Trudy Cool

Well, I do ask it myself -- but rhetorically. If you read carefully what I have previously said, you will see that I have proposed interest charges only in the context of the question of dealing with members who abuse the system, and then only as one of numerous possible alternatives. The point in my previous post is that the reigning money system is founded on money creation on the backs of debtors as though they are collectively delinquent, while clearing shows that money creation cannot take place without them. They are penalized despite the fact that they perform an essential service. Ostensibly interest is charged to compensate the lender for loss of the use of his property. If it were simply that, then there would be a flat rate for all borrowers. It's not the case. Borrowers are classified according to credit rating criteria and obliged to accept collective responsibility for the delinquency of a small minority of the members of their classification -- people they cannot know and cannot influence. In that sense, the charging of interest on the creation of the medium of exchange is a collectivist control mechanism.

Can you explain? In my experience the governance is no more onerous on the clearinghouse as a whole than the due diligence normally practiced by the auditors who act on behalf of shareholders. A "rule" could be as simple as "practice periodic audits with these (x, y, z) extra criteria and provide the CH with a copy." The reigning money system is created by banks that use clearing between them, while imposing an expensive and unstable system on non-members. Clearing is drastically cheaper, free from boom/bust and autonomous (with respect to gummint). Personally, I see a lot of room for justifying some extra governance costs. In fact it is a mathematical impossibility, at least one member must remain below zero to an amount equal to the sum of all positive accounts. The total of all accounts can only ever be zero. The "far-reaching consequences" I refer to earlier derive from these observations: 1) Clearing is the purest medium of exchange 2) Clearing shows, that all symbolic (non-commodity) media of exchange require debtors in order to function. No debtor, no money creation! Obviously, debtors alone cannot bring about money creation; their debits must be accepted. But this is not the point. The point is that, if debtors are an inescapable necessity in the process of creation of the medum of exchange, why are they penalized with interest charges?

Once again there are different techniques for all of these things. The problem you are addressing is one of "governance". Small issuances don't really need it, but as the volume increases, increased security is necessary. Beyond some threshold determined by the market, preference would be given to issuers who submitted their issuance efforts to an independant mint. The mint would insist, to preserve it's own commercial reputation, on strict contractual terms that specify control and transparency. They might also insist on payment of some small percentage into a redemption insurance fund. How stringently do you define simultaneously? Per second? Per day? Per month? I'm unclear what you mean by mirror. This touches on an fundamental fact that I have held off mentioning. Is it possible for all clearinghouse particpants to be positive simultaneously? The implications of the answer have far-reaching consequences for this entire thread. I'll get to that when I have more time -- can you anticipate what I am referring to? There is certainly a risk of this. But if you think of the network bandwidth bubble of the late nineties (where balance sheets were fudged with cross-leasing agreements between carriers), you will see that this is a risk that goes beyond the localized case of a mutual monetization. Almost makes you want to call in the government to referee, doesn't it? Ultimately it is a question of the rules the clearinghouse members set for themselves, don't you think?

I have stated more than once that I came looking for a forum such as this, in the hopes of finding honest and serious debate. I have been labelled a troll and twice slapped with warnings, despite never coming close to your continuous flow of fallacies. Evidently you need to be reminded of the forum prohibition, "... all posts must add to the discussion rather than merely express agreement or disagreement without explaining the writer's reasons". "In conclusion...". Fallacy of non sequitor. Your conclusions fail to connect with the points you put forward as arguments. "... unrealistic assertions again ...". To date no-one in this forum has presented a single non-fallacious refutation of anything I have said, and certainly never substantially demonstrated any assertion to be unrealistic. You in particular spout unsubstantiated disagreement with declarations of faith such as "This scenario does not simply omit some details or frictions, IT IS A RIGGED GAME that nobody would play, and which has nothing to do with an actual economy or the purpose of banking and finance." "... (a false dichotomy) ..." Yet another unsubstantiated article of faith. "... no reason to assume that the overall gold stock is precisely static." The heart of my argument was the consequences of deflation on debtors. An essential component of the scientific method is to hold invariant as many factors as possible in order to observe the effect of deliberately varying just one. To refute me by claiming that the money stock is dynamic is to refute the way in which deflation is described and defined. That would refute, in effect, the foundations of economics -- the fallacy of the stolen concept. "The bank is ultimately just matching up a saver (CD investor) with a borrower." This is a red herring fallacy mixed with the misleading vividness fallacy. My entire argument has concerned monetization. Everything you say here in point 3, is irrelevent because you are explicitly describing non-fractional banking -- in which no money is created. Also, going into vivid depth ill-disguises the complete irrelevancy of this paragraph. "freely set interest rates anticipate and reflect inflation/deflation expectations of both borrowers and lenders" Quite so. But, the specialized skill of a productive sector borrower does not equip him well to make such assessments, and places him at a disadvantage with respect to the financial sector. Moreover, the changes you mention come too late to help the borrower whose interest rate is fixed while his profits absorb the variation. I have argued that mutual monetization is advantageous to the producer because it shields him from inflation/deflation, and relieves him of such speculation. So you are here guilty of ignoratio elenchi -- not only do you fail to support your own conclusion, but you reinforce mine. "it's a good assumption that a banknote (dollar) is specified as a quantity of gold" Ignoratio elenchi, again. You merely repeat what I myself said using different words and present it as an argument against me, ignoring the fact that it has nothing to do with your conclusions.

If you have a free economy, the exchange rate is not fixed! The only way it can be fixed is if the dollar note specifies a precise amount of gold. Assuming you do mean that notes refer to specific quantities; after one year, the CD issuer would have to earn profits enough to repay $105 worth of physical gold. To do so, he must add at least another $5 worth of value to the total stock of value. The total stock of gold is unchanged, so prices decline, proportionately. This has two consequences: 1) Your buying power has increased, meaning your real benefit is more than 5%. 2) The prices your debtor can command for his production declines, making it obligatory for him to work MORE than 5% harder to repay the debt and still derive the benefit he originally sought. This shows once again how lending of the medium of exchange places the productive sector at a disadvantage with respect to the financial sector.

Of course! I've never said that any one of the three forms of monetization should take over completely. I have said that mediated monetization has gained excessive preeminence. I'm also convinced that a better balance between the three would result in a much more stable and properous global economy. On what do you base this statement? When one really digs into it, the variety of ways in which clearing can be achieved is quite surprising. Furthermore, inexpensive computation, networking and digital telephony have opened vast frontiers of possibilities. On the surface of it, yes. However, in practice two different phenomena arise. First, a small number of large issuers come to dominate, but in a "community-oriented" sense. Neighbourhood schools, for example, pump a lot of money from AP and payroll to suppliers and staff. Those people purchase things from parents. Parents pay tuition. Widening the circle, a large perishables market might significantly serve a town and it's hinterland. Wider still, a regional chain store might achieve a predominant issuance. And so on, up to airlines (and Coke, Pepsi, McDonalds, etc.) providing universally accepted global currencies. Illiterate cashiers in the Caribbean have shown that juggling a dozen currencies at a time is far from difficult. Second, individuals and small businesses can pool their own issuance with a clearinghouse/broker/insurer who use those notes as one to one backing for a single corporate issuance. If a dentist issues notes denominated in "fillings", how can inflation ever enter into it? If he tried to spend 10,000 fillings, who would believe he could ever redeem them? In that sense, the amount of monetization continues tightly bound to demand for goods and services. Gold has a tricky problem -- it is not first a medium of exchange. After land, it is the most consistently preferred store of value. Despite all the talk of "gold is money", very few of those who do the talking have any intention of using it for exchange. Liberty Dollars are gaining ground, but I wonder how many holders of them actually use them to buy their groceries? In that sense, I don't see gold as encouraging of production or beneficial to the productive sector. Mediated monetization is clearly indicated for this kind of thing. The main goal of mutual monetization is continuous liquidity, not limitless liquidity. In fact, the most productive member could also be the one most deeply negative. He would do so for the purposes of further business growth, but he would do so unencumbered by the burden of interest payments. I think you mean the second most profitable member, no? There are some curious things about that situation. Seeing that they'd be carrying the debits of others, members in that position cease to consider such profits as assets and come to see greater benefit in real acquisitions and real production than in accumulation of "paper" capital. You are blaming the hammer for failing to turn the screw. Clearing tracks supply and demand perfectly, down to the last cent. If someone wishes to boost supply or demand, the clearinghouse is the wrong venue. You can't persuade a clearinghouse of anything. Acquiring additional credit beyond what you have in the clearinghouse requires persuading others. Clearing is disconnected from boom/bust, even though it's members may not be. If you and I make transaction #000000001 in a clearinghouse, because I sell you a $10 jug of ale, your account goes -$10 while mine goes +$10. At that moment the clearinghouse has a money stock of $10, "created out of thin air". By accepting my jug of ale, you have "given me credit" over my competitors. By accepting your debit I have monetized the credit the clearinghouse expects your customers will give you in the near future. All of this occurs with out any reference whatsoever to wider economic conditions.

Does the quote Maarten mentions, serve? It's proportionate. The greater the percentage of their business they can pass through clearing the further they can insulate themselves. I'm not sure I understand your question. You are right about this if you consider the limits to be a fixed amount. However, there are a host of ways of achieving infinitely adjustable limits. For example, you could set a member's limit 10% further below zero than it was before he last went positive by an amount equal to it. So, a new member might go -50, +50, -55, +200, -60.5, +61, -66.55, +1,234, etc. If the member's business is productive enough to go that amount above zero it is quite unlikely that he'd intentionally drive his credit limit extremely low and then abscond. If you recall my earlier discussion of the initial and subsequent behaviour of the USA in the IMF, you will easily understand what I'm getting at with the above. The US demanded a veto (with Britain) over IMF policies, in respect of its role as principal creditor. Later, in large part due to the Vietnam War, it descended to the level of becoming the fund's principal debtor, has continued on downwards ever since, and yet continues to have veto privilege! This is unbelievably dangerous. If you can imagine all countries being subject, uniformly, to a hard initial floor of $10B, and a "pass as high above zero" rule before the floor could be lowered by 10%, the US gov't would have been much more effectively curtailed in running up its current lunatic volume of debt.

I've already explained my reasons for the apparently stilted scenario. I don't mind repeating myself because you are obviously willing to be polite and thoughtful about it. F=ma is no more "realistic", than my scenario. It fails to take into account friction, drag, viscosity, etc. My scenario is not presented as anything close to reality. It is presented in raw form in order to show the underlying behaviour of the medium of exchange lent into circulation. In my scenario the monopoly is there to symbolize (for the later variants) the role of the Fed's legal monopoly.

Boom/bust is a consequence of the overlaying of additional functions onto money's primary function of mediating exchange. The act of lending money into availability places greater emphasis on the media of investment function (a.k.a store of value), than on the media of exchange function. The particular characteristic of clearing is the complete purity with which it serves the media of exchange function. Five years ago, in the country where I live, all bank accounts were frozen for all amounts above $2k for many months. You can imagine the dire consequences for the economy. It was instant bust. If you can "thought experiment" a productive sector clearinghouse in that environment you can easily see that it would operate in total insulation from reigning conditions. At that time I had the privilege to have my children in a school that had already instituted a clearing exchange for parents and teachers with the school as a "motor" to keep it going. The school paid the teachers a 35% bonus on their salary ($60 bonus over $180) with clearing credits. The teachers used them to acquire the goods and services of the parents. The parents paid tuition fees with them. Thus, a private school of 200 kids created for itself a gross domestic product of roughly $6M per year without so much as a nod of obeisance to the public sector or the financial sector. (I hope I've answered your question) The school director was insistent on operating without such restraints. There were abuses. They did harm the system. Interestingly, the consequence was price inflation! His view was that the more prosperous had a duty to assist the less prosperous! Many of us argued that that was an individual decision and that it was very wrong to build it into the clearing exchange. He prevailed -- until the whole thing fell apart as a direct result of that error. The root of the error was his attempt to overlay a spurious "media of charity" function on top of the media of exchange function. As far as boom/bust being somehow proportional to credit limits is concerned -- I think you'll find instead that the proportionality is with the percentage of their business that participants can run through clearing. If they can do 0% they are fully exposed to reigning conditions. If they can do 100% they are fully insulated. If you go back to the matrix I posted and consider the problem of $330 costs to move $200, and how the exchange eliminates it, I think you'll find clearing more convincing (technically speaking) even than private paper. My experience with clearing however convinced me of the collectivist risk entailed in mutual-monetization and gives me a strong preference for private paper and strict rules in clearing.

This is a very salient point Maarten. Behind what you say is the fact that this discussion has proceeded without a proper definition of money. I've held off providing the correct definition because it is better understood in the context of the scenarios I laid down earlier. Here it is:

I answered the issue you raise in 188 weeks ago. Once again we see the issue fallaciously brought down to a single case taking place within the context of a whole. It is an impermissable assumption that the phenomena of a single action within a whole is a sound basis for drawing conclusions about the sum of all actions within it. A pebble in a wheelbarrow can be moved to the front left and its new position will be the front-left. All the pebbles in a wheelbarrow can be moved to the front left and their new position will be a pile on the ground with the barrow lying amongst them. I created my scenarios in order to minimize ambiguity. Here we see a new scenario fraught with ambiguity. Is Galt the only borrower or does this scenario take place in the Gulch with everyone borrowing? Can Midas spend on other borrowers or not? Can Midas spend outside the Gulch or not? Does the price of the motor precisely equal the interest or not? Can Midas purchase the motor for one cent less than the amount of the interest and then foreclose on Galt's entire collateral? The issue you are raising sNerd, is known as the A circuit and the B circuit ( or A + B ). The A circuit contains the banker's borrowers and depositors and represents all the flows between them. The B circuit has another group of borrowers and depositors, but includes the banker and all his suppliers. The basic principal is that borrowers in the B circuit, in the same city say, derive strong advantages from being close to the banker's circuit of spending. Meanwhile borrowers beyond the banker's spending horizon have severely reduced possibilities of repaying their debt and reclaiming their assets. To use CF's term, "the playing field is tilted" in favor of the banker and those who share his preferences. That is one small part of the point I'm trying to raise -- that self-monetization and mutual-monetization are greatly to be preferred over mediated monetization.

Nor does it make it not so. Nor do unsubstantiated contradictions add anything to a discussion. Nor does claiming someone is emptily stringing words together mean that they are necessarily doing so. On the contrary, it can mean the person making the claim has made no attempt to understand the issue being discussed, or has tried to understand and simply isn't up to the task. If you could refute what I have said you would refute it. Since you can't you merely retreat into vacuous scoffing. How pathetic.

I very well understand this issue. I explicitly refer to it when I state Note that Midas cannot spend any of the principal, it is extingiushed within his accounting system. Also note that the money stock, and hence economic activity, decline back to its previous level as that money is extinguished.

I have deliberately left the charging of interest out of the Borrowed Gold example in order to show the boom/bust inherent in mediated monetization, unfortunately this question cannot be answered without bringing interest back into the scenario. The problem is that the total amount due to be paid is the original principal plus the interest due. Since only the original amount has been created, not the interest, the only source of that additional amount is someone else's monetization. Thus all debts can be paid only if there is either a constant increase in the amount of assets being monetized or a constant increase in the velocity of money. The latter peters out rather quickly. The former continues until asset creation falls behind monetization. Once that point is reached the historic response has been asset acquisition through foreign conquest. As I have previously pointed out, extrapolation from individual experience is a faulty foundation for any understanding of macro-economics. Gratuitous and unwarranted sneering duly noted. Localized booms/busts, within the ambit of a particular national currency, can have a very wide variety of causes. Generalized booms/busts, within the ambit of a particular national currency, are rarely caused by anything other than real or anticipated changes in the money stock. The money stock increases in direct proportion to the original principal of the monetization. The money stock decreases in proportion to the original principal of the monetization plus interest due on that principal. If the lender spends all the interest locally to the original borrower, the bust is no more severe than the boom. If the lender spends the money remotely (eg, where a boom is anticipated rather than where a bust is underway) then the bust will be more severe than the original boom. In short a monetary churn is engendered which ill-serves the productive sector today in the region of the bust, and ill-serves the productive sector tomorrow in the region of the boom, when they find themselves overextended from an artficially exagerrated boost in their money stock at the cost of the region of the bust. None of these phenomena are experienced when monetization is autonomous or mutual. Gratuitous and unwarranted sneering duly noted. Perhaps so. Perhaps not. Such an unsubstantiated declaration can only be resolved by a war of competing statistics, a road I have gone to great lengths to avoid by setting up the "thought experiment" scenarios. Meanwhile, to substantiate your statement, you would have to demonstrate that in the USA insolvency is in fact the issue. I submit that it isn't. The real statistical evidence must include not only insolvency but significant temporary cashflow constraints, recourse to overdrafts, recourse to downsizing, selloffs, sellouts and every other technique used to stay out of insolvency. Business bankruptcies in the USA peaked (at 81,000) in 1987 and again (at 71,000) in 1991. They declined steadily throughout the dot com boom of the 90s and have averaged about 40,000 since 1998. This seems promising, until one considers that consumer bankruptcies per year have quadrupled since 1987 including a 30% jump from 2004 to 2005. Is business insolvency unusual in the USA? or have they learned how to push it out to the consumer/employee? To substantiate your statement, you would also have to demonstrate that the USA situation is a direct reflection of the global situation, or demonstrate that the USA situation is the only one that matters. Failing all, you could simply declare that the USA situation is the only one permitted for discussion. This last would be a good way to gag me if that is what you intend. You have previously jeered at my "frivolity" for suggesting anything to Americans in "an American forum"? My reply then was completely ignored, and now you return again to the same unwarranted jingoism. Where is it declared that this is an America-only forum? The Internet has no geography. Where is it proved that the US situation is the only one that matters or is eligible for discussion? Gratuitous and unwarranted sneering duly noted. Also noted is the cowardice of engaging in behaviour your status as mediator would allow you to sanction were I to engage in the same.

That's the kind of corrosive agent I'm looking for! You seem to have the idea that participants can influence the clearing function. It doesn't work that way. If Eddie has hit bottom, it is only in the context of the generalized rules. Dagny may have closer knowledge of what brought Eddie to that situation, and see no risk in dealing with him. She can't commit the clearinghouse to further debt from him, but there are many solutions outside the clearinghouse. She could simply offer him direct commercial credit. A group of his friends could top up (pay into) his account from theirs by a separate signed agreement outside the clearinghouse. He could give the clearinghouse a lien on a term deposit in a bank. He could borrow money from a bank and buy clearinghouse "credits" from someone who considers himself overexposed (too far positive). Any mechanism you may have heard of between banks in their clearinghouses is equally legitimate for clearing between productive sector businesses.