Jump to content
Objectivism Online Forum

Debitism

Rate this topic


Felix

Recommended Posts

Being a newbie in this area myself, I still wonder if I can pull off defending this theory, but I'll give it a try. :)

Let's start with a simple problem:

In any market, every dollar that enters it has to leave it.

Does it? why?

How about Germany between 1919 and 1923, albeit with deutschmarks instead of dollars?

This entire thread obscures the difference between wealth and money.

Link to comment
Share on other sites

  • Replies 257
  • Created
  • Last Reply

Top Posters In This Topic

People pay back their debt? Hmm... Have a look at these charts:

Debt in the US

That is because we have unsound money, an artificially expanded money supply which encourages people to pay back the dollars they borrow in the present with cheaper dollars they have in the future. On a more fundamental level, if, as you claim, there is never enough money to go around to pay back that debt, then how do bankers put their daughters through college?

Only coins can be remotely considered as having actual (already paid for) value as they should consist of valuable metal. But they don't. You get a lousy coin that is cheap to produce and it backs itself. The difference between the cost to make that coin and its "value" is called minting profit. They can be considered as having only exchange value.
And that is why most advocates of laissez faire favor a gold-backed currency. The pre-eminent Austrian, Ludwig von Mises, wrote, "The excellence of the gold standard is to be seen in the fact that it renders the determination of the monetary unit's purchasing power independent of the policies of governments and political parties." (The Theory of Money and Credit)

That's correct according to the Austrian barter model, because there an economy is defined as all the stuff people create and barter. It totally ignores money like pretty much all economic models.

Then you are woefully misinformed about Austrian theory, as you should be if you are unfamiliar with the work of Carl Menger, the father of the Austrian School. It was Carl Menger's 1871 Principles of Economics that formulated a theory of money that is widely accepted in the economics profession today. See http://www.econlib.org/library/enc/bios/Menger.html

It's something completely new, which is why I was hesitant at first whether I should even mention it especially as I am still learning this myself.

Get back to us when you figure it out.

Link to comment
Share on other sites

That is because we have unsound money, an artificially expanded money supply which encourages people to pay back the dollars they borrow in the present with cheaper dollars they have in the future. On a more fundamental level, if, as you claim, there is never enough money to go around to pay back that debt, then how do bankers put their daughters through college?

Yes, borrowing allows you to exploit government-created erosion of monetary value. The way old debt is paid for is by larger new debt to others. It's a bit like a ponzi-scheme.

Then you are woefully misinformed about Austrian theory, as you should be if you are unfamiliar with the work of Carl Menger, the father of the Austrian School. It was Carl Menger's 1871 Principles of Economics that formulated a theory of money that is widely accepted in the economics profession today. See http://www.econlib.org/library/enc/bios/Menger.html

I don't know the name, but I know the theory: Money only exists to make barter easier.

Link to comment
Share on other sites

Yes, borrowing allows you to exploit government-created erosion of monetary value. The way old debt is paid for is by larger new debt to others. It's a bit like a ponzi-scheme.

Precisely.

I don't know the name, but I know the theory: Money only exists to make barter easier.

Which in a nutshell is Menger's theory of money.

Link to comment
Share on other sites

That's correct according to the Austrian barter model, because there an economy is defined as all the stuff people create and barter. It totally ignores money like pretty much all economic models.

I know very well that the theory I present goes strongly against one of the foundations of Austrian dogma, actually against one of the foundations of pretty much every economic theory. But I still think that it is valid and correspondingly that Austrian theory has got it wrong.

I'm not aware of any economic models that ignore money. I only gave an example without money to show that economic expansion does not require money. And my example is not an "Austrian" example; it is valid in any economic theory I can think of.

Maybe it will help to think of "money" not as something special but just as a specific good that happens be convenient to use as a medium of exchange. So for example gold has various practical uses but also makes a good medium of exchange. Essentially gold-based money is still a form of barter, only with gold as an intermediary in most exchanges. In theory one could use something else, like computer memory chips, as currency, but it would not be as practical. Or one could have more than one medium of exchange, such as both gold and silver.

Edited by Godless Capitalist
Link to comment
Share on other sites

I'm not aware of any economic models that ignore money. I only gave an example without money to show that economic expansion does not require money. And my example is not an "Austrian" example; it is valid in any economic theory I can think of.

Yes. That's my problem. I think that this definition of the economy leads to wrong conclusions.

Maybe it will help to think of "money" not as something special but just as a specific good that happens be convenient to use as a medium of exchange. So for example gold has various practical uses but also makes a good medium of exchange. Essentially gold-based money is still a form of barter, only with gold as an intermediary in most exchanges. In theory one could use something else, like computer memory chips, as currency, but it would not be as practical. Or one could have more than one medium of exchange, such as both gold and silver.

Money is not a good. Gold is a good. Silver is a good. Coins are such "little pieces of goods" that can used for more effective barter. But money doesn't have to be coins. It can be a number on an account sheet at the bank while the coins are in circulation again. Money is an option to get a good. And coin money is already backed by itself, so to speak.

Link to comment
Share on other sites

(Proper) money is a good that also happens to be useful as a medium of exchange. Money can't be both on an account sheet and at the same time in circulation. If a number on an account sheet is not backed up by something of tangible value, it's not really money; it's a form of fraud.

Link to comment
Share on other sites

(Proper) money is a good that also happens to be useful as a medium of exchange. Money can't be both on an account sheet and at the same time in circulation. If a number on an account sheet is not backed up by something of tangible value, it's not really money; it's a form of fraud.

Then you should know that this is today's common banking procedure. Your account is only backed by about 20%. And in case you didn't know: Your Dollar bills are backed by the future work of Americans, not gold.

In a free country, money takes two forms: gold and credit. Gold is produced by miners; its value is primarily ornamental; and its easy convertibility into other goods makes it valuable for other than ornamental purposes. Credit arises from the creditor's trust in the productive ability and integrity of the debtor, which are the same things that make it valuable.

The amount of gold that has been mined is not static, and men's productive ability is even less so. Money is definitely NOT a zero-sum game.

And my point is that the debtor has a debt of the amount of the money he borrowed from his creditor on his shoulders. So we have: A legal title to getting money from me (my debt) and the money I received from the creditor (money). That legal title is additional money.

Link to comment
Share on other sites

1, Sure. What's wrong with that?

2, So you agree that money is not a zero-sum game, don't you?

1. That's my point. One man's money is another man's debt.

2. we have debt of -100$ and money of 100$. That makes zero, doesn't it?

Link to comment
Share on other sites

Talk about a thread that has become tangled!! Not sure which of the points should be responded to. I'll stick to the narrow profit and loss idea, because it I continue to see a very fuzzy "concept" being used there...

When someone spends money on something, economists have, conventionally, tried to split that into components: Wages + Rent + Interest + Profit.

When Profit is used in this sense, then the consumer in the role of consumer does not make a Loss, just as he does not make a non-Wage, a non-Rent or a non-Interest. To say that Profits must be balanced by losses is false, because Profit and Loss are already a way to describe only one side of the flow. That means, the seller can make a profit or loss but the buyer does neither. Aggregate profits in an economy that is not in crisis will always be positive. This is in the same way as Wages will always be positive.

I think, Felix, that you're jumping forward to a theory without firming up the foundational concepts and premises. If you want useful feedback, perhaps you should proceed in slower steps, discussing each step before going on to the next. Start with real world examples, and go from there.

Link to comment
Share on other sites

I think, Felix, that you're jumping forward to a theory without firming up the foundational concepts and premises. If you want useful feedback, perhaps you should proceed in slower steps, discussing each step before going on to the next. Start with real world examples, and go from there.

I did this with Noah on the forum today for about 2 or three hours. I think he finally understood my point, but then he dropped out of the chat due to technical difficulties. I am exhausted right now, so I will leave it at that. I'll try to write a complete explaination. But it may take a while.

But I have found out that there is a book on the theory of debitism written in English. It's called "Money upside down". I haven't read it, however, but saw it on a reading list while searching for debitism-related sites online. It's hard to defend a theory with practically no references. You have to do everything on your own. And this is hard for a layman on that very theory.

Maybe I shouldn't have started with such a controversial title. But at least now I have everyone's attention. :)

Link to comment
Share on other sites

we have debt of -100$ and money of 100$. That makes zero, doesn't it?

To be exact, we have some amount of money in gold, say $30, so if there is a liquid debt of $100, then the total amount of money is $130. If the credit grows to $200, then the money supply will be $230. So the sum will always be $30; I grant that in this sense it's a constant-sum game (until more gold is mined). But why care about this?

It is the sum of liquid assets, less the sum of liquid liabilities--the nation's "aggregate working capital," if you like. It has nothing to do with profit. Profit is the growth in your net worth, which is computed as your total assets minus your total liabilities--including not only cash, but all the land, buildings, machinery, and intellectual property you own. You can make a profit if you are living alone on an island, e.g. by building yourself a hut, which will appear on your imaginary balance sheet as a fixed asset.

Even the word "money" itself is often used to refer to non-cash assets. For example, when I said that Bill Gates owned a lot more than $4.35 billion dollars of money, I was wondering if anyone would point out that most of his wealth was in shares, not in cash. Although he could convert some of his shares to cash immediately, if he tried to sell all of them at one time, I'm sure he'd be doing it at a considerable loss.

It makes no sense to look at the economy as only consisting of the cash. The German word for "economy," Wirtschaft, originally meant "an agricultural operation," whose main purpose was to provide its owner--the Wirt--and his family with food. It was quite possible to run a Wirtschaft without using any money at all. If the Wirt had made a trillion deutschmarks of money but had no food to eat, he would have starved to death and his Wirtschaft could hardly have been considered a success. The goal is not cash; the goal is survival--and profit is therefore correctly measured as the increase in life-sustaining values available to you.

Link to comment
Share on other sites

I agree it would be helpful to start with fundamentals and take smaller steps.

Then you should know that this is today's common banking procedure. Your account is only backed by about 20%. And in case you didn't know: Your Dollar bills are backed by the future work of Americans, not gold.

Yes, I am aware of both of those facts. Both fractional-reserve banking and paper-only money are forms of fraud.

Link to comment
Share on other sites

Writing my treatise may take longer than I suspected as I have to devote most of my time to exams now. I will write a summary of that theory but definitely not until next week. I have other things to do right now. However, I'm interested in that subject too much to drop this task.

Just so that you are not all disappointed by the delay, here's a link to a dissertation on the subject, which was published as "Money upside down", which I already mentioned above. If you want a summary, you will have to wait or have someone else write it before I do.

Edited by Felix
Link to comment
Share on other sites

Felix, if you think that kind of writing merits being taken seriously, then you have a lot to learn about money and banking! It belongs more to this thread than in any serious discussion of economics.

Would you mind telling me why? Because I, for one, accept the idea that the exchange paradigm doesn't hold in a fiat money economy.

Edited by Felix
Link to comment
Share on other sites

Would you mind telling me why? Because I, for one, accept the idea that the exchange paradigm doesn't hold in a fiat money economy.

Felix, you say earlier 'In any market, every dollar that enters it has to leave it. ' and I asked what happens in an inflation, such as Weimar Germany had.

What is your answer?

Link to comment
Share on other sites

Felix, you say earlier 'In any market, every dollar that enters it has to leave it. ' and I asked what happens in an inflation, such as Weimar Germany had.

What is your answer?

In a fiat system, money can be created without actually being backed. It is, however, booked that way. So every Mark created was "backed" by the government. So every new Mark had a corresponding debt booked, which makes the sum zero. For the new money, a corresponding debt is booked, but it is not backed by any goods.

It's in the nature of the paper money system with partial reserve banking. Money appears that is not backed by anything. And once people find out (when it's too late), it all breaks down. To push the farce a little longer, the government may try to print as much as they can, which will naturally stop once the money isn't worth more nominally than producing it costs.

That system is inherently instable. Every inflation has to end in a crash.

Link to comment
Share on other sites

Would you mind telling me why?

It is a mixture of true but unconnected facts, logical fallacies, and plain nonsense, doing a rather good job of imitating the writing style of Immanuel Kant. The overall message seems to be something along the lines of "We are doomed, there will be a terrible economic crisis, everything will collapse, and it's all the fault of the banks." (And sometimes the reader wonders if the next sentence won't be: "...And the banks, as we all know, are all in the hands of the Jooooos!")

The book's central fallacy is that banks "create money out of thin air" when they issue loans. This idea is based on the fact that a bank can give you a loan in the form of money credited to your deposit account. Now, if all anyone ever did with the money a bank has lent him were to keep it on his deposit account and pay interests on it, then it would be true that more and more loans would need to be made to people just to allow them to pay the interest on their loans. But then it would also be true that everyone would have to make his own food or starve to death, because if no one ever spends his money, then no goods will ever be bought or sold.

When a bank gives you a loan, what you do is spend it. Say, you buy a car from the money the bank has lent you. Before the bank gave you the loan, you had had X things; after the bank has given you the loan, you have X things plus a car. Yes, you owe the price of the car plus interest back to the bank, but the bank did, in effect, give you physical goods in exchange for your future payment--namely, the car. No debt is created out of thin air.

Link to comment
Share on other sites

When a bank gives you a loan, what you do is spend it. Say, you buy a car from the money the bank has lent you. Before the bank gave you the loan, you had had X things; after the bank has given you the loan, you have X things plus a car. Yes, you owe the price of the car plus interest back to the bank, but the bank did, in effect, give you physical goods in exchange for your future payment--namely, the car. No debt is created out of thin air.

You spend the money, that is correct. Otherwise you wouldn't borrow it at interest in the first place. But the money you spend is still booked to the account of whoever gave that money to the bank. And you usually don't spend your money cash, do you? You have a credit card or a check and the money wanders from account to account by nothing but changing numbers.

The bank has created money out of thin air. The funny thing is that it is up to you to now create the actual value corresponding to the debt you have to pay it back. By doing so you back the new money created with corresponding services and products and everything is fine. And if you can't pay your debt, you go bankrupt, the debt is deleted and the bank has suffered a loss.

So far that's not a problem. The problem starts with government debt, which is not paid back. This is what creates inflation: Debt, without anyone taking the effort of backing it. It creates new money without creating the corresponding services.

Link to comment
Share on other sites

Guest
This topic is now closed to further replies.
  • Recently Browsing   0 members

    • No registered users viewing this page.
×
×
  • Create New...