Debitism

[Trudy Cool]

What do you mean by trust, particularly as applied to the Borrowed Gold Economy model?

"Trust" in your basic "pot-luck" dinner, is simply that no one will so be abusive as to bring nothing and do nothing, yet consume excessively.

Roughly speaking, "Trust" in the Borrowed Gold Economy, is the reciprocal of "Risk". It ought to refer to the supposed role of banking -- that of intermediating trust between lender and borrower. In the Borrowed Gold Economy, you will notice that Midas has no depositors at all. Early merchant bankers, such as Morgan's, went out of their way to discourage depositors. When they did manage a client's savings for them, it was done mainly as a courtesy service and a minor component of estate management.

I'll use this one for the moment, as the Fiat and Mixed Economy examples are derivatives of this one (if there are important differences, I "trust" they'll be pointed out when necessary.)

I believe this system has the necessary factors of the discussion:

1. having currency within the system unavoidably requires making payments to an entity
   
2. the money circulating within the system decreases subject to the debt-collector's unwillingness to spend the interest he obtains
   

Personally, I'd word both of those differently.

1. Currency exists within the system exclusively because the entity lent it out for a period of time. For that "service" the entity requires repayment back down to and below zero by the end of the period.
   
2. the money circulating within the system decreases down to zero regardless of the debt-collector's willingness or unwillingness to spend the interest he obtains. If it only goes to zero, it is because he chose to spend all the interest.
   

I understand that you mean any system with interest contually paid and not put back into the system, regardless of whether the debts are "bad" or proportionately large to the supply of money, will suffer a diminishing ability to pay the interest?

You can try it out for yourself. Get a few people together. Hold their wrist watches or cellphones as collateral for loans of a handful of dimes and quarters. Have them buy and sell peanuts, potato chips, beer, guacamole, etc. in 12 game turns. You will see that it is mathematically impossible for all of them get their collateral back. It's a carnival trick. It's also the basis for the global financial system.

To the extent that such systems are avoidable subsystems within our own (i.e. personal transactions between willing individuals,) I'd fault the fool who partakes in such a debt and leave it at that. But I believe you are saying that we all are taking on such a "debt," regardless of whether we actively/consciously wish to or not?

When you hear that the financial system is tightening credit, it means they are reducing the money supply. When that occurs, commerce slows and someone must borrow more in order to maintain the amount of medium of exchange the productive sector requires to keep functioning. In a certain sense the borrower is performing a valuable civic service, but they pay, personally, for the privilege.

If such debt-spiral systems are not merely avoidable subsystems within our larger one, but representative of the system (as is) as a whole, what makes it unavoidable (gov't/the Fed?)

I would say that any economist who attempts to base a career on the position I am taking, finds himself with no place to work. After a while he/she just shuts up and jumps in and plays the game. Wanna bet that George Soros hasn't figured this out? Bill Gates? Take a guess at Microsoft's debt load.

What makes it unavoidable is the vast combined power of the public and financial sectors to convince everyone that it's the best of all possible systems.

[hunterrose]

The problem is that your argument is being interpreted as "some people can't/won't pay their debts in time, and their inability to pay harms their creditors." That being a bit obvious, I don't think that is what you (or Trudy) are trying to say, but

• if there are people indebted only within their means to pay (i.e. are not significantly harmed)
  

then isn't the moral of this story "don't borrow more than you can pay back?"

To whatever extent these scenarios are an imminent problem, what is the proposed solution?

[Felix]

The problem is that your argument is being interpreted as "some people can't/won't pay their debts in time, and their inability to pay harms their creditors." That being a bit obvious, I don't think that is what you (or Trudy) are trying to say, but ...

The thing is that most can't. At least they couldn't if it were not for the new debt taken. And if not enough new debt is taken this leads to a crash. The current system is an inherently unstable ponzi-scheme. This is what I am saying.

• if there are people indebted only within their means to pay (i.e. are not significantly harmed)
  

then isn't the moral of this story "don't borrow more than you can pay back?"

The thing is that the economy as a whole is indebted beyond its means of payment because all the money in existence is lent and borrowed and therefore requires interest payments for which money isn't there. And that people just pay back some, which is then again spent, and then used to pay off the debt again, doesn't work. Just because money is paid back to the bank doesn't mean that the bank's customers suddenly spend more. New money only enters the market via new debt.

So, basically "don't borrow more than you can pay back" may be true for some individuals who can and do in fact profit in this system. It is very well possible for some. But it's impossible for all. That's why I believe that this system screws up the concept of a trade which benefits both parties, because it's basically about money and value has become secondary. I hold that this is wrong, that this is not as it should be and that because this is the case, economic models which claim that trade always benefits both parties unfortunately don't apply in the current system.

To whatever extent these scenarios are an imminent problem, what is the proposed solution?

Hm. Actually my main point was making this forum aware that there is a problem in the first place, which is still doubted by ... well ... pretty much anybody .

I talked to Maarten about this and he said that I was too negative and should focus on a way out, too. The only alternative I can think of would be that debt should also be allowed to be paid for in goods. But this would hinder the economy more than it would benefit it. But I haven't given this much thought, yet. I guess if you are looking for solutions, you'd have to ask Trudy.

[Maarten]

Clearing Economy: Midas maintains an accounting book. As each pair of participants negotiates a firm trade, they ask Midas to debit the buyer and credit the seller. Midas charges a percentage on each transaction. Everyone starts with zero. The net value of all accounts is always zero. Negative closing balances are settled up by some form of contractual agreement, perhaps involving interest.

How does the interest fit in here while still maintaining a zero balance?

[hunterrose]

The thing is that most can't [pay their debts within time limits.] At least they couldn't if it were not for the new debt taken. And if not enough new debt is taken this leads to a crash.

You're saying that most people can't pay their debts without taking on greater amounts of debt??

The thing is that the economy as a whole is indebted beyond its means of payment because all the money in existence is lent and borrowed and therefore requires interest payments for which money isn't there.

I seriously doubt that is the case, particularly if you're not talking about the government. How many people (% wise) don't earn enough money to at least pay the interest and some of the principal of their debts? 10%? 1%? 0.1%? If this number is exceedingly low, on what basis do you say that the economy as a whole is indebted beyond its means of payment? Make sure you aren't doing double accounting in saying that all the money in existence is lent and borrowed.

That's why I believe that this system screws up the concept of a trade which benefits both parties, because it's basically about money and value has become secondary. I hold that this is wrong, that this is not as it should be and that because this is the case, economic models which claim that trade always benefits both parties unfortunately don't apply in the current system.

I hope no economist/model would say that every transaction is necessarily profitable to all involved parties. Any person can purchase something that's worth less than it's price. I suppose we'd agree that a wise trade is beneficial to both parties, and a foolish one might not be beneficial to the parties?

[Felix]

You're saying that most people can't pay their debts without taking on greater amounts of debt??

They need other people to take on debt to get the money to pay theirs. I'll explain why below.

I seriously doubt that is the case, particularly if you're not talking about the government. How many people (% wise) don't earn enough money to at least pay the interest and some of the principal of their debts?

I take the government into account, too. It is a main source of debt. But this is also true if there was no government, or if the government didn't take on debt. To understand this you have to get that this thing works over time.

Here's a horribly oversimplified version to get the principle:

Person A takes on a debt on 100 only dollars, which are the only dollars in the market then and has to pay $110 back, 10 of which don't exist. He invests it in the work of B (to buy machines, materials or labor) and then tries to sell his products to get the $110 plus $10 for himself. Now the $100 he gave to B are not sufficient. What he needs is C to take on debt to put new dollars into the market, so that A can get his additional $20.

If this number is exceedingly low, on what basis do you say that the economy as a whole is indebted beyond its means of payment? Make sure you aren't doing double accounting in saying that all the money in existence is lent and borrowed.

Now how do I come to the conclusion that this over-debt is actually the case? Well, if you take a look at the "reserves" of central banks as they are today, you will find that 80% of this is government debt (tendency rising), the rest being other debt. So the cash-bills you have is basically (government) debt.

This money is then increased by fiscal money creation, meaning that banks borrow money to other people while keeping the account balances of their customers untouched. This is, in fact, some sort of double booking. But that's how it works.

So the money you have on accounts and in the hands of people is debt for others. Either government or private. And a government bond, just as a loan from the bank, usually demand interest payments on top of the borrowed money.

This is how I currently see it. But I have to research the specifics of it and I hope that Trudy can help here.

Even if the specifics I presented were wrong, the principle would remain the same.

I hope no economist/model would say that every transaction is necessarily profitable to all involved parties. Any person can purchase something that's worth less than it's price. I suppose we'd agree that a wise trade is beneficial to both parties, and a foolish one might not be beneficial to the parties?

But what happens when one takes on debt without the money to pay it back being in existence? This would be a bad deal, no matter who made it. Unless, of course one knows that

a) more new debt is on its way. (via inflation for example) or

one can beat others in the game by having a better product/service that is so good that people will give you their money (while others will lose out)

[Capitalism Forever]

You would only want that if you believe that a graph of debt service payments to profits, would have something other than a close correlation to debt as a percentage of networth. If you can explain how such a thing could happen, I'll take seriously your request.

Assume that your company has a net worth of $100. If it didn't borrow any money, it could make a profit of $20, making its net worth increase to $120 by the end of the year. In this case,

debt service / profits = 0 / 20 = 0

debt / net worth = 0 / 100 = 0[/code]




Now suppose that the company borrows $50 from a bank at an interest rate of 10%. This way, its total assets will be $150, allowing it to make an operating profit of $30. After paying the $5 interest, it is left with $25 of profits.



[code]debt service / profits = 5 / 25 = .2

debt / net worth = 50 / 100 = .5

Supposing alternatively that it borrows $100 @ 10%. With $200 in assets, it can make $40 in operating profits, and gets to keep $30.

debt service / profits = 10 / 30 = .33

debt / net worth = 100 / 100 = 1[/code]


1. You can see that, although there is a positive correlation between debt service over profits and debt over net worth, it is very far from a direct correspondence.


2. You can also see that, as long as it has a return on assets greater than the interest rate, a higher amount of debt is GOOD for the company--it allows it to make more profits. Without a loan, the company got its owners a 20% return on their $100; with the $50 loan, it earned 25% on the same $100; and with the $100 loan, it earned 30% on that same $100.


As a business owner, I [b]dream[/b] of a 100% debt-to-net-worth ratio for my company!

[Capitalism Forever]

Borrowed Gold Economy: At the outset, neither John nor any participant has any gold coins. They wait for Midas Mulligan to arrive. Midas lends out gold coins by taking signed title to the wristwatches of each participant. For the first hour everything progresses more or less as in the Owned Gold Economy above. However, every fifteen minutes, during the party every participant visits Midas, to pay a gold coin of interest, and John to pay a gold coin of rent. [...]

This is not how it works in reality. Producers need not borrow the medium of exchange from banks. Producers need to produce goods, for which they will be paid with the medium of exchange.

I started my software business with literally ZERO money. All I invested was my programming skills and a laptop (and the latter wouldn't have been necessary). The first time that money entered the picture was when I made my first invoice for the work I had done.

[IAmMetaphysical]

That is the crux felix/trudy. Money is PRODUCED, not borrowed. Even if Midas was the supplier of the medium of exchange, he still had to put work into PRODUCING that medium. It is trade of effort, not trade of stuff. There are no goods without work.

[Capitalism Forever]

Since you are not well-disposed towards believing me -- try this quote from a Federal Reserve official.

To understand what he means please work through the Borrowed Gold Economy scenario in my last post.

What's more, we are completely dependent on the food industry as well! If they create ample food, we are prosperous; if not, we starve. How tragic! How hopeless!

If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation.

1. It is true that if there were no bank loans, there would be no interest-bearing deposits either. But there could still be interest-free checking accounts, debit cards, wire transfers, coins, notes, etc. Only they would probably be more expensive than they are now--and in general, everything would cost more in such an economy in real terms (that is, we would all be poorer), since the lack of loans would make growth much more difficult.

2. Which brings us to the more fundamental problem with the argument: namely, that it is built on a perfectly unrealistic assumption. Why in the world would businesses and individuals want to forgo the benefits they obtain from bank loans?

[Trudy Cool]

How does the interest fit in here while still maintaining a zero balance?

To begin with the unsettled amounts could be rolled over until the next "party", depending on the degree of mutual trust.

But the whole issue is much clearer with an example.

Assume that A, B & C have a triangular business relationship. Assume also that there is a generalized dearth of liquidity and that they all three, in ignorance of the other's decisions, find themselves obliged to borrow from the bank. Obviously if A borrowed 1200 first and immediately paid his debts, B and C would have no need to borrow, so the following is a worst case scenario.

Before clearing...


	   B owes 1000 to A

	   C owes 1100 to B

	   A owes 1200 to C

	  ==================

   Total Debt 3300

Total Interest 330


				  D e b t o r s

	  +--------+------+------+------+-------+-------+

	  |		|   A  |   B  |   C  | Gross |  Net  |

	  +--------+------+------+------+-------+-------+

   C  |	A   |	  | 1000 |	  | 1000  |	   |

   r  +--------+------+------+------+-------+-------+

   e  |	B   |	  |	  | 1100 | 1100  |  100  |

   d  +--------+------+------+------+-------+-------+

   i  |	C   | 1200 |	  |	  | 1200  |  100  |

   t  +--------+------+------+------+-------+-------+

   o  | Gross  | 1200 | 1000 | 1100 | 3300  |	   |

   r  +========+======+======+======+=======+=======+

   s  |  Net   |  200 |	  |	  |	   |	   |

	  +--------+------+------+------+-------+-------+


After clearing ... 


Where:  Individual Gross Debt - Individual Gross Credit = Individual Net Debt


	   A owes 100 to B

	   A owes 100 to C

	  ==================

   Total Debt 200

Total Interest 20[/code]


As you can see clearing takes the huge benefit that normally accrues to the financial sector, and leaves it with the productive sector for productive purposes.

 

The point to which I want to draw your attention is that, while banks operate clearing amongst themselves, they explicitly lock out the productive sector from their clearing mechanisms.


To answer your specific question, "How does the interest fit in here while still maintaining a zero balance?"  In the matrix above, after one year, B & C would have outstanding credit's of $110 each, while A would have an outstanding debt of $220.

[Felix]

That is the crux felix/trudy. Money is PRODUCED, not borrowed. Even if Midas was the supplier of the medium of exchange, he still had to put work into PRODUCING that medium. It is trade of effort, not trade of stuff. There are no goods without work.

The problem is that your $50 bill only costs maybe a cent in production. Goods are produced, and money is not a good. If it were, why is your $50 bill not worth the cent it costs, but $50 instead? And you don't get gold for it.

[EC]

I haven't read (and won't read) the rest of this excessively long thread. However, if the following quote from Felix the cats first post (which I take to be his central argument regardless of the threads tangents) is correct then ALL of Objectivism and ALL arguments for Capitalism MUST be incorrect.

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.

This would require OVERWHEALMING evidence to be presented in it's favor right off the bat given this forums context to simply not be dismissed out of hand as wrong or even arbitrary. Not to mention against forum rules.

[Trudy Cool]

1. You can see that, although there is a positive correlation between debt service over profits and debt over net worth, it is very far from a direct correspondence.

Ok, I take your point. Please confirm the following though ... the graph shows that debt as a percentage of net worth, rose from less than 1/4 to nearly 2/3, in the period 1952 - 2002. (In addition, as I am sure you are aware consumer debt has increased so dramatically that the USA's Net Savings are below zero for the first time since the depression.) I admit I cannot prove that all of it is attributable to the phenomena I describe. Do you assert that none of it is attributable to those phenomena?

2. You can also see that, as long as it has a return on assets greater than the interest rate, a higher amount of debt is GOOD for the company--it allows it to make more profits. Without a loan, the company got its owners a 20% return on their $100; with the $50 loan, it earned 25% on the same $100; and with the $100 loan, it earned 30% on that same $100.

As a business owner, I dream of a 100% debt-to-net-worth ratio for my company!

This may be the case while the economy is bouyant, however that debt is inelastic. As changes in the money supply cause the economy to slow, your profits will shrink while your debt service remains the same.

I can't produce the graph you request because I had not understood the difference you highlight. Meanwhile, I don't see how it disproves the points I'm trying to convey.

[Trudy Cool]

This is not how it works in reality. Producers need not borrow the medium of exchange from banks.

I realize that you consider this to be true. So do most people. The point I'm trying to make is that, in fact, it does not work like this. Under the reigning financial system, there will be a medium of exchange only if someone steps forward to borrow it. The mechanism by which new money comes into existence is through borrowing. Individually we can accept or decline, in aggregate we have no choice whatsoever.

Producers need to produce goods, for which they will be paid with the medium of exchange.

I started my software business with literally ZERO money. All I invested was my programming skills and a laptop (and the latter wouldn't have been necessary). The first time that money entered the picture was when I made my first invoice for the work I had done.

You are describing what transpires once someone has stepped forward to create money by borrowing it. It's not germane. The issue is whether the money creation mechanism is optimal, suboptimal or worse ... nonsustainable.

[Trudy Cool]

That is the crux felix/trudy. Money is PRODUCED, not borrowed. Even if Midas was the supplier of the medium of exchange, he still had to put work into PRODUCING that medium. It is trade of effort, not trade of stuff. There are no goods without work.

I'm sorry but you simply haven't grasped the point of my "Borrowed Gold" scenario, nor the derivative scenarios (which are progressively worse). I do not state that Midas does nothing. He is providing a service -- providing a market with a medium of exchange. However, my last two scenarios also show Midas providing exchange services to a marketplace, but with two major differences: they do not place him in a position of power over the producers, and they do not display the property of an exchange media that rapidly declines to zero.

I have presented those scenarios as "thought-experiments" (physicist style). Please think them through. Please, don't say "It doesn't work like that" -- show me where I am wrong!

[IAmMetaphysical]

Yes, the actual paper cost less than the face value of most bills. But since I obtained the bill in exchange for $50 worth of effort, it actually (to me) represents $50 worth of effort. The problem comes in when the bill first entered circulation. But it is not a problem that is inherent in a money system, just the present one.

[Capitalism Forever]

The problem is that your $50 bill only costs maybe a cent in production.

Well, suppose that you and I were both offered a share in ExxonMobil two years ago, in exchange for doing some work worth $40.

You would have said: "It's just a piece of paper, which cost maybe a cent to produce. I'm not interested."

I would have said: "Why, Exxon is a great company, I'm sure a share in it is a good investment. Count me in."

Ten months later, I could have exchanged my share for one-and-a-half times the amount of work I had done. So which of us made a good deal, and which of us was the fool?

The fact that a share (or a bond, or a note) costs just a cent or so to print has nothing to do with its value. That cent is a transaction cost, similar to the cost of the fuel you use to drive to the bank, or a brokerage fee, or the cost of parking in a shopping mall's car park.

The value of a share comes from the fact that it gives you a title to a portion of Exxon's rigs, refineries, tankers, filling stations--and the fuel that equipment will produce thanks to the ingenuity of Exxon's engineers, and the wealth Exxon's customers are willing to pay for that fuel.

money is not a good.

This is where you get it wrong. Money IS a good, be it in the form of a gold nugget just out of the mine, a gold coin, a note redeemable in gold, a fiat money note, or a record in a bank's computerized database.

A gold nugget has just as little value to me qua gold nugget as a piece of paper has qua piece of paper. Or perhaps even less: I can write on the paper, but I cannot write on the gold. In any event, both have little value to me if I cannot trade them.

But the point is that I can trade them.

The nugget of gold may have little value to me, but it has a great value to a jeweller, so I can go to him and exchange my nugget for a diamond ring with my fiancee's name engraved in it. And behold, the worthless piece of gold has turned into a beautiful ring on the hand of a beautiful lady! Maybe it wasn't so worthless after all?

A "worthless" piece of paper can do the same as a "worthless" piece of gold. If the jeweller can redeem it in gold, it will be valuable to him for that reason. If he cannot, he will still be able to buy things for it, and as long as the Fed keeps inflation down, at stable and predictable prices.

I am not advocating fiat money, as it involves force and empowers the government to steal wealth by causing inflation. But it is a fact that even fiat money can be made to work well if the Fed so wishes. And gold money, which all Objectivists are advocating, will work well independent of what decisions Mr. Bernanke makes.

[Capitalism Forever]

Ok, I take your point. Please confirm the following though ... the graph shows that debt as a percentage of net worth, rose from less than 1/4 to nearly 2/3, in the period 1952 - 2002.

I can gladly confirm that. Gladly because, as I said, it is great for businesses to have credit available.

I admit I cannot prove that all of it is attributable to the phenomena I describe. Do you assert that none of it is attributable to those phenomena?

All of it is attributable to the fact that businesses expect to earn a return on assets greater than the interest rate asked by the banks.

It seems as if you do not get the difference between a loan and the means of exchange. The former is something you owe the bank--a liability for you. The latter is an asset you have. To put it as bluntly as I can: the former is a MINUS, the latter is a PLUS. The former means the bank has given you something you'll have to give back later, and as a price you have to pay interest to the bank. The latter is something someone has given you, and if you have deposited it in the bank, the bank will pay you interest.

YOU DO NOT PAY INTEREST ON THE MEANS OF EXCHANGE YOU HOLD.

[Trudy Cool]

What's more, we are completely dependent on the food industry as well! If they create ample food, we are prosperous; if not, we starve. How tragic! How hopeless!

I don't believe I deserve this kind of jeering. I already covered this issue by pointing out that the flow of goods (in this case food) towards the end consumer, is a flow of thousands of kinds of different goods, while the flow of the medium of exchange from end consumer to original producer involves exactly one good, controlled by a single cartel, the banking system. You cannot compare them so lightly.

A Federal Reserve credit manager made the statement. I suggest you consider that there may be an issue here you have not appreciated -- that a single "good", ideally positioned as a choke point, on a supposedly free market, has a further function than just a medium of exchange -- the Federal Reserve dollar is also a medium of control.

If the above is true, then it is naive to talk about a free market without considering deeply how that control mechanism operates.

1. It is true that if there were no bank loans, there would be no interest-bearing deposits either. But there could still be interest-free checking accounts, debit cards, wire transfers, coins, notes, etc.

You miss the point. If there were no bank loans, there would be no dollars!

But there could still be interest-free checking accounts, debit cards, wire transfers, coins, notes, etc. Only they would probably be more expensive than they are now--and in general, everything would cost more in such an economy in real terms (that is, we would all be poorer), since the lack of loans would make growth much more difficult.

No. You are misinformed. The lack of loans would bring all trade and commerce to a halt. All checking accounts would be empty. Debit cards would refer to empty accounts. Wire transfers would cease. Coins and notes would be stored in bank vaults as the last payments on the debt were made. With all that brought to a standstill, the unpaid debt would be 10s of trillions of dollars, nevertheless.

2. Which brings us to the more fundamental problem with the argument: namely, that it is built on a perfectly unrealistic assumption. Why in the world would businesses and individuals want to forgo the benefits they obtain from bank loans?

Quite so ... when the borrowing is for growth, and the growth is successful. However, when the economy retracts and the choice is between debt or failing to meet payroll, the story is different.

You have said you dream of a 100% debt to net-worth ratio for your company. If you realise your dream, in what sense is the company yours? Surely, you are no more than an operator on behalf of your creditor. This may seem grand when your income/expenses ratio is high. What happens when income falls off, you miss a payment and the creditor begins to dictate terms? It is in this sense that I am arguing that the kind of money issuance mechanism currently in place, is designed by the financial sector to ensure that the productive sector is obedient to its wishes.

Other exchange mechanisms are possible which have no property of concentration of control and instead exhibit the characteristics of a genuinely free market.

[Trudy Cool]

It seems as if you do not get the difference between a loan and the means of exchange. The former is something you owe the bank--a liability for you. The latter is an asset you have.

Oh, I understand very well. But it is not possible to separate the two, the means of exchange I hold IS a loan taken out by someone somewhere. That fact places unnecessary pressures and distortions on the marketplace, and it is those distortions I'm hoping to be able to discuss.

To put it as bluntly as I can: the former is a MINUS, the latter is a PLUS. The former means the bank has given you something you'll have to give back later, and as a price you have to pay interest to the bank. The latter is something someone has given you, and if you have deposited it in the bank, the bank will pay you interest.

As I have already stated, it is not possible to understand the system as a whole while referring to individual experience.

It is only an asset because someone "out there" needs to get their hands on it in order to pay debt or taxes. Otherwise it is just paper.

If I do a month's work in expectation of payment at the end, I am giving credit to my client. I get the green bits of paper, and go out making my own payments. When the paper is used up, my creditors paid and my acquisitions made -- THEN I have real assets.

I have lived through a period of hyper-inflation, bank runs and economic collapse. I have earned the right to state the following -- I understand, better than you, the worth of those bits paper.

YOU DO NOT PAY INTEREST ON THE MEANS OF EXCHANGE YOU HOLD.

I have done nothing to deserve being shouted at.

And, meanwhile you continue you to miss the point. Your statement is true, but only in a limited sense.

I do not pay interest on the medium of exchange -- but someone else does! -- every cent of it and more. I refer to the person who borrowed it into existence. That person must, somehow, recuperate that money and more, or lose his collateral.

Furthermore, the system can only work if the money stock increases continuously. Since this inflationary, the medium of exchange I hold declines in value continuously, just as though I was paying out a bit at a time in interest.

[Felix]

The fact that a share (or a bond, or a note) costs just a cent or so to print has nothing to do with its value. That cent is a transaction cost, similar to the cost of the fuel you use to drive to the bank, or a brokerage fee, or the cost of parking in a shopping mall's car park.

The value of a share comes from the fact that it gives you a title to a portion of Exxon's rigs, refineries, tankers, filling stations--and the fuel that equipment will produce thanks to the ingenuity of Exxon's engineers, and the wealth Exxon's customers are willing to pay for that fuel.

I agree. The stock certificate, being just a piece of paper, is easy to produce. What provides value to it is that it gives you the right to actual values like the ones you named above.

This is where you get it wrong. Money IS a good, be it in the form of a gold nugget just out of the mine, a gold coin, a note redeemable in gold, a fiat money note, or a record in a bank's computerized database.

I agree in the sense that this is the main point of disagreement between me and Trudy and you.

You think that money is treated like any good in the economy.

(The following is an assumption on my part, so please correct me immediately if I'm wrong. I'm trying to understand your position to find out how to explain my theory the best.)

Someone produces gold and then issues paper backed by that gold for convenience reasons. This gold-backed money is as good as gold, and since gold is a good this money can be traded just like it were a good no matter what printing the actual money costs. Someone creates the money and then the rest is basically barter trade with one good being mainly used as a means of exchange for convenience reasons.

Trudy and I, on the other hand, believe that this is not the case. That money doesn't enter the economy as just another good for barter trades.

Our position differs from yours in this one point, all the rest actually follows from that, as far as I can see.

Now I am still quite poor regarding the specifics, which is Trudy's specialty.

You said that if you borrow money you then have to pay it back with interest. You get money, but you have to pay back more.

If you get money from someone, then you can deposit it in the bank and collect interest.

Well, but where does that someone get his money from? I hold that he borrowed his money or got it from someone else who borrowed it. And even though you don't have to pay interest, he does.

[Capitalism Forever]

the flow of the medium of exchange from end consumer to original producer involves exactly one good, controlled by a single cartel, the banking system.

Prove that it's a cartel.

A Federal Reserve credit manager made the statement.

And that is the best argument against fiat money that has ever been made. The fact that our money supply is controlled by people who can say such stupid things.

the Federal Reserve dollar is also a medium of control.

To the extent that the government abuses its power, it is. But that is governmental--or as you like to say, "public sector"--control. We have a problem of statism, not a problem of "debitism."

If there were no bank loans, there would be no dollars!

Why?

The lack of loans would bring all trade and commerce to a halt. All checking accounts would be empty. Debit cards would refer to empty accounts. Wire transfers would cease.

Why?

I have an equivalent of US$10,000 on my company's checking account as of today. If all bank loans were suddenly repaid, the bank would still owe me the $10,000. Sure, it couldn't pay interest on it, but I could still write checks or wire my money to my suppliers.

With all that brought to a standstill, the unpaid debt would be 10s of trillions of dollars, nevertheless.

Huh? I thought we were talking about a scenario where all loans were repaid !

You have said you dream of a 100% debt to net-worth ratio for your company. If you realise your dream, in what sense is the company yours?

In the same sense it was when it had a debt of 0. It used to have assets worth $100, and shareholders' equity of $100. Now it has assets worth $200, shareholders' equity of $100, and a debt to the bank of $100. Sure, now I only really own half the assets, but half of $200 is just as much as all of $100.

This may seem grand when your income/expenses ratio is high. What happens when income falls off, you miss a payment and the creditor begins to dictate terms? It is in this sense that I am arguing that the kind of money issuance mechanism currently in place, is designed by the financial sector to ensure that the productive sector is obedient to its wishes.

If I take on a loan and default on it, I have to bear the consequences. But I have to bear the consequences of anything I do, be it getting a loan, eating an ice cream, marrying, or getting on an airplane. Should I stop doing all these things because you can come up with a scenario where they have negative consequences on me? Or should I rather exercise rational judgment to assess the risks and weigh them against the potential benefits?

If you get on an airplane, you are in the hands of the pilot to a far greater extent than you can ever be in the hands of your creditors, especially if you have incorporated your business. Does this mean that aviation is "designed by the airline sector to ensure that the productive sector is obedient to its wishes" ?

Other exchange mechanisms are possible which have no property of concentration of control and instead exhibit the characteristics of a genuinely free market.

Ah, a "genuinely free" market! Freer than the free market? Is that something like "fair trade," a.k.a. protectionism? Thanks, but I want none of it. You can experiment with your whacky schemes in your third-world rathole to your heart's content, but leave America alone.

[Capitalism Forever]

It is only an asset because someone "out there" needs to get their hands on it in order to pay debt or taxes. Otherwise it is just paper.

No, it is an asset because everyone wants to get their hands on it in order to buy goods. Repaying debt is just a deferred way of buying goods; if you have to repay a debt today, it means you obtained some equipment, real estate, etc. some time ago and didn't pay for it at that time. And you know I'm against taxes.

The Fed note says on it that it's legal tender for all debts, public and private, but that is not what gives it its value. If I offered to give you a bag full of dollar bills for free, would you

• A, say "Yuck! It's heavy! I don't need it!"
  
• B, open it, count out as many dollars as you need to pay your taxes and bank debts, and leave the rest, or
  
• C, snatch the whole bag eagerly?
  

If your answer is anything other than C, I can officially diagnose you as an idiot or a troll, and the discussion is over. If your answer is C, you have some explaining to do!

[Capitalism Forever]

Well, but where does that someone get his money from? I hold that he borrowed his money or got it from someone else who borrowed it.

Okay, and where did the bank get the money from?