. Do not get me wrong, I loved writing my thesis - but exciting, the way people think research is, it was certainly not. My supervisor told me about a project she is working on, trying to measure the competitive advantage American industries have relative to European industries because in America, you can use prison inmates as cheap labor to produce stuff you'd otherwise (in Europe) have to hire non-criminals to do at a much higher cost. This is certainly interesting (I'm looking forward to reading that paper), but it's unlikely to cure cancer or eliminate poverty - as is most research. It just isn't as exciting as it looks on TV.
My point is this: If a researcher makes the kind of a once-in-a-lifetime discovery that money-as-debt would be if the theory was correct, then nothing, absolutely nothing, would stop that researcher from shouting it from the rooftops. Imagine spending 30 years of your life in an office, staring at Excel sheets and battling with funding agencies, and then suddenly one day you discover that the whole monetary system is unsustainable and that the banks have conspired to take over our governments - don't you think you'd tell someone?
And given that, if the Money-as-debt idea was correct, then any economic researcher would be able to find this disastrous flaw in our monetary system, don't you think someone would have leaked it? I mean, someone other than a plastic surgeon?
But why DO so many people believe in conspiracy theories?
This post wasn't supposed to be about a specific conspiracy theory after all. So why are conspiracy theories popular then? Some blame the lack of knowledge, and that's part of it for sure. Even a basic 5 credit module in macroeconomics would be enough to disprove the above theory.
I personally believe that a big part is the search for excitement. In the western world today, we no longer have to spend all our day hunting for food, and so our lives easily turn boring. This is a good thing of course, it's a sign that our quality of life has increased, but it does leave people bored.
And so, they turn to conspiracy theories as a way to make the world just a little bit more exciting than it really is. Instead of those pesky, boring nominal and real interest rates that can explain everything scientifically, they turn to exciting stories of sneaky jews who secretly control the banking system (yes, the money as debt theory states that the jews are behind the whole thing).
Instead of just accepting that there are terrorists out there who are willing to do anything to hurt America, including what they did on 911, they fantasize about a conspiracy involving the CIA and President Bush (and probably a couple of jews as well). It's just more exciting that way.
And on the other side of the spectrum, you have Republicans fantasizing about Obama being a secret Kenyan Muslim socialist, because that's just so much funnier than just accepting that he's a typical liberal from Hawaii (which is bad enough if you ask me).
You also have non-political conspiracy theories, like the ones stating that we will experience a pole shift in the end of 2012, ending virtually all human life on earth, and all the governments of the world are participating in a cover-up to prevent panic. Again, this is a conspiracy theory that makes life a little bit more exciting.
Secondly, I think a lot of conspiracy believers simply have bad self-esteem. Therefore, they try to tell themselves that they are something that they're not. The people who believe in the Money-as-debt theory (or, should I say, fantasy) view themselves as some typ of "freedom fighters" - kind of like Luke Skywalker and the rebel army, fighting against bankers who control the world. And if you're the kind of person who majored in English, couldn't find a job, ended up moving back into your parents basement and got a Ron Paul tattoo, then it surely must be comforting to think of yourself as a living Luke Skywalker, even though you look more like Chewbacca. What the conspiracy theories do is to offer all these losers a chance to become heroes.
It's the same reason people enjoy Second Life: In the real world, they may be losers, but inside the computer world of Second Life, they can be whoever they want to be. Conspiracy theories create a second life in people's first lives, allowing them to be heroes fighting secret world governments and similar. And, since there really is no secret world government, it's totally risk-free: They can sit behind their computer screens and whine about the secret world government and never have to worry about "Men in black" kicking in the doors to their basements and dragging them off to Area 51 - because there is no secret world government, no men in black and whatever is going on in Area 51, I doubt it's a secret base where they torture unemployed liberal arts majors.
I'll stop here. Thank you for reading.