Money as Debt – Basic layman’s question..

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  • Fri, Mar 22, 2013 - 09:00pm



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    Jim H wrote:You are good at

[quote=Jim H]

You are good at stating "laws" without backing them up with examples.

Let me address your first point;

1.) It is not necessary for the "monetary system" to grow to pay the interest on loans. Conflation of stocks vs flows

Thought experiment.. let's think about the opposite of my purported need for growth:  Our monetary system is based on the creation of debt.  If everyone were to start living within one's means… saving the money necessary for each purchase before buying, be it a house or car (for the individual), a sewer system (for the town) or an aircraft carrier (for the Fed. Government) then the money system would begin contracting as existing loans are paid off and new ones are not created.  The total debt chart turns downward.  Eventually there is no more money.  

Do you argue that this is not true?  Because unless you do, I don't see how you justify your point above?  The stocks vs. flows argument may work in an idealized Steve Keen system where he can show some kind of equilibrium, but we don't live in farmville  .. and the last four decades of debt growth, being exponential as Chris often points out, sure don't act like growth is not a monetary imperative… and Ben Bernanke's targeting of a 2% positive inflation rate, even though his stated goal is "price stability" sure does not belie the idea that growth, whether real or even nominal, is not an imperative.  

I am not an academic.. I am an engineer.  I don't live in the farmville land of ideas.  I live in the real world of demonstrable cause and effect, where historical track records speak to the nature of systems.      


Of all the points mentioned, I find it curious that you have focused on just the first point. The thought exercise that you propose cannot be accurately analyzed without using system dynamics, which as an engineer, you will no doubt appreciate the significance of this remark.

The key principles that will guide you (or anyone else) to the correct answer are found in system dynamics, namely models in the time domain. Trying to solve this within an Austrian framework without mathematics capable of recognizing simultaneous differential equations means you are going to get a wrong answer.

If you want to “do the math” here is a link to one of Steve Keen’s papers on this very subject. The laws you seek are verifiable mathematics, not hand waving. He speaks (with equations to back it up) of static economies in equilibrium (as you suggest) as well as dynamic economies that receive frequent and multiple infusions of money capital. But don’t take his word for it, if your differential calculus is rusty, avail yourself of a grad student with a good scientific calculator and see for yourself……


Repayment of debt: ‘negative money’ or a bank asset?


Table9.2 models the conventional treatment of debt as‘negative money’

and of the repayment of debt as necessarily destroying money. A flow is repaid,

which results in a deduction from the firms’ deposit

account and an identical deduction from the firms’ loan account. Both

bank liabilities (the sum of deposit accounts, including the bank’s own

deposits) and bank assets fall.



As Figure 9.2 shows, all accounts gradually taper to zero over time, and

hence economic activity ceases – whereas if firms do not repay their debt,

economic activity can continue indefinitely. This makes the repayment

of debt rather foolish from everyone’s point of view: if debt really is

negative money, then it is in everyone’s interests (bankers, capitalists,

and workers alike) that it never be repaid.



However, if debt is in fact a record of a legal obligation, and money

is not destroyed when debt is repaid, but instead stored as an asset of

the bank – in the bank vault, so to speak – then a very different

picture emerges. The repayment of debt keeps bank assets constant, but

alters their form from active loans to passive reserves. Once the bank

has reserves, they can be relent at the rate, enabling a constant

level of economic activity to be maintained, as in the original model without debt repayment (though at a lower level of activity, since the

level of active deposits falls).




In contrast to the ‘debt as negative money’ model, the model shown

in Table 9.3 behaves similarly to the previous model without debt

repayment, in that a constant level of economic activity is sustained from a single injection of money.



Unfortunately, this leads to the far more interesting point as to where the intrinsic growth imperative in capitalism comes from…..and effectively defeats the notion of decoupling the monetary system from the means of production.

By the way Jim, I am on your side regarding debt based currency, living within one’s means, etc. I disagree that the system as we now observe it can be contained by simple (or even complex) modifications to the monetary system alone. There is a fair body of work from economists and mathematicians alike that suggest that the minimum allowable global (!) growth rate for capitalism is on the order of 3-3.5%- in perpetuity. This has nothing to do with monetary growth. Just not sure where this is all going to come from….


As it stands, this model shows that the circuitist vision fills its objec-

tives of showing the essentially monetary nature of capitalism, and

explaining how the surplus generated in production is monetized by

the process of monetary circulation.



Many thanks to Gillbilly for the (previous) clear and insightful post.

  • Sat, Mar 23, 2013 - 02:04am


    Greg Snedeker

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Debt bondage slavery is a bit extreme since that power dynamic runs in one direction. The relationship between the capitalist and the worker is one of power, but the power can shift in either direction. Both can be seen as protagonistic. Think of  it this way…if a person works hard, takes chances, creates something people want or need, and saves her money, she can become a capitalist (the "better" side of debt, i.e. the controlling part). If someone is let's say born a capitalist/ into a family business, If she is smart and uses her money wisely and puts it to good use, she can remain a capitalist, but if she is lazy and/or a spendthrift, she will quickly become a worker (the more difficult side of debt).  When capitalism was coming into being, the capitalists were the nouveau riche, and the aristocracy/land barons were the "old" money. Capitalists were cutting into the wealth of the landlords and the masses responded to it in kind. In the old system of land barons, the worker had very limited upward mobility, but the new system of capitalism offered hope of becoming a capitalist. Does this hope still sound familiar today? This "work ethic" is still alive today because it still carries a deep resonating value…not a bad thing.

Unfortunately, traditional capitalism doesn't really exist today, at least not at the global macro level. Ownership of capital and the means of production is spread among shareholders voting by proxy, and managers/CEOs have power left unchecked (powerless boards of directors). Competition is tightly controlled and manipulated through oligarchies. Technological innovation is often faster than the rate of retraining the unemployed. Financial instruments are obfuscatory and don't reflect the reality of human economic exchanges of goods and services. These are not mechanisms built on the foundation of traditional capitalism. There was supposed to be internal checks and balances. Of course, pure capitalism never existed, but the ideals were more noble than what they had previous to it. The other big problem is that capital/resources are not infinite, and capitalists didn't foresee the effects of environmental externalities until much later.

In regard to the structure/superstructure alignment, this is just a way of saying that the belief structures need to mirror the system of organization that a society creates to survive (economic system) within the context of its time or there will be collapse or failure of some kind. The mechanisms of the economy from the industrial age would not work with the belief structures/way of life from the Medieval era. These two structures were flexible enough in capitalism, or at least the various forms of capitalism that it worked rather well for quite awhile, but I would say we are moving into a new era where these two structures are moving farther out of alignment. This is not necessarily a bad thing for the evolution of society if the transition isn't too abrupt, but if it is, it can cause a lot of pain, and sometimes even worse, war. This is another thing Darbakrash means when he writes about a dynamic economy. Societies are dynamic and therefore the economic structure and superstructure are also constantly changing.

My judgements and opinions? Well, that is the big reason I came to this site. I'm in a time of my life when I am questioning all of my past opinions and judgements, trying to process new information and form new ones. My wife and I have been making changes in our lifestyle to reflect conclusions that feel right. One of the messages that keeps ringing true to me that I've taken away from PP is the building of resillience through strengthening family and community. I can't control what happens on the global stage, but I can make an impact on my immediate community and environment. If enough of us do that, the world will move in the right direction…hopefully.



  • Sun, Mar 24, 2013 - 07:25am



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    To make matters worse, the

To make matters worse, the common conception of money creation might not even reflect what is actually taking place. That is, it is assumed that government creates money and from there banks lend them, increasing money supply because of fractional reserve banking and interest.

It turns out that banks lend many times more than they should:


  • Thu, Mar 28, 2013 - 04:16pm



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    Money is debt

I think the idea that money is debt is that fiat money is intrinsically valueless and that only the social compact between consumers gives it any value. This relates to the concept that money is a "claim on wealth" but not wealth. Wealth comes from a variety of tanigible items from gold to real estate. Money is only a "marker" that represents a claim to exchange it for wealth.

  • Fri, Mar 29, 2013 - 04:41pm



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Welcome to the forums Gatortrapper.


  • Fri, Mar 29, 2013 - 05:08pm


    Jim H

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    Welcome Gatortrapper

I would ask you to consider that, among intangible forms of money… i.e. inherently valueless currencies… the mechanism behind their creation is an important and distinguishing feature.. and that "debt" based money is a form of money that is created as debt.  I would say that not all intangible, inherently valueless currencies are created equal.. and that the mechanism behind the creation of the money is important and consequential.

All government-backed Fiat currencies today are created as debt.. but this was not always the case.  Some folks believe that governments should be able to go back to exercising their sovereign right to print money without incurring debt.. these advocates today are adherents to the school of modern monetary theory, or chartalism, or, as I like to point out, the Trillion dollar Platinum coin school of thinking.  Lincoln did this with his Greenbacks money;


Finally, a new third category of electronic currency has come into being since 2009 called Bitcoin.  Although inherently valueless and intangible.. the freemarket adoption of Bitcoin continues to gallop ahead because of it's usefullness, and I would argue, the people's growing revulsion with fiat currencies the world over.  I would argue that a very attractive feature of Bitcoin is the creation mechanism, and the resulting scarcity profile of the currency… less than 11 million Bitcoins exist today… and no more than 21 million ever will, with limits built into its open source digital (software) DNA.  We talk more about this in the Bitcoin group is anyone is interested.. but I just bring it up today to create a more broad compare:contrast when it comes to the mechanisms of money creation that are, or have been, practiced.            




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