Interest is not the key, debt-based money is

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adamgrubb's picture
adamgrubb
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Interest is not the key, debt-based money is


"At a minimum, each year enough new money must be loaned into existence to cover the interest payments on all of the past outstanding debt."

Chris (if you're reading this), absolutely brilliant presentation -- but I don't think the above statement is correct.

Interest paid on loans becomes bank profits, employee wages and company expenses, and these are spent back into the economy. Theoretically a single dollar could be pingponged back and forth around the economy enough times (involving people supplying labour and assets to the banks and their shareholders and employees) to pay back all of the currently owing interest. I'd believe interest plays some factor in growth, but not to the extent you put it.

I once asked Richard Douthwaite (author of Growth Illusion and The Ecology of Money) about this issue of interest and growth, and he explained another mechanism by which debt based currency itself (not the interest) is a core driver of growth.

I'd love to see you (Chris) update this presentations with this explanation. It's fairly straightforward. My summary is (I'm copying and pasting from an earlier discussion I had):

How debt-based money drives growth

When there is pessimism about the economic outlook (for whatever reason) people and businesses are less inclined to take out loans, and banks are less inclined to give them. Since money is created when banks create loans, and destroyed when loans are payed back, and people must continue to pay existing loans back, this shrinks the money supply.  As the money supply shrinks, it becomes ever more difficult to do business -- as businesses find it difficult to access money or credit to buy their own supplies, as do their customers.  They must spend more time chasing up money owed them, while other businesses are chasing them.  It's like the lubrication on the gears of the economy begins to dry up. This, in turn, makes for deeper concern about the economic outlook. As businesses become ever less inclined to take out loans, and banks less likely to give them, the money supply shrinks some more. And businesses become less confident again... and so on.

We have a positive feedback loop -- a constantly shrinking money supply and snowballing pessimism -- the feared deflationary cycle in which prices go down, while people's ability to afford things diminishes even faster. Federal banks lose all their power in this cycle, because they can not loan money at less than 0% interest. It will end in total monetary catastrophe if governments can not spend their way out of it. All governments are terrified of losing control of this scenario (and yet are currently facing it), as it would mean at the very least the end of their reigning goverment.

Because a steady state is far too close to the edge of abyss, only growth -- at all costs -- is a viable national financial policy, shared by all leading political parties. And so goverments have adopted the embarrassingly illogical doctrine of the need for endless growth, despite the fact we obviously live on a finite planet.  They really have very little option, and they must tie their interests to corporations, the drivers of this growth. 

My discussion with Douthwaite is available here:
http://www.energybulletin.net/node/25560

 

gyrogearloose's picture
gyrogearloose
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Re: Interest is not the key, debt-based money is

""At a minimum, each year enough new money must be loaned into existence to cover the interest payments on all of the past outstanding debt.""

This has been hammered out in a thread  from memory called "Fatal flaw in the crash course?"

Summation, from memory, not exactly mathematically correct, but effectively true.

 

 

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adamgrubb
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Re: Interest is not the key, debt-based money is

I found two related threads:

http://www.peakprosperity.com/forum/fatal-flaw-logic-crash-course/12557

http://www.peakprosperity.com/forum/perpeptual-expansion-really-requirem...

The issue is discussed...

Fujisan says:

"The interests are profits for banks. They are not "frozen" (taken from the future circulation), but continue to circulate in the economy. Like any other business, banks have expenses, they pay their employees, suppliers, taxes, dividends... which ultimatly are all recycled in the economy. This is also applicable to the Fed."

Which I think is correct, but concludes from this:

Stating that "perpetual expansion is a requirement of modern banking" is just a fallacy for me.

Which I think is incorrect.

I think Chris is right, but for the wrong reasons!  Modern banking does require perpetual expansion, but interest isn't the core issue.

mred explains it:

If the point in contention is that there is no mathematical requirement
for expansion of the money supply under a debt-based system, then...
fujisan is totally right.  I stand corrected, as I held that belief for
some reason... sloppiness probably. But on a closer look, it is a false
belief. Thank you fujisan.

<snip>

As fujisan agrees, things are more complex in practice: the perfect
balance between creation and destruction of money is unattainable.
Furthermore, the greatest fear of the central banker is deflation. The
CB's stated objective is stability (yeah right) but a scenario in which
the money supply is constant would be cutting it really close to a
deflationary situation (exactly at the transition point), so the CB
gives itself a cushion in the form of inflation. That is then one
important reason for the inflation: the nervousness of the CB fearing
to fall into the deflation hole. 

If this is correct it would be useful if Chris could update this chapter of the Crash Course to reflect it and the explanation I gave above, to help build the credibility and clarity of an already excellent resource.

 

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pleaseremoveme
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Re: Interest is not the key, debt-based money is
Quote:

Because a steady state is far too close to the edge of abyss, only growth -- at all costs -- is a viable national financial policy, shared by all leading political parties. And so goverments have adopted the embarrassingly illogical doctrine of the need for endless growth, despite the fact we obviously live on a finite planet.  They really have very little option, and they must tie their interests to corporations, the drivers of this growth. 

This really deserves a more thorough explanation! Why should a steady state be to close to the edge? I still don't see why the system needs growth. Also, inflation is not really a big problem: money should be used as a means of payment, not as a store of wealth and inflation encourages this - whatever Chris says. The growth of debt relative to the rest of the economy is the problem. And now the problem is that too little inflation makes it hard to pay back the debt.

 

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adamgrubb
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Re: Interest is not the key, debt-based money is

This really deserves a more thorough explanation! Why should a steady state be to close to the edge?

We have two competing feedback loops.  Growth and confidence feedback on each other.  Contraction and pessimism feedback on each other.  So under the current money system, trying to achieve a steady state would mean maintaining a very precarious balance between the two.  If the system moves just a little towards growth, or just a little towards contraction, it will tend to move ever faster in those respective directions, until it crashes. 

In nature nothing is really steady state, the nearest thing is pulsing systems in a dynamic equilibrium.  Economies also have boom and bust cycles (pulses), but overall they tend to grow.  Until they don't.  Could an economy based on debt-money achieve a pulsing 'steady state' rather than a pulsing growth?  (Which would mean an entirely renewable, steady energy base.)  I can't say with confidence, but it doesn't sound like the right way, with two competing positive feedback systems.  We need a system characterised by negative feedback, encouraging it to stay on a steady path. 

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pleaseremoveme
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Re: Interest is not the key, debt-based money is

Growth sure didn't make Chris more confident. And similarly, some people may not be discouraged by contraction. If there is a clear casual connection between economic growth and confidence, I wonder what it is. I wonder whether growth couldn't happen even if there is a general lack of confidence, and whether an economy couldn't shrink painlessly when demographic ageing reduces population.

Now I know some economic theories that explain how inlfations and deflations work, and I see that there must be something to them, because they predict what we see happing now. But none of them blames the debt based monetary system, and most of them imply government intervention may provide plenty negative feedback.

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