exponential growth

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strabes's picture
strabes
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exponential growth

I just stumbled on a thread from a few weeks ago where people were challenging CM's exponential growth claim.  Since the thread is old, I started a new thread to revisit that issue and help answer the question that so many people have, i.e. "economists have proven debt does NOT need to increase, so where does exponential growth come from?" 

This brings up 2 key issues: 1) does this mean debt-based money isn't an exponential engine? and 2) what really causes exponential DEBT growth?

#1

First, the economists are correct that modeling interest as a flow shows debt does not need to increase.  But that's because what's happening behind those models is growth in  production, resource consumption, or some other form of value capture for the capital holders.  As financing flows are cycled through the production machine across time, they can capture more value/assets for the capital holders without needing to increase the debt amount. 

But what happens when this implied assumption in the economists' models no longer applies, i.e. the production machine isn't working, or it's been moved offshore, or there's no more resources to consume, or the market is saturated so there's no more growth potential?  The private capital holders will remove capital if they aren't increasing their claim on capital somehow.  The perpetual nature of our debt system must find another way to sustain itself --> use increasing indebtedness to drive consumption and collect more collateral, i.e. claims on assets that will be sucked up once deflation sets in. 

So, the debt-money system is a perpetual, exponential growth machine whether it's increasing debt or increasing production.  Either way, perpetual growth results.

#2 -- What's the real reason DEBT exponentially increases since economists have proven interest isn't the cause?

This is partially answered by #1...production has been restructured offshore so the growth machine has been driven by credit inflation, i.e. increasing debt, to keep the system afloat. 

But the real reason this happens is because the money system is run by publicly-traded banks, which are controlled by private capital holders, something the economists fail to incorporate into their models. The debt and interest flows that these economists model are governed by the banking industry.  Well, these institutions are themselves governed by exponential growth rules.  Don't some of you own the stock of JPM, GS, MS, BAC, C?  What does that mean?  What does that system require?  Why are you buying their stock? What's embedded in their P/E ratio?  GROWTH.

Private capital holders demand exponential growth, and banks are their mechanism for running that machine.  Any bank that maintained a steady state as modelled by the economists (as many locally-owned banks used to do) eventually went out of business, or got gobbled up by a predator like JPM Chase, or is now laden with toxic crap forced onto its balance sheet so it will be gobbled up in due time.  Banks MUST earn a return on capital (ROC), which is return on equity (ROE), which is the exponential rate at which EPS grows for the private banks.  Banks that fail to grow EPS eventually have a stock price that approaches zero.

How do banks grow EPS?  What drives bank ROE?  The key is return on assets (ROA) when it comes to financial institutions.  Now, what they call assets under management (AUM) is actually their liabilities, i.e. your deposits.  So what really are their assets?  Everyone else's debt!  So the way private banking institutions grow marketshare/assets is by increasing public/private debt.  

Then how do they increase the ROA on those assets?  Leverage...even more debt...fractionalization, securitization, derivative-ization.  Again, most banks that failed to operate this way (those that weren't serving the global capital holders) have been gobbled up over time by the banks who had the leverage (those that were serving the capital holders), and the few remaining will be gobbled up in the next phase of deflation given the hierarchical tranches of derivatives/securities that will dictate where ownership/control will flow in deflation...it will flow up the pyramid to the senior capital holders...those with the most derivatives...JPM Chase!  

So, this is the real reason debt has exponentially increased. The only way for the privately-controlled banking system to grow was to put governments, corporations, and people into more debt.  And the way to force that was the central banking system, so there was no way to increase money without increasing debt.

The model worked brilliantly for 70 years.  But now that it has run its course since people are no longer willing to go into more debt, the system is revealed for the disaster it really was all along.  We are now being restructured into a system where the money supply will not be driven by exponential growth under publicly-traded banks governed by standard growth/ROE models.  I think we are being moved into a communistic money system where the economists' model of a perpetual debt system that remains stable will be possible...the key will be taking it out of the hands of the private competitive markets. But we should've done that 100 years ago when communities/states/governments still ran a large part of the money system.  Now the most senior capital holders control everything so the communistic form we'll see now is 1 global system.  Depressing.

 

 

 

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Thomas Hedin
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Re: exponential growth

In order for a debt money system to continue to function the debt must constantly expand generation after generation.  The reason for this is under a debt money system there is no money until someone borrows, then once time and interest kick in the debt grows but the money supply does not.  The money that one borrower uses to pay the interest on his loan is only created somewhere else in the economy by another loan.

When you have to borrow the money into circulation and pay interest on it, and then borrow the money to pay the interest you're on a one way street to bankruptcy.

First, the economists are correct that modeling interest as a flow shows debt does not need to increase.

They are incorrect because economists never include or are taught the effects of interest.  Any debt money system is unsustainable in the long run.

The model worked brilliantly for 70 years.

Here we agree but only for the bankers to transfer all of the wealth of the nation to a into a few hands at the expense of the producers.  Pure fraud and theft by deception.  It only appeared to be working well for a long time because the interest load had not gotten as large as it is today.  Today the interest load is either at or exceeding the total combinded consumer income.

 

Maybe this article can help?

http://www.wealthmoney.org/articles/57-Trillion.html

 

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diarmidw
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Re: exponential growth

strabes

As the instigator of the thread I think you are referring to, I have to say I agree with almost everything you say.

A debt-money system exists to facilitate the pledging of the revenue flow from future output (including enhanced output from asset exchanges, and individual labour output) in exchange for the labour and resources required to produce that output. Interest represents part of the revenue flow that is thus pledged - it is pledged to a bank in exchange for administration, monitoring and for accepting the risk of failure to produce the pledged revenue. If the revenue flow does fail then the bank must remove the debt-money it created through the mechanism of a profit write-off.

As long as the revenue pledges issued and accepted over time are realistic, this is a very, very useful and effective system. The revenue pledges will be realistic if they match the actual level of economic activity going into the future. If exponential increases in activity are possible and desirable (physically, socially etc) then an exponential increase in debt and money is both likely and desirable. If not, then not.

So, if the system is being used properly, then the level of debt and money should respond to the tendency of revenue pledges to succeed or to fail. If output constraints increase, more such pledges will fail and banks' share capital is diminished. Banks become more cautious in their lending. If output constraints decrease, more pledges succeed and banks' share capital increases. Banks will tend to lend more.

Unfortunately the future is extremely uncertain and dependent on the plans of many interlinked individuals, firms and institutions. Economic plans can be self-fulfilling (and self-defeating). In other words, there is no one correct solution to the problem of how much debt-money is the correct amount. The behaviours of  individuals, firms and banks may interact to form booms and busts. In booms more debt is created than turns out to be justified, and in busts less debt is created than would have been justified. Such booms and busts can affect the whole economy or they may affect individual sectors (corporate stocks, property, asset-backed securities, commodities, anything).

The monetary system allows these booms and busts, but it does not drive them. They are driven by the behaviour and interaction of economic agents (individuals, firms, banks etc).

No economist has any excuse for not understanding the above, since it was expounded by John Maynard Keynes in 1936-7. Sadly, however, many still do not.

What I think goes beyond Keynes's analysis is what you describe - where it is not so much the failure of co-ordination he observed in the Great Depression that is now the problem, but almost the opposite. There is co-ordination by the creators, traders and holders of financial assets to ensure a more-or-less permanent boom in these assets, irrespective of the actual capacity (and the damage inflicted on that capacity) of the underlying economy. Even when busts come in some assets, the biggest players have the knowledge and power to shift the losses in the ways you point out.

I think the only point with which I might disagree is the second sentence of the following:

The only way for the privately-controlled banking system to grow was to put governments, corporations, and people into more debt.  And the way to force that was the central banking system, so there was no way to increase money without increasing debt.

The central banking system pretty much responds automatically to the creation of new debt-money by private banks, by creating the new reserves that are required to sustain it. No forcing is really required. And there isn't really any meaningful way to increase money without increasing debt, if by money we mean something that can have real, universally accepted value but isn't actually a usable commodity. Central banking is not the problem - in fact it is the only thing we have at present that gives us any handle on the problem at all. But it isn't enough, now - if it ever was.

Thomas Hedin

We've been through this before. I think you should accept strabes's analysis. It is the only way to thinking of effective solutions.

They are incorrect because economists never include or are taught the effects of interest.

Some do. One being me. The dominant neoclassicals - not really. But then reality just isn't their thing.

Byron Dale is no help. His post in this debate simply mixed up multilateral (money-creating) debt with bilateral (non money-creating) debt. They have completely different economic implications. I made this clear in my response to that post, and he didn't (or couldn't) come back on it.

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Baywork
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Re: exponential growth
diarmidw wrote:

The monetary system allows these booms and busts, but it does not drive them. They are driven by the behaviour and interaction of economic agents (individuals, firms, banks etc).

Diarmidw, to continue your other thread, I think your statement above defines a crucial misjudgment.

I think you agree that lending is a speculative affair on principle. The provisional nature of lending depends on context and impacts its context at the same time. Technically it forms an unstable system (inherent feed forward feedback). I call it a pro-cyclical system; boom and bust cycles are an inevitable system feature.

If you accept that boom and bust cycles are a system feature, you’ll find that bursts infringe your claim that ‘interest payment is not the [system’s] problem’.

 

In a nutshell, credit money is a temporary artifact with a lifetime by definition (the credit principal that a bank promises to pay on demand).

Debt and deposit do not coincide with a strictly temporary concept, they do have a virtual indefinite lifetime by definition.

Perpetual inconsistency between credit money and debt aggregates is inherent, cf. the pro-cyclical system definition above.

Furthermore, the system itself is able to generate exactly zero real value at any time. Either real economy adjusts to the system, and or the system must adjust to the real world. However, the globalized pro-cyclical system has an inherent predisposition to converge to its destiny where the adjustment to the real world denotes a globalized TSHTF-implosion.

 

Knowingly, you want us to work on the sunshine and roses?

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diarmidw
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Re: exponential growth

Baywork

Technically it forms an unstable system...

No question. As Keynes explained.

you’ll find that bursts infringe your claim that ‘interest payment is not the [system’s] problem’.

I don't see why - even if all loans were interest free, because failed loans are costly for the banks there would still be periods where credit-money creation failed to match the potential output of the economy.

...credit money is a temporary artifact with a lifetime by definition...Debt and deposit do not coincide with a strictly temporary concept, they do have a virtual indefinite lifetime by definition...

I'm not sure I follow this entirely. Credit-money and debt are generally created with a definite time-span in mind (the term of the debt). Repayment of the debt will end the life of both. If a private debt-money contract fails, then the bank has ultimate responsibility and takes the hit. For public debt-money, there is no automatic mechanism - but revolution, war and renegotiation with bond holders are all possibilities!

Furthermore, the system itself is able to generate exactly zero real value at any time.

Hmm - exactly what system are you referring to? The debt-money system enables the increased generation of value, in the way I outlined in my previous post.

Of course there is an issue as to whether the benefit/cost calculation is positive or negative for the debt-money system, but we certainly wouldn't have the modern world without it! And the question of interest is only relevant in that it is an expression of the running costs of the system.
 I mean you wouldn't say houses are rubbish because you have to pay rent on them! But if the house is rubbish, the rent may be too high!

Knowingly, you want us to work on the sunshine and roses?

What's your alternative?

 

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Baywork
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Re: exponential growth
diarmidw wrote:

 

you’ll find that bursts infringe your claim that ‘interest payment is not the [system’s] problem’.

I don't see why - even if all loans were interest free, because failed loans are costly for the banks there would still be periods where credit-money creation failed to match the potential output of the economy.

Hi Diarmidw, 

a failed loan does not mean that the money has disappeared; it is still someone’s deposit! The bank must eventually recollect the money selling the collateral and bypass the situation by stressing their equity. And, if the bank fails, depositors recap that all they own is a promise to pay.
However, without interest, the respective aggregates of credit money, deposits, and debt should match: no debt-overhang.

diarmidw wrote:

...credit money is a temporary artifact with a lifetime by definition...Debt and deposit do not coincide with a strictly temporary concept, they do have a virtual indefinite lifetime by definition...

I'm not sure I follow this entirely. Credit-money and debt are generally created with a definite time-span in mind (the term of the debt). Repayment of the debt will end the life of both. If a private debt-money contract fails, then the bank has ultimate responsibility and takes the hit. For public debt-money, there is no automatic mechanism - but revolution, war and renegotiation with bond holders are all possibilities!

Depositors are not generally restricted to a deposit time-span contract: deposits are always someone’s debt, but ‘someone’s debt’ is under the terms of a time-span contract.

In fact, if depositors can or do not spend sufficiently, borrowers must fail without inflation.

diarmidw wrote:

Furthermore, the system itself is able to generate exactly zero real value at any time.

Hmm - exactly what system are you referring to? The debt-money system enables the increased generation of value, in the way I outlined in my previous post.

Of course there is an issue as to whether the benefit/cost calculation is positive or negative for the debt-money system, but we certainly wouldn't have the modern world without it! And the question of interest is only relevant in that it is an expression of the running costs of the system.
 I mean you wouldn't say houses are rubbish because you have to pay rent on them! But if the house is rubbish, the rent may be too high!

I’m referring to the detail that the credit money system is the mother-bubble itself. Would you suggest that leverage in the system and real world value generation is linear correlated? You must notice that the system can be and is abysmally rigged. The system manages control and reallocation of value. However, in revenue it has x-times the size of the system that actually generates the value. In fact, in terms of real world value generation vs. cost, the system is extremely bloated and inefficient.

If you see interest only relevant in that it is an expression of the running costs of the system, you fail to recognize that interest will necessarily generate permanent debt and deposits in the pro-cyclical system.

diarmidw wrote:

 What's your alternative?

Currently I’m reading myself into Gesell’s Freiwirtschaft-concepts…  I think a demurrage currency would be a better concept than an inflation currency.

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strabes
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Re: exponential growth
diarmidw wrote:

The monetary system allows these booms and busts, but it does not drive them. They are driven by the behaviour and interaction of economic agents (individuals, firms, banks etc).

But it affects the behavior of those agents quite dramatically so I don't think the system can be so neatly separated from the agents operating within it.  We have a system now based entirely on putting the masses in debt.  That's the reserve upon which the banking system inflates and off which the agents get mega rich.  Can you not see the problem there?

Several years ago, an ex-friend from Goldman told me he had no debt because it is a drain on wealth.  I said something like "well, but our system depends on the masses being in debt and your firm only exists because the masses are in debt....why is it good for them, actually REQUIRED for them if they want money, and you profit off that, but you think it's a bad thing for yourself?"  He had no answer.  Of course, neither did I at the time.  I just remember thinking something was really wrong, and then we moved on.  And here we are 10 years later...I only wish I had adjusted my life based on what I thought at the time I asked that question.

Quote:

The central banking system pretty much responds automatically to the creation of new debt-money by private banks, by creating the new reserves that are required to sustain it. No forcing is really required.

No forcing is required!?!?   It seems perhaps you're using the lens of an economist that looks only at banks.  What about the other side of the equation...the rest of the people?  You just said it here...the central banks force reserves into the system to facilitate what the private banking system does.  In other words, since reserves are public debt, it forces nations/populations into debt.  I don't know of any person out of 308,000,000 citizens or their unborn children who voluntarily agreed to be put into debt in order to keep JPM Chase afloat, but that's what the central bank does. That's quite a force.

Quote:

And there isn't really any meaningful way to increase money without increasing debt, if by money we mean something that can have real, universally accepted value but isn't actually a usable commodity. Central banking is not the problem - in fact it is the only thing we have at present that gives us any handle on the problem at all. But it isn't enough, now - if it ever was.

Circular logic.  Yes, there's no way to increase money without increasing debt, but that's because our current system says that's what money is.  When JFK increased the money supply by spending silver certificates into circulation, how much did debt go up?  When US mints used to put silver/gold coins into circulation, how much did debt go up?  When the colonies issued colonial scrip, how much did debt go up?

You're correct that central banks are the only way of effectively regulating the system.  But again, that's because of the system they themselves enforce on nations...debt-based money.

Central bank was 1 of the 10 priorities of the Communist Manifesto. I'd suggest that's an indicator you may want to take another look at the system, using first principles rather than the lens of an economist or a Keynesian, to see why our monetary system is a problem. 

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diarmidw
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Re: exponential growth

Baywork

a failed loan does not mean that the money has disappeared; it is still someone’s deposit!

If a loan is accepted as failed and so written off as an asset - the bank must reduce its profit/loss account by the amount of the failed loan. The effect is to reduce the purchasing power of the bank and/or its shareholders by exactly the amount of the loan. True - the holder of the deposit resulting from the loan keeps his money, but money is always withdrawn from elsewhere in the system to ensure that liabilities in the system match assets.

In fact, if depositors can or do not spend sufficiently, borrowers must fail without inflation.

Indeed - that's one of the risks of a loan contract.

Would you suggest that leverage in the system and real world value generation is linear correlated?

Probably not. But that in itself doesn't matter. What matters is whether realistic expected value generation resulting from the leverage outweighs the risk of loan failure and its consequences. To illustrate: if you take out a big loan for a small but safe profit, that's low risk. If you take out a small loan for a big but unlikely profit, that's high risk. But the leverage to average expected profit ratio might be identical in both cases.

you fail to recognize that interest will necessarily generate permanent debt and deposits in the pro-cyclical system.

Interest doesn't generate anything. It forms part of the flow of money after that money is issued in a loan contract, and only exists while that loan contract remains in force. If the loan contract succeeds, the interest flow ceases when the contract ends. Its only trace is a transfer of real goods from the borrower to the bank in exchange for the monitoring, administration and risk-bearing of the bank. (Whether this exchange is always or ever a fair one is a different question.) If the loan contract fails, the bank accepts that there will be no further interest flow and takes the hit to its profit/loss account. If there was no interest flow, no trace at all is left by the interest obligation.

I think a demurrage currency would be a better concept than an inflation currency.

Demurrage is an interesting concept. There's a related idea going around at the moment, which is to tax excess retained profits or non-productive financial assets. See here or here. The point being that these would presumably be exchanged for productive assets that would generate economic activity. But since demurrage relates to money-holding rather than money issue, I don't see how this, on its own, solves the problem of how future production is to be financed in a sustainable and balanced way. Indeed you could argue that all it would do is just to shift the problems more to the boom end than the bust!

strabes

the central banks force reserves into the system to facilitate what the private banking system does.

It's government spending that transfers most of the reserves - so you'd have to find some other way for governments to recompense us for goods and services they use. The private banking system is an essential part of a modern economy, and it cannot function without a medium of exchange between it and the government and between the individual banks. Reserves are this medium of exchange.

None of this is to say that the system has not been misused and misapplied. The question is: do we change the structure of the system, or the way it is managed? You clearly tend toward the former, I tend toward the latter.

When JFK increased the money supply by spending silver certificates into circulation, how much did debt go up?  When US mints used to put silver/gold coins into circulation, how much did debt go up?  When the colonies issued colonial scrip, how much did debt go up?

You cannot issue money that is not itself of value (and therefore costly to obtain or produce) or is not a claim on something. It will not generally be accepted. Nor should it be. Silver certificates were clearly a claim on the government to provide silver if demanded. Silver/gold coins are costly to produce. As far as I understand it, 'colonial scrip' could be used to pay taxes - it was a de facto claim on government services (or at any rate a claim to the right to be left alone by the tax collectors!). So the government cannot generally issue money without incurring a cost, and that cost can only ultimately be met by its citizens.

As I see it, then, we have a choice between a debt-money economy and a barter economy. The latter might be possible, if we can find a way of setting up multilateral barter networks that can use future commodity and service outputs - but that is a major research project! So, at least in the meantime, the major priority should be to re-orient the priorities of the debt-money system away from inflating financial assets and toward enabling genuinely welfare-enhancing output.

Central bank was 1 of the 10 priorities of the Communist Manifesto. I'd suggest that's an indicator you may want to take another look at the system, using first principles rather than the lens of an economist or a Keynesian,

Everything I say is based on first principles of observation and logic as I see them (which may be wrong). That ideas are in the Communist Manifesto is no reason to assume them wrong; that they are held by economists, Keynesian or otherwise, is no reason to assume them correct.

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strabes
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Re: exponential growth
diar wrote:

you'd have to find some other way for governments to recompense us for goods and services they use

Embedded in this statement is what I consider in the box thinking of our current banking system and the idea of government vs. the people since the government has been serving the banks (and the royals in your case) for generations.  In the US, the government was supposed to be us, so there should be no notion of government using stuff for which it has to recompense us.  Government should be an expression of the commonwealth that "uses" nothing but rather "creates" value by engaging the commonwealth to create infrastructure and then monetize that infrastructure such that it is an asset to the people rather than an asset to banks who then rent the value to the people for a hefty cost. 

Quote:

The private banking system is an essential part of a modern economy, and it cannot function without a medium of exchange between it and the government and between the individual banks.

Yes but unfortunately it's now clear that this "modern economy" means "people in servitude to debt laundering machines that own all the money in the system and rent it to the servants in return for a claim on their assets/collateral."  I suggest that's a pre-modern way of life...we just haven't realized it yet because we're still dancing on an inflated bubble that creates an illusion of what this modern economy really is.  Give it time...we'll eventually see the truth.

Quote:

Reserves are this medium of exchange

Yes but those reserves are pure usury...the indebtedness of national populations.  Economists try to justify that based on GDP growth.  It can't be justified.  GDP is just a measure of the amount of value created in a particular slice of time...it ignores the issue of who captures that value.  The monetary system is what determines who captures the value of the economic system.  And a system built on the indebtedness of the masses means the top capital holders collect the value the masses create.

Quote:

The question is: do we change the structure of the system, or the way it is managed? You clearly tend toward the former, I tend toward the latter.

Correct.  I don't see any way to morally, responsibly manage a system of putting the monolithic masses into debt to a few capital holders. 

Quote:

So the government cannot generally issue money without incurring a cost, and that cost can only ultimately be met by its citizens.

Agreed.  But there's a big difference in "incurring a cost" vs. "issuing it all as assets to private banking institutions and interest-bearing debt to the people."  The cost should be the labor of the people in whatever value-creating project we are doing as a community, government.  Then the people doing that labor should be able to monetize the value they create by getting an asset, debt-free money, in return. 

Quote:

That ideas are in the Communist Manifesto is no reason to assume them wrong; that they are held by economists, Keynesian or otherwise, is no reason to assume them correct

You're right.  It was just a big wakeup call to me once I saw it in there.  So being in there isn't what makes it wrong, but it made me rethink all of my neoclassical schooling and ponder how centrally-controlled the financial system is.  It's dictatorial, and since it's largely in private hands, I can't agree with it...philosophically, morally, psychologically, economically.  This is where I think of Farmer Brown's gut instinct that such centralization is a recipe for corruption/disaster.  I would rather have less scale, less GDP, less financial efficiency, etc. in return for more distributed sovereignty, local communities with some freedom over their lives rather than millions of humans being nothing but tiny nodes facilitating money flows in a mega capital machine.

 

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diarmidw
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Re: exponential growth

We need to separate two issues here:

1. How government (even as an abstract co-ordinating entity with no assets of its own) interacts with citizens to create infrastructure from their inputs.

2. How the value of those inputs and infrastructure are subsequently distributed.

To address 1 - The government has the same problem as all attempts to create new value that require multiple inputs. How do you commit in advance to share that new value with those whose efforts and resources go into creating it?

Tthe existing system works by the govt creating money that is transferred to the banking system, while the banks transfer an identical quantity of their own deposit money to suppliers of labour and resources for government projects. The quantity of money created must equal the value of the labour and resources supplied. This process has no direct benefit for the private banks, but it has the indirect effect of maintaining the base on which private banks can safely create further deposits by the creation of their own loan contracts.

Because the base money issued by the government to temporarily 'direct' the labour and resources it requires is generally much greater than the new value created, that money must be removed once it has served its purpose. If not, as I have explained earlier, the quantity of base money alone would very quickly swamp the economy. The govt can remove this money either by taxation or if it chooses (and I believe it chooses this far too much) by issuing bonds in exchange for base money.

It is the need to maintain the flow of money through the economy by removing it that creates the 'debt' in the form of the need for taxation or bond issue. Any money that is issued for the purpose of creating new value must operate in this way, because the money required to create the new value represents labour and resources that are tied up in the production process, and only can only represent them while they are tied up. Once these labour and resources are no longer tied up in this way, but have been transformed into the new, added-value output, they can represent themselves, as it were - and so the money no longer represents any additional real value, and has to go out of the system.

So I conclude that point 1 will always require the creation of money that is an asset to citizens only for as long as it is a liability to the government. If the government is truly representative of its citizens (more on this below) then this liability or 'debt' is a debt of the citizens to the citizens and so is purely an accounting construct, not any sort of real burden or 'usury'.

In the current system, base money does not pass directly into the hands of citizens but passes across the balance sheets of private banks. The net stocks of base money that result from the flows in and out of the economy (augmented as required by the costly borrowing of base money from the central bank) provide a secure asset on the books of the private banks that does not involve the immobilisation of real productive assets. The presence of these secure assets allows private banks to create futher loan contracts in almost exactly the same way that the government does. Only instead of removing money by taxation or bond issue, this is done by the borrower, at the end of the loan contract, repaying to the bank money to the value of the loan.

Because only a proportion of loans will fail, private banks can usually issue loans (and create matching quantities of credit money) to a value considerably greater than that of the base money they hold.

As in the case of govt money creation, the private debt simply represents a promise to return the money that represents the 'tied-up' inputs while they are being used in production, once those inputs are released in the transformed form of the new value-added output. It is again, simply an accounting procedure that records the agreed obligations in this process, ensuring that the money created only exists while the inputs it represents are unable themselves to be exchanged.

Your objection is that this is

a system of putting the monolithic masses into debt to a few capital holders.

Nothing I have described up to now explains how the system does this, because what I have described for the case of base money and for 'private' money created on the back of it, is simply a process by which the inputs into the production process (for govt infrastructure or private production) are guaranteed their agreed share of the ultimate output.

So it's not the system itself that is responsible. The problem lies with my implicit assumptions up to now that the government fairly represents its citizens, and that private contractors wouldn't enter money-creating loan agreements unless they correctly anticipated genuine added value to be created and to get a fair share of that value. The problem is the fact that these assumptions are wrong (or would be, if I had really assumed them!) NOT that a credit-money system must intrinsically always produce these results. The fact that these assumptions are wrong, is the key to understanding issue 2 above.

What I think you are suggesting is a system in which the government transfers a base money directly to individuals in exchange for their contribution to collective endeavour. There would be no private banking intermediaries.

But this centralised banking system would find it more difficult to acquire all of the information it needed to respond accurately and flexibly to money needs in different regions, sectors and business units. It would undoubtedly be at risk of being captured by particular political interests, because unfortunately my initial assumption about government representation is still largely wrong! And the costs of monitoring, administering and bearing the risk of failing to re-acquire money would remain -  they would become internalised instead of being allocated to borrowers in the form of interest. So whoever was getting the money, we would all share in the cost of providing it.

I think that on first principles it is not possible to say whether a centralised or decentralised money system would be preferable. I would suggest that experience (eg of the Soviet bloc) suggests the centralised system would have considerable problems. So given that a decentralised system may capture benefits in local knowledge and adaptation, flexibility and competition, there are grounds for sticking with it. But the present system is not decentralised enough, captures revenue over and above what is required to produce the service it does and bear the true risk (given govt bailouts) of lending, and fails to produce adequate social benefit from its operations. I see these problems as mainly ones of corporate ownership and governance. Both need to be more broadly based than simply shareholders and their representatives. Such failures as there are in the direction of base money need to be addressed by making government itself more representative.

If we can reform the current banking system rather than destroying it, then we have the potential to combine efficient use of resources, social benefit and local knowledge, adaptation, flexibility and competition.

The cost should be the labor of the people in whatever value-creating project we are doing as a community, government.  Then the people doing that labor should be able to monetize the value they create by getting an asset, debt-free money, in return.

I think this is a confusion between the value of the liability created when money is issued (which must cover the cost of all of the inputs into the value-creating project) and the actual additional value over and above the cost of the inputs to the value-creating project itself. There is no need to monetise the additional value created. Why would we? The additional value created is the point of the exercise - why replace it with intrinsically worthless money? If you are suggesting that new money should be created alongside the added value, then how do you account for the further addition to total wealth this apparently represents - since we now have new added value and new money?

Possibly the source of your confusion is that you are proposing that providers of labour and resource inputs should receive money when they hand over this added value to its ultimate consumers - but if they do, this must be money that represents some other currently 'tied-up' inputs; it cannot be money that represents the inputs that have now been released as added-value output. You cannot have a good and a current claim on that good both in circulation at the same time! That's fraud of the Bernie Madoff variety!

I would rather have less scale, less GDP, less financial efficiency, etc. in return for more distributed sovereignty, local communities with some freedom over their lives rather than millions of humans being nothing but tiny nodes facilitating money flows in a mega capital machine.

I can understand your sentiment here - but I think it is actually possible to have increasing real wealth and the things we would like to see - or at least a balance between them that allows for good sustainable living. Don't forget that the less developed world cannot afford to have less - they need more.

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DrKrbyLuv
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Re: exponential growth

Interest creates insatiable debt in our debt based system.  If the interest rate were always zero, then the money supply would be equal to the debt and all loans could be theoretically canceled out.  When interest is added, the total debt will always exceed the money supply - the options become debt default or ever-accelerating economic growth; or both at varying degrees. 

If 100 people created a new debt based economy, and each borrowed $10,000 under the same terms; $1 million dollars would be created as debt (principal).  If the interest rate were 10%, then each would owe $1,100.  If no other loans are created, then we can calculate how many must default, as a minimum, since $1 million was created and $1.1 million is owed through 100 loans.

The minimum rate of default, on the simple closed system described above, is the same as the interest rate.  If the interest rate is 10%, then a minimum of 10% of the loans must default.      

The 10% minimum, assumes that the available money supply is divided up equally among the debtors.  It is possible for one of the one hundred borrowers to capture enough of the money to force the other 99 to default.  

The economy isn't this simple as new loans are continually created, which adds to the money supply.  But the underlying imbalance (more debt than money) prevails and accumulates through every loan in which interest is added.  A debt based economy will always have more debt than money which means:

  1. It is a pyramid scheme, for someone to "win", someone else must "lose"
  2. The system cannot be sustained, infinite growth cannot be met by finite resources  

The basic problem with debt based systems is that you cannot grow wealth without growing debt.  The system is unable to create wealth - it can only take and redistribute it.

Larry    

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Re: exponential growth

You make perfect sense.  But how does the debt unwind even as the Fed is implementing QE2 in order to offset the debt unwind?

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Re: exponential growth
DrKrbyLuv wrote:

The minimum rate of default, on the simple closed system described above, is the same as the interest rate.  If the interest rate is 10%, then a minimum of 10% of the loans must default.      

Hi Larry,

I think went through this already. The cited statement may be inaccurate.

Your case: 100 people borrow $10,000 each. Terms are 365 days and 10% interest. That makes $1 million deposits, i.e. 1 million payable on demand money additional in the system for one year.

The one year is important since:

a)      within the year: sum A is spent by depositors, captured by borrowers, transferred to the bank as interest service, spent by the bank, captured again by borrowers (..and transferred to the bank to complete repayment after 365 days, and finally erased by the bank; cf. pos. b) )

b)      sum B is 100*$10,000, to be recaptured by borrowers within the year to make the repayment, and finally erased by the bank

c)      sum C out of the $1 million is not spent by depositors within the year

If sum A is able to match $100000 (100*10% interest), $0 can remain as sum C: no force to grow for the system by compound interest generated debt.

However, the system creates permanent debt, since it promotes sum C to be greater than zero. Diarmidw claims “So it's not the system itself that is responsible.” The system must be used properly…

I do think this is plain wrong. The system holds asymmetrical incentives for sum C to be greater than zero. We do have a system that promotes and rewards ‘improper’ use.
Besides, who expects a system not to be rigged if the system systematically holds incentives for rigging?

Finally, since we already agreed that the system is pro-cyclical by nature, we must notice that the system is responsible for bursts: Thus the system is responsible for permanent debt which is caused from a sure as hell dislocation from sum A to Sum C whilst moving from upturn to downturn.

So it's the system itself that is responsible.

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Re: exponential growth

diarmidw,

1.  You imply government creates base money.  Government creates no money, at least in the US.  The mega global capital pool creates base money by purchasing the indebtedness of the masses that the government packages up for them.  That then becomes the base upon which the banking system inflates. So the government's license to steal from future Americans is a key part of the process, but the decision to purchase that debt, which prices it and determines its monetary value, is what converts it into money.

2.  It seems you're limiting your perspective to our current system when you say this:

Quote:

Possibly the source of your confusion is that you are proposing that providers of labour and resource inputs should receive money when they hand over this added value to its ultimate consumers - but if they do, this must be money that represents some other currently 'tied-up' inputs; it cannot be money that represents the inputs that have now been released as added-value output. You cannot have a good and a current claim on that good both in circulation at the same time!

So are you saying a worker on an infrastructure project can't be paid anything of value, a stock, for his labor?  He can't retain any value?  He can only have debt-money that disappears once the project is over? 

In the old days, when people were paid in coin, what "other currently tied-up input" did the coins represent? 

This is the fundamental issue I'm talking about.  It's why I'm proposing sovereign money...money that represents a store of wealth, a stock that isn't a conditional liability tied up in bank leveraging schemes.  I think people should have money that sits on the Asset side of their balance sheet (it is effectively "theirs"...it's what I call sovereign...it can be a stock until the person puts it into the flow system) rather than only having money that reflects what's on the Liability side of our balance sheets (an asset to the banks...a perpetual flow)

 

 

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Thomas Hedin
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Re: exponential growth

It's amazing to me that people can't understand that all money is created as a debt and that once time and interest kick in it's impossible to pay back more that what was created.

Principle + interest = only principle is created.

1 + 0 = 2?

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Re: exponential growth

Baywork

the system creates permanent debt, since it promotes sum C to be greater than zero.

This is true - in the sense that there are always reasons why some deposits will be held idle. But if this is stable and the desire for debt to fund ongoing production is stable, there is a stable gap that can be offset by additional base money. (Which is why there are various mechanisms for the central bank to adjust the quantity of base money.) Sure, problems arise when there is instability - but this is inevitable in any system that involves interdependent future plans.

who expects a system not to be rigged if the system systematically holds incentives for rigging?

Any system that concentrates important decisions (with the central bank and individual private banks in this case) is inevitably open to 'rigging'. But without it, we simply have anarchy. A bit of anarchy is just fine - a lot is very bad. There is a very fine (and constantly shifting) balance between the two. At the moment the balance is wrong, but I believe it is not impossible to get the balance right using the basic system we have.

If you disagree, then you have to be able to propose an alternative system, as strabes has tried to. I've explained above why I don't think that system is an improvement.

strabes says in response to that:

You imply government creates base money.  Government creates no money, at least in the US.  The mega global capital pool creates base money by purchasing the indebtedness of the masses that the government packages up for them.

By 'purchasing the indebtedness of the masses' are you talking about the acquisition of base money by private banks as the government spends? This isn't strictly a purchase - they get the money for free! I guess the quid pro quo is that they set up the transaction network! I would have thought you could say that the government creates this money - it is ultimately up to the government whether or not it is created - but I am not sure that is a material point. This is the mechanism by which it is created, we could say, and leave it at that!

And yes, base money is a liability of the central bank and ultimately citizens, so I guess your statement is not technically false. But the way you express it implies that this mechanism is not a good thing! I was trying to explain how it could be a good thing, or at least a better thing than your alternative.

So are you saying a worker on an infrastructure project can't be paid anything of value, a stock, for his labor?  He can't retain any value?  He can only have debt-money that disappears once the project is over?

There's a danger of mixing up the abstract and the real-life situation here. In the abstract, if we have one infrastructure project, then indeed all the money disappears. Reward can only be in the form of the added-value output. Yes, the worker could opt to have a stock (representing a share of the project capital) but this is ultimately just to defer the acquisition of output to a subsequent period.

In the real-life situation, there are of course multiple over-lapping infrastructure projects, so that there is always some money circulating. A worker on one project can purchase the output from another project. All money is equal so the govt doesn't care from which project repayment originates, as long as the right quantity is returned.

In the old days, when people were paid in coin, what "other currently tied-up input" did the coins represent?

Well, it depends what sort of coins they were. If their face value matched their intrinsic value (ie gold coins valued at full weight), then the gold in the coin was the tied-up input. Clearly if the gold is in the coin, it can't be used for any other purpose. But then this is a commodity money with all the limitations associated with that.

Frequently, of course, such coins had a face value greater than their weight in metal - because they were backed by the authority of the sovereign, and could be used to pay his taxes. The tied-up inputs were then those that the sovereign controlled - armies for the most part, I guess!

I'm proposing sovereign money...money that represents a store of wealth, a stock that isn't a conditional liability tied up in bank leveraging schemes.  I think people should have money that sits on the Asset side of their balance sheet...rather than only having money that reflects what's on the Liability side of our balance sheets...

I guess that would be nice, but it's an impossibility unless we are willing to tie-up existing resources in the same way that gold is tied up in gold coins. And that means the US would probably have to tie-up several trillion dollars-worth of some homogenous commodity with a stable intrinsic value to have an extremely costly and inflexible money system. It might be possible (presumably with gold) and worth it, but I doubt it.

If you are going to create a money that has genuine value backing, but doesn't tie up current resources, then the only option is to back the money with promises of future value - which inevitably means the money represents a liability to the one giving the promise. At least for private bank-loans the promise is given voluntarily by the borrower! Government money is backed by our implicit promise to pay our taxes or buy bonds.

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Re: exponential growth
Thomas Hedin wrote:

It's amazing to me that people can't understand that all money is created as a debt and that once time and interest kick in it's impossible to pay back more that what was created.

Thomas,
key factor is that interest must always be spent as it occurs, rather than accumulated, to avoid exponential debt growth.

So imagine a system where banks and people are allowed to request and receive interest, but all interest has to be settled immediately when due using barter. Should be OK.
Then allow people to use coins instead of barter to settle their interest transactions. Should still be OK.
Finally allow people to use bank money (credit deposits) instead of coins to settle their interest transactions.
As said, to avoid additional debt, key factor is that you don’t draw deposits from interest. That’s the constraint economists applied to prove that debt does not need to increase.

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Re: exponential growth
diarmidw wrote:

Baywork

the system creates permanent debt, since it promotes sum C to be greater than zero.

This is true - in the sense that there are always reasons why some deposits will be held idle. But if this is stable and the desire for debt to fund ongoing production is stable, there is a stable gap that can be offset by additional base money.

Diarmidw, a stable gap is an illusion, since compound interest generates an exponentially growing gap.

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Re: exponential growth

Baywork

The only entities that can accumulate deposits from interest payments are banks. If they are doing this then the interest they are charging exceeds their costs (including their costs of expansion and of stock-market financing etc). Get their interest charges down to the correct level, then you eliminate this. Can it be done? I don't know - but I can think of some ways we could try.

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Re: exponential growth
diarmidw wrote:

The only entities that can accumulate deposits from interest payments are banks. If they are doing this then the interest they are charging exceeds their costs (including their costs of expansion and of stock-market financing etc). Get their interest charges down to the correct level, then you eliminate this. Can it be done? I don't know - but I can think of some ways we could try.

Diarmidw,

part of the ‘costs’ for the bank is the interest for their depositors. All bank money is someone’s deposit. As said, there are ‘sum C’ deposits. Sum C-depositors can accumulate and do accumulate deposits from interest.

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Re: exponential growth
Baywork wrote:

Thomas,
key factor is that interest must always be spent as it occurs, rather than accumulated, to avoid exponential debt growth.

Not only must the interest payments be immediately recirculated, but the loan that generated those interest payments must have been used as a productive capital investment that increases production.

Consumptive loans result in the exponential growth of money and debt.  This includes home loans for all existing home sales, auto loans, and credit card loans, to name a few types of consumptive loans.  As well, all loans from within the shadow banking system which are effectively leveraged speculations on other outstanding debts (i.e. "assets") create an exponential cycle.

I find the theory of "perfect loans" (all loans are productive, all interest recirculates) to be unworkable from a real-world stand-point because people gamble (speculate) and have strong, innate desires to consume what they've not produced.  Human nature is what it is.  

Regardless, what we see is an almost perfect fit of the data to an exponential function and our first job is to understand why that is...I have no doubts in my mind that it is a feature of our debt-based money system.

I suppose I should amend that to reveal my underlying assumption which is that exponential growth is a feature of a debt-based money system that is operated by humans.

Perhaps if it were operated by Capuchin monkeys, or squid, we'd see a different outcome. 

So "perfect loans" is an interesting theoretical construct, but I still fail to see its real-world utility.  How does it help us?  What's the proposal?  Is there a decision or action I would take differently today as a result of it?

Alternatively, understanding that our debt-based money system is exponential and needs to keep growing exponentially in order to operate properly (i.e. avoid massive deflationary destruction) informs all of my decisions and actions because, in the absence of a different model that conforms to the data as well or better, I must conclude that our main economic system has a hard date with a brick wall at some point.

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Re: exponential growth

Baywork

OK. I sort of see what you are getting at. But there is no automatic reason to assume that the additional interest flow through these accounts is  reflected in any growth in unspent deposits. They might be - but it's an empirical question, not a theoretical one - and would be amenable to incentive adjustment.

I also think that it's relevant that banks don't as a whole need to offer interest on deposits (deposit money can only exist as deposits, after all). It's not a true cost of their activities, only their need to compete with each other for base money. (I guess offering interest also dissuades taking out cash - but I think this is a pretty marginal issue. Do current/checking accounts in the US pay interest? Mine pays essentially zero.)

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Re: exponential growth

cmartenson

Consumptive loans result in the exponential growth of money and debt.  This includes home loans for all existing home sales, auto loans, and credit card loans, to name a few types of consumptive loans.  

Only if their issue follows an exponential growth path. This is not automatic. If the rate of new loan issue were constant, than as long as the future income flow of borrowers matched their commitments to repay principal and interest, the level of debt and money thus created would be constant.

As well, all loans from within the shadow banking system which are effectively leveraged speculations on other outstanding debts (i.e. "assets") create an exponential cycle.

Sure, if they are being issued at a rate that exceeds real value growth! But this is just stupidity and greed. You can't blame that on the monetary system. In particular, it is important to distinguish between the bilateral debts of the shadow banking system (systemically important only because of the size and scope of the institutions involved) and the multilateral debts of the actual banking system (systemically important because in the end we are all collectively responsible for these debts.)

exponential growth is a feature of a debt-based money system that is operated by humans. Perhaps if it were operated by Capuchin monkeys, or squid, we'd see a different outcome.

Not vampire squid, though! :-) This statement may very well be true. So that leaves us asking

1. Can we humans collectively control our own behaviour tendency here?

2. If not, can we come up with a better system?

My answers are 'Yes, I think so' to the first question, and 'Maybe, but I'm not sure' to the second! If you say 'Definitely No' to the first this leaves you with a responsibility to answer 'Yes' to the second and explain what your alternative system is. Would it be the sort of thing strabes is talking about on this thread?

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Re: exponential growth
diarmidw wrote:

I also think that it's relevant that banks don't as a whole need to offer interest on deposits (deposit money can only exist as deposits, after all). It's not a true cost of their activities, only their need to compete with each other for base money. (I guess offering interest also dissuades taking out cash - but I think this is a pretty marginal issue. Do current/checking accounts in the US pay interest? Mine pays essentially zero.)

As said, “interest payment is not the system’s problem”?!?        Then again, I also think that it's relevant that banks as a whole do have to offer interest on deposits. True, checking accounts hardly pay interest, like cash in your wallet. But, if banks would not generally offer interest on deposits, they’d all be insolvent the same day. Strangled to death within seconds, by unsatisfiable demand calling their promises to pay.

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Re: exponential growth

Our debt money system is a pyramid scheme that requires that some lose in order for others to gain.  It is untenable and designed to move money and power up the pyramid to those who control the debt.

In 1941, congressman Wright Patman asked Marriner Eccles, governor of the Federal Reserve board how the Fed gets the money to buy government bonds:

Eccles: "We createded it"

Patman: "Out of what?"

Eccles: "Out of the right to issue credit money"

Patman: "And there is nothing behind it, is there, except our government's credit?"

Eccles: "That is what our money system is, If there were no debts in our money system, there wouldn't be any money."

This important exchange tells us two things:

1) The money created for free by the banks, is solely backed by the credit of the people and the property of the United States.  The banks add nothing, not even a guarantee that the money won't lose value but yet they benefit by collecting interest on money they never had.  If the interest is not paid, then the banks collect collateral, either way they win.

If government bonds are fully secured by the credit of the people and the property of the United States, why aren't they simply issued as money instead of bonds?  Why is a parasitic private monopoly required?  By entering into this arrangement, we essentially made our government subservient to the international banking cartel - we gave away our financial sovereignty which is the basis of our freedom and independence.

2) The Fed does not create money, it creates debt which we accept as money.  This is why the United States cannot add to its national wealth without adding to its national debt.

Real and dramatic monetary reform is the only remedy that will solve the "credit crisis" that left alone, will result in a ruinous depression and bankruptcy.  By taking back our sovereign power to issue and control our money we would once again enjoy the freedom and independence that our founding fathers intended.

There is another problem with our system that should help us identify solutions.  In another thread, I said that the national debt IS the money supply.  Since all money is created as debt, it is also destroyed through principal repayment.

"Loans alone cannot sustain the money supply because they zero out when they get paid back.  In order to keep money in the system, some major player has to incur substantial debt that never gets paid back; and this role is played by the federal government."  - Ellen Brown, Web of Debt

The national debt is around $13.3 trillion dollars and the broad money supply measured as M3 is around $13.7 trillion.  Without the national debt, there wouldn't be an M3. All the talk about balanced budgets was a lot of bs as to repay the national debt would be to destroy the money supply.

Instead of a national debt, we should build national wealth by creating debt free money and then spend it into the economy.  Debt free money, unlike debt money, is permanent.  The money supply would become much more stable as we would once again have capital in the system.  As it is now, we are essentially renting the money supply of others.

Larry

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Re: exponential growth

Baywork

if banks would not generally offer interest on deposits, they’d all be insolvent the same day. Strangled to death within seconds, by unsatisfiable demand calling their promises to pay.

How so? If all banks stop paying interest on savings accounts, what are your options?

1. Use your non-earning deposit to purchase some other asset - the deposit remains but is transferred to the previous owner of the asset. No consequence to the banking system as a whole.

2. Take your money out as cash - everyone does it and you have a classic bank run. But why would you do that? Cash doesn't earn interest either, and you'd have to buy a safe.

3. Use your non-earning deposit to pay off any outstanding debts - if a lot of people did this at once the banks would be very unhappy (but not I think instantly insolvent). But how often is deposit interest greater than loan interest? Yes, never - so clearly the reason you had both a deposit and a loan had very little to do with the interest you were earning on the deposit!

I note you didn't challenge my more important objection to your argument, which was

...there is no automatic reason to assume that the additional interest flow through these accounts is  reflected in any growth in unspent deposits.

 

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Re: exponential growth

DrkrbyLuv

The banks add nothing, not even a guarantee that the money won't lose value but yet they benefit by collecting interest on money they never had.  If the interest is not paid, then the banks collect collateral, either way they win.

The banks take on the risk of the loan failing - their capital account is charged by the amount of the failed loan, which in itself helps to prevent the loss of money's value. Of course, collateral mitigates this risk (and so tends to lower interest rates), but unless every loan is fully collateralised (which it isn't) risk remains.

The national debt is around $13.3 trillion dollars and the broad money supply measured as M3 is around $13.7 trillion.  Without the national debt, there wouldn't be an M3.

Not so. This matching of figures is just a coincidence. You are confusing the issue of govt bonds (which actually removes money from the system) with the total liability created by govt spending and associated money creation. If in any one year govt spending exceeds bond sales (and of course it always does), then there must be base money flowing through the economy. This is true even if there is zero deficit and zero national debt.

Instead of a national debt, we should build national wealth by creating debt free money and then spend it into the economy.  Debt free money, unlike debt money, is permanent.  The money supply would become much more stable as we would once again have capital in the system.

If you look back through my previous posts you should see why this really cannot work. If you keep spending a permanent money into the economy on the scale required, the quantity of that money must soon become excessive, and it will eventually become unacceptable and value-less. Given that economic agents know this in advance... In technical terms, while the nominal money supply will be stable, the real money supply will rapidly shrink to zero!

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Re: exponential growth
diarmidw wrote:

Baywork

if banks would not generally offer interest on deposits, they’d all be insolvent the same day. Strangled to death within seconds, by unsatisfiable demand calling their promises to pay.

 

2. Take your money out as cash - everyone does it and you have a classic bank run. But why would you do that? Cash doesn't earn interest either, and you'd have to buy a safe.

 

Well, I can tell you that I do that precisely because the bank pays (effectively) no interest. It is better to have cash in hand than bank digits that  may be unavailable to change into cash when you need/want it.

Without interest there is little or no reason to keep much if any money in the bank.

 

 

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Re: exponential growth

Diarmidw, 
I see, your solution is to stop paying interest on savings accounts to eliminate the interest problem. So you are going to pull the rug out from under investment banking?

diarmidw wrote:

I note you didn't challenge my more important objection to your argument, which was

...there is no automatic reason to assume that the additional interest flow through these accounts is  reflected in any growth in unspent deposits.

 

Of course, the assumption is that ‘sum C’ deposits generate an interest greater than zero in sum:

The bank must find new sources to fund ‘sum C’ interest. Since we’re faced with ‘sum C’ type of deposits, we’re also faced with a certain amount of ‘type C’ compound interest. That is a certain amount of interest on interest aso., where neither has an ultimate borrower nor credit contract funding it. The bank must find new borrowers, or hide the debt by rigging and derivatives, or create fake money through CDS aso., or try to roll of the debt to the lender of last resort, or whatever, - or hit the wall…

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DrKrbyLuv
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Re: exponential growth

diarmidw wrote:

The banks take on the risk of the loan failing - their capital account is charged by the amount of the failed loan, which in itself helps to prevent the loss of money's value. Of course, collateral mitigates this risk (and so tends to lower interest rates), but unless every loan is fully collateralised (which it isn't) risk remains.

You missed the point in taking my comment out of context.  My post was referring to government bonds which ARE fully "collateralized" so there is NO "risk", just unnecessary usury.

And there is another unfair aspect of our bond system, that is that when the Fed, through the FOMC, expands the money supply by buying bonds, it simultaneously creates bank reserves at the same amount for free.  The reserves become a liability of the Fed and an asset to the banks.  But in this chicanery, the Fed never pays its liability as their promise to pay is accepted as the payment.  

I wrote:  The national debt is around $13.3 trillion dollars and the broad money supply measured as M3 is around $13.7 trillion.  Without the national debt, there wouldn't be an M3.

In response, diarmidw wrote:  Not so. This matching of figures is just a coincidence. You are confusing the issue of govt bonds (which actually removes money from the system) with the total liability created by govt spending and associated money creation.

This is not a coincidence as there is a correlation that comes with the fact that the national debt is now the basis for the bulk of the money supply.  You can easily prove this by calculating what would happen if the national debt were fully repaid.  If we paid back the $13.3 trillion owed through the national debt, the money supply (M3) would be reduced by that amount, which would collapse the economy. 

And, you are wrong in stating that "issue of govt bonds (which actually removes money from the system)."  When government bonds are bought by banks (through the creation of new money), it ADDS money to the system.

Larry

LogansRun's picture
LogansRun
Status: Diamond Member (Offline)
Joined: Mar 18 2009
Posts: 1443
Re: exponential growth

Central Bank of England was established 1694.

Central Bank of the United States (FED) was established in 1913.

This conversation is showing me, that the extra 219 years of indoctrination of the British people, has paid off handsomely.  Yell

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