Exponential by Design, or by Operation?

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Exponential by Design, or by Operation?

I disagree that the money system “is an exponential system by its very design.”  I think that the money supply is increasing exponentially not because that is how the system was designed but rather how it is being operated.  Subtle but crucial distinction.  If people and governments start living within their means and repaying debt, outstanding debt decreases and less money will have to be created to pay the interest on the outstanding debt.  Is this not correct?  This points to a way forward: individuals, communities, countries must start living within their means to reduce debt, and save. The chapter’s analogy of car's engine running on straw is poor.  A better analogy might be supplying too much gasoline to the engine causing it to speed up, overheat and explode.  If the car is run sensibly it can run for a very long time. This issue is fundamental - it was referred to again in the latest (Nov.30/08) Martenson report - and warrants further scrutiny. 

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Re: Exponential by Design, or by Operation?

I think its by design because interest is added - how can interest be justified as anything other than an unnecessary parasitic load. All interest, especially the intererst charged in the creation of money is unjst. And not just in the creation of money. 

 

 

 

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Re: Exponential by Design, or by Operation?

The morality of charging interest is a different matter.  The question is if all citizens and countries lived within their means would the money supply necessarily grow exponentially?  I think no.

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Re: Exponential by Design, or by Operation?

It's definitely by design.  Money is created when the debt is written, but the money to repay the interest is not.  To repay the interest, more money must be created, which requires 'stuff' to be built/made/created to justify the creation of the wealth.

It's the interest load that causes exponential growth, not the money system itself.  If we allowed interest free loans, then exponential growth would not be required. 

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Re: Exponential by Design, or by Operation?
Damnthematrix wrote:

It's definitely by design.  Money is created when the debt is written, but the money to repay the interest is not.  To repay the interest, more money must be created, which requires 'stuff' to be built/made/created to justify the creation of the wealth.

 Yes, but if debt was paid off there would be no interest.   Assume people lived within their means and borrowed only for self-liquidating assets (e.g. machinery that produced an income).  The money supply would stabilize at the size of the productive economy, which is not growing exponentially.

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Re: Exponential by Design, or by Operation?
kiwi_canuck wrote:

I disagree that the money system “is an exponential system by its very design.”  I think that the money supply is increasing exponentially not because that is how the system was designed but rather how it is being operated.  Subtle but crucial distinction.  If people and governments start living within their means and repaying debt, outstanding debt decreases and less money will have to be created to pay the interest on the outstanding debt.  Is this not correct?  This points to a way forward: individuals, communities, countries must start living within their means to reduce debt, and save. The chapter’s analogy of car's engine running on straw is poor.  A better analogy might be supplying too much gasoline to the engine causing it to speed up, overheat and explode.  If the car is run sensibly it can run for a very long time. This issue is fundamental - it was referred to again in the latest (Nov.30/08) Martenson report - and warrants further scrutiny. 

When someone argues that our money system "is an exponential system by its very design", what he means is that it is the nature of the system.  If you accept that it is its nature, then you would, by reason, agree it is the design.  Basically it is just another way of saying the same thing.  The term "operated" is a function.  Operation causes variations and therefore cannot be part of its "nature" since it's a variable. 

kiwi_canuck wrote:

If people and governments start living within their means and repaying debt, outstanding debt decreases and less money will have to be created to pay the interest on the outstanding debt.  Is this not correct?This points to a way forward: individuals, communities, countries must start living within their means to reduce debt, and save. 

Not only would these communities start living within their means to reduce debt, by your theory, they would also by necessity have to offer more in terms of reducing those means.  For example, if we, as a family, require 3 pigs to feed us each month, but have lived off five pigs every month for the past 10 years, then in order to pay off our debt we're looking at eating 1 1/2 - 2 pigs each month to pay off our debt (interest AND principle).  Now if we want to "save" then we're looking at lowering our means even further-- down to a max. of 1 1/2 pigs each month for 'x' number of years.

Your theory, or idea, requires this.  I'm not saying it's not a good idea.  I'm just thinking it will be very difficult for most americans to accept these means as positive.

Where this ends and 1984 picks up would be an intersting idea.

 

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Re: Exponential by Design, or by Operation?
caroline_culbert wrote:

When someone argues that our money system "is an exponential system by its very design", what he means is that it is the nature of the system.  If you accept that it is its nature, then you would, by reason, agree it is the design.  Basically it is just another way of saying the same thing.  The term "operated" is a function.  Operation causes variations and therefore cannot be part of its "nature" since it's a variable. 

Maybe it is semantics.  But the way I see it, exponential growth is one possible outcome with the current design, but not the only outcome.  Saying that growth is by design implies to me an inevitability that we can do nothing to control, which I believe is not the case.

caroline_culbert wrote:

Not only would these communities start living within their means to reduce debt, by your theory, they would also by necessity have to offer more in terms of reducing those means.  For example, if we, as a family, require 3 pigs to feed us each month, but have lived off five pigs every month for the past 10 years, then in order to pay off our debt we're looking at eating 1 1/2 - 2 pigs each month to pay off our debt (interest AND principle).  Now if we want to "save" then we're looking at lowering our means even further-- down to a max. of 1 1/2 pigs each month for 'x' number of years.

Your theory, or idea, requires this.  I'm not saying it's not a good idea.  I'm just thinking it will be very difficult for most americans to accept these means as positive.

I agree.  Further, people would also need to be simultaneoulsy more productive.  It would be brutal, but there is a way forward.

Cliff

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Re: Exponential by Design, or by Operation?

If we had sound money that was backed by something, then you would be correct.  The problem is that we have credit-based money where every dollar created accrues interest.  If every entity lived within it's means and paid off all it's debt, so that we had a debt free world, all credit money would be gone.  Without completely paying off debt, there would still be interest required, which has to come from somewhere.

The simplified way to look at this is to cut the number of players down to 2.  You and the bank.  You borrow $100 at 24% annual interest, or $2/month (at the beginning).  It is a 24 month loan with a fixed payment of $5.29/month.  The total you will pay over the life of the loan is $126.87. The total amount of money in the system at the start is $100, and each month, as principle is repaid, the total is reduced by the principle amount.  Along about month 18 you realize that you only have $4.78 left of the $100 you originally borrowed leaving you 51 cents short for your next payment.  The total amount of credit money remaining in the system is now $29.56, $24.78 of which belongs to the bank.  Your remaining principle balance is 29.56.  In order to pay off your remaining balance you either have to a)borrow more money (at interest) or b)work for AND own the bank, as well as supply all other needs to it. (so that you get all money from wages, expenses, and dividends).  Option a leaves you in the same boat in the end, only with a bigger unpaid balance at the end, and option b is a very priviledged position that few if any can be in. 

I realize that this is way over simplified, and some will probably complain that it leaves out the role of "self-liquidating assets" and other functions that we use money for, but the point remains the same - as principle is paid back in a credit money system, the amount of money shrinks.  If it is not replaced by further borrowing, then the debt holders will eventually run out of money to repay the debt, leading to default.  Too many defaults will destroy the system through a loss of confidence in the system.

Please feel free to poke holes in this, particularly the main points, preferably without re-framing it. If you must reframe it, clearly lay out the framework that you are using.  

 

All the best.

 

The numbers used above come from an OpenOffice spread sheet that I am more than willing to share if anyone would like.

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Re: Exponential by Design, or by Operation?

I think this section has failed to consider velocity. One can have
debt i.e. 10 units plus 1 unit of interest to be paid in one time
period equals 11 units of debt. If only one unit of money is in
the system it does not follow that at the end of the time period
10 units of debt will remain. If one unit of money is used to pay
12 obligations in htat time period, a net of one unit of value is the
result.

Example: I buy from A, A buys from B, B
from C etc. to K pays to L,or 12 payments. The effect is the same as having 12
units of money spent once. Trouble comes if nothing is produced
in the tranactions. So I would contend that it is exponential by
operation.

<>

 

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Re: Exponential by Design, or by Operation?
twdalt wrote:

I think this section has failed to consider velocity. One can have debt i.e. 10 units plus 1 unit of interest to be paid in one time period equals 11 units of debt. If only one unit of money is in the system it does not follow that at the end of the time period 10 units of debt will remain. If one unit of money is used to pay 12 obligations in htat time period, a net of one unit of value is the result.

Example: I buy from A, A buys from B, B from C etc. to K pays to L,or 12 payments. The effect is the same as having 12 units of money spent once. Trouble comes if nothing is produced in the tranactions. So I would contend that it is exponential by operation.

<>

 

That's an interesting idea I hadn't considered.  I wonder how much money it would take to knock down the cascading dominoes?  It should be substantially less than the total debt owed.   Does that mean we could give printed money to all people at the end of the chain (L), who could repay K who could repay J and so on up the line so that we have a bail-out package for the fraction of total debt owed?

 

 

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Re: Exponential by Design, or by Operation?

Excuse me?  You want to borrow money, and then pay it off before interest is due?  You call that a loan?

You've lost me....

Mike 

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Re: Exponential by Design, or by Operation?

I don't understand what this discussion is all about.

Apply a percentage growth rate, like interest, to ANYTHING, and you have exponential growth.

It's JUST mathematics.  There's NOTHING to argue about.  It's like 1+1=2.  Get it?

Mike 

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Re: Exponential by Design, or by Operation?

Sorry Reuben, I didn't see your post for ages and then after seeing it I have spent much time thinking about it. 

reubenmp3 wrote:

If every entity lived within it's means and paid off all it's debt, so that we had a debt free world, all credit money would be gone. 

 I don't think this affects your argument but if all debt was paif off so that all credit money was destroyed wouldn't the interest remain?  And the reserves too?  i.e., if debt = 0, money <> 0.   

reubenmp3 wrote:

  

 The simplified way to look at this is to cut the number of players down to 2.  You and the bank.  You borrow $100 at 24% annual interest, or $2/month (at the beginning). 

You're right - when you simplify it like that it is clear that you run out of money.  In your example if you have to borrow money to make loan payments then I agree the money supply will grow exponentially by design.

The other way to pay the debt is to buy a self-liquidating asset and trade with another country.  But this just changes the boundary of the problem and begs the question where the other country's money came from, so I don't consider that a solution.

One thing is for sure - if people lived within their means, paid down debt, and saved then the rate of growth would slow dramatically but it would still grow exponentially if the seed money was borrowed.

A couple things still bother me:

(1)  I have paid off my debts but I still have money to buy groceries.  If individuals can repay all debt then why not groups of individuals, towns, states, nations?   Has any country paid off its debt, and if so, what does it use for money domestically?

(2) Strictly speaking the US money supply has in fact NOT grown exponentially.  Why not?  Refer to the charts at http://en.wikipedia.org/wiki/Money_supply.  It appears to be made up of exponential parts and linear parts.  What caused the plateau in the 90's?    I reviewed the Crash Course but couldn't find the answer.  (As an aside have a look at India's money supply chart lower down.  It is a perfect exponential curve!)

Cliff

 

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Re: Exponential by Design, or by Operation?
Damnthematrix wrote:

I don't understand what this discussion is all about.

Apply a percentage growth rate, like interest, to ANYTHING, and you have exponential growth.

It's JUST mathematics.  There's NOTHING to argue about.  It's like 1+1=2.  Get it?

Mike 

No, I don't get it yet.    Look at the US money supply graph over time.  It is not simple compounding.  I am curious what made it plateau in the 90's.

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Re: Exponential by Design, or by Operation?

hi Kiwi,

I thiink the plateau in the 90s has something to do with the years the Clinton Administration had no nominal deficit (they were only "borrowing" the social security surplus).  It seems like less debt creation would slow the growth of the money supply.

On the question of how debt can ever be repaid.  I was wondering if defaulted loans could help provide the money to pay the interest.  Let say there are a 100 borrowers who each borrrow 200,000 for homes.  All that money is out in the world having gone to the builders and supplies etc who built the homes, but then 5 of those borrowers default and the bank looses the 200,000 and the interest it was going to get (it does get the houses back and just to keep this simple decides to rent them instead of sell).  5 borrowers times 200,000 is a million dollars that is now out in the world that doesn't go back to the bank and no interest on those 5 loans goes back to the bank.  Some of that million dollars eventually finds its way ot the 95 other borrowers who work at restaurants and law officies and medical offices, wherever.  They can use whatever portion of that million dollars that gets to them to pay the interest on their loans.  So it seems like so long as there is a sufficient default rate that would free up money for the others to fully pay back the rest of the loans.  I'm curious as to what people think of that scenerio.

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Re: Exponential by Design, or by Operation?

OK, show me where I go wrong:

 Example: loan of 1000 Eu, 5 % per year, for 1 year.

 The bank creates 1000 Eu out of thin air one way or an other.

I have to pay back the 1000 Eu

I work hard to produce stuff (what ever it may be)

 The bank people buy my stuff and pay me 50 Eu.

Now I can pay back my loan (1000 Eu and pay the interest).

What happened:

- I got the right to use 1000 Eu for 1 year

- I worked hard and created stuff

- The bank-people collected my stuff for which I worked hard (and indeed did not have to work that hard..)

 

In my opinion, no extra money needs to be created to pay back the loan and pay the interest. Of course I have to add some value to the community (the stuff I make) else I have to default.

 

Woody

-----

A western Civilization! That would be a GREAT IDEA!

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Re: Exponential by Design, or by Operation?

Only works when the bank buys your  stuff for 50 eu, if someone else bought it they would do that with money that was debt from the start, you could better default as quickly as possible. In the first case there is no extrat 50 eu to pay back debt, in the second case there is 1000 eu.

So to save the system, bankruptcy is the way to go. Or in other words a correction.

Problem now is that the 'Correction' is too big to let it correct.

 

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Re: Exponential by Design, or by Operation?

As simple as the concept of compounding is, I think that economists like Keynes and Friedman were so mesmorized by their theories of government control of money that they didn't look at the unseeen consequences.

There is a classic quote from Henry Hazlitt in "Economics in One Lesson." "The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."

See http://en.wikipedia.org/wiki/Parable_of_the_broken_window

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Re: Exponential by Design, or by Operation?

The following is copied straight out of the text from Chapter 8 of the Crash Course and seems to answer the original question.  It appears that exponential expansion is by design.  If you have difficulty understanding this key concept, I suggest watching and/or reading Chapter 8 again. 

 

“And perpetual expansion is a requirement of modern banking… All of which leads us to the fourth Key Concept, which is that perpetual expansion is a requirement of modern banking. In fact we can make a rule: Each year, new credit (loans) must be made that at least equal the amount of all the outstanding interest payments that year. Without a continuous expansion of the money supply, past debts would not be able to be serviced, and defaults would ripple through, and possibly destroy, the entire system.” 

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Re: Exponential by Design, or by Operation?

You know what I was thinking about?  The gov't creates a lot of money from thin air too.  I think we all do.  My question is: Does the gov't make money, exponentially, since the money is passed onto others who have to claim that income and therefore may pay taxes (depending on their liabilities)?  Sorry.  Here's an example that might help explain my question a little further.

person (A) has $1000

person (A) gives $1000 to person (B)

------Person (B) must "claim" $1000 on their taxes (as income)

Person (B) purchases (x), for $1000, from Person (C)

------Person (C), merchant, must "claim" $1000 on gov't

Person (C), merchant, purchases equip (x), for $1000, from Person (D)

------Person (D), merchant, must "claim" and/or pay taxes on such income

....ad infinitum

Depending, on the tax liabilities of each company, doesn't the initial $1000 create money, out of thin air, to the gov't?

I'm sure this is offset somewhere, but how does anyone keep track of this?

This is a very, very crude example of what I am trying to get at.  Maybe someone can help me with this...

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Re: Exponential by Design, or by Operation?

Caroline,

    While the government does create money from thin air (through deficit spending and borrowing from the Fed), the tax revenues are not from thin air - they come out of the revenue of the various parties that are taxed.  If the government were creating that money from thin air, you would not have to pay them anything for taxes - my pocket book would like that, but the dollar would be toast very quickly if this was the case.

 

All the best,

Reuben

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Re: Exponential by Design, or by Operation?
reubenmp3 wrote:

Caroline,

    While the government does create money from thin air (through deficit spending and borrowing from the Fed), the tax revenues are not from thin air - they come out of the revenue of the various parties that are taxed.  If the government were creating that money from thin air, you would not have to pay them anything for taxes - my pocket book would like that, but the dollar would be toast very quickly if this was the case.

 

All the best,

Reuben

I was wondering if the same dollar is being taxed at 'x' percentage more than once.  If so, would that create money out of thin air, so to speak?

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Re: Exponential by Design, or by Operation?

Caroline,

There are two ways to look at it - one is that the $1000 is diminished by the taxes that are required for each transaction, so after the first transaction the balance is 900 (10% tax, or $100).  After the second transaction, there is $810 left, etc. The other way to look at it is that the taxes are paid from other revenues - so if the first person to recieve the money makes 10 identical transactions, they get $1000.  Their taxes are $1000, so all of one of the transactions goes to the taxes.  This second way of looking at it muddies the water, in my opinion.

As for "creating" it out of thin air - the only way that happens is through a loan.  Taxing the same dollar as it moves through the system does not create them, it simply diverts them to a different part of the system, namely the government.

 All the best,

Reuben

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Re: Exponential by Design, or by Operation?
kiwi_canuck wrote:

I disagree that the money system “is an exponential system by its very design.”  I think that the money supply is increasing exponentially not because that is how the system was designed but rather how it is being operated.  Subtle but crucial distinction.  If people and governments start living within their means and repaying debt, outstanding debt decreases and less money will have to be created to pay the interest on the outstanding debt.  Is this not correct?

This is correct. I raised this very question in another thread (Must it grow?) a couple of weeks before you did. The crash course had really impressed me, so I was puzzled that Martenson made this peculiar claim. I was halfway expecting that I had overlooked something, but when Martenson replied, it became clear it was he who was guilty of sloppy thinking. It really disappointed me that he refused to admit his mistake; I can only wonder what other facts he has gotten wrong.

 

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Re: Exponential by Design, or by Operation?
Damnthematrix wrote:

I don't understand what this discussion is all about.

Apply a percentage growth rate, like interest, to ANYTHING, and you have exponential growth.

It's JUST mathematics.  There's NOTHING to argue about.  It's like 1+1=2.  Get it?

Mike 

Yes, it's just simple math. The system needs a certain rate of growth to pay the interest and survive. We might tweak that rate in how we operate the system, but any positive rate of growth generates an exponential curve.

FV = PV * (1+ i)^n
Run the numbers in Excel or on graph paper.

It's amazing how much I see this function everywhere now that I'm aware of it.

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Re: Exponential by Design, or by Operation?

Erikha,

This question has been raised other places too, and it defies simple explaination.  If you are looking for a mathematical proof, you will not find a simple one.  As Chris says, it is not a written rule, but it is a condition that is required for the overall smooth functioning of the system, much like breathing is for your body.  There are mathematical ways to prove the expansion, but they are far beyond my capacity to produce - the simple models that I have created elsewhere on the site  (https://www.PeakProsperity.com/forum/fatal-flaw-logic-crash-course/12557) do not begin to cover the complexity of how money flows through the system, and it is that component that buggers up any attempt to simplify the system to get a better handle on it.

All the best,

Reuben

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New Zealand Contact

kiwi_canuck

I am a kiwi trying to navigate heading back home.  Are you connected to NZ and have you or are you considering New Zealand?

MstJane

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Re: Exponential by Design, or by Operation?

"No, I don't get it yet.    Look at the US money supply graph over
time.  It is not simple compounding.  I am curious what made it plateau
in the 90's."

The recession that sent my Photographic Studio broke......

Mike 

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Re: Exponential by Design, or by Operation?

"All that money is out in the world having gone to the builders and
supplies etc who built the homes, but then 5 of those borrowers default
and the bank loses the 200,000 and the interest it was going to get
(it does get the houses back and just to keep this simple decides to
rent them instead of sell)."

Ah you see....  you're cheating.  Banks aren't in the businerss of renting.  They would definitely sell, they need the liquidity NOW.  The new buyers would probably borrow, and join the merry go round...

Mike 

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Re: Exponential by Design, or by Operation?

ANY money, is debt, created some time in the past...  or at least 95% of it is.  Money IS debt.  Do the CC again!  You've flunked...!

Mike 

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Re: Money As Debt by Paul Grignon...

...(Me Thinks**?**) I-am-going-to-squeak-in-very-very-quietly-in-to-the-depths-of-this-thread-and-drop-off-a-teeny-tiny-small-crumb-of... :-

Money As Debt

...then, back-awayEmbarassedever-so-very-very-quietly...

...shhh...like-a-mouse-with-socks-on...scuttle...

...like-a-cat-sleak-sly-sloping-the-corner-edges-of-alley-walls...

...not...a...single...sound...

shhhh,

Paul

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