Debitism

[Capitalism Forever]

You have a credit card or a check and the money wanders from account to account by nothing but changing numbers.

The money wanders from account to account because the owners of the accounts provide goods and services to each other.

Whenever money is credited to my account, it is because I have done some work for my client. Whenever money is debited away from my account, it is because I have bought something I wanted. The bank will never owe me any money I haven't earned, and I will never owe the bank any money I haven't spent on goods. Just when is money created out of thin air?

The problem starts with government debt, which is not paid back.

The problem starts with taxation, but do not blame the banks for that. Government debt IS actually paid back, but it is paid back with stolen goods--the goods I haven't been able to buy because I had to pay taxes, or (what was more typical in earlier decades) because the purchasing power of my money has decreased due to inflation.

[Felix]

Whenever money is credited to my account, it is because I have done some work for my client. Whenever money is debited away from my account, it is because I have bought something I wanted. The bank will never owe me any money I haven't earned, and I will never owe the bank any money I haven't spent on goods. Just when is money created out of thin air?

The moment you go to the bank and say: I want a loan. Then the bank books money to your account and books your debt on its own to balance the sheet.

You then spend that money on goods someone has produced. He then uses it to pay back his debt plus interest. (Well, actually this is usually a company - Single people don't build cars.) Now you are the sucker, because basically he transferred his debt plus interest over to you. Now you have to work to pay back your debt (plus interest, which doesn't even exist in the market, yet). You have to find the next sucker. And at some point, there is nobody to be found and the whole game crashes.

The problem starts with taxation, but do not blame the banks for that. Government debt IS actually paid back, but it is paid back with stolen goods--the goods I haven't been able to buy because I had to pay taxes, or (what was more typical in earlier decades) because the purchasing power of my money has decreased due to inflation.

The government would pay it back with stolen money. But how? Paying it back would lead to deflation corresponding to the prior inflation. Prices would fall to pre-inflation-level. And they would fall quickly, causing companies on a wide range going bankrupt because they are now unable to pay back the debt they financed production with. And new companies wouldn't start. Hardly anyone would take up new debt. And then there isn't even enough money to go around to pay back the principal.

And I doubt that - for example - Japan is capable of paying back its debt. Don't they have a debt of around 120% of the GDP? How do you pay that back? Germany has debt of 60-70% of the GDP and they have trouble paying even the interest and they take on new debt every year.

The perfect government debt is zero.

[Capitalism Forever]

The moment you go to the bank and say: I want a loan. Then the bank books money to your account and books your debt on its own to balance the sheet.

So I owe the bank $100 and the bank owes me $100. Don't the two cancel out each other?

As long as my loan is deposited in the bank, the bank hasn't really loaned me anything. Only when I withdraw it, either in the form of cash or goods purchased against my account with the bank, do I actually obtain the loan. When I owe the bank $100 and the bank owes me nothing, that's debt!

Now you are the sucker, because basically he transferred his debt plus interest over to you.

I have a car, which will allow me to get to the office faster, earn more money, repay the loan and its interest--that is, pay for the car--and take my girlfriend on a ride every weekend. If you call this being a sucker, then I want to be the biggest sucker in the world!

Now you have to work to pay back your debt (plus interest, which doesn't even exist in the market, yet). You have to find the next sucker.

I just found him--in the person of my boss, who is willing to pay me more for working more hours and producing more for his company. You see, he too is trying to be as big a sucker as possible!

And at some point, there is nobody to be found and the whole game crashes.

Honestly, Felix, the real sucker is you, for having fallen for such a laughable "theory."

[fatdogs12]

In any market, every dollar that enters it has to leave it. This means that any person's profit has to happen at the expense of another person's money. And more importantly: Not everyone can profit. One person's profit is another person's loss. Now I'm not talking about felt benefit, but about actual measurable profit:

Namely, you enter the market with y Dollars and leave it with y+x Dollars. It's a mathematical necessity that if someone gains money, someone else loses it.

Now every company enters the market with the goal to make such a profit. And as far as I see it, most of them have to fail.

The main mistake made by Austrians is that they confuse money with felt benefit:

The idea held is: I have 5000$ and I want to buy a car and it is worth 10000$ to me. Then there is the guy who sells that car to me for 5000$, because that's what it's worth to him. I then get a car worth 10000$ and he gets his 5000$ and it looks like I have made a profit of 5000$. But I have not. All that is not profit, but felt benefit. It's all in my head. I can't invest these 5000$, I can't pay my bills with it. Simply because they don't exist. They are a way of expressing my happiness about the car. But it creates no additional money. All we have is a car and 5000$. Like before. The difference is that I am happier about having the car than he is. But that's not profit. Profit would be if I would then sell it to someone else for 6000$. Then I would have made 1000$ of profit. It's this difference that's not seen in economics that makes me doubt the theory of profit by mere exchange.

I have wanted to write on this thread but I have held back till now. If I understand what you mean (and I think I do after all the posts), I believe that your problem is akin to philosophising [sIC i'm sure] in mid stream. You are starting with a discussion of debt and money in relation to the creation of wealth without looking at what economics is, what values are and what their relationship is. The problem with economics and money is that you simply cannot start learning about economics by starting with money any more than you can start leaning about ethics before learning about man. (you can learn about it by memorization only)

Money is used as a tool for efficiency which comes in later in an economy's growth, it's not needed initially because it's not very efficient if you have just a few people that make up an economy.

Now in a capitalistic society everyone (in theory) can gain wealth at the expense of no one. Lets take an example to illustrate this point but first we must remember that the entire basis for any economic activity is the fact that human beings have values, they have things that they "act to keep or gain". Since there are few values that exist without effort (like food and clothing) we have to put out actual effort in order to gain these values.

With that in mind lets start our example, lets say we have a group of 10 people who are taking a boat ride in the ocean but the boat they gets flooded and they have to ditch right onto a desert island. (like Gilligan's Island) Now they are all on this island and don't have a way to get off (assume that they reason that leaving the island is impossible for this example) They realize that they need to survive on a daily basis and this is indeed the start of thier economy.

Now this island has a few variety of fruit and all pretty abundant so there is no real risk of going hungry. They could also go fishing if they wanted to. Of course none of this is a reality yet so they all have a choice of how they are going to survive individually. Now initally they start out just picking fruit off the trees each for himself. Now that lasts a week or so but then some people start getting tired of eating the same thing and they really want to eat some of that fish (a value now). They realize that they will first need to learn how to make a fire in order to cook that fish (another value). Now lets say a few of them try for a week or so and one of them named Jim finally learn how he can create fire by rubbing some sticks. Now he has something valueable that others want, he has created some wealth for himself. But of course he spent a lot of time achieving this fire skill and he doesn't want to just give his new skill away for free. He says that in return for giving him 2 fish he will cook both and give one back to the catcher of the fish. (so they both get 1 cooked fish to eat)

Now lets say there are 4 other guys who want to eat fish, so they figure 'hey all I gotta do is catch 2 fish for myself and I can get myself a nice warm fish dinner'. So Jim sits back while 2 of the 4 guys go and catch 2 fish each. (the other 2 people were unsuccessful at catching fish) Jim cooks the fish and he and the other two guys enjoy the fruits of all thier labors. Now they have all benefited without anyone suffering or being stepped upon.

Obviously this is not a zero sum game as everyone has indeed gained. Jim for his very valuable research and development (learning how to make fire) has benefited him the most as he has not had to work very hard since his discovery and everytime someone wants some fish cooked he will benefit by one fish. Okay so we have seen 3 economic gains so far, the discovery of fire, the two fisherman enjoying a dinner of fish and Jim who got a huge benefit of 1 fish for dinner and one left over.

Now Jim realizes that by tomorrow that left over fish is gonna be fuuuuunky smelling and nasty but he just can't eat anymore. However he does have two people who very badly want to eat that fish, so he tells them, "I'll tell you guys what, I will be willing to trade this for whoever gets me the most mango's by the end of the day". Now one of the two remaining guys Palo was able to get 15 mango's while the other guy Tom only got 10. Now Jim gets 15 mango's to add to his pile of assets.

Now lets say that for the average islander it takes an hour to pick 5 mangos (they are aplenty but hard to get a hold of). Jim knows the next morning that he can probably expect at least 4 fish he will have to cook and maybe more if more are caught. Because of this he figures that it would help if he had some sort of real type of cooking surface which is more permanant and bigger. Jim also knows that he can count on the fact that the other people on the island want mangos and that they will be glad to experiance a time savings in work if they could have an activity that yielded better results. (more mangos per hour)

Jim sets up a deal he will give Bruce -- who doesn't like fish -- 6 mangos if he will get some rocks and make him a little cooking surface. Now here again both people benefit, Jim gets a bigger and more permanant cooking surface (a value) and Bruce gets a 6 mango's instead of his usual 5 for an hours work. Here again is a win / win situation. There is actually an economic expansion because Bruce is now gaining more than he usually would.

DEBT TIME

Now how does debt fit into this picture and is there nessasarily a loser in a debt situation? Lets continue with our story and see:

If you recall from earlier Tom was one of our unsuccessful fisherman. Now a few weeks have gone by at this point and the two fisherman who know how to fish have been catching about 8 total fish a day. Enough that about once a day he can afford a fish, so he is happy but he is basically living mango to mango to get these daily fish. Tom had an idea though, he figured he could use some of the local plants to fashion a net so he could then catch fish at probably a more efficient rate than the other two. The only problem is that he figures it will take a week or more to fashion the net and during that time he really won't have an opportunity to gather mangos. So while he could just do a little bit of work on the net at a time then go gather mangos it could take him months to finish. A better possibility though is him getting a loan of food so he can finish the net in the week it would take.

Based on this idea Tom approaches Jim, "Hey Jim, I noticed that you have accumulated a lot of fruit and everyday you have 4 fish that you either eat or sell. I have an idea that will likely get me to gain even more fish for you each day however what I need is a some food for a week so I can make my device". Jim thinks about it and thinks Tom to be an honest man so he agrees and sets his interest. "I will agree to that deal however in return I want 2 days worth of food for every day that I give you food" (100% interest). Tom agree's and he is off to start work on his net.

Now at the end of the first week Tom is done and he takes it out to get some fish. On his first day he alone catches 7 fish. This brings up the total islands fish supply to 15 fish a day. He has now increased productivity in fish catching by almost double. It's a fantasic thing. Everday he eats 2 fish and gives 2 fish to Jim as the expense of cooking the first 2, the last 3 however goes to paying back his debt to Jim. In short order Tom has paid back Jim (less than a week) and now Tom has started to create wealth for himself. He now produces almost what the two other fisherman make combined. Getting this loan and therefore debt allowed him to go from just subsistance on fruit to being the next most wealthy guy to Jim.

Was this situation beneficial to everyone? Certainly so! Everyone now can get fish at cheaper prices because there is more to go around. Without that loan that particular gain in productivity would not have happened.

Now lets consider also that maybe the maximum demand for fish is about 11 fish a day on the island. So lets say that the other two fisherman are now where Tom once was, they are not really able to get to far ahead because Tom came in and increased the supply so much. So one of the fishermen Alex has decided there is no point in just making so little as far as food goes. He figures it's better to go and try to find something different to do, something that people will have a demand for.

He comes up with an idea, "what if I created a small boat that could hold a reasonable weight? If I did I could go out deeper in the ocean and catch other fish, crabs, small octopus or possibly take some of that sea weed out there and trade that for something." Now Alex really wants to do the job but it's going to take quite a while. He figures it will probably take him a month and a half to make the boat, which of course will mean a lot of debt. So it's very risky, especially since he doesn't know for a fact that it will work. For him though the rewards could also be large, he could bring in many things which would be very valuable to many people on the island.

While there are 5 who don't like fish they all would like to have some crab or octopus. This could make him very wealthy in the end. Of course if it fails he will have to try something else in order to make money in order to pay his loan back and it will take quite some time. At first he approaches Tom (our New Money man), Tom realizes that this would be a big investment on his part and if he lost his investment it would take a big toll on him. He says he will put up 2 weeks worth of food to fund the deal in return for a months worth of food (100% interest). Now all Alex needs is another months worth of a food loan and he can get started. He approaches Jim the BBQ man and Jim has some surprising news for him. He will give him a loan for the whole month and a half and he only wants 90% interest.

At this point Jim has accumulated enough wealth that he can afford to easily take this risk and do it cheaper than Tom because he has such a greater supply of wealth. Even if it was a while before Alex paid him back he would be fine and could survive no problem. He realizes that the gains are reasonably likely and well worth it.

Now again we have a win / win situation with no one getting hurt. Even Alex has gotten a cheaper interest rate because there is more wealth to go around! How fantasic! I hope this makes it reasonably clear that one person gaining wealth does not come at the expense of another person. If Alex is successful there will be three people who are now wealthy on the island.

And maybe at some point they will figure out enough to get off that island :-)

[Capitalism Forever]

That was a great story, fatdogs12! I wish all economics professors could be like you!

[Felix]

Thanks again fatdogs12 for your good and lengthy example. I agree with everything you described. But my point was something different. You described economy and debt relationships in a barter system, where goods are produced and exchanged. In your example it is possible to pay off the debt by creating more goods as the debt is to be paid in goods. I agree that if this is the case, there is no problem.

My problem is that I think that this picture changes completely when money enters the picture. You may be able to create additional goods, but you can only create additional money by accepting a corresponding debt (in todays partial-reserve banking system). In a pure barter economy, this is even impossible.

Hm. Maybe I can illustrate it this way:

Jim and Tom (the two rich guys on the island) have five gold coins each, which amount to all the gold there is on the island. (This makes sense because gold doesn't rot (unlike fish or other food), it's the perfect means to conserve value) Jim borrows his 5 coins to Alex and so does Tom, each wanting 6 coins in return three months later.

At this point Alex is screwed as there are only ten coins in existence and he has to bring back twelve.

Let's say that he spends his ten coins and builds a ship and fishing net. He then uses that to catch more fish than anyone else, but it doesn't help him at all. His contract says that he has to pay back in gold. And even if he manages to get all the coins back and has a ton of fish and a ton of fruit, he can still not pay back his debt because he lacks two coins.

Now this example was extremely simplified to make a point. Usually there are more people involved, keeping this from being as obvious as I made it above.

These are the simplifications:

1) There are no other coins is circulation

Even if there were at some point other coins in circulation, they would - in the end - end up in Jim's or Tom's hand.

2) Alex is the only one who borrows

Let's say Alex only borrows 5 coins from Jim and Palo borrows 5 coins from Tom to build a mango-picking device. Now at best one of them will be able to pay back his debt while one of them will necessarily fail.

Alex will win and Palo will lose.

My point here is that the existence of borrowed money completely distorts this barter situation. A money economy is fundamentally different from a barter economy.

[IAmMetaphysical]

Felix, you are totally missing the point. Money has no value, not even gold, unless someone wants it as jewelry. It is not the gold that makes value, but work. its not money that makes value, but work. Having ten dollars is not enough for it to be able to buy you ten dollars worth of stuff. The reason it buys you ten dollars worth of stuff is because we all have agreed to having that ten dollars REPRESENT ten dollars worth of work, and we agree to accept it in lieu of work or physical product so that we can exchange it for someone else's work/product.

I will let Ayn Rand explain the rest:

Money is a tool of exchange, which can't exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value. Money is not the tool of moochers, who claim your product by tears, or of the looters, who take it from you by force. Money is made possible only by the men who produce.

When you accept money in payment for your effort, you do so only on the conviction that you will exchange it for the product or effort of others. It is not the moochers or the looters who give value to money. Not an ocean of tears nor all the guns in the world can transform those pieces of paper in your wallet into the bread you will need to survive tomorrow. Those pieces of paper, which should have been gold, are a token of honor--your claim upon the energy of the men who produce. Your wallet is your statement of hope that somewhere in the world around you there are men who will not default on that moral principle which is the root of money.

[IAmMetaphysical]

Also, in your example, since the gold was so rare and static it was a bad unit of currency. Gold ahs to be mined, and mining is work. So gold is a goo d standard that can not be artificially inflated too easily. Did you know that salt was once currency???

The bottom line is, that not everything can be currency, because not everything can accurately REPRESENT work/product.

[dark_unicorn]

Also, in your example, since the gold was so rare and static it was a bad unit of currency. Gold ahs to be mined, and mining is work. So gold is a goo d standard that can not be artificially inflated too easily. Did you know that salt was once currency???

The bottom line is, that not everything can be currency, because not everything can accurately REPRESENT work/product.

I have a question about the Gold Standard, does it neccesarily have to consist only of Gold? Can Platinum or Silver possibly substitute for Gold because they are also fairly rare and durable? I'm just curious as to why it is particularly gold that should be the standard of worth.

[IAmMetaphysical]

I'm not really an expert but I would say that yes, silver can be currency, also platinum. Like I said SALT used to be currency. Really anything that takes work to make or find or mine, and is portable enough can be currency, because it is only a symbol of work. If it takes you say a day to mine a pound of gold, then that pound of gold will be worth a days worth of your work. Same with any other substance. Same with paper money. It takes relatively little work to make paper money, you can make millions in one day(print them I mean) so thats why if you did, a million dollars would only be worth a day's worth of work, so then a dollar would be worth say three seconds. Having to carry around that much cash wouldn't be that efficient, so something that takes a little more effort to produce/find/mine would be better. Gold is good, silver is good, copper is good, platinum may be a bit scarce and/or expensive, I'm not sure.

Anything that is really abundant, you'd have to carry around a lot of, and anything too scarce you'd have to carry around tiny amounts of. Findijng the middle ground isn't that hard, SALT once worked, and so did gold, and silver.

[Felix]

I'm not really an expert but I would say that yes, silver can be currency, also platinum. Like I said SALT used to be currency. Really anything that takes work to make or find or mine, and is portable enough can be currency, because it is only a symbol of work. If it takes you say a day to mine a pound of gold, then that pound of gold will be worth a days worth of your work. Same with any other substance. Same with paper money. It takes relatively little work to make paper money, you can make millions in one day(print them I mean) so thats why if you did, a million dollars would only be worth a day's worth of work, so then a dollar would be worth say three seconds. Having to carry around that much cash wouldn't be that efficient, so something that takes a little more effort to produce/find/mine would be better. Gold is good, silver is good, copper is good, platinum may be a bit scarce and/or expensive, I'm not sure.

Paper money is a debt certificate. Gold is a commodity. These are different things. Paper money can be easily produced, yes. That's the reason some guys try to create counterfeit money. Paper money derives its value from the fact that it is backed by some value (or at least it should be). In addition to that, paper money is a currency by law (you can substitute "by force" for that). You have to accept paper money as payment.

And gold doesn't derive its value from the work it takes to get it but from the benefit it has to people. Competition usually drives the price down - closer to the "value from the work".

[IAmMetaphysical]

Gold should get its value from the work it took to produce it, plus the demand for it as a trade tool. Anything can be used in this way, if a lot of people agree that they will use it to exchange goods. Basically, think of it this way. A miner mines gold, and uses it to "pay" for the goods he wants. The person who sells them their goods for his gold is essentially "buying" his gold from him with his goods/services, then he uses that gold he "bought" to buy other things. The goods are never lost, so there is no "debt", only the transfer of goods.

In other words, there really is no "buying" and "selling" only the transfer of goods, and work. Thats how "money" can be created, because humans create work, the create products, which just adds to the amount of goods to be traded.

Edited March 29, 2006 by IAmMetaphysical

[Felix]

As long as there is only barter trade, there is no problem, even with money. The problem starts the moment debt comes into place.

My problem is this: If you borrow a certain amount of money at 5% interest, you have to get that money plus interest back from the market in, say, one year. Now if this sort of lending/borrowing is done on a consistent basis with compound interest it results in a concentration of money.

Let's be benevolent and say that there are 250.000 metric tons of Gold available on earth in total. At least the currency available is finite. That is my point.

Now let's say that by production and trade I (and 99 other people) have been able to get one of these metric tons of Gold. If all these 100 people invest their gold at 5% interest(compounded), there is not enough Gold on earth to fill the rising demand in 161 years later.

The actual numbers are irrelevant. The problem is one of basic structure. The point is that the amount of currency is finite and that compound interest creates (over time) a demand for currency that can't possibly be met.

With paper money the problem is similar. There is only so much money in circulation right now. New money can now not be mined like gold (which at some point can't be mined anymore, too), it has to be created by a corresponding rise in debt. There is no other way out of this as far as I see it.

The problem is not that additional value can't be created. It can. I seriously believe that a 5% rise in this product/benefit-wealth is possible. But what is missing is the currency that corresponds to that 5% rise. Where does that come from? If the world economy is rising by 5% in product/benefit-wealth, where does the additional currency come from that pays for it?

In other words: How do you monetize your profit?

If you lend money, you put 100$ into the market, but you have to get 105$ back. How is this possible on a consistent basis? Where do all these additional 5$-bills come from?

[Capitalism Forever]

he can still not pay back his debt because he lacks two coins.

He sells some fish for 6 coins and gives them to Jim, repaying half his debt. Jim buys some mangos and a hammock, and the sellers of these things buy fish from Alex. So Alex sells 6 more coins' worth of fish and repays the rest of his debt.

[fatdogs12]

As long as there is only barter trade, there is no problem, even with money. The problem starts the moment debt comes into place.

My problem is this: If you borrow a certain amount of money at 5% interest, you have to get that money plus interest back from the market in, say, one year. Now if this sort of lending/borrowing is done on a consistent basis with compound interest it results in a concentration of money.

Let's be benevolent and say that there are 250.000 metric tons of Gold available on earth in total. At least the currency available is finite. That is my point.

Now let's say that by production and trade I (and 99 other people) have been able to get one of these metric tons of Gold. If all these 100 people invest their gold at 5% interest(compounded), there is not enough Gold on earth to fill the rising demand in 161 years later.

See and right there lies the problem with your whole reasoning. Money is not fixed. Forget actual dollars, if you want to discuss that after then fine, but just assume a gold standard for now. Lets just say that through creating a lot of wealth over many years 1000 individuals obtain all the gold that was for sale in the world. So now they are the richest men alive right? Lets also say that they hoard it and don't ever sell it or us it. No one could ever become wealthy right?

Wrong and here is why. So what if a few people accumulated all the gold. There are other metals and other goods that can act as means of trade. So lets say that all these people accumulate all the gold and here I am farming. Now I want to sell my crops, well silver has a high value and I will gladly still take that for my money.

I understand that you point is "Hey money is in a finite supply so therefore economics is a zero sum game, Bill Gates gets rich and kids in Africa stave to death". Money is not finite, Money is a tool, that is all it is. Many things have been used as currency over time, besides gold and dollars. It's a great amazingly efficent tool but it only serves to exchange value.

Does this explination clear up the confusion? If not please reply using only a gold standard system, I do not want things to get convoluted. If you want to discuss the dollar system than we can talk about that after.

BTW I am fairly bothered that you choose to propound a theory which you yourself do not fully understand. It's one thing to defend it without you being aware that you do not know but in this case I think you are fully aware of the fact that you do not grasp the whole of the problem. It would be exactly similar to me coming to this same exact message board and telling everyone that Governement controls are a good thing. The only difference is that Ayn Rand EXPLICITLY showed why that was wrong many times.

If you disagree with something or find a non integration please state what you do not understand and ask if someone could explain the difference. A man can hardly claim to follow Ayn Rand and then tout the logic of Plato's metaphysics, yet that is what you are doing. I hope you understand that I am not trying to be mean. If you do agree with Ayn Rand you will understand how insulting it would be if I were to come and tell you that she was a total idiot and didn't understand anything and then on the other hand turn around and say I was a big follower of her. You did not do this explicitly of course but through implication you have stated that Ayn Rand is wrong about an awful lot of things.

Edited March 29, 2006 by fatdogs12

[IAmMetaphysical]

If the world economy is rising by 5% in product/benefit-wealth, where does the additional currency come from that pays for it?

{emphasis added}

Therein lies your misunderstanding. You don't use "money" to "pay" for stuff, you use your labor/product/time to pay for things, the "money" is only a symbol for those things. IF we ran out of gold, then we would start using some other commodity in order to trade.

I would go further, but I think fatdogs explained it all.

[Felix]

BTW I am fairly bothered that you choose to propound a theory which you yourself do not fully understand. It's one thing to defend it without you being aware that you do not know but in this case I think you are fully aware of the fact that you do not grasp the whole of the problem. It would be exactly similar to me coming to this same exact message board and telling everyone that Governement controls are a good thing. The only difference is that Ayn Rand EXPLICITLY showed why that was wrong many times.

If you disagree with something or find a non integration please state what you do not understand and ask if someone could explain the difference. A man can hardly claim to follow Ayn Rand and then tout the logic of Plato's metaphysics, yet that is what you are doing. I hope you understand that I am not trying to be mean. If you do agree with Ayn Rand you will understand how insulting it would be if I were to come and tell you that she was a total idiot and didn't understand anything and then on the other hand turn around and say I was a big follower of her. You did not do this explicitly of course but through implication you have stated that Ayn Rand is wrong about an awful lot of things.

Hm. Okay. I agree that this wasn't the best way for me to start the discussion. I really should have started this from another angle. But I read that book on Debitism and it made a point (at least to me). I also understand that if this theory is right, then a lot of things Ayn Rand said would be wrong. This is exactly why I am posting this theory here and trying to defend it. This theory goes against a lot of things I held as true myself for a long time and I want to know for sure.

He sells some fish for 6 coins and gives them to Jim, repaying half his debt. Jim buys some mangos and a hammock, and the sellers of these things buy fish from Alex. So Alex sells 6 more coins' worth of fish and repays the rest of his debt.

My problem is that this requires Jim to spend his money. And he has to spend it before the debt to Tom is due. This is highly unlikely, especially since Alex borrowed his money from Jim and Tom at the same time which makes this actually impossible.

[fatdogs12]

My problem is that this requires Jim to spend his money. And he has to spend it before the debt to Tom is due. This is highly unlikely, especially since Alex borrowed his money from Jim and Tom at the same time which makes this actually impossible.

I answered this entire issue, did you read the top part of my post? I am trying to get you untie the mental knots you got yourself into but if you don't respond to my explination then I can't help :-(

[Felix]

See and right there lies the problem with your whole reasoning. Money is not fixed. Forget actual dollars, if you want to discuss that after then fine, but just assume a gold standard for now. Lets just say that through creating a lot of wealth over many years 1000 individuals obtain all the gold that was for sale in the world. So now they are the richest men alive right? Lets also say that they hoard it and don't ever sell it or us it. No one could ever become wealthy right?

Wrong and here is why. So what if a few people accumulated all the gold. There are other metals and other goods that can act as means of trade. So lets say that all these people accumulate all the gold and here I am farming. Now I want to sell my crops, well silver has a high value and I will gladly still take that for my money.

Does this explination clear up the confusion? If not please reply using only a gold standard system, I do not want things to get convoluted. If you want to discuss the dollar system than we can talk about that after.

No, sorry. The thing is that the gold would be in circulation to attain interest. They won't let it sit in their basement. It would be borrowed to make more money (gold). And that money(gold) isn't there. This would make some people lose out despite having produced a lot of value. That's also what I mean with monetization. These people sell their goods and services to pay back their debt plus interest (and profit). But even that interest isn't around. And all that fixed money supply that is traded would have to be paid back with interest at a certain point in time. You can't just wait longer until one guy paid off his debt to then use that to pay it back. Your debt is due at a certain time. And if you can't get it then, you have lost. (see my response to Capitalism Forever)

Please tell me how and why exactly this is wrong. I think then we will be making progress here.

Thank you all, guys. Especially for your patience.

[fatdogs12]

No, sorry. The thing is that the gold would be in circulation to attain interest. They won't let it sit in their basement.

That depends on how much they have. Assuming we are talking about a situation where there is a gold standard

and people put thier gold into banks they would earn some interest and the bank would earn some interest. If they didn't have much of course they wouldn't likely loan it out. That is a major service that banks provide actually. They make making money on your money easier and hastle free (of course you don't make much either).

It would be borrowed to make more money (gold).

Well it would be borrowed to make more values and then traded for gold.

And that money(gold) isn't there. This would make some people lose out despite having produced a lot of value.

Who is losing out? Why are they losing out? The person who puts thier money in the bank is losing out? Again, how and why?

That's also what I mean with monetization. These people sell their goods and services to pay back their debt plus interest (and profit).

If you mean the borrowers, then I agree of course.

But even that interest isn't around.

You mean that the gold to pay for the interest is not around? That's silly though, of course it is. People create more values and sell them for gold or for another acceptable value. That is all gold is, it's a value.

And all that fixed money supply that is traded would have to be paid back with interest at a certain point in time.

Again this is my point, the money supply is NEVER fixed in the same sense that the amount of values created is never fixed. Don't forget, you can you anything as currency, salt, peanuts, cheese, turkeys, monkeys, computer parts. A currency is just a value... So why don't we use salt instead of gold? Well salt is cheap as all get out. It's like a few pounds of the stuff for a dollar. If I wanted to buy a car I would have to haul in a few dumptrucks to pay for my car. What about peanuts? What about cheese? Well cheese is more expensive but not expensive enough, while at the same time it goes bad fast so it just won't work. That is why precious metals work well, they are very valuable PLUS they don't ever go bad.

You can't just wait longer until one guy paid off his debt to then use that to pay it back. Your debt is due at a certain time. And if you can't get it then, you have lost. (see my response to Capitalism Forever).

Please tell me how and why exactly this is wrong. I think then we will be making progress here.

Yeah I mean that is true if the money supply is finite. I have explained the how and why of why this is wrong above. Everything you are stating is denying how economics works, which is people produce values. Before we go any further at all you need to understand that the money supply is not FINITE. This is the central issue that you are having a problem with. Forget the other stuff. You will ALWAYS be confused and no one will convince you otherwise until you address why money is not in finite supply.

Do you understand now? If not, please tell me why the money supply is fixed? I believe I have already straighted things out but if not please explain why. Don't waste your time with other issues until you get this one down.

Edited March 30, 2006 by fatdogs12

[A.West]

In a real economy with a real currency, pretty much everyone would have assets and provide services that would be of economic value to others, and nearly everyone would have at least some amount of the underlying currency (gold, salt, etc.). (After all, why would people choose a currency that wasn't commonly used, and regularly available?) Thus productive individual A would focus on converting his economic value into adequate liquidity on his loan repayment date (trading labor or other assets for currency from those who do not have high currency liquidity needs at that time.) At another time productive individual B may supply liquidity, or need liquidity. The bank is not the only source of credit - every productive individual is a potential source of credit and liquidity. And if the bank extends credit (currency due at a future time) beyond the ability of its creditors to repay on time, then the bank will have to take a loss, restructure loans, seek repayment in alternative assets, fail, or whatever. It's not the end of the world or some stunning newly discovered mystery of economics!

But to understand this, you've got to look outwards to reality, observing what really goes on in an economy. You can't understand it by rationalistically deducing your way into it.

[Felix]

Yeah I mean that is true if the money supply is finite. I have explained the how and why of why this is wrong above. Everything you are stating is denying how economics works, which is people produce values. Before we go any further at all you need to understand that the money supply is not FINITE. This is the central issue that you are having a problem with. Forget the other stuff. You will ALWAYS be confused and no one will convince you otherwise until you address why money is not in finite supply.

Do you understand now? If not, please tell me why the money supply is fixed? I believe I have already straighted things out but if not please explain why. Don't waste your time with other issues until you get this one down.

You are right. My point is that the money supply is finite. How can it not be? Usually, within a large area there is only one currency around. And all debt-contracts are therefore written regarding this very currency. The contract says: I give you 100 gold coins now and you give me 105 gold coins in a year. Now if you come along in a year and tell me: I have only 100 coins but I will give you this beautiful painting (or this fish, or RAM chip, or whatever), you are in trouble, because you have broken the contract. This doesn't mean that the currency stops flowing around, as it is usually invested and thereby in circulation and demanding interest. This means that usually most people have some of that currency to trade. But still the problem remains. If all the money is lent and demands additional 5% (which don't exist), people will compete hard to get enough of the existing currency, because not everyone will get enough. Now it is still possible to succeed in a new business venture. But not everyone can win as some will fail to monetize their newly produced values, because that money simply doesn't exist and they will break their contract of debt.

[fatdogs12]

You are right. My point is that the money supply is finite. How can it not be? Usually, within a large area there is only one currency around. And all debt-contracts are therefore written regarding this very currency. The contract says: I give you 100 gold coins now and you give me 105 gold coins in a year. Now if you come along in a year and tell me: I have only 100 coins but I will give you this beautiful painting (or this fish, or RAM chip, or whatever), you are in trouble, because you have broken the contract. This doesn't mean that the currency stops flowing around, as it is usually invested and thereby in circulation and demanding interest. This means that usually most people have some of that currency to trade. But still the problem remains. If all the money is lent and demands additional 5% (which don't exist), people will compete hard to get enough of the existing currency, because not everyone will get enough. Now it is still possible to succeed in a new business venture. But not everyone can win as some will fail to monetize their newly produced values, because that money simply doesn't exist and they will break their contract of debt.

If the money supply was finite then we would all be back in the stone age. This is why I said forget about paper money, focus on gold, otherwise you will get yourself screwed up. Right now you are putting the cart before the horse. Money is the servant not the dictator. Money is used by us it doesn't dictate to us. Again you are saying to me "see, if there is finite amount of gold we are all screwed because we need gold and we don't have it." But in reality as I said we can use something else.

I have to research the actual issue of money supply and how values related to that but it's a secondary issue at best. You must understand how things work on a basic level before you get into the details. I would suggest reading the guy that Andrew mentioned on the first page. The book he mentioned is availible online for free, so you can google it, I think it has a section on currency.

Meanwhile I will research the issue myself (which is really what you should be doing) and when I have the answer I will present it. I would easily stake my life on the fact that your entire theory is wrong because it would be a lot like my telling you that 2+2=5, it just doesn't make any sense. I can understand you not understanding how money works but the fact that you can believe what you do is just scary.

[brit2006]

After talking to Felix in the chat room, and reading this thread, I think I have an answer that will satisfy Felix. (I hope!)

Say person x is the banker and person y is the debtor. x lends $100 to y. $100 is the entire stock of money in this economy. y must pay it back plus 5% interest, ie $105. How does he do this when there is only $100 in the economy?

The answer, and this is what I think you are forgetting Felix, is that x is also a regular person. People have values. For example lets say that x loves good paintings. y is a good painter. y paints a picture that x thinks is worth $10. y gives back the $100 and the painting and has therefore paid back the debt (plus a bit extra which is important for later).

Now I know what you will say Felix, that the contract was in dollars and that x needs to be paid 105 dollars bills! But as a real person with values, how foolish would x be to not accept the painting as payment when he is gaining the equivilant of $110, $5 more than was originally agreed! He is getting a fantastic deal and would surely accept payment of interest in this fashion.

Now, if this happened on a large scale with more actors, paintings would eventually become an accepted currency because it is backed by the fact that x loves paintings. Instead of lugging paintings around people would exchange certificates of ownership, ie paper currency - new currency would be created. This paper currency would look exactly the same as the current $1 bills in the economy. This is not inflation. If a new $1 bill enters the economy (backed by the painting) at the same time as a new good enters the economy that is worth $1, then this does not add to inflation.

Keeping in mind the sentence in bold above, why could new currency not be created?

[Felix]

Now, if this happened on a large scale with more actors, paintings would eventually become an accepted currency because it is backed by the fact that x loves paintings. Instead of lugging paintings around people would exchange certificates of ownership, ie paper currency - new currency would be created. This paper currency would look exactly the same as the current $1 bills in the economy. This is not inflation. If a new $1 bill enters the economy (backed by the painting) at the same time as a new good enters the economy that is worth $1, then this does not add to inflation.

Keeping in mind the sentence in bold above, why could new currency not be created?

Well, so basically you agree that new currency has to be created to make things work. My problems come with this paintings-thing. I don't think that a new barter-currency needs to be introduced before one can have new paper money. I agree that people have values and that money should be backed by such values. And usually when you get a loan, you have to have a collateral of some sort, usually real estate and yes, maybe even a famous painting. If you fail to pay the money, you end up losing your collateral. Before that you usually declare bankruptcy (not good). Usually the bank auctions it off to get money instead of the good. Basically the bank can't accept goods. It borrowed, and then loaned, their customer's money, basically. What will they tell them: Well, no, you can't access your account today, Sir, because we used your money to buy this beautiful painting. Take this instead. The bank would go broke in no time. And banks usually promise monetary profits (interest) to its customers. So the bank itself is under debt-pressure to pay the interest to their customers. And dealing with every single customer about which good he wants for his 4,74$ interest is not very practical for a bank.

For this bankruptcy (which would be bad for both the bank and the debtor) not to happen, you seem to agree with me here, one would need new currency. According to debitism this new currency can be created by someone else borrowing money before you have to pay yours back. Then there is enough money in the market for you to pay back your interest. And since you worked for your money, the money (which was previously nothing but fake) is now backed by values.

So what happens is that money enters the market and then it is backed by the work of the debtor, because he usually spent that money and has to work to get it back.

So what you usually have is a tiny inflation first (fiscal money creation) and then a tiny deflation, (creation of goods to get the money back). In the end prices remain relatively stable. And since the debtor is under extreme time-pressure and pressure to produce something of high enough value to get the money back, usually we end up with better stuff all the time.

So all we need for the system to work out is new debtors. And how much new debt we need is defined by the interest rate to be paid on current debt.