TECHNOLOGY is not going to solve the problem. The economic model MUST be reformed!

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kmarinas86's picture
kmarinas86
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Joined: Dec 29 2008
Posts: 164
TECHNOLOGY is not going to solve the problem. The economic model MUST be reformed!

Technology - This allows us to be more productive, efficient, and better for the natural environment.So as far as both energy and natural enviornment is concerned, technology does not inherently cause any problems. However, if technology is directed towards overly-redundant or unsafe efforts, we may let ourselves set up organizations which form a mold that mandates people to attempt arbitrary and round-about methods just to get the things they want.

Money system - The point of a money system it is to allow for the exchanges of good and services. Therefore every single activity involving money should facilitate trade. This means that money should be designed to not be as a scarce resource. At the same time, the money has to be more than a unit of account, but it has to be a store of value. This means that over some period of time, the value of money must be kept stable relative to the value of some good, otherwise, it is simply represent itself. This does not require price fixation however. What it requires however is that the growth and contraction of the money supply should be proportional to the growth and contraction of trade. Therefore a system must be developed where:

  1. Increasing the frequency of activity opens ways to grow the money supply in proportional manner.
  2. Decreasing the frequency of activity opens ways to shrink the money supply in proportional manner.

Frequency of trade - When trade occurs, accounts storing money are changed. Most transactions obey a conservation of money principle, where if one account is charged some amount, then that same amount must be added to some other account. In the conservation of money principle, the total amount of money does not change, and nor does the total amount of liquid assets. What changes is the distribution of liquid assets among households and firms. Over time, variances in behavior entitles some accounts with surpluses and burdens other accounts with shortages.

Credit - When the amount of liquid assets falls short of the amount desired before contining trade, one forgoes the trade and instead chooses inactivity. This inactivity has negative effect on productivity. Credit markets were developed to allow people to have access to higher levels of money so that their trade could continue even though their personal accounts were at unfortunately low levels. These markets have been developed a certain type of flexibility, where one could forego making regularly defined payments on debt and have compounding interest as a result. The negative effects of credit markets have been discussed in great detail by economic professionals.

New Balance System - The key solution to our problems with the compounding-interest credit markets is abandon them entirely as a tool for finance by replacing them with a viable deferred payment service which can be termed the New Balance System. The New Balance System is a system that forgoes the conservation of money principle. As frequency trade increases, the sum of money balances will increase, and as the frequency of trade decreases, the sum of money balances will decrease. It must be done as a two-front matter, as follows:

  1. The impact that spending has on the monetary balance comes slowly.
  2. The impact that income has on the monetary balance comes quickly.

Bi-directional money balance principle - When the overall trade frequency is constant, the only way it is possible for person to accumulate a long-term positive balance is for a long-term negative balance to exist. Therefore one should not try to add money to the system to get rid of the negative sign; defeating the system this way has negative legal, economic, and ethical consequences. To properly economize real-world scarcity, the balances of the accounts (positive or negative) must be recognized as a figure of merit for transaction acceptance, an idea similar but more rudimentary than credit approval. In conditions where so many buyers are requesting services that supply cannot reach demand, business may non-discrimantorily reject all customers who have a balance below a certain value advertised. This makes a higher balance meaningful and worth working to earn and maintain even though people would be allowed to spend without limit when they have negative balance.

Consider two individuals at January 1:

  1. A Boy who has a $0 balance in account where he is signed up for a plan ($10/month) where spending is diluted over a period of 10 months beginning on the month of the next addition to the account. Spending dilution frequency is 1 month.
  2. A Girl who has a $0 balance in account where she is signed up for a plan ($5/month) where spending is diluted over a period of 10 months starting at the date of expenditure. Spending dilution frequency is 1 month.

Their spending activities for the first year are as follows:

  1. The Boy
    1. January 1: Buys a product from the Girl for 2000 dollars
    2. July 1: Buys a product from the Girl for 4000 dollars
  2. The Girl
    1. April 1: Buys a product from the Boy for 4000 dollars
    2. October 1: Buys a product from the Boy for 2000 dollars

The changes to the calendar of balances due to spending are as follows:
Excludes regular monthly banking fees

The Boy
1/1/2008 OLD BALANCE + 0 = NEW BALANCE
2/1/2008 OLD BALANCE + 0 = NEW BALANCE
3/1/2008 OLD BALANCE + 0 = NEW BALANCE
4/1/2008 OLD BALANCE + 4000 - 200 = NEW BALANCE
5/1/2008 OLD BALANCE - 200 = NEW BALANCE
6/1/2008 OLD BALANCE - 200 = NEW BALANCE
7/1/2008 OLD BALANCE - 200  = NEW BALANCE
8/1/2008 OLD BALANCE - 200  = NEW BALANCE
9/1/2008 OLD BALANCE - 200  = NEW BALANCE
10/1/2008 OLD BALANCE + 2000 - 200 - 400 = NEW BALANCE
11/1/2008 OLD BALANCE - 200 - 400 = NEW BALANCE
12/1/2008 OLD BALANCE - 200 - 400  = NEW BALANCE
1/1/2009 OLD BALANCE - 200 - 400  = NEW BALANCE
2/1/2009 OLD BALANCE - 400  = NEW BALANCE
3/1/2009 OLD BALANCE - 400  = NEW BALANCE
4/1/2009 OLD BALANCE - 400  = NEW BALANCE
5/1/2009 OLD BALANCE - 400  = NEW BALANCE
6/1/2009 OLD BALANCE - 400  = NEW BALANCE
7/1/2009 OLD BALANCE - 400  = NEW BALANCE

Total fees for 19 months = +190 dollars
Net change in balance due to activities = 0 dollars
Net balance = -190 dollars

 

The Girl

1/1/2008 OLD BALANCE + 2000 = NEW BALANCE
2/1/2008 OLD BALANCE + 0 = NEW BALANCE
3/1/2008 OLD BALANCE + 0 = NEW BALANCE
4/1/2008 OLD BALANCE - 400 = NEW BALANCE
5/1/2008 OLD BALANCE - 400 = NEW BALANCE
6/1/2008 OLD BALANCE - 400 = NEW BALANCE
7/1/2008 OLD BALANCE + 4000 - 400  = NEW BALANCE
8/1/2008 OLD BALANCE - 400  = NEW BALANCE
9/1/2008 OLD BALANCE - 400  = NEW BALANCE
10/1/2008 OLD BALANCE - 400 - 200 = NEW BALANCE
11/1/2008 OLD BALANCE - 400 - 200= NEW BALANCE
12/1/2008 OLD BALANCE - 400 - 200  = NEW BALANCE
1/1/2009 OLD BALANCE - 400 - 200 = NEW BALANCE
2/1/2009 OLD BALANCE - 200 = NEW BALANCE
3/1/2009 OLD BALANCE - 200 = NEW BALANCE
4/1/2009 OLD BALANCE - 200  = NEW BALANCE
5/1/2009 OLD BALANCE - 200  = NEW BALANCE
6/1/2009 OLD BALANCE - 200  = NEW BALANCE
7/1/2009 OLD BALANCE - 200  = NEW BALANCE

Total fees for 19 months = +95 dollars
Net change in balance due to activities = 0 dollars
Net balance = -95 dollars

Over the 19 month periods, the bank earns 285 dollars from the two customers, regardless of their activity.

The above is honest and sincere proof that a method of deffered payment is possible without compounding interest. What the proof promises is a way for the bank to NOT actually lend money. Thus a bank will not have to borrow money to finance someone's borrowing. There is NO borrowing promoted in this system. Also beneficial is the banks ability to project its revenue more accurately. And because money service fees can easily be spread through users more evenly, this allows for low-risk, high-volume revenue for the banks, which helps banks to compete more efficiently to lower industry costs.

All entrepenuers whether firms or individuals will highly benefit from the implementation of the New Balance System. The New Balance System can be presented as a superior alternative to the come-and-go stock market, When the New Balance System is in place, the per population labor and tuition costs of the financial industry will go down. Also, the needy will benefit from the ability to spend as much money as they need (below 0 balance) though with restrictions as advertised by individual firms to maintain par between supply and demand. The costs of goverment will also fall drastically as a result of large measures to cut subsidies that are no longer needed.

CONCLUSION: The New Balance System is the first and only sustainable monetary policy which can be controlled by the people!

mred's picture
mred
Status: Bronze Member (Offline)
Joined: Apr 8 2008
Posts: 96
Re: TECHNOLOGY is not going to solve the problem. The ...

One of the big problems of the present monetary system is that it fuels bubbles. In doing so, it destroys productively deployed capital as resources are diverted towards unsustainable activities. The reason that the monetary system fuels bubbles is that it allows for virtually unlimited credit (read money supply) expansion. From the perspective of the designers of the system, this is not a "flaw", but a feature; it was designed that way. Consider the housing market: people divert resources from say, declining stocks, to houses. In doing so, they increase demand and prices rise. As prices rise, more people recognize a profit opportunity and borrow more money to buy more houses, thus feeding the cycle. This continues until the bubble bursts and the effects of all the wasted resources become evident. The roaring 20's witnessed such a bubble credit expansion, which when added to other political factors, led the US into the Great Depression. The same situation is happening now.

I may be misunderstanding the original post, but that is the problem with the proposal of "different" ideas. Extraordinary claims are in need of extraordinary evidence, and in this case, new proposals for a monetary system are in need of particularly good explanations about their workings and how they are superior. The "New Balance System", as well as other systems proposed in these forums suffer from the same problem of fueling bubbles. Money is created on "demand", as I infer from statements above like: "the needy will benefit from the ability to spend as much
money as they need (below 0 balance) though with restrictions as
advertised by individual firms to maintain par between supply and demand."
If the needy can, so everyone else. This would induce "economic" activities and "investments" in which people are just riding and fueling trends, thus helping destroy the real capital that the money is supposed to represent. Regarding the same quote: how could restrictions "maintain par between supply and demand" if the new money is itself altering the supply and demand equilibrium?

I also don't understand how possibly such system would be "controlled by the people". This is my understanding of a monetary system controlled by the people: a system in which people themselves can create or extinguish money, not the policies of some institution. Consider a pure gold/silver standard, in which money supply elasticity is provided by bills of exchange between producers. In such a system, there would be a prevailing interest rate determined by the amount of savings in the society. More savings means cheaper credit and vice-versa. There would not be volatility in the interest rates, something that would yield two instant benefits:

1. The formation of a parasitic financial sector specialized in gambling (OTC derivatives trading) would be precluded.

2. There would not be surreptitious siphoning of resources from the productive sector. Remember that a rise in interest rates renders some deployed productive capital unprofitable and declining rates increase the costs associated with previously acquired debts.

In such an environment, given that metal can not be printed, a government in need of money must borrow from the existing pool of savings by selling bonds. Should the government engage in types of spending that are not popular (war, insider profiteering, etc.), then the people could vote with their money and withdraw it from the system. The price of the unpopular government spending would be an increased cost of borrowing. That is actual control by the people. This action by individuals would be effective also in case that the banks were paying inadequate rates to their long-term depositors. People can't do this today, as an infationary money supply forces people to keep their money in the system.

Finally, what makes the present money a bad store of value are the fluctuations in its amount. It is this instability which is pernicious to productive capital. Again and again, people get sidetracked by the horrific use of the word inflation to represent a rise in prices instead of a rise in money supply (as implied by the money/trade-ratio-related statements). It is possible for people to lose in purchasing power even when prices stay constant, since the increases in worker productivity over time, which would result in appreciating money (appreciating value of work) would effectively be stolen. All of these proposed "new" monetary systems have this profound defect. For some reason they use the government's preferred definition of inflation. No wonder the government runs circles around us all the time.

"Inflation, as this term was always used everywhere and especially in
this country, means increasing the quantity of money and bank notes in
circulation and the quantity of bank deposits subject to check. But
people today use the term "inflation" to refer to the phenomenon that
is an inevitable consequence of inflation, that is the tendency of all
prices and wage rates to rise. The result of this deplorable confusion
is that there is no term left to signify the cause of this rise in
prices and wages. There is no longer any word available to signify the
phenomenon that has been, up to now, called inflation. …  As you cannot
talk about something that has no name, you cannot fight it. Those who
pretend to fight inflation are in fact only fighting what is the
inevitable consequence of inflation, rising prices. Their ventures are
doomed to failure because they do not attack the root of the evil. They
try to keep prices low while firmly committed to a policy of increasing
the quantity of money that must necessarily make them soar. As long as
this terminological confusion is not entirely wiped out, there cannot
be any question of stopping inflation." -- Ludwig Von Mises

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Re: TECHNOLOGY is not going to solve the problem. The ...

Double post. Innocent

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Re: TECHNOLOGY is not going to solve the problem. The ...

One of the big problems of the present monetary system is that it fuels
bubbles. In doing so, it destroys productively deployed capital as
resources are diverted towards unsustainable activities. The reason
that the monetary system fuels bubbles is that it allows for virtually
unlimited credit (read money supply) expansion. From the perspective of
the designers of the system, this is not a "flaw", but a feature; it
was designed that way. Consider the housing market: people divert
resources from say, declining stocks, to houses. In doing so, they
increase demand and prices rise. As prices rise, more people recognize
a profit opportunity and borrow more money to buy more houses, thus
feeding the cycle. This continues until the bubble bursts and the
effects of all the wasted resources become evident. The roaring 20's
witnessed such a bubble credit expansion, which when added to other
political factors, led the US into the Great Depression. The same
situation is happening now.

Agreed.

I may be misunderstanding the original post, but that is the problem
with the proposal of "different" ideas. Extraordinary claims are in
need of extraordinary evidence, and in this case, new proposals for a
monetary system are in need of particularly good explanations about
their workings and how they are superior. The "New Balance System", as
well as other systems proposed in these forums suffer from the same
problem of fueling bubbles. Money is created on "demand", as I infer
from statements above like: "the needy will benefit from the ability to spend as much
money as they need (below 0 balance) though with restrictions as
advertised by individual firms to maintain par between supply and demand."

If the needy can, so everyone else.

Money should be created on demand, but it should be as painless to get rid of it too. That is the problem with the current system. which can only do it with lots of hassle and waste. And there's so much of it becomes feedstock for an entire industry - the financial industry. I think financial industry shouldn't be more complicated than public utilities such as water, yet we current rely on the system just to get things done when cash is limited. We don't say there is a "water industry", but water is a sector of the utilities industry. In the same way, I believe financial industry should be scaled down to become simply part of the utilities industry.

This would induce "economic"
activities and "investments" in which people are just riding and
fueling trends, thus helping destroy the real capital that the money is
supposed to represent. Regarding the same quote: how could restrictions
"maintain par between supply and demand" if the new money is itself altering the supply and demand equilibrium?

What kind of people ride and fuel trends? Everyone does! Is that all they do? It takes a lot of simplification to believe that! Real capital gets destroyed due to deterioration and lack of replacements. If business halts due to a bad economy, that's like a intersection getting jammed as a result of its traffic lights switching too quickly

When I say supply and demand are on par, for restaurants I mean that lines are swift and tables are filled at peak hours and labor available is appropriate for the task. For supplies, it means that inventory runs smoothly, turns over efficiently, with minimal cost as a result of financial factoring of inventory, goods, etc.. For anything else, it means business is thriving and producing very little waste.

If you want proof that credit problems create inventory problems, then look no further than the current situation of the car industry. Isn't is strange that just when cars are getting better that people decide to delay their decision of buying a car? The availability of credit should not have to change day to day. That is why a system like this is needed.

I also don't understand how possibly such system would be "controlled by the people".

Money is simply a store of value. So I took that to the next level and said if you have money in an account, that account is a store of value! So what happens is that when you buy something, the value of the seller goes up immediately while you, the buyer, do not see an immediate drop in your store of value. The banker will be required by law to refrain from reducing the value of your balance immediately upon sale and would be required to gradually implement the difference over a long period of time. In this sense, by selling, the seller creates money, because the short-term effect it has on the money supply is an increasing one, but in the long-term it does not. However, if the economy over the years sustains a long-term duration of heightened production and consumption, then higher levels of money will be maintained in the economy in the long run.

This is my understanding of a monetary system controlled by the people:
a system in which people themselves can create or extinguish money, not
the policies of some institution. Consider a pure gold/silver standard,
in which money supply elasticity is provided by bills of exchange
between producers. In such a system, there would be a prevailing
interest rate determined by the amount of savings in the society. More
savings means cheaper credit and vice-versa. There would not be
volatility in the interest rates, something that would yield two
instant benefits:

1. The formation of a parasitic financial sector specialized in gambling (OTC derivatives trading) would be precluded.

2. There would not be surreptitious siphoning of resources from the
productive sector. Remember that a rise in interest rates renders some
deployed productive capital unprofitable and declining rates increase
the costs associated with previously acquired debts.

In such an environment, given that metal can not be printed, a
government in need of money must borrow from the existing pool of
savings by selling bonds. Should the government engage in types of
spending that are not popular (war, insider profiteering, etc.), then
the people could vote with their money and withdraw it from the system.
The price of the unpopular government spending would be an increased
cost of borrowing. That is actual control by the people. This action by
individuals would be effective also in case that the banks were paying
inadequate rates to their long-term depositors. People can't do this
today, as an infationary money supply forces people to keep their money
in the system.

Bureacracy and group think are not necessary for a money supply controlled by the people. In fact, it is better for individuals, rather than a group, to control the money supply. But this control should be only short-term because otherwise it will cause the money supply to expand yet still, resulting in inflation. Also, a money supply that is severely restricted in the short-term would not prevent bank panics. Buying any size house would be a problem especially because who would pay for the construction today's houses if no one can make 100% down payment? We cannot rely on lending to do this unless we let it force us to increase the amount of money available, invalidating your version of a people-controlled money supply.

The alternative is to live smaller, but that does not mean living will be any easier! What you also talk about is that people should control government spending. But some people have that as their full time job, and not everyone will like to do that! You know people who ask the government to change how they use their money are often called lobbyists. Goverment officials who listen to them are actually discredited for doing this because the distaste that some citizens have for "special interests".

Finally, what makes the present money a bad store of value are the
fluctuations in its amount. It is this instability which is pernicious
to productive capital. Again and again, people get sidetracked by the
horrific use of the word inflation to represent a rise in prices
instead of a rise in money supply (as implied by the
money/trade-ratio-related statements). It is possible for people to
lose in purchasing power even when prices stay constant, since the
increases in worker productivity over time, which would result in
appreciating money (appreciating value of work) would effectively be
stolen. All of these proposed "new" monetary systems have this profound
defect. For some reason they use the government's preferred definition
of inflation. No wonder the government runs circles around us all the
time.

I was not talking yet about the effect that my "New Balance System" would have on prices. You claim that "all" of "these" newly proposed monetary systems would increase the money supply as if that were inherently bad. You have not shown how my New Balance System would act contrary to my expectation that it reduce the need for a financial "industry" for something that should really be a straight forward duty - that of allocating labor to produce real wealth. When you simply see how the financial industry can be reduced from a multi-trillion dollar sinkhole to a simple utility facilitating the growth of markets, as cheap as water itself, then you can easily see how the exact opposite may occur.

"Inflation, as this term was always used everywhere and especially in
this country, means increasing the quantity of money and bank notes in
circulation and the quantity of bank deposits subject to check. But
people today use the term "inflation" to refer to the phenomenon that
is an inevitable consequence of inflation, that is the tendency of all
prices and wage rates to rise. The result of this deplorable confusion
is that there is no term left to signify the cause of this rise in
prices and wages. There is no longer any word available to signify the
phenomenon that has been, up to now, called inflation. …  As you cannot
talk about something that has no name, you cannot fight it. Those who
pretend to fight inflation are in fact only fighting what is the
inevitable consequence of inflation, rising prices. Their ventures are
doomed to failure because they do not attack the root of the evil. They
try to keep prices low while firmly committed to a policy of increasing
the quantity of money that must necessarily make them soar. As long as
this terminological confusion is not entirely wiped out, there cannot
be any question of stopping inflation." -- Ludwig Von Mises

mred's picture
mred
Status: Bronze Member (Offline)
Joined: Apr 8 2008
Posts: 96
Re: TECHNOLOGY is not going to solve the problem. The ...

Hi,

I concur with the opinion that the banking system should be
something much simpler. At present, the financial sector is rigged to
favor one group, the bankers, at the expense of everyone else. They
enrich themselves with a plethora of sleights of hand.

Next, I list some points of disagreement and some questions:

  1. You say: "Money should be created on demand, but
    it should be as painless to get rid of it too. That is the problem
    with the current system. which can only do it with lots of hassle and
    waste.
    " Yet your system has the same method of extinguishing
    money as the present system, namely the repayment of a debt. The
    difference, as I understand it, is that in your proposal the
    repayment would happen over a very long period of time. Why would it
    be less painless than in the present system with monetized debt?
  2. You say: “What kind of people ride and fuel trends?
    Everyone does! Is that all they do? It takes a lot of simplification
    to believe that!
    ” I'm not sure what your point is in here. Not
    everyone rides and fuel bubbles, just like not everyone was involved
    in the housing bubble. However, the pernicious effects still exist. Nowhere I
    said that “all people do is to ride and fuel trends.”
  3. I understand the notion of equilibrium of supply and demand.
    My point is that such equilibrium is not static given the constant
    injection of money, and for this reason your statement: “Also,
    the needy will benefit from the ability to spend as much money as
    they need (below 0 balance) though with restrictions as advertised
    by individual firms to maintain par between supply and demand.

    Cannot
    really be fulfilled. Much like traditional monetary interventions of
    central banks who try to aim at a “magical” interest rate that
    will equilibrate the economy, while their intervention changes
    whatever value this rate of interest would have. So it is like a dog
    chasing its own tail. Furthermore it is not clear what you mean by
    the last part of your statement: which restrictions? As advertised
    by individual firms? What is that?

I
never said nor implied that credit problems would not cause
inventory problems. Of course they do. But the problem is deeper
than that. I'm getting the impression that you think that the only
limit to economic growth is the availability of money, and that the
creation of money is equivalent to the creation of capital. If so,
those are tremendously erroneous and dangerous views. Such views
might be nurtured by the observation that for a couple of decades
the Americans have been living beyond their means by simply creating
money on demand (through credit) to satisfy their consumption wants,
thus giving the impression that money is simply a token that can be
created in a whim, that you can get something out of nothing. But if
there is something that the present crisis shows, is that such
behavior cannot be sustained. If you live beyond your means for a
period, then you must expect a following period of living below your
means. What is bad for the individual is also bad for a society.
After the binge comes the time to pay the bills, and that requires
production and real savings. If the creation of money and capital
were the same, then there would be no poverty in the world. Every
country could print its way out of poverty. Obviously this is not
possible.

You
say: “Money
is simply a store of value.

The fact that it is supposed to be a store of value makes it a very
subtle entity and not that simple. You admitted that your proposal
involves the creation of money on the spot. This is followed by the
statement: “if
the economy over the years sustains a long-term duration of
heightened production and consumption, then higher levels of money
will be maintained in the economy in the long run.

This last statement describes what happens in a bubble as well. At the same time, you
agreed
with my initial statement that described money creation as
the fuel that feeds the bubble fire, but yet do not believe that the
increase of the monetary supply by credit creation (on demand) is a bad thing.
Those two ideas are inconsistent and can not be believed
simultaneously.

I
described a classical sound money system in which the value of the
money could not be debased by government intervention nor by the
reckless behavior of other members of society (read bubble-fueling).
Nowhere I said nor implied that such system requires bureaucracy. It
does not follow from what I said that it also involves groupthink.
On the contrary, every individual can make his/her own decisions and
the value of the money will be maintained regardless of the
decisions of others. I further qualified the advantages of such
system by pointing out that the people as a group of individuals
would be able to rein in the excesses of a government.

You
say: “Buying
any size house would be a problem especially because who would pay
for the construction today's houses if no one can make 100% down
payment? We cannot rely on lending to do this unless we let it force
us to increase the amount of money available, invalidating your
version of a people-controlled money supply.

It does not invalidate anything. What I reject
is the idea that people should be encouraged to live beyond their
means. This would be made much easier under a monetary system that
would not allow debasement by inflation. To be able to produce money
on the spot to satisfy consumption is a bad thing. It is
intrinsically inflationary and hurts savers and producers. Credit
could be obtained from the existing pool of savings and lent at
interest. If someone does not qualify or if the society is not
wealthy enough to give everyone a house on credit... too bad. It
would be time to build wealth the old-fashioned way: by producing
and saving. None of which we have in the US to speak of anymore.

What
would control government borrowing and spending would be the same
factor that would control the borrowing and spending of individuals:
the available pool of savings. The individuals would have the
additional prerogative of deciding whether they want their savings
invested in government bonds through direct purchases or through
their banks. That is a prerogative that people do not have today as their choices are rendered meaningless by the government's ability to borrow newly printed money (at interest). It
is not a burden for the individual as you say, it would be a right provided by
the nature of the monetary system. Your comment about lobbyists has
nothing to do with what I am describing. The action of a lobbyist is
basically to bribe congresspeople into diverting resources to some
specific sector. As a whole, the lobbyist group only induces
increased
government spending to benefit some sector at the expense of another.
This is totally unrelated with what I am describing.

Finally,
I need to emphasize: money debasement through expansion of the
monetary supply is indeed an intrinsically bad thing. It is particularly pernicious
when the money is created by debt on the spot. This favors the first
users of the money at the expense of the savers. As I said in my
previous post, in this environment even constant prices would imply
a loss for the people, given the lack of appreciation of the money
due to increases in productivity.

I
do not object that in some form, your proposal would indeed result
in a reduction of the size of the financial sector. But that is not
the point in contention. As I understand your system, it is exactly
like the present one except that repayment of debt happens over a
more extended amount of time. If this is true, then the burden is
yours to show that you would solve the problems that we suffer today
due to the monetary system: destruction of productive capital,
erosion of savings, bubble activities, diversion of resources to
non-productive sectors and an overall impoverishment of a society. Finally, let me emphasize that what I described is a classical sound money system (call it constitutional money), one that has seen the light of day in some prosperous periods of human history and that has been attacked and sabotaged by people who do not like the individual freedom that it entails.
kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Re: TECHNOLOGY is not going to solve the problem. The ...

Hi,

I concur with the opinion that the banking system should be
something much simpler. At present, the financial sector is rigged to
favor one group, the bankers, at the expense of everyone else. They
enrich themselves with a plethora of sleights of hand.

Next, I list some points of disagreement and some questions:

You say: "Money should be created on demand, but
it should be as painless to get rid of it too. That is the problem
with the current system. which can only do it with lots of hassle and
waste.
" Yet your system has the same method of extinguishing
money as the present system, namely the repayment of a debt. The
difference, as I understand it, is that in your proposal the
repayment would happen over a very long period of time. Why would it
be less painless than in the present system with monetized debt.

Because the bank will not lend money. Also, the person does not worry about increasing debt. Instead they just make sure their balance is high enough to get the services they need.

You say: “What kind of people ride and fuel trends?
Everyone does! Is that all they do? It takes a lot of simplification
to believe that!
” I'm not sure what your point is in here. Not
everyone rides and fuel bubbles, just like not everyone was involved
in the housing bubble. However, the pernicious effects still exist. Nowhere I
said that “all people do is to ride and fuel trends."

I understand the notion of equilibrium of supply and demand.
My point is that such equilibrium is not static given the constant
injection of money, and for this reason your statement: “Also,
the needy will benefit from the ability to spend as much money as
they need (below 0 balance) though with restrictions as advertised
by individual firms to maintain par between supply and demand.

Cannot
really be fulfilled. Much like traditional monetary interventions of
central banks who try to aim at a “magical” interest rate that
will equilibrate the economy, while their intervention changes
whatever value this rate of interest would have. So it is like a dog
chasing its own tail. Furthermore it is not clear what you mean by
the last part of your statement: which restrictions? As advertised
by individual firms? What is that?

To prevent having long lines, the business people may have to adjust prices or require people to have a higher balance to get extra service. Such things are advertised as in they are displayed numbers which people can see.

I
never said nor implied that credit problems would not cause
inventory problems. Of course they do. But the problem is deeper
than that. I'm getting the impression that you think that the only
limit to economic growth is the availability of money, and that the
creation of money is equivalent to the creation of capital. If so,
those are tremendously erroneous and dangerous views. Such views
might be nurtured by the observation that for a couple of decades
the Americans have been living beyond their means by simply creating
money on demand (through credit) to satisfy their consumption wants,
thus giving the impression that money is simply a token that can be
created in a whim, that you can get something out of nothing. But if
there is something that the present crisis shows, is that such
behavior cannot be sustained. If you live beyond your means for a
period, then you must expect a following period of living below your
means. What is bad for the individual is also bad for a society.
After the binge comes the time to pay the bills, and that requires
production and real savings. If the creation of money and capital
were the same, then there would be no poverty in the world. Every
country could print its way out of poverty. Obviously this is not
possible.

Well true, but:

Businesses, not just individuals, would have access to the same system. Thus their costs would be signficantly reduced. They would not have to depend so much on the fumbling stock market nor compounded interest loans in order to start a business.

You
say: “Money
is simply a store of value.

The fact that it is supposed to be a store of value makes it a very
subtle entity and not that simple. You admitted that your proposal
involves the creation of money on the spot. This is followed by the
statement: “if
the economy over the years sustains a long-term duration of
heightened production and consumption, then higher levels of money
will be maintained in the economy in the long run.

This last statement describes what happens in a bubble as well. At the same time, you
agreed
with my initial statement that described money creation as
the fuel that feeds the bubble fire, but yet do not believe that the
increase of the monetary supply by credit creation (on demand) is a bad thing.
Those two ideas are inconsistent and can not be believed
simultaneously.

The key is that the bubble should not pop. The reason why the bubble popped is because the money that the shares represent or the houses represent simply wasn't there. You can have a lot of stock value, but if the money is not there, the shares are worthless and return less than what they claim. They are simply just overvalued. Why? It is the greed of the system in the stock market and in the realty industry, what more? That the money supply must increase to support that stupidity is not in debate, but an increase of the money supply can exist without that stupidity established in the first place, and thereby one wouldn't really call it a bubble if it never popped. Why don't you see as many bubbles with most other goods even though the money supply is the same increase? Those markets have less stupidity of course! The money supply is not the inherent reason, the terrible credit and stock market systems certainly are.

I
described a classical sound money system in which the value of the
money could not be debased by government intervention nor by the
reckless behavior of other members of society (read bubble-fueling).
Nowhere I said nor implied that such system requires bureaucracy. It
does not follow from what I said that it also involves groupthink.
On the contrary, every individual can make his/her own decisions and
the value of the money will be maintained regardless of the
decisions of others. I further qualified the advantages of such
system by pointing out that the people as a group of individuals
would be able to rein in the excesses of a government.

Consider a pure gold/silver standard, in which money supply
elasticity is provided by bills of exchange between producers. In such
a system, there would be a prevailing interest rate determined by the
amount of savings in the society. More savings means cheaper credit and
vice-versa. There would not be volatility in the interest rates,
something that would yield two instant benefits:

1. The formation of a parasitic financial sector specialized in gambling (OTC derivatives trading) would be precluded.

2. There would not be surreptitious siphoning of resources from the
productive sector. Remember that a rise in interest rates renders some
deployed productive capital unprofitable and declining rates increase
the costs associated with previously acquired debts.

In such an environment, given that metal can not be printed, a
government in need of money must borrow from the existing pool of
savings by selling bonds. Should the government engage in types of
spending that are not popular (war, insider profiteering, etc.), then
the people could vote with their money and withdrawit from the system.
The price of the unpopular government spending would be an increased
cost of borrowing. That is actual control by the people. This action by
individuals would be effective also in case that the banks were paying
inadequate rates to their long-term depositors. People can't do this
today, as an infationary money supply forces people to keep their money
in the system.

So you are saying that government should simply fund itself through borrowing and not from taxes. But the government does not make any money, so to pay for this, they will need to either collect taxes, or increase borrowing.

It would be hard to withdraw money out of the system entirely because that requires people to use cash. They could not use checks, debit cards, or credit cards and it would be risky to make expensive purchases online. At best, they'll move money to a bank not tied to US government, but that does little to make your wishes come true. Some people would rely on foriegn banks.

To lower interest rates you have to increase savings. But you must remember that digital money that is not printed, not just consumer's non-paper money, but also businesses' non-paper money is stored in banks. All of these things are savings, so if the amount of money in cash is minimal, then the majority of money is saved to begin with. What you must understand is that you need a mechanism for people to produce more than they spend, that means that money should come easy for the businesses and hard for the consumers, yet there is a paradox in that.

As for

You
say: “Buying
any size house would be a problem especially because who would pay
for the construction today's houses if no one can make 100% down
payment? We cannot rely on lending to do this unless we let it force
us to increase the amount of money available, invalidating your
version of a people-controlled money supply.

It does not invalidate anything. What I reject
is the idea that people should be encouraged to live beyond their
means. This would be made much easier under a monetary system that
would not allow debasement by inflation. To be able to produce money
on the spot to satisfy consumption is a bad thing. It is
intrinsically inflationary and hurts savers and producers. Credit
could be obtained from the existing pool of savings and lent at
interest. If someone does not qualify or if the society is not
wealthy enough to give everyone a house on credit... too bad. It
would be time to build wealth the old-fashioned way: by producing
and saving. None of which we have in the US to speak of anymore.To create money on the spot for production is not a bad thing however. Should not business be able to create means beyond their current means? The answer is yes. But an empty bank account is no justice to an entreprenuer who wants to start a growing business. Credit entirely from savings would have abnormally high interest rates, and it would limit credit to the amount in savings. Once you compound the interest rates so much that it exceed the amount of savings: Watch out! You are not solving the problem by not getting rid of compounding interest. It will cause credit bubbles and changing how the money supply grows (even by making it constant) will not change that fact. People will file for bankrupcty for credit bubbles even in your system.

What would control government borrowing and spending would be the same
factor that would control the borrowing and spending of individuals:
the available pool of savings. The individuals would have the
additional prerogative of deciding whether they want their savings
invested in government bonds through direct purchases or through their
banks. That is a prerogative that people do not have today as their
choices are rendered meaningless by the government's ability to borrow newly printed money (at interest). It
is not a burden for the individual as you say, it would be a right provided by
the nature of the monetary system. Your comment about lobbyists has
nothing to do with what I am describing. The action of a lobbyist is
basically to bribe congresspeople into diverting resources to some
specific sector. As a whole, the lobbyist group only induces
increased
government spending to benefit some sector at the expense of another.
This is totally unrelated with what I am describing.

Interest will cause every excess borrower to owe more than they have, or even more than they spent to begin with. That is the exact same problem as living beyond ones means. You did not solve the problem.

Finally,
I need to emphasize: money debasement through expansion of the
monetary supply is indeed an intrinsically bad thing. It is particularly pernicious
when the money is created by debt on the spot. This favors the first
users of the money at the expense of the savers. As I said in my
previous post, in this environment even constant prices would imply
a loss for the people, given the lack of appreciation of the money
due to increases in productivity.

Then why can't we have a money supply with one dollar and make it run the economy, say, for 1000 years? Because it is not flexible enough. One is ignoring the fact that population still grows and that if production increases on par with the money supply, then prices will not inflate as much. With a constant money supply You are essential requiring money deflation rather than constant prices. How are you going to get that to work? You are talking zero about how to make the population growth rate 0% in a nation with lots of immigration.

Also, money that is digital spends 100% of its time in banks. Money no longer remains digital when it is redeemed in cash and that is when it is no longer a deposit. Then you just ban paper-money, but that won't solve the problem either!

I
do not object that in some form, your proposal would indeed result
in a reduction of the size of the financial sector. But that is not
the point in contention. As I understand your system, it is exactly
like the present one except that repayment of debt happens over a
more extended amount of time. If this is true, then the burden is
yours to show that you would solve the problems that we suffer today
due to the monetary system: destruction of productive capital,
erosion of savings, bubble activities, diversion of resources to
non-productive sectors and an overall impoverishment of a society.

The key is that obligations should never exceed payment. The nature of compounding interest makes this mathematically impossible! And if you have a growing population with a constant money supply, payments will go down and obligations will rise, causing a very devastating depression. By the time people will die, all the wealth would be gone!

Finally,
let me emphasize that what I described is a classical sound money
system (call it constitutional money), one that has seen the light of
day in some prosperous periods of human history and that has been
attacked and sabotaged by people who do not like the individual freedom
that it entails.

Again, how do you propose that everyone use cash not stored in a bank as deposit when people are going towards digital money and online stores?

mred's picture
mred
Status: Bronze Member (Offline)
Joined: Apr 8 2008
Posts: 96
Re: TECHNOLOGY is not going to solve the problem. The ...

I see... you:

a) want something out of nothing and think that this is possible

b) confuse money with capital

c) don't distinguish between a bubble and sustainable economic activity

d) don't seem to realize how inflation of the monetary supply (money debasement) is harmful, or how the abundance of something makes that something less valuable.

e) don't understand how bubbles can only be fueled by fiat currency expansion in a runaway process while sound currency prevents bubbles to grow dangerously

f) don't realize that compound interest is present in principle in any economic activity that involves a return on capital, not only in the banking sector.

g) don't realize that the amount of money is arbitrary. You can add 10 zeros to every bill representing any dollar amount, that doesn't mean that you can support an economy 10 orders of magnitude larger, just that you debased the monetary unit by that same factor. 

h) don't realize that appreciating money is not the same as deflation. Deflation, like inflation, is a monetary phenomenon always. It has to do with increasing or decreasing money supply only.

i)  don't realize that prosperity can only be achieved by production and saving, and that no amount of money-printing is going to change that.

j) don't realize how the distinction between electronic and paper money is irrelevant in this particular discussion.

I never said that cash should never be stored in a bank.  Finally, what I described is not "my system", it is a system that emerged organically from the free economic interaction of people. It is historical. There is no need to re-invent anything, just to take the power away from the bankers and their debt-based fiat money system. That's all.

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Re: TECHNOLOGY is not going to solve the problem. The ...

I see... you:

a) want something out of nothing and think that this is possible

When demand outstrips supply, that is living beyond our means. That is not sustainable. Production must be reinvested in greater production in order for output to increase. If it is not reinvested in greater production, labor is allocated not towards increasing output, but maintaining or reducing it instead. If people are weary about their bank account, they get tempted to borrow. You're saying the government should borrow money from the people. How can one believe that the government will guarantee that interest will be paid? Is borrowing going to stop them? I think not! Better come up with a different idea.

b) confuse money with capital

Money is asset. The asset can be traded for physical capital. It can be used to develop financial capital. So what is your point?

c) don't distinguish between a bubble and sustainable economic activity

A bubble is unsustainable, and sustainable economic activity is sustainable. Our current system is not sustainable. Compounding interest is not sustainable (just one the many observations by the author of this site). So what is your point about your idea that requires the government to owe interest on borrowing? What is it about your idea that makes it so much better, or so much more revolutionary? What does you idea contribute to this site. Either you can or cannot answer any of these questions.

d) don't seem to realize how inflation of the monetary supply (money
debasement) is harmful, or how the abundance of something makes that
something less valuable.

You have utterly zero acceptance of the fact that the money created in my system can only exist as long as the period in which the subtraction of the balance has to fall. That is a matter of mathematics and not ideology. If 10 dollars are added to the seller's account immediately and 10 dollars is subtracted from the buyer over the course of 10 months, how much money did I really create in the long-run? How is this not more sustainable than our system of credit which has compounding interest built into it? How then does this require exponential obligation debt?

e) don't understand how bubbles can only be fueled by fiat currency
expansion in a runaway process while sound currency prevents bubbles to
grow dangerousl

They can also be destroyed by fiat currency contraction. How is a system like your "government owes interest and debt" plan any more sustainable than our current system which finances the financing of financing?

f) don't realize that compound interest is present in principle in any
economic activity that involves a return on capital, not only in the
banking sector.

f) You don't realize that compound interest is inherently unsustainable.

g) don't realize that the amount of money is arbitrary. You can add
10 zeros to every bill representing any dollar amount, that doesn't
mean that you can support an economy 10 orders of magnitude larger,
just that you debased the monetary unit by that same factor

g) You't don't known my opinion here. Don't make claim to facts which don't exist. Money in inherently arbitrary for it is product of design. The number of zeros shows how much money you can trade for other money of the same currency. That doesn't say anything about how big an economy is. Where is your point?

h) don't realize that appreciating money is not the same as deflation. Deflation, like inflation, is a monetary phenomenon always. It has to do with increasing or decreasing money supply only.

It is obvious that is not the same thing. Money can appreciate over time <--- That says nothing about whether it is circulating. That says nothing about what it can trade for in other markets.That says nothing about what it is worth in terms of real goods.

i)  don't realize that prosperity can only be achieved by production
and saving, and that no amount of money-printing is going to change
that.

If people look at the computer screen and see that they have no money left ---> What are they going to do with all the physical capital they still have? They will be forced to strive towards the situation in order to become profitable again. Do you think that a system that is fragile because of the use of compounding interest going to make the situation any better? Do you think we need a government that borrows money at interest to the people only to tax them to pay for that interest? Do you think that there is a good chance for change that the interest will go back into people's bank account? Do you think people can stand to buy trillions of dollars of government bonds every year? Do you know how much those requirements will be distributed across citizens? What will they do with those bonds if they move out the country?

j) don't realize how the distinction between electronic and paper money is irrelevant in this particular discussion.

j) You don't realize that I started the thread, so I am defining the discussion more than you.

I never said that cash should never be stored in a bank.  Finally,
what I described is not "my system", it is a system that emerged
organically from the free economic interaction of people. It is
historical. There is no need to re-invent anything, just to take the
power away from the bankers and their debt-based fiat money system.
That's all.

How? Do you know where to find a "financial magician" who can do this for you; OR do you really believe that such things are possible without promoting an alternative within the current framework? Will it work by dismanting the system first then deciding what to do with the ashes? Or will it somehow involve a very powerful director that will make it all happen? Or will it happen by making protest on the street shouting for unilateral change of the system? Will it involve the use of an online currency trade medium which all of Americans must accept? In short, what political goals need to be set forth to actually achieve that independence from those who manage our money?

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
Re: TECHNOLOGY is not going to solve the problem. The ...

I got as far as: 

Technology - This allows us to be more productive, efficient, and better for the natural environment.

Are you kidding me?  Computers have definitely slowed work down....  And they each require 500 pounds of fossil fuels to make, and they consume energy right up until they die.  Call that efficient?  And better for the environment?

Technology has allowed us to drive bigger cars because they use as much gas as older small cars used to.  Is that efficient?  Good for the environment?

Technology is fun, no doubt about it.  It allows me to critique something you wrote half way 'round the world.  So what?

Then, when I started reading your post regarding the economy, it sent my head spinning.

Sorry, but you really should re-read mred's critique, because IMHO he is spot on....

Mike 

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Re: TECHNOLOGY is not going to solve the problem. The ...

I got as far as: 

Technology - This allows us to be more productive, efficient, and better for the natural environment.

Are you kidding me?  Computers have definitely slowed work down.... 
And they each require 500 pounds of fossil fuels to make, and they
consume energy right up until they die.  Call that efficient?  And
better for the environment?

Technology has allowed us to drive bigger cars because they use as
much gas as older small cars used to.  Is that efficient?  Good for the
environment?

Technology is fun, no doubt about it.  It allows me to critique something you wrote half way 'round the world.  So what?

Read my title again ;)

I am saying it helps us. That does not mean it also can't hurt us. That is why inspite of what it can do, it is not the solution. The effectiveness of technology is extremely hindered by our relatively antique financial models. The only way to make techonlogy serve us faster, cheaper, and better is a thriving economy with no huss and fuss. Our financial system has more than 100 times more overhead than we need for an efficient service for deferred payment. The goal of reducing that overhead can only be achieved by changing the mechanics - and therefore the mathematics of finance itself. A viable system of deferred payment that uses no compound interest while achieving objectives as simple as a baking shop, to as far reaching and expensive as a space tourism program, without the issuance of lent money from banks of any kind, is the goal I have in mind.

Then, when I started reading your post regarding the economy, it sent my head spinning.

Sorry, but you really should re-read mred's critique, because IMHO he is spot on....

Mike 

Why do you need to post here if you have no critique of this? You don't even understand what he is critquing, so how can you convince me to take you seriously? I can't take him seriously because he is throwing his own proposal along with his misunderstanding of my idea. Just now he could not answer me directly so instead he just made a laundry list of his beliefs about my arguments. His dumbest one, the first one the list, claimed that I believe in "getting something from nothing". That is a pure fantasy belief fueled by his bad ego.

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Re: TECHNOLOGY is not going to solve the problem. The ...

I want to ressurect this thread to see if anyone can really understand the points I have been making.

Premise:

Frequency of trade - When trade occurs, accounts storing money are changed. Most transactions obey a conservation of money principle, where if one account is charged some amount, then that same amount must be added to some other account. In the conservation of money principle, the total amount of money does not change, and nor does the total amount of liquid assets. What changes is the distribution of liquid assets among households and firms. Over time, variances in behavior entitles some accounts with surpluses and burdens other accounts with shortages.

Idea:

New Balance System - The key solution to our problems with the compounding-interest credit markets is abandon them entirely as a tool for finance by replacing them with a viable deferred payment service which can be termed the New Balance System. The New Balance System is a system that forgoes the conservation of money principle. As frequency trade increases, the sum of money balances will increase, and as the frequency of trade decreases, the sum of money balances will decrease. It must be done as a two-front matter, as follows:

  1. The impact that spending has on the monetary balance comes slowly.
  2. The impact that income has on the monetary balance comes quickly.

Cautions:

Bi-directional money balance principle - When the overall trade frequency is constant, the only way it is possible for person to accumulate a long-term positive balance is for a long-term negative balance to exist [in some other account]. Therefore one should not try to add money to the system to get rid of the negative sign; defeating the system this way has negative legal, economic, and ethical consequences. To properly economize real-world scarcity, the balances of the accounts (positive or negative) must be recognized as a figure of merit for transaction acceptance, an idea similar but more rudimentary than credit approval. In conditions where so many buyers are requesting services that supply cannot reach demand, business may non-discrimantorily reject all customers who have a balance below a certain value advertised. This makes a higher balance meaningful and worth working to earn and maintain even though people would be allowed to spend without limit when they have negative balance.

jneo's picture
jneo
Status: Platinum Member (Offline)
Joined: Jan 7 2009
Posts: 742
Re: TECHNOLOGY is not going to solve the problem. The ...

 

"Are you kidding me?  Computers have definitely slowed work down"

Totally disagree with you on that statement.  Technology is the only tool that solves human problems.  Technology has increased our factors of production to be used to help the economy.  

We went from mailing letters to faxing, and e-mailing.  Men on assembly lines, to machines doing the work with no break or vacation time.

the list goes on and on.  

Computers have made the world work better, and faster.  Kind of like how you can express your opinion with a few clicks of the mouse on your computer to comment on this site.  

 

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