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Reuben, I agree ALL profits MUST remain in circulation. But it’s possible.
CM states the money supply must expand by its very design. My exemple is theorical, hence simplistic. It just proves that money supply must not expand by its very design.
In practice, it does expand or fluctuate. I don’t mind whichever reason: velocity, investment, tendancy of banks… But by its very desing, it must not.
Reuben, and everyone else,
Here is the model that I show lower down, reworked to show that in order for the money in circulation to remain constant, the money supply must grow. The banks expenses will stay a $5/day, so the profits that come out of circulation equals "interest due – $5" In order for the money in circulation to remain constant, the daily loans must be $105 for the second year.
There is no money out of circulation! No interests are "destroyed", only the principal is. All interests are profits for banks which, ultimatly, MAY all remain in circulation.
My point is that the interest-bearing-debt-money-system must not expand by its VERY DESIGN as CM states.
Banks are like any other business, they "sell" debt with some profit called interest.
EXCEPT that banks MAY create more money by freezing some their profits (interests) into reserves and make more loans with these additional reserves (at least 10 more times). They MAY do so, but MUST NOT. Banks are NOT FORCED to lend more money, although they have a natural TENDANCY to do so since it’s how they make profit.
But by its VERY DESIGN, the interest-bearing-debt-money-system MUST NOT expand.
I hope you see the difference between "very design" and "tendancy". And also "may" and "must".
Same thing in France, but 1000 Euros for cars > 7 years (if I recall well). They already did such temporary bonus twice in the past and it proved to have absolutly no effect in the long term since it’s only temporary. Indeed, when such a temporary stimulus is annonced, those willing to buy will wait until it starts; and some will anticipate their purchase before it ends. But it does not create any more demand. That’s just wasted money given to a few opportunists. We have a similar temporary stimulus in Belgium: a VAT (retail tax) cuts from 21% to 6% for new houses. Absolutly ridiculous.
I’d have prefered a stimulus to demolish cars and swap to bicycle or get a free public transportation season tiket as long as you don’t have a car.
I agree the Fed and other Central Banks do indeed expand money on the belief that "steady low inflation is a requirement for the economic stability". So money expansion is a deliberate policy of CBs, but not a requirement of the interest bearing debt system by its very desing as CM states (what Reuben and mred call mathematical requirement).
That’s a big difference. Let me explain. It’s too easy for an opponent of CM to argue:
Who are you reffering to? Chris Martenson? This guy is just plain wrong, you can’t trust him! His Crash Course is full of mistakes like "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" or "our debt-based money system […] is an exponential system by its very design"…
Take it as you like, hard and harsh, but it’s too bad Chris Martenson is providing weapons to his opponents to destroy his own Crash Course!
I do believe CM’s message is 100% plain correct, but it must be 100% sound and uncontestable to be credible.That’s the only reason I argue against these statements CM makes in Chapter 8.
Yes, that’s the point.
At Chapter 8, Chris Martenson states (emphasis are mine):
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
our debt-based money system […] is an exponential system by its very design.
perpetual expansion is a requirement of modern banking
I cannot agree on the above statements.
However, I agree with this statment "the amount of debt in the system will always exceed the amount of money". But as I said, in real world not all outstanding debts are due at once. Only part of the it is due day after day, and all the interests are ultimatly recycled into the economy.
Chris Martenson are you reading? Please comment.
When the ECB (European Central Bank) earns a profit on securities, it pays it out as dividend to its shareholders… which happen to be the states inside the eurozone. So most of the money payed in interest to the ECB, is payed back as a dividend to the lenders, creating effectively an almost interest free loan.
In fact ECB’s shareholders are National Central Banks (CB), not the states. See Art 28 of ECB Statute
Some CB are 100% nationalized (eg in France) and then all their profits indeed come back to the Govt.
But other CB are not, eg in my country, Belgium, the CB is 50% owned by state, 50% owned by private shareholders. Anyone can even buy stock of National Bank of Belgium. See Art 4 of NBB statute. That beeing said, the profits are distributed according to the law. The maximum dividend per share has even been lowered recently, so most of the profits comes back to the Govt.
I don’t know how it works in other states.
You should be able to find gold coin shops in the Netherlands. Anyhow, if you drive to Brussels, you’ll find other shops near "de Beurs" (Stock Echange) in particular in Zuidstraat (street at the rear of Beurs going south). I understand you fear for counterfeight coins, so I would advice to buy at well established shops. One I would recomand is Gold&4X (formerly Munters). Someone else also mentioned me EuroGold also near de Beurs, but I don’t know this shop.
Before driving a long way, please check what coins they actually have in stock. Displaying sell prices on their site does not necessarly means they have the coin in stock. Not sure you’ll find Kruggerand or Maple Leaf or other 1oz coins since there is much demand.
I agree perpetual debt is a requirement, but the money creation/destruction process does not require perpetual expansion.
Interests are neither created nor destroyed, they remain in circulation. When paied back, interests are taken from other actors. When a bank collect interests, it spend thems back in the economy or invest them.
Beeing a bank or even the Fed does not make any difference with other business. Retail stores make profits by selling goods at a higher price it cost them; banks make profits by "selling" credit at a higher price it cost them. Banks’ profits are called interests, but I cannot see any difference here. Utimatly all profits are invested or spent back into the economy, whichever their source.
Maybe the capitalist system does freeze some of the profits, or divert them from normal flow of economy, but this is not a feature of the money creation/destruction process itself.
scepticus, it does not make sense since it’s totally different the way it works in the real world.
The delay between payments do not change anything. If everyone should pay 1/12th every month, then each day, 12 persons will pay 1/12th of $110, so in total $110 is payed back each day.
mred – the problem I was referring to is the "exponential growth" of interest as described by Chris Martenson. Since only the principal of debt is issued, any subsequent interest payments must be taken from the future circulation. Of course, the circulation must also support principal debt obligations and commerce.
I cannot agree with you and Chris here as I replied in the thread where Chris gave his answer: Is perpeptual expansion really a requirement for modern banking?
Stating that "perpetual expansion is a requirement of modern banking" is just a fallacy for me.
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.
Just a simple example. Assume a total money supply of $36,500 sufficient for economy to function properly. Each and every day someone borrows $100 for 1 year with 10% interest. Let the economy turn for some time. Each and every day someone pays its debt contracted the previous year: $110 = $100 principal (money destroyed) + $10 interest (profit for bank) and someone else borrows $100 (money created). So each and every day, the money created equals exaclty the money destroyed, there is no expansion. Each and every day the bank makes $10 profit, which it uses to pays its employees, suppliers, taxes, shareholders… which will spend they money. And so on forever. There is no shortage of money since each and every day, there is $36,500 in the system. Of course this is over simplified, sometimes more or fewer loans are made, bearing different interests, having different maturities, GPD varies from year to year… but on average, this how it could work. So modern banking does NOT require perpetual expansion.
The banking system does not require money expansion, but the Fed and other Central Banks are indeed expanding money supply at a (much) higher rate the GDP grows. Which induce price inflation soon or later. In fact these days, they "pray" for some inflation, because they fear for deflationary spiral.