exponential growth

In order for a debt money system to continue to function the debt must constantly expand generation after generation.  The reason for this is under a debt money system there is no money until someone borrows, then once time and interest kick in the debt grows but the money supply does not.  The money that one borrower uses to pay the interest on his loan is only created somewhere else in the economy by another loan.

When you have to borrow the money into circulation and pay interest on it, and then borrow the money to pay the interest you're on a one way street to bankruptcy.

First, the economists are correct that modeling interest as a flow shows debt does not need to increase.

They are incorrect because economists never include or are taught the effects of interest.  Any debt money system is unsustainable in the long run.

The model worked brilliantly for 70 years.

Here we agree but only for the bankers to transfer all of the wealth of the nation to a into a few hands at the expense of the producers.  Pure fraud and theft by deception.  It only appeared to be working well for a long time because the interest load had not gotten as large as it is today.  Today the interest load is either at or exceeding the total combinded consumer income.

Maybe this article can help?

http://www.wealthmoney.org/articles/57-Trillion.html

Diarmidw, to continue your other thread, I think your statement above defines a crucial misjudgment.

I think you agree that lending is a speculative affair on principle. The provisional nature of lending depends on context and impacts its context at the same time. Technically it forms an unstable system (inherent feed forward feedback). I call it a pro-cyclical system; boom and bust cycles are an inevitable system feature.

If you accept that boom and bust cycles are a system feature, you’ll find that bursts infringe your claim that ‘interest payment is not the [system’s] problem’.

In a nutshell, credit money is a temporary artifact with a lifetime by definition (the credit principal that a bank promises to pay on demand).

Debt and deposit do not coincide with a strictly temporary concept, they do have a virtual indefinite lifetime by definition.

Perpetual inconsistency between credit money and debt aggregates is inherent, cf. the pro-cyclical system definition above.

Furthermore, the system itself is able to generate exactly zero real value at any time. Either real economy adjusts to the system, and or the system must adjust to the real world. However, the globalized pro-cyclical system has an inherent predisposition to converge to its destiny where the adjustment to the real world denotes a globalized TSHTF-implosion.

Knowingly, you want us to work on the sunshine and roses?

Hi Diarmidw, 

a failed loan does not mean that the money has disappeared; it is still someone’s deposit! The bank must eventually recollect the money selling the collateral and bypass the situation by stressing their equity. And, if the bank fails, depositors recap that all they own is a promise to pay.
However, without interest, the respective aggregates of credit money, deposits, and debt should match: no debt-overhang.

Depositors are not generally restricted to a deposit time-span contract: deposits are always someone’s debt, but ‘someone’s debt’ is under the terms of a time-span contract.

In fact, if depositors can or do not spend sufficiently, borrowers must fail without inflation.

I’m referring to the detail that the credit money system is the mother-bubble itself. Would you suggest that leverage in the system and real world value generation is linear correlated? You must notice that the system can be and is abysmally rigged. The system manages control and reallocation of value. However, in revenue it has x-times the size of the system that actually generates the value. In fact, in terms of real world value generation vs. cost, the system is extremely bloated and inefficient.

If you see interest only relevant in that it is an expression of the running costs of the system, you fail to recognize that interest will necessarily generate permanent debt and deposits in the pro-cyclical system.

Currently I’m reading myself into Gesell’s Freiwirtschaft-concepts…  I think a demurrage currency would be a better concept than an inflation currency.

Baywork

a failed loan does not mean that the money has disappeared; it is still someone’s deposit!

If a loan is accepted as failed and so written off as an asset - the bank must reduce its profit/loss account by the amount of the failed loan. The effect is to reduce the purchasing power of the bank and/or its shareholders by exactly the amount of the loan. True - the holder of the deposit resulting from the loan keeps his money, but money is always withdrawn from elsewhere in the system to ensure that liabilities in the system match assets.

In fact, if depositors can or do not spend sufficiently, borrowers must fail without inflation.

Indeed - that's one of the risks of a loan contract.

Would you suggest that leverage in the system and real world value generation is linear correlated?

Probably not. But that in itself doesn't matter. What matters is whether realistic expected value generation resulting from the leverage outweighs the risk of loan failure and its consequences. To illustrate: if you take out a big loan for a small but safe profit, that's low risk. If you take out a small loan for a big but unlikely profit, that's high risk. But the leverage to average expected profit ratio might be identical in both cases.

you fail to recognize that interest will necessarily generate permanent debt and deposits in the pro-cyclical system.

Interest doesn't generate anything. It forms part of the flow of money after that money is issued in a loan contract, and only exists while that loan contract remains in force. If the loan contract succeeds, the interest flow ceases when the contract ends. Its only trace is a transfer of real goods from the borrower to the bank in exchange for the monitoring, administration and risk-bearing of the bank. (Whether this exchange is always or ever a fair one is a different question.) If the loan contract fails, the bank accepts that there will be no further interest flow and takes the hit to its profit/loss account. If there was no interest flow, no trace at all is left by the interest obligation.

I think a demurrage currency would be a better concept than an inflation currency.

Demurrage is an interesting concept. There's a related idea going around at the moment, which is to tax excess retained profits or non-productive financial assets. See here or here. The point being that these would presumably be exchanged for productive assets that would generate economic activity. But since demurrage relates to money-holding rather than money issue, I don't see how this, on its own, solves the problem of how future production is to be financed in a sustainable and balanced way. Indeed you could argue that all it would do is just to shift the problems more to the boom end than the bust!

strabes

the central banks force reserves into the system to facilitate what the private banking system does.

It's government spending that transfers most of the reserves - so you'd have to find some other way for governments to recompense us for goods and services they use. The private banking system is an essential part of a modern economy, and it cannot function without a medium of exchange between it and the government and between the individual banks. Reserves are this medium of exchange.

None of this is to say that the system has not been misused and misapplied. The question is: do we change the structure of the system, or the way it is managed? You clearly tend toward the former, I tend toward the latter.

When JFK increased the money supply by spending silver certificates into circulation, how much did debt go up?  When US mints used to put silver/gold coins into circulation, how much did debt go up?  When the colonies issued colonial scrip, how much did debt go up?

You cannot issue money that is not itself of value (and therefore costly to obtain or produce) or is not a claim on something. It will not generally be accepted. Nor should it be. Silver certificates were clearly a claim on the government to provide silver if demanded. Silver/gold coins are costly to produce. As far as I understand it, 'colonial scrip' could be used to pay taxes - it was a de facto claim on government services (or at any rate a claim to the right to be left alone by the tax collectors!). So the government cannot generally issue money without incurring a cost, and that cost can only ultimately be met by its citizens.

As I see it, then, we have a choice between a debt-money economy and a barter economy. The latter might be possible, if we can find a way of setting up multilateral barter networks that can use future commodity and service outputs - but that is a major research project! So, at least in the meantime, the major priority should be to re-orient the priorities of the debt-money system away from inflating financial assets and toward enabling genuinely welfare-enhancing output.

Central bank was 1 of the 10 priorities of the Communist Manifesto. I'd suggest that's an indicator you may want to take another look at the system, using first principles rather than the lens of an economist or a Keynesian,

Everything I say is based on first principles of observation and logic as I see them (which may be wrong). That ideas are in the Communist Manifesto is no reason to assume them wrong; that they are held by economists, Keynesian or otherwise, is no reason to assume them correct.

We need to separate two issues here:

1. How government (even as an abstract co-ordinating entity with no assets of its own) interacts with citizens to create infrastructure from their inputs.

2. How the value of those inputs and infrastructure are subsequently distributed.

To address 1 - The government has the same problem as all attempts to create new value that require multiple inputs. How do you commit in advance to share that new value with those whose efforts and resources go into creating it?

Tthe existing system works by the govt creating money that is transferred to the banking system, while the banks transfer an identical quantity of their own deposit money to suppliers of labour and resources for government projects. The quantity of money created must equal the value of the labour and resources supplied. This process has no direct benefit for the private banks, but it has the indirect effect of maintaining the base on which private banks can safely create further deposits by the creation of their own loan contracts.

Because the base money issued by the government to temporarily 'direct' the labour and resources it requires is generally much greater than the new value created, that money must be removed once it has served its purpose. If not, as I have explained earlier, the quantity of base money alone would very quickly swamp the economy. The govt can remove this money either by taxation or if it chooses (and I believe it chooses this far too much) by issuing bonds in exchange for base money.

It is the need to maintain the flow of money through the economy by removing it that creates the 'debt' in the form of the need for taxation or bond issue. Any money that is issued for the purpose of creating new value must operate in this way, because the money required to create the new value represents labour and resources that are tied up in the production process, and only can only represent them while they are tied up. Once these labour and resources are no longer tied up in this way, but have been transformed into the new, added-value output, they can represent themselves, as it were - and so the money no longer represents any additional real value, and has to go out of the system.

So I conclude that point 1 will always require the creation of money that is an asset to citizens only for as long as it is a liability to the government. If the government is truly representative of its citizens (more on this below) then this liability or 'debt' is a debt of the citizens to the citizens and so is purely an accounting construct, not any sort of real burden or 'usury'.

In the current system, base money does not pass directly into the hands of citizens but passes across the balance sheets of private banks. The net stocks of base money that result from the flows in and out of the economy (augmented as required by the costly borrowing of base money from the central bank) provide a secure asset on the books of the private banks that does not involve the immobilisation of real productive assets. The presence of these secure assets allows private banks to create futher loan contracts in almost exactly the same way that the government does. Only instead of removing money by taxation or bond issue, this is done by the borrower, at the end of the loan contract, repaying to the bank money to the value of the loan.

Because only a proportion of loans will fail, private banks can usually issue loans (and create matching quantities of credit money) to a value considerably greater than that of the base money they hold.

As in the case of govt money creation, the private debt simply represents a promise to return the money that represents the 'tied-up' inputs while they are being used in production, once those inputs are released in the transformed form of the new value-added output. It is again, simply an accounting procedure that records the agreed obligations in this process, ensuring that the money created only exists while the inputs it represents are unable themselves to be exchanged.

Your objection is that this is

a system of putting the monolithic masses into debt to a few capital holders.

Nothing I have described up to now explains how the system does this, because what I have described for the case of base money and for 'private' money created on the back of it, is simply a process by which the inputs into the production process (for govt infrastructure or private production) are guaranteed their agreed share of the ultimate output.

So it's not the system itself that is responsible. The problem lies with my implicit assumptions up to now that the government fairly represents its citizens, and that private contractors wouldn't enter money-creating loan agreements unless they correctly anticipated genuine added value to be created and to get a fair share of that value. The problem is the fact that these assumptions are wrong (or would be, if I had really assumed them!) NOT that a credit-money system must intrinsically always produce these results. The fact that these assumptions are wrong, is the key to understanding issue 2 above.

What I think you are suggesting is a system in which the government transfers a base money directly to individuals in exchange for their contribution to collective endeavour. There would be no private banking intermediaries.

But this centralised banking system would find it more difficult to acquire all of the information it needed to respond accurately and flexibly to money needs in different regions, sectors and business units. It would undoubtedly be at risk of being captured by particular political interests, because unfortunately my initial assumption about government representation is still largely wrong! And the costs of monitoring, administering and bearing the risk of failing to re-acquire money would remain -  they would become internalised instead of being allocated to borrowers in the form of interest. So whoever was getting the money, we would all share in the cost of providing it.

I think that on first principles it is not possible to say whether a centralised or decentralised money system would be preferable. I would suggest that experience (eg of the Soviet bloc) suggests the centralised system would have considerable problems. So given that a decentralised system may capture benefits in local knowledge and adaptation, flexibility and competition, there are grounds for sticking with it. But the present system is not decentralised enough, captures revenue over and above what is required to produce the service it does and bear the true risk (given govt bailouts) of lending, and fails to produce adequate social benefit from its operations. I see these problems as mainly ones of corporate ownership and governance. Both need to be more broadly based than simply shareholders and their representatives. Such failures as there are in the direction of base money need to be addressed by making government itself more representative.

If we can reform the current banking system rather than destroying it, then we have the potential to combine efficient use of resources, social benefit and local knowledge, adaptation, flexibility and competition.

The cost should be the labor of the people in whatever value-creating project we are doing as a community, government.  Then the people doing that labor should be able to monetize the value they create by getting an asset, debt-free money, in return.

I think this is a confusion between the value of the liability created when money is issued (which must cover the cost of all of the inputs into the value-creating project) and the actual additional value over and above the cost of the inputs to the value-creating project itself. There is no need to monetise the additional value created. Why would we? The additional value created is the point of the exercise - why replace it with intrinsically worthless money? If you are suggesting that new money should be created alongside the added value, then how do you account for the further addition to total wealth this apparently represents - since we now have new added value and new money?

Possibly the source of your confusion is that you are proposing that providers of labour and resource inputs should receive money when they hand over this added value to its ultimate consumers - but if they do, this must be money that represents some other currently 'tied-up' inputs; it cannot be money that represents the inputs that have now been released as added-value output. You cannot have a good and a current claim on that good both in circulation at the same time! That's fraud of the Bernie Madoff variety!

I would rather have less scale, less GDP, less financial efficiency, etc. in return for more distributed sovereignty, local communities with some freedom over their lives rather than millions of humans being nothing but tiny nodes facilitating money flows in a mega capital machine.

I can understand your sentiment here - but I think it is actually possible to have increasing real wealth and the things we would like to see - or at least a balance between them that allows for good sustainable living. Don't forget that the less developed world cannot afford to have less - they need more.

You make perfect sense.  But how does the debt unwind even as the Fed is implementing QE2 in order to offset the debt unwind?

Baywork

the system creates permanent debt, since it promotes sum C to be greater than zero.

This is true - in the sense that there are always reasons why some deposits will be held idle. But if this is stable and the desire for debt to fund ongoing production is stable, there is a stable gap that can be offset by additional base money. (Which is why there are various mechanisms for the central bank to adjust the quantity of base money.) Sure, problems arise when there is instability - but this is inevitable in any system that involves interdependent future plans.

who expects a system not to be rigged if the system systematically holds incentives for rigging?

Any system that concentrates important decisions (with the central bank and individual private banks in this case) is inevitably open to 'rigging'. But without it, we simply have anarchy. A bit of anarchy is just fine - a lot is very bad. There is a very fine (and constantly shifting) balance between the two. At the moment the balance is wrong, but I believe it is not impossible to get the balance right using the basic system we have.

If you disagree, then you have to be able to propose an alternative system, as strabes has tried to. I've explained above why I don't think that system is an improvement.

strabes says in response to that:

You imply government creates base money.  Government creates no money, at least in the US.  The mega global capital pool creates base money by purchasing the indebtedness of the masses that the government packages up for them.

By 'purchasing the indebtedness of the masses' are you talking about the acquisition of base money by private banks as the government spends? This isn't strictly a purchase - they get the money for free! I guess the quid pro quo is that they set up the transaction network! I would have thought you could say that the government creates this money - it is ultimately up to the government whether or not it is created - but I am not sure that is a material point. This is the mechanism by which it is created, we could say, and leave it at that!

And yes, base money is a liability of the central bank and ultimately citizens, so I guess your statement is not technically false. But the way you express it implies that this mechanism is not a good thing! I was trying to explain how it could be a good thing, or at least a better thing than your alternative.

So are you saying a worker on an infrastructure project can't be paid anything of value, a stock, for his labor?  He can't retain any value?  He can only have debt-money that disappears once the project is over?

There's a danger of mixing up the abstract and the real-life situation here. In the abstract, if we have one infrastructure project, then indeed all the money disappears. Reward can only be in the form of the added-value output. Yes, the worker could opt to have a stock (representing a share of the project capital) but this is ultimately just to defer the acquisition of output to a subsequent period.

In the real-life situation, there are of course multiple over-lapping infrastructure projects, so that there is always some money circulating. A worker on one project can purchase the output from another project. All money is equal so the govt doesn't care from which project repayment originates, as long as the right quantity is returned.

In the old days, when people were paid in coin, what "other currently tied-up input" did the coins represent?

Well, it depends what sort of coins they were. If their face value matched their intrinsic value (ie gold coins valued at full weight), then the gold in the coin was the tied-up input. Clearly if the gold is in the coin, it can't be used for any other purpose. But then this is a commodity money with all the limitations associated with that.

Frequently, of course, such coins had a face value greater than their weight in metal - because they were backed by the authority of the sovereign, and could be used to pay his taxes. The tied-up inputs were then those that the sovereign controlled - armies for the most part, I guess!

I'm proposing sovereign money...money that represents a store of wealth, a stock that isn't a conditional liability tied up in bank leveraging schemes.  I think people should have money that sits on the Asset side of their balance sheet...rather than only having money that reflects what's on the Liability side of our balance sheets...

I guess that would be nice, but it's an impossibility unless we are willing to tie-up existing resources in the same way that gold is tied up in gold coins. And that means the US would probably have to tie-up several trillion dollars-worth of some homogenous commodity with a stable intrinsic value to have an extremely costly and inflexible money system. It might be possible (presumably with gold) and worth it, but I doubt it.

If you are going to create a money that has genuine value backing, but doesn't tie up current resources, then the only option is to back the money with promises of future value - which inevitably means the money represents a liability to the one giving the promise. At least for private bank-loans the promise is given voluntarily by the borrower! Government money is backed by our implicit promise to pay our taxes or buy bonds.

Diarmidw, a stable gap is an illusion, since compound interest generates an exponentially growing gap.

Diarmidw,

part of the ‘costs’ for the bank is the interest for their depositors. All bank money is someone’s deposit. As said, there are ‘sum C’ deposits. Sum C-depositors can accumulate and do accumulate deposits from interest.

Baywork

OK. I sort of see what you are getting at. But there is no automatic reason to assume that the additional interest flow through these accounts is  reflected in any growth in unspent deposits. They might be - but it's an empirical question, not a theoretical one - and would be amenable to incentive adjustment.

I also think that it's relevant that banks don't as a whole need to offer interest on deposits (deposit money can only exist as deposits, after all). It's not a true cost of their activities, only their need to compete with each other for base money. (I guess offering interest also dissuades taking out cash - but I think this is a pretty marginal issue. Do current/checking accounts in the US pay interest? Mine pays essentially zero.)

As said, “interest payment is not the system’s problem”?!?        Then again, I also think that it's relevant that banks as a whole do have to offer interest on deposits. True, checking accounts hardly pay interest, like cash in your wallet. But, if banks would not generally offer interest on deposits, they’d all be insolvent the same day. Strangled to death within seconds, by unsatisfiable demand calling their promises to pay.

Baywork

if banks would not generally offer interest on deposits, they’d all be insolvent the same day. Strangled to death within seconds, by unsatisfiable demand calling their promises to pay.

How so? If all banks stop paying interest on savings accounts, what are your options?

1. Use your non-earning deposit to purchase some other asset - the deposit remains but is transferred to the previous owner of the asset. No consequence to the banking system as a whole.

2. Take your money out as cash - everyone does it and you have a classic bank run. But why would you do that? Cash doesn't earn interest either, and you'd have to buy a safe.

3. Use your non-earning deposit to pay off any outstanding debts - if a lot of people did this at once the banks would be very unhappy (but not I think instantly insolvent). But how often is deposit interest greater than loan interest? Yes, never - so clearly the reason you had both a deposit and a loan had very little to do with the interest you were earning on the deposit!

I note you didn't challenge my more important objection to your argument, which was

...there is no automatic reason to assume that the additional interest flow through these accounts is  reflected in any growth in unspent deposits.

Well, I can tell you that I do that precisely because the bank pays (effectively) no interest. It is better to have cash in hand than bank digits that  may be unavailable to change into cash when you need/want it.

Without interest there is little or no reason to keep much if any money in the bank.

diarmidw wrote:

The banks take on the risk of the loan failing - their capital account is charged by the amount of the failed loan, which in itself helps to prevent the loss of money's value. Of course, collateral mitigates this risk (and so tends to lower interest rates), but unless every loan is fully collateralised (which it isn't) risk remains.

You missed the point in taking my comment out of context.  My post was referring to government bonds which ARE fully "collateralized" so there is NO "risk", just unnecessary usury.

And there is another unfair aspect of our bond system, that is that when the Fed, through the FOMC, expands the money supply by buying bonds, it simultaneously creates bank reserves at the same amount for free.  The reserves become a liability of the Fed and an asset to the banks.  But in this chicanery, the Fed never pays its liability as their promise to pay is accepted as the payment.  

I wrote:  The national debt is around $13.3 trillion dollars and the broad money supply measured as M3 is around $13.7 trillion.  Without the national debt, there wouldn't be an M3.

In response, diarmidw wrote:  Not so. This matching of figures is just a coincidence. You are confusing the issue of govt bonds (which actually removes money from the system) with the total liability created by govt spending and associated money creation.

This is not a coincidence as there is a correlation that comes with the fact that the national debt is now the basis for the bulk of the money supply.  You can easily prove this by calculating what would happen if the national debt were fully repaid.  If we paid back the $13.3 trillion owed through the national debt, the money supply (M3) would be reduced by that amount, which would collapse the economy. 

And, you are wrong in stating that "issue of govt bonds (which actually removes money from the system)."  When government bonds are bought by banks (through the creation of new money), it ADDS money to the system.

Larry