Must it grow?

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erikha's picture
erikha
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Must it grow?

I really enjoyed this course, but there is one essential point I don't accept as it is stated. Martenson says: "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." Is this really so?

Consider a simple economy with just you and me and 100 currency units (CU). If you lend me the 100 CU at a 5% interest rate, and I use these money to buy food from you, how can I pay you back? Next year I'll owe you 105 CU, and all the cash in the world is just 100 CU, which you hold. So far I follow, but I really don't see why the extra 5 CU must be loaned into existence. Why cant I simply work for you? If you pay me 50 CU a year, I can pay down my debt in less than 3 years, and we're back to where we started.

Erik

srbarbour's picture
srbarbour
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Re: Must it grow?

[quote]I really enjoyed this course, but there is one essential point I don't accept as it is stated. Martenson says: "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." Is this really so?[/quote]

This is one area, where Chris's presentation is sadly wrong.  It is unnecessary that new cash is created, because cash does not disappear upon paying debts. 

 (This would be true is the Fed paid interest on its Federal Reserve Notes.)

However, it is  true that the average total production of the entire economy per/year must be large enough to offset all debt interest.

A simple example would be this:

Bob is an apple farmer.  He has a magic tree that produces 5 apples every year.  

Bob goes to Sam, and buys Sam's axe.  Bob has no apples, however Sam says that he'll give it to Bob if Bob eventually gives him 25 apples, +3 apples a year.   

The math is simple 25 - (5-3)y  = 0;   25 = 2y;  12.5 years for Bob to pay Sam back.   This is possible because Bob produces new apples every year.

If however, Bob cannot produce enough apples a year, on average, the math relentlessly tells us the Bob will fail to pay back the loan period.   That doesn't mean however, that Sam won't get all the apples he ever wants.  Indeed, such impossible to pay back loan -- usury -- has often been a tactic to achieve slavery in effect.

--

Steve 

 

 

Ray Hewitt's picture
Ray Hewitt
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It's a matter of discipline

Every dollar in circulation represents a dollar of debt. Debt carries interest charges that grow exponentially because of the nature of compound interest. It grows for the reason that it enables government to deficit spend without raising taxes. It does grow because government doesn't have the discipline to pay off its debts. In all history, every government that inflated it's currency eventually destroyed its currency. I see no reason to believe this time will be an exception.

Though the debt may not be circulating, if it went directly into something like real estate, the price of that real estate represents a quantity of money. It doesn't show up in Federal Reserve statistics, but it's there. So as real estate prices are collapsing, the money supply is collapsing as well. All these bailouts and massive deficits are an attempt to keep the money supply from collapsing.

erikha's picture
erikha
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Re: Must it grow?
[quote=srbarbour]

This is one area, where Chris's presentation is sadly wrong.  It is unnecessary that new cash is created, because cash does not disappear upon paying debts. 

[/quote]

Exactly.  If the only way to circulate money was through loans, he would be right, but as long as money are exchanged for goods and services, debt could be handled without creating more debt.

I do however think it is true that the economy must grow, but the reason is that people who have a sufficiently high income, choose not to spend all of it, but rather invest the surplus. The dividends of this investment are then reinvested. Thus the fortune of these people grows exponentially. Since the total economy at any given time is finite, this growth will either have to come to an end through an economic crisis (insolvency), or the economy as a whole must grow by creating ever more debt in the remaining economy and/or by printing more money (inflation). When the debt at last reaches a point where all income above the existential minimum goes to cover interest, the only remaining options are insolvency and inflation. Thus I think it is safe to conclude that Martenson is correct in effect, but not for the reasons he presents.

To put it another way: In principle, the economy could balance, but it is inherently unstable. As soon as enough surplus is created somewhere in the economy to invest and reinvest, the economic equivalent to a black hole is created. It's these black holes that drive the exponential growth.

Erik

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Damnthematrix
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Re: Must it grow?

This is one area, where Chris's presentation is sadly wrong. It is unnecessary that new cash is created, because cash does not disappear upon paying debts.

Not accurate......

Sure, once the money borrowed is spent (to buy a house or a SUV or a holiday to the Bahamas) the wealth represented by the borrowings exists.

BUT.....  the money/wealth necessary to pay the interest on the loan(s) doesn't......

To cover the cost of the interest, NEW money must be created through more growth.....  and this is where it all falls apart because you then get trapped in a spiralling exponential vicious circle..... 

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Damnthematrix
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Re: It's a matter of discipline
[quote=hewittr]

Every dollar in circulation represents a dollar of debt. Debt carries interest charges that grow exponentially because of the nature of compound interest. It grows for the reason that it enables government to deficit spend without raising taxes. It does grow because government doesn't have the discipline to pay off its debts.

[/quote]

You shouldn't generalise so much......

The Australian Government is NOT in debt.  At all.  But the NATION is.  Big time!

Not the same thing, but the end result's the same.  The national debt cannot be repaid.

fombie's picture
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Re: Must it grow?

Chris is right: money is created together with debt. Be it that the debt is always slightly more than the money, because the principal is equal to the amount of money that is created, but there is also intrest that is due. And by the same mechanism,  when debt is repayed, money disappears. This mechanism can never be maintained with zero growth, because debt (including intrest) is always larger than the available money to pay it back.

Do not confuse the creation/destruction of money with the creation/destruction of cash: in this process the total amount of cash stays the same: when the loan is created, the bank hands over the cash, and when the loan is repayed, the bank takes the cash back in. What changes are the numbers in the books (computers) of the bank: in the moment the bank creates the loan it also creates new money in your bank account (not cash!) and then pays you the money from your account in cash.  When you repay the loan the amount of cash is added to your account, and the money from your account disappears by repaying the loan. The cash just circulates, the money in bank accounts is created/destroyed.

And remember that the amount of cash is just a small portion compared to all the money that exists only as numbers in bank accounts.

 

 

cmartenson's picture
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Re: Must it grow?

Consider a simple economy with just you and me and 100 currency units (CU). If you lend me the 100 CU at a 5% interest rate, and I use these money to buy food from you, how can I pay you back? Next year I'll owe you 105 CU, and all the cash in the world is just 100 CU, which you hold. So far I follow, but I really don't see why the extra 5 CU must be loaned into existence. Why cant I simply work for you? If you pay me 50 CU a year, I can pay down my debt in less than 3 years, and we're back to where we started.

Erik and Steve,

This is one area where it's possible to reduce a problem too far, to the point that it loses meaning and becomes misrepresentative. 

I am going to respond to this issue of "working to pay off the interest" because it comes up a lot and, frankly, it's highly misleading.

Yes, in principle if the interest for every loan was paid back in direct labor to a bank no new money NEED be created.  That is exactly correct.

However, let's back up and consider the real world. 

In the US the total credit market debt stands at $52 trillion.  Assume an average 5% rate of interest (too low, but we'll use it for demonstration purposes) and this means that the interest payments each year total $2.6 trillion, or 18% of the total US economy, or 27% of all direct personal income.

Does anyone really want to suggest that more than 25% of all wage-labor in the US is directly performed for banks?  Man, that's a lot of floor waxing (or apple selling).  Assuming a higher blended average rate of 6% or even 7% only serves to drive this propotion, and absurdity, even higher.

How much direct labor in exchange for interest payments could we guesstimate?  We'd pretty much be on target with an assumption that direct labor for a bank is significantly less than the direct expense line for that bank*. 

If we add up all the expense lines of all the banks that could possibly apply as direct "labor to pay interest" we come up with a tiny, tiny fraction of $2.6 trillion.  Because it is so small a fraction we can ignore it like we can ignore the gas-mileage impact of having your headlights on while driving.  [Note: I don't put these minor points of clarification in the crash Course because then it would be over 8 hours instead of less than 4.] 

So my point stands - unless and until we find a society where all interest payments are settled with direct labor (in goods &/or services) to banks we have a situation where the money supply must increase by the amount of interest outstanding (less the negligible proportion repaid in direct labor). If not, then someone somewhere is going to go into default and the banking system will be quite unhappy, as it is today.

So where does the difference between direct labor and the total interest payments come from?  New credit/money creation, of course. 

 

* The portion of the direct expenses that would not apply to the "labor to pay the interest" expense would be such things as all internal employee salaries and interest payments to depositors.  Together, these constitute the bulk of any bank's expenses leaving a relatively minor proportion that we could apply to the "labor to pay the interest" pool.  

 

PS - Steve, you are confusing CASH and CREDIT which are not the same things at all and are then putting those words in my mouth.  I've never confused the two anywhere in my Crash Course or writings.   Also, it is absolutely true that when debts are repaid the credit money that was created disappears with the settlement of that debt. This is simple accounting and there are lots of places where you can brush up on money creation via credit formation.

erikha's picture
erikha
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Re: Must it grow?
[quote=cmartenson]

Yes, in principle if the interest for every loan was paid back in direct labor to a bank no new money NEED be created.  That is exactly correct.

[/quote]

Good. I suspected you knew this, but it confused me that you did not mention this obvious objection in your crash course.

[quote=cmartenson]

* The portion of the direct expenses that would not apply to the "labor to pay the interest" expense would be such things as all internal employee salaries and interest payments to depositors.  Together, these constitute the bulk of any bank's expenses leaving a relatively minor proportion that we could apply to the "labor to pay the interest" pool.  

[/quote]

This I don't understand. If Alice has a deposit in the bank, and she uses the interest to pay her hairdresser, why can't the hairdresser use these money to pay the interests on her loan in the same bank? Even the stockholders' dividends could be used to pay down their or their butcher's loans in the bank.

You obviously have thought this through, as is evident from your excellent crash course,  but this really bewilders me. I don't disagree that the economy must grow, but I don't see the direct relation to banks and interest rates, but rather to profits on on investments in general.

Erik

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srbarbour
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Re: Must it grow?
Quote:

PS - Steve, you are confusing CASH and CREDIT which are not the same
things at all and are then putting those words in my mouth. I've never
confused the two anywhere in my Crash Course
or writings. Also, it is absolutely true that when debts are repaid
the credit money that was created disappears with the settlement of
that debt. This is simple accounting and there are lots of placeswhere
you can brush up on money creation via credit formation.

I'll clear this up first:

I apologize if my perceptions and/or the reading of my reply has in essence put words into your mouth.

Quote:

Yes, in principle if the interest for every loan was paid back in
direct labor to a bank no new money NEED be created. That is exactly
correct.

I'll expand here.

Recall, currency merely masks the underlying barter system of the real economy. Provided that the bankers who receive currency, spend that currency to buy real physical goods/services, then every debt is in fact, being paid back in direct labor.

I'll provide one of those overly simplified examples to make it more clear:

Bob has an apple tree that always produces 5 apples a year.

Bob owes Joe $25, +$3 a year.

Sam is Joe's butler, he earns $5 a year.

Every year Joe buys from Bob 5 apples for $1each ($5 dollars)

Bob uses that money to pay back Joe, who then uses the money to pay Sam.

Bob is out of debt in exactly 12.5 years.

In this example, it is quite clear the the effect is as though Bob gave Joe apples, and Joe gave Sam the apples. In other words, the debt is being paid back in directly labor. Though, quite ironically by Sam, who accepts the task in exchange for apples.

We can thus determine a reasonable estimate how much the banking industry is collecting in direct labor, by the total sum of all expenditures, salaries, and distributed profits of the banking industry.

Quote:

So my point stands - unless and until we find a society where all interest
payments are settled with direct labor (in goods &/or services) to
banks we have a situation where the money supply must increase
by the amount of interest outstanding (less the negligible proportion
repaid in direct labor). If not, then someone somewhere is going to go
into default and the banking system will be quite unhappy, as it is
today.

So where does the difference between direct labor and the total
interest payments come from? New credit/money creation, of course.

New currency creation is the same as forgiving all debts (denominated in that currency) by a certain percent -- equal to the (inflationary) currency printing. The banks, frankly, have no desire for their debts to be forgiven. This distaste is expressed in an interest rate which is pretty much always greater than the rate of the expansion of the (base) currency.

Reality in the end is quite simple, the vast majority of these debts are not being paid back. Currency printing, new debt, and defaults are in fact expressions of a refusal to pay back debt.

Keep in mind, the real economy is physical goods and services. If a banker is not receiving the expected share of this that banker is in fact, not being paid back. At best, that banker is deferring receipt to a later date.

In any case, you are getting ahead of yourself Chris. You have, in this argument, assumed that all of that $52 trillion in notional debt can all be called 'real'. A very large percentage (much like with Credit Default Swaps), is an absurd daisy chain of entities borrowing money from other entities where the path of debt crosses where it began potentially many times.

A quick, and (not quite) overly simplistic example of this:

Bob borrows $10 from Joe, and promises to pay back $11.

Sam borrows $10 from Bob, and promises to pay back $12.

Joe then borrows $10 from Sam, promises to pay back $13.

Total nominal debt: $36

We could get fancy, and have various individuals borrowing more money from one another to pay back a 'fraction' of the owed debt, while promising to pay back more in the future, etc... The total value of the debt would then balloon.

The reality of what this game is though, becomes obvious if we 'unwind' the trade:

E.g

(Debts: Joe $13 -> Sam $12 -> Bob $11 -> Joe[$10] )

Sam demands his debt back from Joe, Joe gives $10 and promises to get the rest in a bit. Joe demands his $11 from Bob, who gets $10 by demanding back his $12 from Sam. Bob then pays $10 to Joe.

(Debts: Joe $3 -> Sam $2 -> Bob $1 -> Joe[$10])

Joe then takes $3 and pays back, Sam. Sam gives Bob $2. Finally, Bob gives Joe $1.

End total: $0 Debt, Joe has $8, Sam has $1, and Bob has $1;

We can say, that Sam and Bob have in fact, swindled from Joe $2. That, is, unfortunately the essence of our current financial industry...

I wouldn't dare say, however, how much of the total debt is in fact a great game of Bank A trying to swindle Bank B (or more accurately, Bank A and Bank B swindling their shareholders). But, we know for a fact that most of the nominal value of Derivatives and Credit Default Swaps are exactly this kind of insanity. I wouldn't be surprised though, if of that $52 trillion 50% to 75% was in fact, an insane money game.

Quote:

* The portion of the direct expenses that would not apply
to the "labor to pay the interest" expense would be such things as all
internal employee salaries and interest payments to depositors.
Together, these constitute the bulk of any bank's expenses leaving a
relatively minor proportion that we could apply to the
"labor to pay the interest" pool.

As pointed out above, I would contend there is no such thing as an 'expense' paid in 'actual money' (e.g. not the issuance of new debt), that does not represent an eventual collection of direct labor.

As such: Salaries, interest payments to depositors, profits paid to shareholders, etc... most definitely would count.

Or do you contend, Chris, that these individuals never collect Services/Goods with money accumulated by these endeavors?

--

Steve

erikha's picture
erikha
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Re: Must it grow?
srbarbour wrote:

I'll provide one of those overly simplified examples to make it more clear:

Bob has an apple tree that always produces 5 apples a year.

Bob owes Joe $25, +$3 a year.

Sam is Joe's butler, he earns $5 a year.

Every year Joe buys from Bob 5 apples for $1each ($5 dollars)

Bob uses that money to pay back Joe, who then uses the money to pay Sam.

Bob is out of debt in exactly 12.5 years.

I think you meant to say that Every year Sam buys from Bob 5 apples for $1 each ($5 dollars).

By the way, I would like to give two simple examples to show why the economy must grow.

Imagine a simple trillion dollar economy in balance, where all interest and profit is spent, and debt does not grow. Accept for a moment that this is possible. Everybody is happy, except one poor beggar who nobody will employ. One day the beggar has a bright idea for revenge. He goes to the bank and opens a savings account with a guaranteed 5% interest rate, and deposits his only dollar. He leaves the bank with a smile, knowing that as long as he never touches his account, all the money in the world will be his. All he has to do is wait for 567 years.

The next example is not quite so nice. The starting point is the same, but this time it is a 100 million dollar factory owner who is infected with megalomania. He decides to stop spending his profits. Each year, when expenses and salaries are payed, his factory earns 10 million dollars, i.e. 10% of his invested capital. In stead of spending this money on a luxurious lifestyle, he starts to buy other equally profitable businesses. So each year his revenues grow, and he is able to buy more and more. In less than 100 years all the money and property in the world is his, and not once has he been to the bank.

Erik

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