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?
I fail to see how maintenance has anything to do with this. A maintenance fee could be charged, in gold. Gold could be lent, at interest. But more gold could not easilly be introduced into the system. Fractional reserve banking would have to be outlawed, but that is something I believe should happen whether we are on a gold standard or not.
It would mean the end of money for banks, but the beginning of freedom for everyone else. Bnaks would continue to exist, just in a much different form with far less power.
I have two bank accounts: a demand account, and a savings account. Now I find it objectionable that the bank loans out money that I hold in my demand account, because I keep it there to be able to spend it whenever I need. But the savings account is another story. I expect the bank to invest that money, or to loan it out, so that they can pay me a bit of interest, at least enough to counter inflation. I really don’t understand why banks should be obliged to hold any of my savings in reserve, as long as they don’t throw it away, and as long as they keep their hands off my debit.
I would say that the main business of banks is to loan out the money of their depositors, and in a full reserve system, this is simply prohibited. Therefore full reserve banking is no banking at all.
Full-reserve banking refers to demand deposits, not savings deposits. Obviously, if you deposit money in the bank knowing they are going to lend it out, and agree to not have access to it for a period of time, that is one thing. In that case there is no double-claim on the money.
But, as you point out, if you put your money in a demand account and they lend it out to someone else, that is a double-claim and should be illegal.
Reading through this thread made me finally register on this site. Great talk, smart peeps.
It seems that a factor is being left out of this conversation which woupiestek just touched on when remarking "To maintain a gold reserve or to mint the gold, the banks have to spend money on a regular basis.".
Anything we place value on needs an INVESTMENT to keep its value. Money, house, car, health, relationship, etc. That investment analogous to INTEREST.
Now, when you borrow to get something (spend more than you have, time, money, calories) you pay INTEREST twice, once on the loan and once on the upkeep, and you have to do even more work to keep the object perceived value. It is like having an affair; so much more work, but so much more valuable. :^)
The economy is, and will crash, because we are running out of energy. We have become tired chasing our desires and let our investments fail. We want the affair, but not the work. So we are getting caught with their pants around our ankles. We are more likely to pay interest on on loans then we are to invest in what we already own, always thinking there is something better.
Money is debt because life is debt. Humans have just turned money into a representation of life. The economy is doomed becuase each one of us is doomed. As J. Krishnamurti would say. "We are the world, and the world is us."
Let us make this simple (but not too simple), and say that the economy is composed of three sectors: households (H), finance (F) and business (B). There are three relationships we need to consider: households/finance, finance/business and business/households.
There are two streams of money across this interface. There is the stream from households to finance (HF), mainly composed of fees and interest on loans. Then there is the stream from finance to households (FH), mainly composed of salaries and interest on deposits. HF is of course larger than FH, since the interest rate on loans is smaller than the interest rate on deposits.
The finance sector has a net stream from households, HF – FH. In addition to this, there is the stream of money from business, BF, mainly composed of interest on loans. If we for a moment assume that the system is in balance, this means that there has to be a stream of money FB that is larger than BF. There is of course interest on deposits and payment for goods and services, but this cannot be larger than BF, or finance would not be very profitable. The last part of this stream would be the owners of the financial sector spending their profit on a luxurious life style. (In this model, owners are included in the sector they own, not in the household sector.)
The stream BH is salaries payed to households. Since there is a net stream of money from households to finance (HF – FH), the stream HB is smaller than BH, meaning that households spend only a part of their salaries on goods and services. This is not a problem for business, since it is balanced by a net stream from finance thanks to the owners luxurious life style. This does seemingly not make any room for a profit in business, but there is. Since business owners are counted as part of the business sector, the profit payed to owners is canceled by the owners spending on their luxurious life style.
This model is in perfect balance. There is a net stream HF – FH which equals FB – BF which equals BH – HB. There is nothing in the financial system that prohibits such a balance. The size of the money flow between sectors is given by the amount of debt. The larger the debt, the larger the stream of money to the financial sector, and the more money the bank owners have to spend.This is not reality though, in real life neither bank owners nor business owners spend all their profits.
If bank and business owners (capitalists) were to save money, this would reduce the money flow to households. Households can now decrease their spendings, which will force business to decrease their expenses to households, and we have a certain economic breakdown. The other possibility is that households loan the savings from finance and business in order to keep the economy going, but this will then increase the flow of interest from households to finance, allowing the finance sector to save even more money that the households eventually have to loan. Then we have the other type of economic breakdown due to an exponentially growing debt. This is what we see today.
This bubble is not driven by the need to loan more money in order to pay interest, like the Crash Course claims, the culprit is the capitalists’ hoarding. Since it is utopian to believe that we can convince capitalist not to hoard, the only way to avoid recurring economic crises is to abolish capitalism, i.e. transfer ownership to the people. We can no longer afford to provide for the capitalist class.
Had the capitalist hoarded more money before, not some much of it had been available for subprime mortgages. So forget the hoarding as the main problem.
Capitalist hoarding? This is a contradiction in terms. Hoarding is exactly what capitalism is NOT about. Capital seeks valorization, not hoarding. To make money off capital, it must be put to work, that is, transformed into other forms of capital. Those new forms of capital are transformed into commodities. Those commodities seek a return in a market.
Capitalists are rich not by what the accumulate, but by what they spend and reinvest. Hoarding money is the worst way to advance your fortunes. The discount rate alone guarantees that a given quantity of money will lose value over time. To protect a fortune, one must invest it to get a return. Otherwise through simple consumption and inflation it will diminish.
There seems to be a lot of misunderstanding about capitalism on this blog. Capitalism is not resilient. Class antagonisms are. Power relationships are maintained by disparities in power between the capital owning class and the labor selling class. This power disparity is also key to the propaganda system that perpetuates so much misunderstanding of what capitalism is and isn’t. Unfortunately, these misperceptions are held at an emotional level that is nearly impossible to penetrate. Indoctrination often trumps reason. In fact, nearly always.
To truly understand capitalism, you have to read Marx. In volume one of Capital he discusses capitalism and its antecedents. Capitalism didn’t just spring into existence one day. It evolved out of mercantilism and cottage industry. It started amongst the class of people of means who combined manufacture with the new forms of tools and energy. There are causes behind the terms Luddite and sabotage. These terms have criminal connotations precisely because the powerful could use the power of the state to protect their interests. These ideas grew out of the alienation of workers as the new capitalists used their class prerogatives and power to transform craft into industry. The new system of industrial manufacture on a capitalist model transformed craftsmen into wage slaves. Before capitalism it was unthinkable that a worker would not be the owner of his own tools and resources and the master of his fate. The term wage slave was an apt description of a former skilled craftsman reduced to a hand to mouth existence on industrial wages. This seems to be lost as people have forgotten their history. The first century of capitalist industrialism was ugly. We forget that we are the beneficiaries of strikes and organizing that brought about an eight hour day, paid vacations, medical benefits, workplace safety, an end to child labor. It’s also forgotten that the capitalist fought these changes tooth and nail. They often called upon the power of the state to crush worker’s struggles. Now they use the media to keep us distracted from our history. They want us to be atomized consumer units that participate in a dog and pony show form of democracy.
Now that so many of us live in relative comfort we think we’re far removed from these struggles. Just the opposite is true. Now we see what the middle class is worth when jobs and capital flee to overseas markets. People by the millions are at risk of losing their homes to predatory lending and other swindles. The rate of poverty is rising and promises to rise further still as the current financial debacle worsens. Without a market in which to sell it’s labor, the so-called middle class is just as vulnerable to poverty as the already impoverished. Like the song says, ‘possessions mean nothing if you don’t have rights’.
Capitalist hoarding? This is a contradiction in terms. Hoarding is exactly what capitalism is NOT about. Capital seeks valorization, not hoarding. To make money off capital, it must be put to work, that is, transformed into other forms of capital.[/quote]
Hoarding is just another way to say that capitalists are getter richer, either in the form of increasing deposits on which they receive interest, or in the form of capital goods, which also yield returns. On the other hand, spending is the exchange of money for consumer goods that decline in value and do not yield returns, for instance food, clothes, hairdressing and movie tickets.You do not get richer from buying consumer goods.
Capital goods can be considered a less liquid type of money. If the returns on capital goods are spent, the hoarding halts, but this is not the case. If the returns are reinvested in capital goods, capitalists are hoarding. In this case debt does not grow, but the value of capital goods grow exponentially. Sooner or later this growth must hit the ceiling due to natural limits of a finite world, as Martenson explains in the crash course. When this happens, capitalists must find other ways to invest their capital, leading to financial speculation with exponentially increasing values in for instance real estate and stock markets, which again leads to growth in debt when these financial objects are traded for money.
So, capitalist hoarding definitely is at the core of this matter. Capitalism has failed. If capitalism survives this crisis, as it probably will, history will repeat itself, and we’ll have a new crisis. And a another. And a another. Until humankind destroys itself in war and environmental crisis. Or, but this is less likely, we take to our senses and rid ourselves of the capitalist system.
I’ve been reading some of the material of Steve Keen. It seems Australian debts have grown at a steady 4% faster than GDP rate annually, simply moving from one part of the economy to the next. So for some reason Australian banks just increased the amount of debt exponetially, simply search for debtors to stick it on in the process. I believe the numbers for the USA and EU show the same thing…
This makes me wonder whether Chris isn’t right is some sense: that banks have to borrow more money form the central bank just to pay the interest on their own outstanding loans. But because the commercial banks are insolvent, not because the debt standard is.
Although the capitalists can buy politicians and votes, the US is still a democracy, and sometimes the capitalists loose from the majority. That may already have been enough to break their power. Think of how the FED and the government enforce inflation by steadily keeping interest rates and taxes to low: how does that benefit the capitalists? Their money looses it’s value and their investments have lower returns. Do you really believe that they of all people do have a long term plan?
Reading through this thread made me finally register on this site. Great talk, smart peeps.
The economy is doomed becuase each one of us is doomed. As J. Krishnamurti would say. "We are the world, and the world is us."
Glad you liked this thread.
I like your Krishnamurti quote, but I doubt he would have used it in that context. If Krishnamurti was as smart as think he was, he would also have said that nature is inherently abundant and that we are bliss.Consciousness creates reality. Pure consciousness is bliss.Our inner peace does not depend on outer circumstances.
Consciousness is rising in the world today, and this economic crisis is nothing but an opportunity for something better, a society with a higher level of consciousness, to arise in place of the completely unenlightened system we have been living in.
I’m excited and hopeful about what I see transpiring. (I also recognize that danger and opportunity are two sides of the same coin, so I’m not ignoring the danger.)