Debitism

[softwareNerd]

And everytime it reenters the circulation, the total debt owed to the bank rises.

How? If a person takes $100 from the bank and pays $25 to an employee for work done, how has the debt owed to the bank risen?

[Felix]

How? If a person takes $100 from the bank and pays $25 to an employee for work done, how has the debt owed to the bank risen?

Well, the moment that person takes $100 from the bank, he has accepted a debt of $105 if he pays back in a year. $5 plus for the bank.

[softwareNerd]

Well, the moment that person takes $100 from the bank, he has accepted a debt of $105 if he pays back in a year. $5 plus for the bank.

That's fine. I thought you meant that each time the money re-enters circulation it creates debt. So, when the borrower puts the money back into circulation by buying services of an employee, and when that employeee puts the money back into circulation by buying food, no additional debt is created. Indeed, the restaurant-owner probably owns stock of the bank, and he takes the dividend and buys the product of the original borrower... and that's how that guy ends up with $105 to pay back to the bank.

[Felix]

That's fine. I thought you meant that each time the money re-enters circulation it creates debt. So, when the borrower puts the money back into circulation by buying services of an employee, and when that employeee puts the money back into circulation by buying food, no additional debt is created.

That's right.

Paid back debt only reenters the market as new debt. Maybe that's a better way to put it.

Indeed, the restaurant-owner probably owns stock of the bank, and he takes the dividend and buys the product of the original borrower... and that's how that guy ends up with $105 to pay back to the bank.

Hm. This is not very probable. It may occur in some cases. But for this to work in general it would require that the bank pays out its entire interest as dividend and that before it receives it itself. This doesn't happen.

[Capitalism Forever]

I'm not yet prepared to offer a formal thesis on the source of value for fiat money.

If I were to sum up the source of the value for fiat money in one word, I would say inertia. The dollar became valuable when there was a gold standard, because there was a gold standard. When the gold standard was abandoned, traders didn't suddenly stop accepting dollars as payment, but continued to sell their goods at the prices they had charged before, expecting everyone else to do so. In other words, although the dollar wasn't convertible into gold now, it was still convertible into bread, milk, and gasoline, at about the same rates as before (initially, at least). Its further convertibility into such goods has depended on how the government has manipulated the money supply.

No government can institute a completely baseless currency. It cannot just say, "We are creating a new currency out of thin air, and calling it the aero. Henceforth, everyone in this country shall trade in aeros!" No one would accept the areo as payment because no one knows how much it is worth. The government would have to specify a standard of value in terms of gold, another currency, or some basket of goods, and guarantee convertibility, at least for a while.

[A.West]

CF,

I think you're right that any fiat currency will initially be linked to a more tangible value. This is why many 3rd world countries initially peg their currencies to more established currencies (dollar, pound, euro), especially initially. But while I certainly don't defend fiat currencies and consider them inherently unstable and long-run inflationary, I do think that they do have at least an indirect link to real values. Sadly, it's probably through the taxation system. The government is able to extort value from producers, and spend it in the economy, and require payment in such terms. So a fiat currency involves some relationship between how many units there are, what kind of value it can extract from the economy, how much the govt is borrowing, etc. It's not just that the government has fooled people into thinking something totally worthless is still worth something, and that people are too lazy (have too much inertia) to reassess matters. Because when a government's fiat money units/economic value extraction relationship falls apart, people in financial markets can quite brutally punish that currency.

[Capitalism Forever]

My point is that it isn't just spent. As it reenters the market the debt rises.

Yes, when it is repaid, the debt sinks; then, when the money re-enters the market, it rises. The two cancel out.

[Maarten]

Would it be correct to say that interest in this case is similar to how a normal individual makes a profit? In both cases the person in question gets more back than he started with, but it would be very strange to argue that someone who is making a profit is causing problems for the economy. If that was true, then we couldn't be where we are today...

Is it a valid assumption to treat interest as a form of profit?

[Capitalism Forever]

I do think that they do have at least an indirect link to real values. Sadly, it's probably through the taxation system.

I would say that taxation is a source of value for the dollar, although not a standard of value. This is because taxes themselves are denominated in dollars. The "face value" of the dollar--i.e. that it is legal tender for taxes--does specify that you can use the dollar to buy "protection by the IRS," but it doesn't specify how much protection a single dollar affords you. All you know is that there is a finite number of dollars that will make the IRS happy.

If people lost confidence in the dollar and began trading in a private currency, so that taxes were all that could be paid in dollars, the government would have to specify an exchange rate at which you have to convert your revenue into dollars when filing your taxes. This exchange rate would be just as arbitrary as the tax rate itself.

[Capitalism Forever]

Would it be correct to say that interest in this case is similar to how a normal individual makes a profit? In both cases the person in question gets more back than he started with, but it would be very strange to argue that someone who is making a profit is causing problems for the economy. If that was true, then we couldn't be where we are today...

Is it a valid assumption to treat interest as a form of profit?

Sure; interest is a lender's profit.

The difference between debt and equity is that debt has a fixed amount of principal and a (typically) fixed interest rate, while the value of and the dividends paid after equity will vary. I suppose the reason the Debitistarians are whining about debt but not about equity is that when things go south for a company, it can choose not to pay dividends and its stocks will lose value automatically, but it cannot refuse to pay interest and the principal of its debt will stay the same.

[softwareNerd]

Hm. This is not very probable. It may occur in some cases. But for this to work in general it would require that the bank pays out its entire interest as dividend and that before it receives it itself. This doesn't happen.

Sure, but dividend was just one example. Actually, the bank will pay out all of it's net-interest unless it wishes to increase its cash balance.

Banks (and any other business) can make profits and grow bigger without increasing their cash-balances; they can do so while decreasing their cash balances. Indeed, if one considers the economy as an aggregate and compares two point-in-time snapshots, cash balances are exactly the same, because the example assumes they are (i.e. it assumes a static supply of money).

[hunterrose]

This is from an earlier post, hunter

Does the quote Maarten mentions, serve?

Yes, thank you both.

It's proportionate. The greater the percentage of their business they can pass through clearing the further they can insulate themselves.

Agreed, but it's extremely unlikely that everyone will be able to clear 100%. Mutual monetization doesn't have mediated monetization's lending "problem," but that is at the cost of being a significantly more limited version of monetization (i.e. mutual monetization can't occur in nearly as many situations as mediated monetization.) Self monetization is (in theory) possible in as many or more situations as mutual monetization, but it comes at the cost of having to interpret the value of a nigh infinite number of self-monetized monies (in addition to an inherently higher inflation than gold.)

I suppose we'd all agree that each has its particular benefits and disadvantages, but I personally think a gold-based system (with self and mediated functions overlaid) is more viable than systems that enhance mediated/self monetization's advantages (and detriments.)

There are a host of ways of achieving infinitely adjustable limits. For example, you could set a member's limit 10% further below zero than it was before he last went positive by an amount equal to it. So, a new member might go -50, +50, -55, +200, -60.5, +61, -66.55, +1,234, etc.

For someone who wishes to obtain $22B for a science program, such a solution would essentially require them to earn a positive $20B balance in order for them to obtain the $22B program.

If the net value of all accounts is zero, it's going to be very hard for everyone to thus continually increase their negative limit. In such a scenario, the most productive member is inevitably going to keep a positive balance, making the net balance of everyone else negative. The second most productive member is also likely to maintain a positive balance, making the rest of the balances (net) even more negative, etc. In theory, there would be an infinite capacity to expand credit, but in practice the people who actually desire/need to increase their floor (i.e. those with negative balances in the first place) are going to (in a net zero situation) find it impossible to expand credit significantly. Borrowing (mediated monetization) would be necessary in such cases, which is why I doubt that such a system (or any system) could ever extricate itself from boom/bust possibilities.

Edited May 12, 2006 by hunterrose

[Trudy Cool]

Agreed, but it's extremely unlikely that everyone will be able to clear 100%.

Of course! I've never said that any one of the three forms of monetization should take over completely. I have said that mediated monetization has gained excessive preeminence. I'm also convinced that a better balance between the three would result in a much more stable and properous global economy.

Mutual monetization doesn't have mediated monetization's lending "problem", but that is at the cost of being a significantly more limited version of monetization (i.e. mutual monetization can't occur in nearly as many situations as mediated monetization.)

On what do you base this statement? When one really digs into it, the variety of ways in which clearing can be achieved is quite surprising. Furthermore, inexpensive computation, networking and digital telephony have opened vast frontiers of possibilities.

Self monetization is (in theory) possible in as many or more situations as mutual monetization, but it comes at the cost of having to interpret the value of a nigh infinite number of self-monetized monies

On the surface of it, yes. However, in practice two different phenomena arise.

First, a small number of large issuers come to dominate, but in a "community-oriented" sense. Neighbourhood schools, for example, pump a lot of money from AP and payroll to suppliers and staff. Those people purchase things from parents. Parents pay tuition. Widening the circle, a large perishables market might significantly serve a town and it's hinterland. Wider still, a regional chain store might achieve a predominant issuance. And so on, up to airlines (and Coke, Pepsi, McDonalds, etc.) providing universally accepted global currencies. Illiterate cashiers in the Caribbean have shown that juggling a dozen currencies at a time is far from difficult.

Second, individuals and small businesses can pool their own issuance with a clearinghouse/broker/insurer who use those notes as one to one backing for a single corporate issuance.

(in addition to an inherently higher inflation than gold.)

If a dentist issues notes denominated in "fillings", how can inflation ever enter into it? If he tried to spend 10,000 fillings, who would believe he could ever redeem them? In that sense, the amount of monetization continues tightly bound to demand for goods and services.

I suppose we'd all agree that each has its particular benefits and disadvantages, but I personally think a gold-based system (with self and mediated functions overlaid) is more viable than systems that enhance mediated/self monetization's advantages (and detriments.)

Gold has a tricky problem -- it is not first a medium of exchange. After land, it is the most consistently preferred store of value. Despite all the talk of "gold is money", very few of those who do the talking have any intention of using it for exchange. Liberty Dollars are gaining ground, but I wonder how many holders of them actually use them to buy their groceries? In that sense, I don't see gold as encouraging of production or beneficial to the productive sector.

For someone who wishes to obtain $22B for a science program, such a solution would essentially require them to earn a positive $20B balance in order for them to obtain the $22B program.

Mediated monetization is clearly indicated for this kind of thing. The main goal of mutual monetization is continuous liquidity, not limitless liquidity.

If the net value of all accounts is zero, it's going to be very hard for everyone to thus continually increase their negative limit. In such a scenario, the most productive member is inevitably going to keep a positive balance, making the net balance of everyone else negative.

In fact, the most productive member could also be the one most deeply negative. He would do so for the purposes of further business growth, but he would do so unencumbered by the burden of interest payments.

The second most productive member is also likely to maintain a positive balance, making the rest of the balances (net) even more negative, etc.

I think you mean the second most profitable member, no?

There are some curious things about that situation. Seeing that they'd be carrying the debits of others, members in that position cease to consider such profits as assets and come to see greater benefit in real acquisitions and real production than in accumulation of "paper" capital.

In theory, there would be an infinite capacity to expand credit, but in practice the people who actually desire/need to increase their floor (i.e. those with negative balances in the first place) are going to (in a net zero situation) find it impossible to expand credit significantly.

You are blaming the hammer for failing to turn the screw. Clearing tracks supply and demand perfectly, down to the last cent. If someone wishes to boost supply or demand, the clearinghouse is the wrong venue. You can't persuade a clearinghouse of anything. Acquiring additional credit beyond what you have in the clearinghouse requires persuading others.

Borrowing (mediated monetization) would be necessary in such cases, which is why I doubt that such a system (or any system) could ever extricate itself from boom/bust possibilities.

Clearing is disconnected from boom/bust, even though it's members may not be. If you and I make transaction #000000001 in a clearinghouse, because I sell you a $10 jug of ale, your account goes -$10 while mine goes +$10. At that moment the clearinghouse has a money stock of $10, "created out of thin air". By accepting my jug of ale, you have "given me credit" over my competitors. By accepting your debit I have monetized the credit the clearinghouse expects your customers will give you in the near future. All of this occurs with out any reference whatsoever to wider economic conditions. Edited May 15, 2006 by Trudy Cool

[Felix]

Sure, but dividend was just one example. Actually, the bank will pay out all of it's net-interest unless it wishes to increase its cash balance.

Why? They increase their business simply by lending out their profits again. It's not that they produce anything and need new machines for higher productivity or lots of more people to do the work. Your point is that they spend it all and that's something that I strongly doubt.

[softwareNerd]

They do pay it all out, even if it is new loans.

Actually, I don't see how having banks as lenders in the example adds something. For instance, assume that the bank is taking a share in the company. Or, which is the same thing, instead of "bank" use "capitalist".

[Felix]

They do pay it all out, even if it is new loans.

Actually, I don't see how having banks as lenders in the example adds something. For instance, assume that the bank is taking a share in the company. Or, which is the same thing, instead of "bank" use "capitalist".

If they loan it out, they don't spend it (pay it all out). You don't seem to get the difference. If you loan it out, you demand more back later, thereby worsening the problem and putting it off into the future. That's what the entire debt-pile-up-idea is all about.

Maybe this quick and dirty example helps:

Imagine if you had only one lender and one borrower. You have the lender give a $100 loan to the borrower. He demands $105 back in one year. For the borrower to pay back the money to the lender, the lender would have to either spend $5 to the borrower (That's what you're saying) or the lender lends the $5 to the borrower, which is nothing but compound interest by postponing the payment. The interest payment due grows exponentially at 5% per year. If the money was just paid out, the debt could be actually paid.

I don't see why the bank would pay out its entire profit of $5 (in this example). Its business is lending money. Why would the bank spend its entire profit on "increased productivity" if they then only had the very same amount of money to loan? This makes no sense to me.

[softwareNerd]

If the banker is rational, we must assume the borrower is too. A company that borrows $100 and agrees to pay back $5 as interest knows it can make more (say $10) in profits; else it won't borrow in the first place. So, it might, for instance, take the $100 and pay it to workers and end up with goods it sells for $110.

The question you need to answer is this: where does that $110 come from?

[Capitalism Forever]

Gold has a tricky problem -- it is not first a medium of exchange. After land, it is the most consistently preferred store of value.

It is, currently. But have you ever wondered why? Because of the threat of inflation.

In a free economy, with a gold standard currency, inflation would not be an issue. The exchange rate between the dollar and gold would be fixed; thus, an interest-yielding, dollar-denominated CD or bond would always be a better investment than gold. If you bought an ounce of gold for (say) $100, in a year you'd still have an ounce of gold worth $100; but if you bought a $100 bond yielding 5% p.a., in a year you'd have $105.

[Maarten]

If they loan it out, they don't spend it (pay it all out). You don't seem to get the difference. If you loan it out, you demand more back later, thereby worsening the problem and putting it off into the future. That's what the entire debt-pile-up-idea is all about.

But it is the same. If a company spends $100 on goods, they will want to make a profit as well, so eventually they get back more money than they paid. How is this different from interest? The only thing I can see that is different is that interest is usually agreed upon in advance, and you can't not pay it, but I think in reality this difference is negligable.

Why are you focusing on interest and not on profit? If one of the two creates a problem, then I think the other would as well.

[Trudy Cool]

It is, currently. But have you ever wondered why? Because of the threat of inflation.

In a free economy, with a gold standard currency, inflation would not be an issue. The exchange rate between the dollar and gold would be fixed; thus, an interest-yielding, dollar-denominated CD or bond would always be a better investment than gold. If you bought an ounce of gold for (say) $100, in a year you'd still have an ounce of gold worth $100; but if you bought a $100 bond yielding 5% p.a., in a year you'd have $105.

If you have a free economy, the exchange rate is not fixed! The only way it can be fixed is if the dollar note specifies a precise amount of gold.

Assuming you do mean that notes refer to specific quantities; after one year, the CD issuer would have to earn profits enough to repay $105 worth of physical gold. To do so, he must add at least another $5 worth of value to the total stock of value. The total stock of gold is unchanged, so prices decline, proportionately. This has two consequences:

1) Your buying power has increased, meaning your real benefit is more than 5%.

2) The prices your debtor can command for his production declines, making it obligatory for him to work MORE than 5% harder to repay the debt and still derive the benefit he originally sought.

This shows once again how lending of the medium of exchange places the productive sector at a disadvantage with respect to the financial sector.

[Capitalism Forever]

If you have a free economy, the exchange rate is not fixed! The only way it can be fixed is if the dollar note specifies a precise amount of gold.

It does.

Assuming you do mean that notes refer to specific quantities; after one year, the CD issuer would have to earn profits enough to repay $105 worth of physical gold.

He will. That's why he agrees to pay 5% interest in the first place.

To do so, he must add at least another $5 worth of value to the total stock of value.

That is what economic activity is all about--creating value.

The total stock of gold is unchanged, so prices decline, proportionately.

Any decline in prices will be transient. An increase in the buying power of gold--and thus, the dollar--will cause

• an increase in mining, which will increase the gold stock;
  
• a decline in demand for gold watches and jewellery, which will make more gold available for circulation;
  
• increased monetization of real estate and other fixed assets, further growing the money supply;
  
• increased spending, which will increase the velocity of money.
  

Such changes will continue until the supply of gold--or equivalently, the demand for goods--catches up with the supply of goods, which is the same thing as the demand for gold. By the time the CD in our example matures, prices will be back to their original level.

In terms of the Equation of Exchange,

MV = PQ

this means that P will be stable in a free economy, and the growth in Q will be supported by a growth in M and V.

[A.West]

If you have a free economy, the exchange rate is not fixed! The only way it can be fixed is if the dollar note specifies a precise amount of gold.

Assuming you do mean that notes refer to specific quantities; after one year, the CD issuer would have to earn profits enough to repay $105 worth of physical gold. To do so, he must add at least another $5 worth of value to the total stock of value. The total stock of gold is unchanged, so prices decline, proportionately. This has two consequences:

1) Your buying power has increased, meaning your real benefit is more than 5%.

2) The prices your debtor can command for his production declines, making it obligatory for him to work MORE than 5% harder to repay the debt and still derive the benefit he originally sought.

This shows once again how lending of the medium of exchange places the productive sector at a disadvantage with respect to the financial sector.

1) in a free economy with free banking, it's a good assumption that a banknote (dollar) is specified as a quantity of gold

2) freely set interest rates anticipate and reflect inflation/deflation expectations of both borrowers and lenders.

3) The bank is ultimately just matching up a saver (CD investor) with a borrower. In a free economy, in aggregate, borrowers borrow money in order to finance positive net present value projects that expand the economy. Savers redeploy their excess capital to profit from and finance such economy-expanding projects. Banks generally make their money by collecting the spread as payment for their services in intermediating between savers and borrowers.

4) there is no reason to assume that the overall gold stock is precisely static. There would be a general and slow trend towards gradual increase, but with mining costs functioning as an automatic thermostat. Occasionally major new orebodies or refining/mining methods are discovered as well.

In conclusion, your unrealistic assertions again fail to connect with reality, and certainly provide no basis to conclude that the "financial sector" disadvantages the "productive sector" (a false dichotomy) in a free economy.

One interesting though slighly flawed book that illustrates the real benefits of financial system development on the overall economy is:

The Wealth of Nations Rediscovered : Integration and Expansion in American Financial Markets, 1780-1850, by Robert E. Wright

[Capitalism Forever]

There would be a general and slow trend towards gradual increase, but with mining costs functioning as an automatic thermostat. Occasionally major new orebodies or refining/mining methods are discovered as well.

Not to mention that such discoveries are a function of the investment into mining, which in turn is "regulated" by the purchasing power of gold. It's like with oil: if oil prices increase relative to the prices of other goods, firms will invest more into exploration, leading to discoveries of new oil fields.

[hunterrose]

If a dentist issues notes denominated in "fillings", how can inflation ever enter into it? If he tried to spend 10,000 fillings, who would believe he could ever redeem them? In that sense, the amount of monetization continues tightly bound to demand for goods and services.

For anyone who was considering whether to accept this dentist's notes, it'd be hard to know how many notes this dentist has circulated to other people over the last hour. Inflation could thus enter this private paper economy.

I think you mean the second most profitable member, no?

Hmm, I suppose you're right. To be more accurate, I should say that everyone cannot simultaneously increase their limit. Does this not mirror the borrowed gold situation, in that everyone at the party cannot simultaneously pay their debts?

Clearing is disconnected from boom/bust, even though it's members may not be. If you and I make transaction #000000001 in a clearinghouse, because I sell you a $10 jug of ale, your account goes -$10 while mine goes +$10.

All of this occurs with out any reference whatsoever to wider economic conditions.

Can all of this occur without reference to the mutal/self monetization of others e.g. if a group of individuals aspire to infinitely increase their limits by alternately maxing each other's positive balances out, or the above dentist circulates more notes than he can redeem?

[Trudy Cool]

1) in a free economy with free banking, it's a good assumption that a banknote (dollar) is specified as a quantity of gold

2) freely set interest rates anticipate and reflect inflation/deflation expectations of both borrowers and lenders.

3) The bank is ultimately just matching up a saver (CD investor) with a borrower. In a free economy, in aggregate, borrowers borrow money in order to finance positive net present value projects that expand the economy. Savers redeploy their excess capital to profit from and finance such economy-expanding projects. Banks generally make their money by collecting the spread as payment for their services in intermediating between savers and borrowers.

4) there is no reason to assume that the overall gold stock is precisely static. There would be a general and slow trend towards gradual increase, but with mining costs functioning as an automatic thermostat. Occasionally major new orebodies or refining/mining methods are discovered as well.

In conclusion, your unrealistic assertions again fail to connect with reality, and certainly provide no basis to conclude that the "financial sector" disadvantages the "productive sector" (a false dichotomy) in a free economy.

I have stated more than once that I came looking for a forum such as this, in the hopes of finding honest and serious debate. I have been labelled a troll and twice slapped with warnings, despite never coming close to your continuous flow of fallacies. Evidently you need to be reminded of the forum prohibition, "... all posts must add to the discussion rather than merely express agreement or disagreement without explaining the writer's reasons".

"In conclusion...". Fallacy of non sequitor. Your conclusions fail to connect with the points you put forward as arguments.

"... unrealistic assertions again ...". To date no-one in this forum has presented a single non-fallacious refutation of anything I have said, and certainly never substantially demonstrated any assertion to be unrealistic. You in particular spout unsubstantiated disagreement with declarations of faith such as "This scenario does not simply omit some details or frictions, IT IS A RIGGED GAME that nobody would play, and which has nothing to do with an actual economy or the purpose of banking and finance."

"... (a false dichotomy) ..." Yet another unsubstantiated article of faith.

"... no reason to assume that the overall gold stock is precisely static." The heart of my argument was the consequences of deflation on debtors. An essential component of the scientific method is to hold invariant as many factors as possible in order to observe the effect of deliberately varying just one. To refute me by claiming that the money stock is dynamic is to refute the way in which deflation is described and defined. That would refute, in effect, the foundations of economics -- the fallacy of the stolen concept.

"The bank is ultimately just matching up a saver (CD investor) with a borrower." This is a red herring fallacy mixed with the misleading vividness fallacy. My entire argument has concerned monetization. Everything you say here in point 3, is irrelevent because you are explicitly describing non-fractional banking -- in which no money is created. Also, going into vivid depth ill-disguises the complete irrelevancy of this paragraph.

"freely set interest rates anticipate and reflect inflation/deflation expectations of both borrowers and lenders" Quite so. But, the specialized skill of a productive sector borrower does not equip him well to make such assessments, and places him at a disadvantage with respect to the financial sector. Moreover, the changes you mention come too late to help the borrower whose interest rate is fixed while his profits absorb the variation. I have argued that mutual monetization is advantageous to the producer because it shields him from inflation/deflation, and relieves him of such speculation. So you are here guilty of ignoratio elenchi -- not only do you fail to support your own conclusion, but you reinforce mine.

"it's a good assumption that a banknote (dollar) is specified as a quantity of gold" Ignoratio elenchi, again. You merely repeat what I myself said using different words and present it as an argument against me, ignoring the fact that it has nothing to do with your conclusions.