Debitism

[Trudy Cool]

What happens if the party goes on indefinitely, and the maturities of the loans are spread out about evenly (e.g. one or two loans maturing every hour? That is the analogous equivalent of how a real-life economy works, and I don't see why a boom-bust cycle is inherent in it.

I saw it stated in the Fractional Reserve thread, as a supposedly indisputable fact, that Fractional Reserve banking causes the boom/bust cycle. I don't agree. Boom/bust is a property of lending, while lending is an element of fractional reserve banking.

If loans really did mature "flat" as you say, then I would agree that it is analogous to a real-life economy, but it isn't the case. Events, the start of a growing season or the end of a war for example, cause booms of various kinds that encourage much simultaneous confidence for borrowing. These bursts of borrowing come to term simultaneously and have a depressive effect as the term approaches and the last vestiges of liquidity from the initial burst are withdrawn from availability.

The initial burst in my scenario, is everyone's need to buy all the ingredients for their various recipes.

I thought monetization was precisely the core function we were supposed to be focusing at, wasn't it?

Oh, its definitely about monetization. Further monetization is a complication I want to avoid for now.

[Capitalism Forever]

If loans really did mature "flat" as you say, then I would agree that it is analogous to a real-life economy, but it isn't the case. Events, the start of a growing season or the end of a war for example, cause booms of various kinds that encourage much simultaneous confidence for borrowing. These bursts of borrowing come to term simultaneously and have a depressive effect as the term approaches and the last vestiges of liquidity from the initial burst are withdrawn from availability.

Your implicit premise here is that most of the loans have the same duration. I doubt that is the case!

And even when there are a great number of loans maturing at the same time, there are solutions, such as refinancing and further monetization of assets. (Remember that the loans have allowed the economy to grow, so there are now additional assets available for monetization!)

[Trudy Cool]

Your implicit premise here is that most of the loans have the same duration. I doubt that is the case!

Doubt no longer. It certainly isn't the case. But the list of typical loan terms isn't very long, is it? I skate over the issue because, again, it is noise on top of the underlying principal --> that all third-party monetization of assets has a built-in characteristic of decay over time. That has at least two inescapable consequences:

1. Borrowing must occur to keep the supply going.
   
2. There is a logical disconnect between supply/demand for good/services and supply/demand for the medium of exchange.
   

I am convinced that both of these are detrimental to non-financial exchange.

And even when there are a great number of loans maturing at the same time, there are solutions, such as refinancing and further monetization of assets. (Remember that the loans have allowed the economy to grow, so there are now additional assets available for monetization!)

This last statement has many implications.

One is that, somehow, economic growth requires bank loans. Is this certainly the case? If that is your position you would have to demonstrate that neither of my two proposed scenarios (Clearing and Private Paper) engenders economic growth.

Another implication, is that the new assets are created at least as fast as the need for re-monetization. Is this certainly the case?

My search for certainty on these topics lead me to compare intermediated monetization (bank debt) with self-monetization (Private Paper) and mutual monetization (Clearing). I am convinced that my two scenarios demonstrate, with certainty, that:

1. Accepted debits are essential to economic growth, but the debits can be bi-lateral or multi-lateral, without intermediation.
   
2. That supply/demand for good/services and supply/demand for the medium of exchange can be tightly synchronized.
   
3. Asset creation can develop much more rapidly than monetization.
   

If I'm wrong I am eager to discover where the error is.

[A.West]

I utterly reject the "borrowed gold scenario." It parallels neither the origins of money nor of banking, and I have no idea why anyone would play that game, when real alternatives are available. One must tie economic actions to values, not arbitrary scenarios that kind of resemble real institutions but actually don't.

Menger's "Principles of Economics" still remains free to download off of the internet.

[Capitalism Forever]

Doubt no longer. It certainly isn't the case. But the list of typical loan terms isn't very long, is it?

OK, so that would translate to something like a six-hour party with half the loans having a three-hour duration and the other half a six-hour duration. Would there be a bust after the third hour? I say there might be a temporary decline, but there would be no total bust.

Also, in real life, all loan contracts are not signed on the same day; if there is, say, a bullish period lasting 4 years, then the starting dates of the loans will be spread out over that period. So your model would be more accurate if Midas monetized one or two wristwatches every minite for the first two hours (again with some of the loans lasting 3 hours and some, 6).

Which means, IMO, that the effect of loan repayments would hardly be noticeable.

I skate over the issue because, again, it is noise on top of the underlying principal

If it dramatically changes the conclusion, you can't really skate over it, can you?

--> that all third-party monetization of assets has a built-in characteristic of decay over time.

What do you mean by "decay" ? And why does it only arise if there is third-party involvement?

This last statement has many implications.

One is that, somehow, economic growth requires bank loans. Is this certainly the case?

It is certainly NOT the case. You can have growth without loans; you can have more growth with loans. And similarly, you can have loans without banks, but you can have more and better loans with banks.

Another implication, is that the new assets are created at least as fast as the need for re-monetization. Is this certainly the case?

As long as the return on assets is at or above the interest rate, yes. Business loans are made with both the bank and the debtor expecting that the debtor will be able to earn more than the interest. If the credit approval departments are rational enough, this expectation will come true in most of the cases.

[Trudy Cool]

OK, so that would translate to something like a six-hour party with half the loans having a three-hour duration and the other half a six-hour duration. Would there be a bust after the third hour? I say there might be a temporary decline, but there would be no total bust.

It'd be a fifty percent decline in the money stock. That this is a highly damaging decline is very well understood. Unless there is a corresponding increase in the velocity of money the amount of exchange that that amount of money could support would decline as well. Having paid off their borrowing, those with quick &/or high profit business plans will pocket some of the coins for their "store of value" purposes. Any coin saved in that way is unavailable to those with debts to pay, yet every coin lent must be paid back. So each coin taken out of "play" is a coin unavailable for debt repayment, and someone will lose their collateral as a result. It's musical chairs.

Also, in real life, all loan contracts are not signed on the same day; if there is, say, a bullish period lasting 4 years, then the starting dates of the loans will be spread out over that period. So your model would be more accurate if Midas monetized one or two wristwatches every minite for the first two hours (again with some of the loans lasting 3 hours and some, 6).

Which means, IMO, that the effect of loan repayments would hardly be noticeable.

It is not difficult to do a spreadsheet that shows the behaviour, but in my view the issue is simple enough that it's not necessary. The end result is the same no matter how you adjust the variables (within the rules that: all the medium of exchange is lent into circulation, must be fully reimbursed at the end, and that keeping earnings is permitted).

If it dramatically changes the conclusion, you can't really skate over it, can you?

You have not succeeded in demonstrating that it changes the conclusion at all, you have merely changed the internal variables such the decline in the money stock follows a different path. The quantity of money declines to zero over the course of party, it cannot do otherwise.

What do you mean by "decay" ?

Sorry. As I've said, I have an engineering background. It is a term used in describing waveforms: attack, sustain and decay. In those terms a borrowed/lent money supply is a very large set of triangular bursts with instantaneous attack and zero sustain followed by a decay to below zero by the amount of interest charged.

And why does it only arise if there is third-party involvement?

I think it's quite obvious in the clearing economy. In the private paper economy, as should be obvious from my anecdote Larkin Merchandise Bonds each note redeemed with goods was immediately paid out again to accounts payable or payroll. It's a steady state function tightly bound to supply and demand. Their is no "decay".

It is certainly NOT the case. You can have growth without loans; you can have more growth with loans. And similarly, you can have loans without banks, but you can have more and better loans with banks.

I do not take either of these two points on faith. It is not demonstrated that "more" bank loans are desireable, nor is it demonstrated that bank loans are somehow "better" than the other scenarios I've proposed. In fact the matrix in my post 113324 demonstrates the exact opposite. With bank debt, the three actors incur $3300 debt, with an interest cost of $330. With clearing, only one of them incurs debt ($200), with an interest charge of $20.

Please explain why the former is preferrable.

As long as the return on assets is at or above the interest rate, yes. Business loans are made with both the bank and the debtor expecting that the debtor will be able to earn more than the interest. If the credit approval departments are rational enough, this expectation will come true in most of the cases.

The trouble is that approvals and debtor must prognosticate behaviour of the money supply. If either one's assessment causes the loan not to happen the money supply continues its decline to zero. If both agree to the loan they lift the money supply by the amount of the loan and from that new, higher point it resumes its decline to zero. Which ever they predict, they contribute to a tendency in the direction of their prediction. This dynamic behaviour is inherent in any situation in which the medium of exchange is lent into circulation. Participants in a clearing economy &/or a private paper economy are very well insulated from any concern about the money supply since their transactions proceed regardless, so they have no need to gamble on it for their future success.

[Capitalism Forever]

The end result is the same no matter how you adjust the variables (within the rules that: all the medium of exchange is lent into circulation, must be fully reimbursed at the end, and that keeping earnings is permitted). [...] The quantity of money declines to zero over the course of party, it cannot do otherwise.

So what you're saying is effectively: "If people keep taking money out of circulation, the amount of money in circulation is going to decline." Well, no surprise there! But I don't see how the premise of that statement applies to real life. Why would people want to store an ever-increasing portion of their wealth in gold, when they can more profitably invest it in bonds, stocks, and real estate?

I do not take either of these two points on faith. It is not demonstrated that "more" bank loans are desireable, nor is it demonstrated that bank loans are somehow "better" than the other scenarios I've proposed.

Pay more attention. I was not saying that more bank loans were desirable, nor that bank loans were better than your other scenarios. I was saying that more loans were desirable, and that bank loans were (usually) better than direct loans.

Why are more loans desirable? Because more loans means more growth.

Why are bank loans usually better than direct loans? Because banks provide services that, due to economies of scale, are less efficient if done individually, or perhaps not even possible:

• Banks pool the deposits of investors, making it possible for smaller investors to participate in larger loans. If a company wants to borrow $100 million, they probably won't feel like accepting $10,000 loans from 10,000 different people; they wouldn't be prepared for the administrative burden. Also, it is easier to provide one large item of collateral than thousands of small ones.
  
• A bank can also combine several shorter-term investments into a longer-term one, or break down a single long-running deposit into several short-term loans.
  
• Without the bank, the lenders and borrowers would have to find each other via advertisements, which would not only cost money but also time.
  
• Before a loan is made, the lender has to evaluate the borrower's business plan, or at least appraise his creditworthiness. This is done much more efficiently and reliably by trained and experienced professionals than by individuals who are seeing a business plan for the first time in their lives.
  
• If the borrower defaults, the bank is in a much better position to take the necessary measures than many of its depositors probably are, again thanks to its size and expertise.
  
• Upon foreclosure, the bank will probably have a better bargaining position in auctioning off the collateral, as it does not need the money so urgently; and again, it can rely on its specialized professionals and years of experience.
  

In fact the matrix in my post 113324 demonstrates the exact opposite. With bank debt, the three actors incur $3300 debt, with an interest cost of $330. With clearing, only one of them incurs debt ($200), with an interest charge of $20.

Loans are not typically taken to finance accounts payable. And your matrix ignores time. If all three payments are due on the same day, A will take a dozen gold bullions worth $100 each and give them to C; C will give 11 of them to B; and B in his turn will forward 10 of them to A. Or they will write checks, which achieves the same. But in either case, the net result will be that A's balance sheet will show $200 less of cash than the day before, while B's and C's will total $100 more. Since it all happened within a day, no one incurs any interest.

However, if A has to pay C today and C will only have to pay B in thirty days, then A's balance sheet will be $1200 lighter of cash for thirty days, but in exchange A will be using the product C gives him for thirty days without having delivered his own product to B--thus it is only just that he should incur the interest due on $1200 for 30 days. And note that B and C, assuming that they both transact within a day, will still not incur any interest.

And all this applies regardless of whether they use gold or a bank or a clearinghouse. Your example achieves the figures it achieves by assuming a minimum round-trip time for A's money in the clearing case while assuming a longer time frame in the banking case. In other words, it's tilting the playing field!

[hunterrose]

I'm burning through a lot of econ stuff in order to question some things I have no good answers to yet, but I'll drop this for the moment.

A far better mechanism than either of the above disasters is AR/AP clearing... This has reduced advantages from the unrestrained clearing I show in my post 113324, but is protected from the danger you highlight.

This also seems to have problems, though not necessarily as terminal as the aforementioned ones.

At the party, suppose Eddie wishes to buy a good, but has a -500 account, the point beyond which his account can't be reduced and at which he has to attain positive accounting units through clearing or selling goods in order to buy goods. (If there is no hard/soft purchasing limit, it seems to be a reset-to-zero situation or otherwise equally unpalatable to the most productive members.)

Dagny, who has a positive accounting balance, considers clearing with Eddie. Under what circumstances would she gain from clearing with Eddie (I ask because it seems that she would lose accounting units in clearing with him unless she has outstanding debts directly or indirectly involving Eddie.)

[Trudy Cool]

So what you're saying is effectively: "If people keep taking money out of circulation, the amount of money in circulation is going to decline." Well, no surprise there! But I don't see how the premise of that statement applies to real life. Why would people want to store an ever-increasing portion of their wealth in gold, when they can more profitably invest it in bonds, stocks, and real estate?

It is not at all what I am saying.

As a factor in the shrinking money stock, the amount people hold in private savings is trivial. The overwhelming proportion is attributable to continuous debt repayment. Repayment of loan principal extinguishes money, and the money stock declines by that amount. The real life situation is that under the reigning monetary system the marketplace, as a whole, has no choice whatsoever but to keep the money supply going by entering further and further into debt.

Pay more attention. I was not saying that more bank loans were desirable, nor that bank loans were better than your other scenarios. I was saying that more loans were desirable, and that bank loans were (usually) better than direct loans.

Why are more loans desirable? Because more loans means more growth.

Why are bank loans usually better than direct loans? Because banks provide services that, due to economies of scale, are less efficient if done individually, or perhaps not even possible:

1. Banks pool the deposits of investors, making it possible for smaller investors to participate in larger loans. If a company wants to borrow $100 million, they probably won't feel like accepting $10,000 loans from 10,000 different people; they wouldn't be prepared for the administrative burden. Also, it is easier to provide one large item of collateral than thousands of small ones.
   
2. A bank can also combine several shorter-term investments into a longer-term one, or break down a single long-running deposit into several short-term loans.
   
3. Without the bank, the lenders and borrowers would have to find each other via advertisements, which would not only cost money but also time.
   
4. Before a loan is made, the lender has to evaluate the borrower's business plan, or at least appraise his creditworthiness. This is done much more efficiently and reliably by trained and experienced professionals than by individuals who are seeing a business plan for the first time in their lives.
   
5. If the borrower defaults, the bank is in a much better position to take the necessary measures than many of its depositors probably are, again thanks to its size and expertise.
   
6. Upon foreclosure, the bank will probably have a better bargaining position in auctioning off the collateral, as it does not need the money so urgently; and again, it can rely on its specialized professionals and years of experience.
   

I am completely uninterested in arguing the pros and cons of bank loans; they are beside the point.

The issue is whether bank debt deserves to be the preferred technique for creation of the medium of exchange. I've been comparing three different techniques: mediated monetization (bank debt), self monetization (private paper) and mutual monetization (clearing). Clearing exchanges provide every one of the capabilities in your list above, (in proportion to their size), just the same as banks.

The difference is blatantly obvious however. If the banker were to become aware that a triangular deadlock had arisen between three of his customers (A, B & C as in my example), he would not offer to clear it down and lend only $200 to A. You can be sure he would keep the knowledge to himself and lend out the full $3,300, knowing that his risk is only $200. I am not arguing that he has no right to do so. I am merely arguing that in doing so he has un-necessarily increased the cost of business of A, B & C. As far as A, B & C are concerned it is no different from a vandal breaking some windows. Sure the glazier profits, but where is the benefit? What has been created? He provides no contribution at all to the overall prosperity of the marketplace. The banker has charged $330 to clear $200. How is this beneficial to his three customers?

Loans are not typically taken to finance accounts payable.

This is why I am uninterested in discussing the merits of bank loans. You are arguing for borrowing for growth, while I am concerned about accounts payable and how the quantity of money influences one's chances of meeting payroll and accounts payable. I am arguing that a medium of exchange should be strongly disconnected from borrowing for growth so that exchange can continue insulated from the boom/bust cycles that result from borrowing the medium of exchange into availability. If you consider WIR in Switzerland, you have an example of a complementary exchange that increases in trading volume when Francs are scarce and decreases when they are more easily available. Since WIR circulates in Switzerland exclusively, a retreat into WIR as a response to unfavourable conditions with the Franc, means that the Swiss reduce their import expenditures and prefer local goods and services. This thereby strengthens local exchange, encourages growth and restores confidence adequately to permit further monetization in Francs.

And your matrix ignores time. If all three payments are due on the same day, A will take a dozen gold bullions worth $100 each and give them to C; C will give 11 of them to B; and B in his turn will forward 10 of them to A. Or they will write checks, which achieves the same. But in either case, the net result will be that A's balance sheet will show $200 less of cash than the day before, while B's and C's will total $100 more. Since it all happened within a day, no one incurs any interest.

You have misunderstood the scenario. They are all cash flow negative. They have no gold. They can't write NSF cheques. Thus, none of what you say here is pertinent.

However, if A has to pay C today and C will only have to pay B in thirty days, then A's balance sheet will be $1200 lighter of cash for thirty days, but in exchange A will be using the product C gives him for thirty days without having delivered his own product to B--thus it is only just that he should incur the interest due on $1200 for 30 days. And note that B and C, assuming that they both transact within a day, will still not incur any interest.

There is justice if B receives the interest from A. You can't argue that justice is done if A pays interest, but B never sees it. Meanwhile the banker receives interest from A and from B.

And all this applies regardless of whether they use gold or a bank or a clearinghouse. Your example achieves the figures it achieves by assuming a minimum round-trip time for A's money in the clearing case while assuming a longer time frame in the banking case. In other words, it's tilting the playing field!

Once again, I have shown the simplest possible case in order to draw attention to the basic behaviour. There is no disingenuous attempt to tilt the playing field. Clearing can be handled in many ways. It can be once a month, once a day or continuous. None of it affects the basic behaviour. If you wish to talk about tilting the playing field the drastic difference between bank debt and clearing is a perfect example. Unlike clearing, bank debt tilts the field, very strongly indeed, in favour of the banker.

Moreover, if you wish to argue that bank debt is superior to clearing you would have to argue that bankers are fools to use clearing between them when they could have all the "superior benefits" of bank debt.

[Capitalism Forever]

Repayment of loan principal extinguishes money, and the money stock declines by that amount.

Yes, if you repay the principal, then the asset you've monetized will no longer be monetized. Which means it is now again available for monetization, and the same amount of currency can be brought into circulation again if the market needs it. Where is the problem?

The real life situation is that under the reigning monetary system the marketplace, as a whole, has no choice whatsoever but to keep the money supply going by entering further and further into debt.

Further and further? If you repay $1000 of principal and take on a new loan of $1000, there will be no change in the magnitude of your "liabilities" column--or at least so I was taught by my math teacher.

I am completely uninterested in arguing the pros and cons of bank loans; they are beside the point.

You asked, so I thought it would be polite to answer.

I am arguing that a medium of exchange should be strongly disconnected from borrowing for growth so that exchange can continue insulated from the boom/bust cycles that result from borrowing the medium of exchange into availability.

Very fine, except for one little problem: I don't believe that any boom/bust cycles result from "borrowing the medium of exchange into availability." That is what we have been arguing about.

You have misunderstood the scenario. They are all cash flow negative. They have no gold. They can't write NSF cheques.

I don't know about your third-world rathole, but in the United States, it is unusual enough for one business to be insolvent, let alone three interconnected ones. So your scenario has no relevancy as far as American business is concerned. (Perhaps insolvency wouldn't be the norm in your country, either, if you focused more on creating wealth than on denigrating banks?)

[Trudy Cool]

I'm burning through a lot of econ stuff in order to question some things I have no good answers to yet, but I'll drop this for the moment.

That's the kind of corrosive agent I'm looking for!

This also seems to have problems, though not necessarily as terminal as the aforementioned ones.

At the party, suppose Eddie wishes to buy a good, but has a -500 account, the point beyond which his account can't be reduced and at which he has to attain positive accounting units through clearing or selling goods in order to buy goods. (If there is no hard/soft purchasing limit, it seems to be a reset-to-zero situation or otherwise equally unpalatable to the most productive members.)

Dagny, who has a positive accounting balance, considers clearing with Eddie. Under what circumstances would she gain from clearing with Eddie (I ask because it seems that she would lose accounting units in clearing with him unless she has outstanding debts directly or indirectly involving Eddie.)

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.

[Trudy Cool]

Yes, if you repay the principal, then the asset you've monetized will no longer be monetized. Which means it is now again available for monetization, and the same amount of currency can be brought into circulation again if the market needs it. Where is the problem?

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.

Further and further? If you repay $1000 of principal and take on a new loan of $1000, there will be no change in the magnitude of your "liabilities" column

As I have previously pointed out, extrapolation from individual experience is a faulty foundation for any understanding of macro-economics.

--or at least so I was taught by my math teacher.

Gratuitous and unwarranted sneering duly noted.

Very fine, except for one little problem: I don't believe that any boom/bust cycles result from "borrowing the medium of exchange into availability." That is what we have been arguing about.

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.

I don't know about your third-world rathole,

Gratuitous and unwarranted sneering duly noted.

... but in the United States, it is unusual enough for one business to be insolvent, let alone three interconnected ones.

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.

So your scenario has no relevancy as far as American business is concerned.

You have previously jeered at my "frivolity" for suggesting anything to Americans in "an American forum"?

Need I say how frivolous it is of you to come to an American forum and suggest

this

as a viable alternative for

Americans

?

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?

(Perhaps insolvency wouldn't be the norm in your country, either, if you focused more on creating wealth than on denigrating banks?)

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.

[softwareNerd]

The problem is that the total amount due to be paid is the original principal plus the interest due.

Galt borrows from Midas and pays back 10% every year for 12 years [that includes interest.]It works just fine because Midas pays money to Galt for his motor -- he's not just a banker, he's a consumer too.

[Trudy Cool]

Galt borrows from Midas and pays back 10% every year for 12 years [that includes interest.]It works just fine because Midas pays money to Galt for his motor -- he's not just a banker, he's a consumer too.

I very well understand this issue. I explicitly refer to it when I state

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.

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.

[softwareNerd]

I very well understand this issue.

Just because you mention an issue and string some words together that end by saying it cannot happen, does not make it so.

[Trudy Cool]

Just because you mention an issue and string some words together that end by saying it cannot happen, does not make it so.

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.

[Felix]

Come on, guys, please! All these accusations are leading nowhere. If you don't understand something, just ask. And please just stick to the issue and leave all these jeering-fights out. You know that this is leading nowhere.

[softwareNerd]

It isn't a question of jeering. It is a question of a string of words being irrefutable.

To my mind, post #189 is not a reply to #188. Would you like to answer #188, Felix?

Edited May 9, 2006 by softwareNerd

[Capitalism Forever]

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.

Trudy, has it ever occurred to you that interest is paid precisely because the loans allow "asset creation" ? Thanks to the loans, more wealth is created, some of this new wealth is monetized, and voila, you have enough currency to repay the principal and the interest.

Of course, if you are borrowing money to cover your accounts payable--to pay for things you have bought but can't afford--then you won't be creating new wealth, you won't have enough money to repay the loan, and you'll be stuck with an ever-increasing pile of debt. That's why you shouldn't spend beyond your means. If you do that--no matter which country you live in--you'll end up living in a rathole. That was my point.

[hunterrose]

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.

That's what I'm starting to think, but in that case, what is the advantage of this clearinghouse system over a gold system? As far as I can immediately remember, the benefit of this clearinghouse system is that it's supposed to eliminate boom/bust. But if the above are the distinctive ways it does so, it seems to me that they aren't distinctive - couldn't the above outside-of-clearinghouse transactions equally be done outside of a gold market?

To the extent that a clearinghouse truly gave its participants unlimited funds, I suppose it'd eliminate boom/bust, though at the significantly worse cost IMO of alienating the most productive members. And, as far as I can tell, if the clearinghouse has any real limitations from negative balances (a prereq for the most productive ones?) it loses whatever is uniquely supposed to prevent boom-bust. Is this correct?

Personally, I find much less to fault the service-based system (e.g. Larkin, the airline) you've exampled. I'm still mulling over that, and some other things that've been said, but I am more suspicious of, not only whether a clearinghouse system (as presented) is boom/bust free, but whether it'd have any significant advantages over gold in the first place.

Edited May 9, 2006 by hunterrose

[Trudy Cool]

It isn't a question of jeering. It is a question of a string of words being irrefutable.

To my mind, post #189 is not a reply to #188. Would you like to answer #188, Felix?

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.

[Felix]

It isn't a question of jeering. It is a question of a string of words being irrefutable.

I really don't get it. If you don't understand what Trudy is saying, just ask. Why do you accuse him instead?

Would you like to answer #188, Felix?

Well, I don't want to screw up the discussion. But then, it's quite screwed up already.

First, a general thing:

The basic difference between Trudy's (and my) view and yours is that we believe that if debt is paid, the money leaves the circulation forever. Our model of money is fundamentally different from yours. That's what causes all these misunderstandings. For you, money is something like a good. It's nothing special. It can be traded just like a spoon or a car or a piece of fruit. The reason for this is, of course the idea that money is a gold coin, that a gold coin has value and that it is traded just like everything else.

I can only speak for myself here, but here's my model of money:

Money is not a good. And as far as I have read, coin money didn't originate as a means of exchange but as a means to pay taxes. (Unfortunately all my resources are in German, but I'm trying to find an English source.) Paper money should be a claim to some actual good. It isn't. You receive no goods for it from the bank that issues them (in the case of the Dollar, it's the Fed). The "reserves", of which around 80% consist of government debt, have nothing but accounting significance.

And the Fed doesn't spend the money, it lends it. That's where all the Dollars in circulation basically come from. They are created (printed) and then lent. That's how they gain their "value" in spite of the fact that they are not backed. They gain their value because they have to be paid back. In addition to there's the key interest rate, which can very well be interpreted as some sort of tax.

Money isn't created in a mint, where dug up gold is being minted and then spent. It doesn't enter the circulation by spending but by lending. That's the fundamental difference between our views of money. You think it's created and then spent, we hold that it's lent.

I'm still reading up on this, but this is how it works as far as I can see.

To answer your question:

For your example to work, these additional 20% of John's debt would have to enter the circulation. If Midas didn't spend any money, John would be bankrupt after a maximum of 10 years, because there would be no more money in circulation. For this not to happen, Midas would have to spend John's entire interest within the 12 years. This would make this case the equivalent of John paying his interest with goods and services. If this were the case, there would in fact be no problem as far as I can see.

But Midas has to pay part of that interest to his customers and can therefore not spend it. And they won't spend it because they want to save it for retirement, for example. In addition to that, a bank is a company, trying to grow, that is to make more and more money over time. So if Midas just spent all the money, his bank wouldn't grow. He would, in fact, be a bad banker.

You may also want to read this previous reply to a similar question.

[Maarten]

Felix,

but you are no longer discussing just fiat money, you are arguing that it is also inherent in the economies we are describing. It's no longer just a case of one party talking about how it is, and one party how it should be, because you two say that even a gold economy has problems.

The only thing I can think of regarding this issue is that it is very irrational for banks to ask a higher interest than the increase in buying power (that happens due to more production). If this is continued indefinately then you would have a problem at some point, but that doesn't mean that the gold economy is inherently flawed, it means that irrationality causes these problems.

Would you agree that there is no problem here whatsoever if interest was at a rate much lower than the amount of money entering the economy?

[Felix]

but you are no longer discussing just fiat money, you are arguing that it is also inherent in the economies we are describing. It's no longer just a case of one party talking about how it is, and one party how it should be, because you two say that even a gold economy has problems.

A borrowed/lent gold economy does have similar problems, yes. Trudy described that in his borrowed gold scenario.

The only thing I can think of regarding this issue is that it is very irrational for banks to ask a higher interest than the increase in buying power (that happens due to more production). If this is continued indefinately then you would have a problem at some point, but that doesn't mean that the gold economy is inherently flawed, it means that irrationality causes these problems.

If you have interest to be paid in gold, you have the same problem as in a fiat money system. There's not enough money out there unless the banks spend all the interest money, which they can't for the reasons I've outlined above.

Would you agree that there is no problem here whatsoever if interest was at a rate much lower than the amount of money entering the economy?

You mean in a gold standard system?

If the new money entering the economy was spent and not lent, then there would be no problem. If it was lent, the problem would remain the same, only with gold instead of paper. Because at some point (due to exponential growth of the money needed to enter the economy) there won't be enough gold to enter the economy.

The only difference between the fiat money standard and the gold standard as it was is whether the money is backed by gold or not. If it's not backed at all, this of course allows effortless money creation and makes the problem ten times worse (and adds more problems). But I think that the fundamental problem is the lending of the medium of exchange with interest to be paid in that very medium. It's a systematic flaw.

[Maarten]

Yes, but you don't need to pay interest in new money, interest can be paid because money becomes worth more; i.e. the buying power of a dollar increases. Sure, it would require an overhaul of the current system, but I think it would remove most, if not all, of the problems you are pointing out.

And how, exactly, can gold money be lent into existence? It's not like someone has a molecular nanofactory that is creating atoms of gold out of thin air. Gold has to be produced, and I fail to see how you can speak of lending money into existence in a gold-economy.