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Fatal Flaw in Logic of the Crash Course?

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  • Mon, Feb 02, 2009 - 10:36pm

    #12

    Set

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    Re: Fatal Flaw in Logic of the Crash Course?

“Fatal Flaw?  I don’t think so.  This way too long article targets only one element of the “Crash Course” and even if there were any truth to any of it and it wasn’t written by a biased source, I would question its truth and accuracy.  Regarding this Central Bank as well as all of the previous ones, I find the opinions of Thomas Jefferson, Alexander Hamilton, and many others to be less suspicious and biased.

 

It is encouraging to see that the Fed is at last, at least recognizing the need to defend itself against mounting public opinion of its illegitimacy and fraudulent nature.  I didn’t have time to read the entire article, but I did see a defense of fractional reserve banking, but I didn’t see anything about fiat currency.  The problems arising from the issuance of fiat currency seems like a more important issue to address.  The money supply and the debt that backs that money appears to be the next crises looming on the horizon.  The history of all fiat currencies has been well recorded and documented and its eventual demise is not even up for debate.       

  • Mon, Feb 02, 2009 - 10:58pm

    #13

    scepticus

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    Re: Fatal Flaw in Logic of the Crash Course?

mred, how would your arguments apply to say the bank of england or bank of japan? These entities are publically owned.

Also, as I said in reply to the Keen article thread, government debt should not be thought of as simply an interest bearing loan since they have the ability to simply monetise it. It’s not debt – it is something else – but how to classify it? Clearly we can classify it as robbery since the monetisation is basically a flat tax on most of the population, but it would still be nice to place it in more academic/macroeconomic terms. 

  • Tue, Feb 03, 2009 - 12:31am

    #14

    DrKrbyLuv

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    Fatal Flaw in Logic of the Crash Course?

The Mathematical Flaw is NOT a Myth

Chris Martenson has used mathematics to fully explain the exponential growth of interest/debt – which is irreversible – and terminal.  This is not just a "theory" or a "myth" it is a mathematical certainty.   Your source never endorses or refutes the math but instead suggests that it’s effects are compensated for elsewhere. 

So what is he, or you saying – is Chris’s math wrong?  Or is his math correct, but through some double shuffling of money the exponential growth of debt/interest doesn’t matter?

The author contends that the banks and various other lenders spend the interest charges collected back into circulation implying that in some way this makes the math a "myth."  No doubt some of the interest charges collected will end up back in circulation – but that misses the point and the logic of the math.

Let me give an example; a $100,000, 30 year, 7.5% amortized home mortgage will end up costing the home owner $251,717 to fully retire the loan.  $100,000 in principal and $151,717 in interest.  So, you say the interest collected will be spent back into circulation – ok, let’s see how that works out.

The principal amount, $100,000 is retired from circulation as it is repaid – that’s fine.  And the interest, $151,717 will be spent back into circulation.  What a deal, we borrow $100,000 principal and repay it, and we get a bonus $151,717 put into circulation!  We will all be rich in no time!

But as you can see, only $100,000 was ever created (and retired) – the interest payments must come from future debt – this is the point and the math! 

I hope this helps clear up the matter.  I’m glad you are skeptical and asking questions and I think It is good you took the Crash Course – you will find through further investigation that Chris is on the mark with many very important issues.

One other quick suggestion – check sources carefully – the source of your
linked page – Woodard was a paid apologist in writing a complimentary
view of his employer.  And, more to the substance, his long list of
apologies and rationalizations are laughable at best.

  • Tue, Feb 03, 2009 - 12:53am

    #15

    SkylightMT

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    Re: Fatal Flaw in Logic of the Crash Course?

[quote=DrKrbyLuv]

The principal amount, $100,000 is retired from circulation as it is repaid – that’s fine.  And the interest, $151,717 will be spent back into circulation.  What a deal, we borrow $100,000 principal and repay it, and we get a bonus $151,717 put into circulation!  We will all be rich in no time!

But as you can see, only $100,000 was ever created (and retired) – the interest payments must come from future debt – this is the point and the math!  [/quote]

I might be really stupid… but, I still don’t understand.

The $151,717 gets put into circulation. I don’t see how it can’t get put into circulation. It goes to the mortgage company, and they use it to pay salaries and expenses. People getting their salaries use it to pay THEIR expenses and buy stuff. And so on. Its money created by lending, and I just don’t see how it doesn’t go back into circulation.

You say the $100,000 was the only money created, yet, as far as my dorky brain can see, that’s the money that WASN’T created. Its the money actually lent (well, not counting fractional lending). The bank got it from people making deposits. Then when it was repaid it went back to the bank and was lent again. Its the interest that created new money, not the principle. I think. The bank had to have the money to lend the $100,000, so they didn’t create the principle. But they DID create money in the form of the interest.

I also don’t know what it means that the $100,000 was retired. Does that mean that it goes back to the feds and is burned? Taken out of circulation somehow? I don’t think it does. It gets spent just like the interest money got spent. Keeps going around, as far as I can see.

I don’t know why this is so hard for me to understand. I’d appreciate it if you would keep trying to explain it, because I really do want to understand this concept.

  • Tue, Feb 03, 2009 - 01:25am

    #16
    AnOregonian

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    Re: Fatal Flaw in Logic of the Crash Course?

[quote=SkylightMT]

The bank got it from people making deposits. Then when it was repaid it went back to the bank and was lent again.

[/quote]

NO! This is the part many folks don’t get. Banks create money when they lend it – they don’t use customer deposits. Think of it this way: The bank has $1,000,000.00 in customer deposits. It makes home loans totaling $10,000,000.00 – where does it get the other $9,000,000.00 from? It lends it into existence.

When you repay the loan with interest – you have to get the interest money from somewhere. Where does it come from? Someone else’s debt.

I leave it to the brighter minds on this site to expand on my simplistic comments.

  • Tue, Feb 03, 2009 - 02:07am

    #17

    SkylightMT

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    Re: Fatal Flaw in Logic of the Crash Course?

[quote=SamLinder]

NO! This is the part many folks don’t get. Banks create money when they lend it – they don’t use customer deposits. Think of it this way: The bank has $1,000,000.00 in customer deposits. It makes home loans totaling $10,000,000.00 – where does it get the other $9,000,000.00 from? It lends it into existence. [/quote]

Oh, okay! I get it. Due to fractional reserve lending, banks create money by lending money that they only actually have a small percentage of.

But… if we simply eliminated fractional reserve lending, couldn’t we still have the same economy that we have now? I mean, fractional reserve lending is a relatively recent phenomenon… at least, to the extent that its being used now. Fractional reserve lending is the problem… and not a fatal flaw in our whole economic system. They should just eliminate fractional reserve lending, or at least, increase the percentage that must actually be held in cash.

How does fractional reserve lending cause it to be a requirement that our economic system must continue to lend increasingly to be stable?

  • Tue, Feb 03, 2009 - 03:13am

    #18

    DrKrbyLuv

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    Re: Fatal Flaw in Logic of the Crash Course?

[quote=SkylightMT]The $151,717 gets put into circulation. I don't see how it can't get
put into circulation. It goes to the mortgage company, and they use it
to pay salaries and expenses. People getting their salaries use it to
pay THEIR expenses and buy stuff. And so on. Its money created by
lending, and I just don't see how it doesn't go back into circulation.[/quote]  
Sorry if I wasn't clear - yes, some of the interest payments will be spent into circulation.  My point is that even if 100% were, the problem would still remain.  And, by the way, not all of the interest is spent back into circulation which may accelerate the problem.  For example, we owe over a trillion dollars to China alone.  We cannot guarantee that any part of the interest will be spent into OUR circulation.

 

This is a big reason why countries like China and Japan make sure that they always export more than they import. When we buy their products, we help diffuse the growth of interest debt by pouring money into their circulation. 

[quote=SkylightMT]How does fractional reserve lending cause it to be a requirement that
our economic system must continue to lend increasingly to be stable?[/quote] 

Fractional lending doesn’t cause the problem and no matter what reserve percentage you use, it can’t solve the problem. And, currency specie doesn’t matter, you may have gold backed, fiat, or even coconuts as dollars – the problem will remain.

 

 

 

 

  • Tue, Feb 03, 2009 - 07:10am

    #19
    mred

    mred

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    Re: Fatal Flaw in Logic of the Crash Course?

Scepticus, mate, it just dawned on me that you are writing from the UK.

The argument goes unchanged. Note that the process of (high-powered) money creation is (nominally) the same: governments sell their debt in public bond auctions; whatever they can’t sell, the central bank picks up the tab with brand new money. The inflationary requirement of the debt-based system is the same. I don’t quite understand your comment about direct debt monetization, that is after all another example of debt-based money. What did I miss? But I see where you are coming from now; and the following is my take on it. You make the observation that in the British case, the government would be selling a debt to itself and therefore, in principle it could write it off, so it is really no big deal. Is that a fair representation of what you think?

Assuming that it is, what must be considered is not only the government-central bank tandem, but also the rest of the players. Let me make a roundabout argument:

In a different time, competing banks would issue their own gold certificates to depositors. As competing entities, they could not afford to issue more certificates than the amount of gold in reserve, lest when the certificates ended up in competing banks, these would in turn ask for certificate redemption and deplete the fraudulent bank of its gold. However, the temptation for all banks to over-issue certificates was simply too big. The solution: form a cartel that would issue a common certificate for all competing banks, and furthermore, have a centralized provider of reserves in case that any bank fell short. The end result: competition was minimized and all banks could then inflate in unison. Since their profits are the interests, their previous profits would now be multiplied by the reserve ratio. I’m sure you knew this, but I need this to be kept in mind.

For the system to work, the minimal reserves of the banks must be sound. The reserves are composed mainly of deposits by the public and the high-powered money in the commercial banks’ accounts at the central bank. This is the main connection of the CB-government tandem with the outside. The CB’s role is to support (if you want, subsidize) the local banking cartel. When the CB purchases government securities, the value of those securities ends up increasing the cartel’s reserves. It is for this reason that even though at the level of the government/CB one could say that the government owes money to itself and thus may ignore the obligation, the fact is that such act would decapitalize the commercial banks. The obligation of the government is thus ultimately to the commercial banks under this scheme.

The depths of the present crisis are manifested in the desperate measures to save the commercial banks even at the cost of loading the CBs with crap assets. They know what they are protecting: the biggest cash cow is the commercial banking sector. That is the first line of defense, even if the CB is weakened to the possible point of becoming insolvent itself (which they are already).

The elites in other countries may not be as shameless as the American ones, in terms of openly having a CB that directly stands to benefit when the government’s deficit spending increases. That the regional banks’ stocks can’t be traded, or that the profit rate is capped at 6% is a smokescreen. It is the whole concept of central banking that is tailored to serve the interests of a particular sector. The only case in which this would not be true would be the case in which the government owned both the central bank and all the banks that collect demand deposits from the public. There have been successful instances of these that I know about. In any other scheme,  whether public or private, the CB is an instrument of control and a means to subsidize a local banking cartel. As a side comment, the Bank of Japan is not fully public, about 40% of its shares are privately owned and also privately traded. The Bank of England may very well be fully government owned, but the interests/families that once owned it have frequently staffed the board of governors since its "nationalization." In conclusion, other elites know better about how to guard against negative perceptions than the American ones. But if you understand the system as a whole, you’ll see that it is a scam that was not set up to serve the public, but rather to be served by it.

 

 

 

  • Tue, Feb 03, 2009 - 07:14am

    #20
    mred

    mred

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    Re: Fatal Flaw in Logic of the Crash Course?

[quote=DrKrbyLuv]Fractional lending doesn’t cause the problem and no matter what reserve percentage you use, it can’t solve the problem. And, currency specie doesn’t matter, you may have gold backed, fiat, or even coconuts as dollars – the problem will remain. 
[/quote]

Would you mind expanding on this? The nature of money is all-important. What particular problem are you referring to?

  • Tue, Feb 03, 2009 - 10:22am

    #21

    scepticus

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    Re: Fatal Flaw in Logic of the Crash Course?

mred: "Scepticus, mate, it just dawned on me that you are writing from the UK."

Yes. 


"You make the observation that
in the British case, the government would be selling a debt to itself
and therefore, in principle it could write it off, so it is really no
big deal. Is that a fair representation of what you think?"

yes. 

"Since their profits are the interests, their
previous profits would now be multiplied by the reserve ratio. I’m sure
you knew this, but I need this to be kept in mind."

Agreed. I was aware of this. 

"For the system to work, the minimal reserves of the banks must be
sound…. [snip] … one
could say that the government owes money to itself and thus may ignore
the obligation, the fact is that such act would decapitalize the
commercial banks. The obligation of the government is thus ultimately
to the commercial banks under this scheme."

By decapitalising the banks somewhat, the government can both write off its own debt and clip their wings with regards to future credit expansion.Would this not achieve the same thing as an increase in the reserve ratio?i.e. keep reserveratio the same but make sure the banks have less high powered money.

"the biggest
cash cow is the commercial banking sector. That is the first line of
defense, even if the CB is weakened to the possible point of becoming
insolvent itself (which they are already)."

That is only the case when people wish to borrow money, and have a reason to do so. My whole line of reasoning on this site and others has been that this era in which borrowing against future growth makes sense, is coming to and end. If the banking system has ceased to be a cash cow, why prop it up? The elites would be better off dashing for whatever the next gravy train is. If they knew what that train was and where it would be leaving from, you can guarantee that there would be little political appetite for propping up banking and a rush of pigs onto the new train. The fact that they are trying to prop up a doomed system leads me to believe the elite have no more idea what is gonig to happen than we do. There is no conspiracy, just greed so short term that they did not even consider what they’d do for an encore.

"The elites in other countries may not be as shameless as the
American ones,"

The old eurpoean elite are much more widely distributed accross industry than in the US. In the US the elite are all FIRE sector. Over here, and especially in mainland europe the elite are normally a political/industrial/media/old money tycoon hybrids – like Silvio Berlusconi and Murdoch.

"In any other scheme,  whether
public or private, the CB is an instrument of control and a means to
subsidize a local banking cartel."

Agreed. I also agree it does not serve the public. I am speculating mostly about how the powers that be will attempt to modify the system to mollify the public,  which they are going to have to do to stay in power as the depression deepens.

People won’t tolerate the kind of poverty seen during the depression this time around – you can be sure of it. I suspect change will come in europe first due to the different character of the elite over here – france, germany and UK may lead the way. Eventually other nations like japan and the US will be forced to follow their lead, if the reforms in europe prove successful.  

 

 

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