Fatal Flaw in Logic of the Crash Course?

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  • Thu, Feb 19, 2009 - 08:42am

    #131
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    Re: Fatal Flaw in Logic of the Crash Course?

Patrick & mred,

Thanks for your explanations. 

But do we really need to explain the very cause(s) of this exponential growth in the CC?

Please put this back in the context of the CC. Understanding the money creation/destruction process is not easy by itself. Chris pointed that some people had to take the CC several times before grasping the concept. Explaining the reasons of money expansion, may yet further confuse "Joe the Plumber" or even worse let it move away because of the technical details.

So IMO, at this stage in the CC, we should just mention the high unstabality of a debt-based money system. And show some evidence of the exponential growth of money supply.

I agree we could further explain in a footnote, but not in the speech IMO.

All best

  • Thu, Feb 19, 2009 - 06:05pm

    #132
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    Re: Fatal Flaw in Logic of the Crash Course?

Well, at this point we are just explaining stuff to ourselves. It is not "we" who define what is in the CC; we just provide feedback and nitpicking as necessary, but if our daydreaming is not lent credibility, then it is an exercise between ourselves.

Thomas: Debt grows exponentially while the money supply remains constant only when the debts are not being paid back. In that case, compound interest over a non-decreasing principal + interest burden makes everything explode, just like with people falling behind on 20%+ credit card loans. But in general, must of the debts in a system are constantly being repaid. Even under an interest-only payment scheme, the debt and the money supply remain basically the same over time (think government bonds). If some principal is periodically repaid as well, the debt will eventually be extinguished. If less than the owed interest is paid in a given period (as in a negative amortization loan)… then the whole thing will blow up exponentially as you say, but in general, that pathology is not characteristic of most credit in a society (unless basically everyone is going bankrupt, which we may very well witness in the future). The above is what happens when you consider interest and time actually.

  • Fri, Feb 20, 2009 - 02:38pm

    #133
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    Re: Fatal Flaw in Logic of the Crash Course?

There most certainly is a fatal flaw in the crash course. While it is true that the economy grows exponentially, the driving force is not the banking system. Banks are, of course, a central ingredient, since banks can create new money, but what must be understood is what creates the demand for new money.

If all economic agents spent everything they earned, there would be no pressure for increasing the total debt. What drives the expansion is that not everyone do spend everything they earn, instead they accumulate by saving or investing parts of their surplus. Savings are reinjected into the economy as loans, but at the same time increase the flow of money to the accumulator. Investments are similar. Money that are invested in a factory, for instance, are returned to the economy, but at the same time the investor can collect the surplus value the workers at the factory create, which again increases accumulation. "Accumulate, accumulate! That is Moses and the prophets!"

It does not matter whether capitalists get to our money by collecting interests or surplus value, the real problem is that our political and economic system allows and encourages them to hoard.

 

  • Fri, Feb 20, 2009 - 07:07pm

    #134
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    Re: Fatal Flaw in Logic of the Crash Course?

Erikha: you’re almost right I think. But the system is centuries old, and I think it has reached the point, where capitalist own all the money, a long time ago. At that point however some kind of equilibrium must occur, were increasing either interest or debt, doesn’t lead to more bank profits, but only to more bankrupcies.

I suppose that the real problem is speculation: by blowing up the real estate bubble, flooding the market with money, more debt could be created and sustained than before. Now the system is working it’s way back to equilibrium at great losses for the majority of capitalists. I think the debt money system could run stably, if it wasn’t for the bubbles.

  • Fri, Feb 20, 2009 - 07:08pm

    #135
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    Re: Fatal Flaw in Logic of the Crash Course?

Hello all.

     Wow, busy thread since I’ve been away.  Just a couple of questions that I have based on all that I have read:

     What constitues "by design"?  We have established that it is possible to have a stable monetary system that is based on money loaned into existance at interest, so long as we have perfect liquidity (the money to repay the loans is in the right place at the right time.)  However, our system makes no provision in it’s design to provide perfect liquidity.  Does this mean that our system is therefore designed in such a way that it will (perhaps even must) expand?  Where is does everyone else draw the line?  There are two things I am driving at here – one is that design is not just about what is stated, it can also be drawn from what is omitted.  The other is the difference between a "perfect" mathematical system or model, and the real world.

 As for a revision to the CC to make it more acceptable, how about saying that it will, by it’s nature, expand? Is "nature" too close to "design" in meaning?

I am not sure why Chris decided to define the amount that must be borrowed each year as the amount of interest due, and I am not sure that that is the amount that our current system must have each year to grow, and I am not sure how to figure out what that figure is, so perhaps that piece should be removed.  

Just faning the flames with my two cents,

All the best,

Reuben

  • Fri, Feb 20, 2009 - 07:17pm

    #136
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    Re: Fatal Flaw in Logic of the Crash Course?

The design flaw is interest: the more money banks loan, the more interest they earn. Therefore banks constantly seek opportunities to increase debt, hoping that when debts rise to an unsustainable level, someone else will take the fall.

  • Fri, Feb 20, 2009 - 11:17pm

    #137
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    Re: Fatal Flaw in Logic of the Crash Course?

[quote=woupiestek]

The
design flaw is interest: the more money banks loan, the more interest
they earn. Therefore banks constantly seek opportunities to increase
debt, hoping that when debts rise to an unsustainable level, someone
else will take the fall. [/quote]

I disagree.  The design-flaw is fiat money.  If money were backed by a tangible commodity, it could not be willed into existence.  

Pretend for a moment that dollar bills were not printed into existence.  Pretend that instead, dollar bills were mined from mountains, requiring actual labor and capital to extract.  

Now, imagine a scenario whereby, at the moment, it costs exactly $1 to extract $1 from the ground.  That is, the labor and capital it costs to dig up the earth, comb through all the rubbish, and extract $1 is $1.  Such a system would, in that moment, be balanced.  There would be no point in extracting any dollars because it would not be profitable.

Now, imagine the economy grows a little bit.  More goods and services come into being.  The cost of labor and capital goes down because there are more goods and services being chased by an equal-amount of dollars.  The dollar-mining companies immediately realize that (because that is the business they are in) it now costs them $0.90 to extract $1.  So, they mine dollars and make a nice 10% by doing so.  

I’m sure you know how the story concludes:  soon, they’ve produced enough dollars to catch up with the increase in goods and services, and their labor and capital costs are back up to $1 spent for every $1 extracted.  So, they stop mining for a while until the economy grows a little.

In this type of system, the money growth is naturally, automatically, double-feedback-looped controlled.  Now just pretend that what is being extracted is gold, and you will understand why gold, or some type of commodity based money standard blows away the joke, the farce, and the theft, that is fiat money.

I beleive I am preaching to the choir here, but I’ve been wanting to make that analogy for a while!

Cheers,

Patrick

  • Sat, Feb 21, 2009 - 01:54am

    #138
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    Re: Fatal Flaw in Logic of the Crash Course?

Wait a minute.  Let’s take this apart a little more carefully.

Assuming some number of people borrow in aggregate some principle for some term, if they repay that principle at the end of the term, they are by definition in default.  The conditions for the loans is that they repay the principle plus interest.  Well, duh, you say.  The interest part of the loan must also be surrendered to the lender.  Where does this interest come from?  Simply put, it was lent to someone else who like the others spent it into the economy.  In reality, not everyone borrows simultaneously nor are all loans retired likewise.  Banks lend money into the economy at a rate that is not constant.  It grows exponentially in order to have enough money on hand to service previous loans.  The banks must also guard against default by keeping the growth in the money supply adequate for repayment.  Not all borrowers succeed in repaying their loans and this effectively takes money out of the system.  The banks must also account for this in their lending policies.

This system seems to favor no one and is therefore assumed to be fair to everyone.  But it’s not.  The system favors people who have the means to repay loans.  This seems inoccuous at first, but think about it.  The banking system favors those who borrow to form a capital.  That capital is converted from debt-money capital into resource and/or commodity capital and labor capital.  The labor capital transforms the resource/commodity capital into new commodities for sale.  The rate of commodity formation must keep pace with the rate of money formation in order to service the principle plus interest.  This is called economic growth.  It feeds on an accelerating rate of resource conversion and conversely depletion.

Enter M. King Hubbert.  In general terms the peak of production of any non-renewable resource is at the half way point of depletion.  Many mineral resources are peaking, not just oil. Some are past peak.  The easy high-grade stuff was gone decades ago.  Now we’re in an era of diminishing returns as a given quantity of money capital can only be transformed into diminishing quantities of commodities.  The costs and returns on resource extraction are increasing and decreasing, respectively.  The way around this over the last few decades has been to lower the cost of the labor capital component in in commodity transformations by seeking ever cheaper labor markets.  Even that has bottomed out.  There is no other labor market to which capital can flee.

There is a profound ideological component to this process that regularly escapes notice.  For this system to continue, people continually make decisions and choices that perpetuate it.  These choices are not value neutral.  Implicit in these choices are some inherently immoral values.  For starters is the notion that it is right and proper for one group of people to appropriate the labor of another and remunerate those workers for far less than the value their labor adds to a commodity.  A particularly glaring example is the garment industry which routinely pays only a few percent of the sale price of a garment to the garment workers.  In some countries these people live in near slavery for the benefit of a few capitalists.  When confronted with this situation, the capitalists routinely cite a miriad of reasons why this must be so.  All of these excuses boil down to one thing: if the capitalists give up their exploitation they’ll be forced to sell their one labor under the very conditions they inflict on others.  It’s no wonder they refuse.

Another form of theft is the taking resources from those to come after us.  They imploy all manner of sophistry to justify this.  Among them is the idea that the economy will grow to meet the future demands.  Anyone familiar with Hubbert knows the falacy in this.  The second half of the industrial era will be a period of diminishing returns on resource/commodity transformation.  Fewer commodities will confront more money.  Thus, those who come after will have money that is worth less to buy fewer commodities.

Another justification for this massive theft is the notion  that these people don’t exist yet and therefore have no rights.  Therefore they, whoever they will be, are not being deprived of anything.  Rights are only assignable to individuals, as the rightwingers would have us believe.  Groups of individuals as a class should have no rights.  Everyone gets to be a rational player in the various markets guided by the unseen hand toward the best and highest good.  These are easy arguments for a class of people who exist only by virtue of the power disparities inherent in a class system.  Deny class dynamics and in a single stroke the capital owning class can dispense with any notion of accountability for all they have stolen.

In fact many leftists, students of Marx or not, play into this mass deception by themselves denying the class component in power disparities as relates to the mal-distribution of wealth.  Many Marxists scratch their head in bewilderment at how resiliant capitalism seems to be.  But, their asking the wrong question.  It’s not that capitalism is so resiliant; it’s not.  The resiliance is in the class based disparities in power and the pervasive propaganda system that supports it.  The class power divide is perpetuated by simply telling everyone that it does not exist.

Finally, we can return to the monetary system.  It is the keystone of the economic system just as every commodity confronts debt-money in a market.  That the banking owning class can get away with renting our common currency to us is a testament to the power of the propaganda system.  The TINA hoax by way of the Thatcherites is one of their crown jewels.  There Is No Alternative they would have us believe.  The only possible system of commodity production is one that mines the Earth to exhaustion.  It’s a system that transformes everthing into waste.  It converts the commons into private property for the benefit of a few.  It transforms whole ecosystems into chemical and biological wastelands.  The monetary system demands it because the class that issues the money demands it. 

Unfortunately, the only cure is it’s collapse.  The enormous network of repayments cannot survive without an influx of new debt-money.  With the prospect of diminishing returns on technology, there is no incentive to borrow to grow.  There may be borrowing, but it is not for the purpose of commodity production.  These new debt instruments are abstractions several orders removed from the fundamental activities of sustaining human life.  They have no intrinsic survival value.  It’s perfectly true that you can’t eat money.  The emphasis over the last several decades has been the production of money, not in sustainable commodities that sustain humans without depleting the ecosphere.  Coming up with a way to sustain ourselves in a balanced way has been a low priority for those who thought having piles of cash would always make them secure.  We’re at a point in time where no amount of class power can succeed against the physical constraints of an environment increasingly hostile to all life.

The answer is more democracy.  We need a full spectrum of rights.  It’s not enough just to vote.  The forms of democracy are worthless when it comes to defending our rights.  It’s a logical absurdity to separate political rights from economic rights.  They are one in the same.  For rights to mean anything we have to take back our right to a future free of class tyranny.  We have to restore the commons.  Capital must be the birthright of everyone on the planet, not just those born into a few certain families that already own most of what’s ownable.  As Jefferson said, there can be no equality without equality of outcome.  The rich love the level playing field because that is where they have the advantage.  To get everyone else to love it they have to convice everyone else that their interests are the same as the rich.  The comming collapse will be an opportunity to diminish class power disparities.  We may be materially poorer, but in a real sense we could become a lot freer.

  • Sat, Feb 21, 2009 - 06:04am

    #139
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    Re: Fatal Flaw in Logic of the Crash Course?

[quote=reubenmp3]

Hello all.

     Wow, busy thread since I’ve been away.  Just a couple of questions that I have based on all that I have read:

     What constitues "by design"?  We have established that it is possible to have a stable monetary system that is based on money loaned into existance at interest, so long as we have perfect liquidity (the money to repay the loans is in the right place at the right time.)  However, our system makes no provision in it’s design to provide perfect liquidity.  Does this mean that our system is therefore designed in such a way that it will (perhaps even must) expand?  Where is does everyone else draw the line?  There are two things I am driving at here – one is that design is not just about what is stated, it can also be drawn from what is omitted.  The other is the difference between a "perfect" mathematical system or model, and the real world.

 As for a revision to the CC to make it more acceptable, how about saying that it will, by it’s nature, expand? Is "nature" too close to "design" in meaning?

I am not sure why Chris decided to define the amount that must be borrowed each year as the amount of interest due, and I am not sure that that is the amount that our current system must have each year to grow, and I am not sure how to figure out what that figure is, so perhaps that piece should be removed.  

Just faning the flames with my two cents,

All the best,

Reuben

[/quote]

Hi Reuben,

Design means "it’s nature".  When someone mentions that ‘y’ is necessary for ‘x’, then ‘y’ is a necessary component for ‘x’.

For example, by design or by necessity, a square must always contain only four 90 degrees angles.  Four 90 degrees angles is part of a squares "nature".  It is necessary, and without the ‘only four 90 degrees angles’ it would not be a square.

 

  • Sat, Feb 21, 2009 - 10:19am

    #140
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    Re: Fatal Flaw in Logic of the Crash Course?

What about maintenance, Patrick? To maintain a gold reserve or to mint the gold, the banks have to spend money on a regular basis. Add to that the administration costs for all the bank accounts. A gold standard means losses, were the current debt standard means profits. Maybe if all money was stamp scrip, allowing banks to profit from stamp sales, such a system could work. But otherwise I think a full reserve banking system on a gold standard means no banking system at all. Is that the idea? Even if it works, why wouldn’t the lure of interest pull us right back where we are on a more profitable debt standard, just as it has done before?

 

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