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I wonder what the point of this article is. I am very curious to understand why such an effort, from positive money as an institution, and also from not only this author but also Steve Keen, and Tim Jackson, to proof that it is not necessarily in all cases that there is not enough money to pay back the debt due to money creation by lending with interest. So you come up with this, by your own admission, “contrived” example of one case in which it doesn't happen. Far from explaining one by one all the situations in which it does happen, as I did in the case of Steve Keen’s article in Forbes about the same subject, my question is: from the whole society point of view, what does it change the fact that the banks, if they want, can spend all their earnings back into the economy IN DEPOSITS or CASH, and IN TIME, and in this one case there will beenough money to pay back poor Alice's debts? The fact that this theoretical possibility exists, what does it proof? This question is the one we need to answer. The process of answering these other questions may help to do so:
1. When do these cases happen versus the cases in which it does not happen? In other words, in what conditions banks would spend all their earnings in deposits and in cash and in time? The answer to this question is clear to me: banks do spend or lend back all their earnings into the economy when the economy is growing and there are plenty of businessopportunities. So keeping this money creation system entails a commitment to economic growth by the whole society. Do we want to commit to economic growth? Can we? Do we really need to keep our commitment to economic growth just so this money creation system works properly or because we think economic growth is our best chance to meet the population needs?
2. You may say that the fact that there are not business opportunities is because banks don’t spend or lend enough, or in other words, that they are not open to finance the “not so obviously profitable businesses”. And the question is: Do you expect that, through regulation, you can force a bank to spend money or provide loans when they don't want to? Is this really possible or adequate? Could you force a woman to have babies because population is decreasing and it would be a good thing for society? Wouldn’t it be more interesting to encourage and support the ones who want to? In our case: wouldn’t it be more interesting to encourage other money-creation ways different from bank-money, if they proof to be willing and able to reach the real economy in a way that is socially more profitable?
3. How many distributional effects can the banks profit from by spending all their earnings in “their own way”? This is where we can see the importance of timing, and the liquidity constraint. Let’s take some real life examples. For instance, banks can distribute dividends indeposits, so shareholders can spend back into the economy bank profits. But,just as an example, check this out: Bank Santander pays 89% of the shareholdersIN SHARES: http://www.expansion.com/me.... Since normally people can't buy stuff with shares, you have here a case in which Bob will not spend the interest into the economy again immediately. This means that there will not be enough money so Alice can sell her house WHEN she loses her job, but there will probably enough money in the market later on, WHEN she’sbeen evicted and the house is selling by half the price she paid.
4. What happens in real life? When coming to this subject I see all these articles you write explaining possible cases, lots of theory. But what does reality tell us? Isn’t issuspicious to you the evidence that in all financial crises there is a monetary contraction? That the monetary aggregates growth charts all seem to show a consistent growth, when not in crises, “as if” monetary mass needed to grow all the time? What other explanation you can provide for this phenomenon?
I think one scientific task is to find out if the money creation that the banking system carries out is good enough for society to be the ONLY LEGALLY REGULATED way to create money (aside from the cash creation that Central Banks carry out), not to point out contrived ways in which this type of money creation could be good for society, if it happened. Another scientific task would be to explore different money creation systems that could have better results for society.
Thanks for your comment - you clearly raise some very interesting points. There are a few reasons why we decided to write this blog. Primarily, because there are number of people that use the desert island analogy to claim it is mathematically completely impossible for both the principal and interest to be repaid. We have highlighted one possible 'case' scenario, but we could come up with multiple scenarios which would prove our point. So this first post, is supposed to show that it is not mathematically impossible to pay off both the principal and the interest. The second point was to address the issue of spending, and to show that if banks( as well as business/households) dont spend their profits then problems will start to emerge. This is important, because from an economic perspective because we are showing that it is the spending (flow) that matters versus the quantity of money (stock). Finally, please know that we are aware this is a sensitive and complex subject - we are writing a part 2 that will hopefully address some of the other points you raise. I hope this clarifies things for you.
If there ever were only $100 between Alice, the Cooks and Bob the Banker the only way Alice can repay $110 is by using some of the money twice. That's the $10 she first paid as interest which Bob then used to buy from the Cooks which Alice then got from the Cooks, added to the $90 she had (she had used $10 of the $100 earlier in the day to repay the interest) and now repays the total principal amount. Bob now has his $100 plus $10 worth of whatever he bought from the Cooks.
You can see I understand the explanation. Nevertheless, it still sounds like so much sleight of hand and not something on which I would build an economy.
The sorry state of economics is mirrored by this piece of theorization on interest. It is really amazing how economics became distorted! This present analyses tries to discover the mechanism of commercial society concentrating on consumption and the role of finance to sustain consumption, without taking into the world of production. Instead of following the traditional concept of economics, which concentrated on production as the cause of wealth generation (like Adam Smith) and discussing the role of interest with focus on production of goods (for example Menger, Böhm-Bawer, Wicksell). Moreover, in order to blur the major difference between production centred economics and consumerist economics even misrepesent the characters and functions of the main actors and robs them from the most important human trait: being able to think and adopt their conduct to the changing environment. Instead of it, it uses puppet like constructs and deus ex machine problem solving to direct to them to the end result wished by the storyteller.
First of all: there is no need for money in a small economy consisting of only two actors in a closed island, where they composed of a small and closed community of actors. This is the situation, where actors do barter, or exchange based on reciprocity (see: Polányi). The 100 gold coin in such a situation only has „money” function if they entertain the hope that they would one day escape from the island and returning to the civilization, where the gold gains again money function or they part of a larger (open-ended) commercial connections, where there is a need for money. But these options are not mentioned.
Thus, we have two actors, who are acting as ants, who have genetic codes to follow a pattern of behaviour regardless the circumstances, or robots, who have pre-written software to act to follow the pre-written programme regardless the circumstances. No wonder, that the storyteller only could solve the problem of impossibility to meet with the normal expectations in different environment with magic, by a deus ex machine solution, which unlikely to happen in a real world environment.
Secondly: human beings acting in the story not only reduced to economic role models not fitting to the real environment, but these models are stripped from essential qualities, which are present in the real world. Alice is supposed to be the entrepreneur. But in the first story she a hoarder, a „rat pack”, who does not ask a credit of 100 gold to enterprise with it hoping that she could gain income with investing the 100 gold, hoping that a year later her income will be bigger than the credit she asked in order to be able to repay it with interest. She ask 100 gold to hoard it and in order to give back 110 one year later. She is not only a rat pack. She is not even considering how she would able to pay back the 10 gold coin of interest. She is in an inland, where there is no goldmine, no mint. She not even tries (according to the story) to do something to get somehow 10 gold coins through enterprising (for example doing trade with inhabitants of other islands to gain gold coins). She promised impossible return as there is not the slightest chance to give back 110 gold coins after a year. She is contracting a contract, which she never ever would be able to keep, and in this sense this is insane and mindless act from her viewpoint.The so called banker seemingly does what a banker supposed to do: lend capital at interest to an entrepreneur. But what kind of banker, who does not do the minimal information gathering and thinking before lending his capital? He and his client are in an island, where there is no gold mine, neither mint. If he is a human being, and not an ant like living creature who acts based on genetic codes, than he would not lend 100 gold and ask 10 gold coin as interest. Probably, a banker also would ask an entrepreneur why she needs such a large capital, how she plans repay the loan and the interest, and based on the prudent risk assessment would decide whether to lend that money or not. John does not act as a prudent banker, but follows a pre-programmed script without thinking at all, as an ant or pre-programmed robot.
Both character is rather subject of psychology, than economics. They are mistakenly characterized, and they have such a weird way of acting, that their acting could not be a solid base of economic theorizing. No wonder that the only solution to solve the impossibility theorem of solving the conflicting acts of two mindless person (the ratpack, who asks 100 gold coint promising giving back 110 knowing that impossible to give back 110, and and the banker, who gives the 100 gold credit at 10 gold coin interest knowing that there is no chance to get hold of extra 10 gold coin) a deus ex machine solution a la Moliere in order to avoid the Shakespearean tragedy, which would unfold in reality. This story is only serves to to mislead both the author and the reader, and could not be a foundation of a sound economic theory, where cause and effect has relationship to each other and not result of deus ex machine solution.
The second story, with three participants (banker, producer and entrepreneur) also full of unexplained deus ex machine acts, which are to blur the causal effects of acting of economic agents. Just a few examples:
1) Why need Alice 100 gold credit in order to buy food from Cooks, when she anyway has products, which are happily bought by Cooks?2) The Banker does not consume for 12 months, and then he accepts a 10 gold repayment, which he immediately use to buy from Cooks, what they need to pay for the products of Alice, who thus able to repay the loan (again in such a irregular deus ex machine way that they first pay the interest in the last day of the duration of credit in order to allow the sudden consumtion need of the banker to be satisfied by the cooks, who ...Hey, what a coincidence of events! And again the problem of being on an inland without goldmine and mint.... deus ex machine acts and solutions invented by a storyteller, who wants to make the reader to believe in something, which could only be deducted from impossible and unique strory of mindless and misrepresented characters.
There is one reason of this deus ex machine story-making: capital, money and interest are economic phenomana, which could not be explained based on consumption and financing needs of consumption. The key of understanding economics, money, capital and interest is in the production process, driven by entrepreneurally minded people (who are also consumers at the same time), who are seeking to satisfy the needs of consumers. If you does not discuss production, and the role of entrepreneur and consumer, than you are in need the deus ex machine solutions to solve the problem of repaying credit with interest. Voila: you have invented it.
This issue is perhaps my central concern with the monetary system. However, with my current understanding, I think that you have missed the point. Sure, it may be possible for someone to earn money and pay back their loan including interest, but what happens in the system as a whole? Once the loan is repaid there is still debt left over in the form of the interest. It has to come from somewhere, and the only place it comes from is the bank that creates it as a loan, ie debt.
My understanding of how this is ultimately addressed is via the extra value injected via goods, which though it may cost X to create, are worth Y in the economy, Y being greater than X, we therefore have a mechanism to consume debt without the use of credit borne money. There is of course also the injection into the economy of debt free money by central bank creation, for those instances where a country's central bank isn't a quasi private institution which lends instead of prints, like the US Federal Reserve. The first part is far more interesting though, as it implies that the build up of debt generated by credit borne money with cumulative interest is a major cause of us strip mining the Earth for extra value to suppress the debt.
Any thoughts from all parties are welcome, I find this issue very confusing from a mathematical point of view, and I am certainly not a mathematician.
Bernard Lietaers fable of the 11th round adresses this question, I have wondered why Steve Keen and others seem so keen to pooh pooh this as a naive urban myth. Usury is the Price of money, it is the metric of Economists, the high priests of Economics Woo.What we see in Keen and Varafoukis is really at best a controlled opposition clinging to the social control mechanism that is debt based money. They all do it.Prouhdon scotched the artifice in his dialogue with bastiat, and also as described by Kropotkin.Story of the 11th Round.http://www.lietaer.com/2010...
We can learn a lot from the Swiss referendum on Citizens Income as discussed here.´However, the nearly universal misunderstanding of money is a major obstacle. For too long we’ve allowed a small coterie of bankers and “court economists” to hold the secrets and “tutor” us. So, it’s time for total openness.First, regarding the claim that the Swiss proposal would’ve been too costly, what’s entirely omitted from the discussion is that the proposal (and similar proposals elsewhere) appear to call for re-distribution of existing money—taking money from certain sectors through taxation and re-allocating it to the people at-large.The implication is that the money supply is basically static and that re-distributing limited funds would require tough budget decisions—sparking tax hikes and associated spending increases in several areas; hence the claim “costs too much.”But a successful basic-income plan can and must be based on the creation of new money, or “distributism,” not on reshuffling existing money, which is “re-distributism.” That’s the “state secret” that no one wants to touch.The issuance of new money needs to happen to overcome the huge “gap” between today’s paltry purchasing power and the massive mountain of debt and the towering totality of prices on all available goods and services. We have full stores and empty wallets. (Ideally and importantly, governments should reclaim their interest-free money-creation rights and forbid private central banks from creating money any longer).´´http://leconomistamascherat...
This is for me the nub of the matter something I have in common with Joseph Prouhdon, explained by Peter Kropotkin in the Encyclopedia Britannica thus.https://archive.org/stream/...”Now Proudhon advocated a society without government, andused the word Anarchy to describe it. Proudhon repudiated,as is known, all schemes of Communism, according to whichmankind would be driven into communistic monasteries orbarracks, as also all the schemes of state or state-aided Socialismwhich were advocated by Louis Blanc and the Collectivists. Whenhe proclaimed in his first memoir on property that ” Propertyis theft,” he meant only property in its present, Roman-law,sense of ” right of use and abuse ” ; in property-rights, on the otherhand, understood in the limited sense of possession, he saw thebest protection against the encroachments of the state. At thesame time he did not want violently to dispossess the presentowners of land, dwelling-houses, mines, factories and so on. Hepreferred to attain the same end by rendering capital incapableof earning interest; and this he proposed to obtain by means ofa national bank, based on the mutual confidence of all those whoare engaged in production, who would agree to exchange amongthemselves their produces at cost-value, by means of labourcheques representing the hours of labour required to produceevery given commodity. Under such a system, which Proudhondescribed as ” Mutuellisme,” all the exchanges of services would bestrictly equivalent. Besides, such a bank would be enabled tolend money without interest, levying only something like 1 %,or even less, for covering the cost of administration. Every onebeing thus enabled to borrow the money that would be requiredto buy a house, nobody would agree to pay any more a yearlyrent for the use of it. A general ” social liquidation ” wouldthus be rendered easy, without violent expropriation. The sameapplied to mines, railways, factories and so on. ”
Such is, substantially, Socialism’s theory of Capital and Interest.DOI-IV-3.52Not only do we affirm, in accordance with this theory (which, by the way, we hold in common with the economists) and on the strength of our belief in Industrial development, that such is the tendency and the import of lending at Interest; we even prove, by the destructive results of economy as it is, and by a demonstration of the causes of poverty, that this tendency is necessary, and the annihilation of Usury inevitable.DOI-IV-3.53In fact, Rent, reward of Capital, Interest on Money, in one word, Usury, constituting, as has been said, an integral part of the price of products, and this Usury not being the same for all, it follows that the price of products, composed as it is of Wages and Interest, cannot be paid by those who have only their Wages, and no Interest to pay it with; so that, by the existence of Usury, Labor is Condemned to Idleness and Capital to Bankruptcy. DOI-IV-3.54This argument, one of that class which mathematicians call the reductio ad absurdum, showing the organic impossibility of lending at Interest, has been repeated a hundred times by Socialism. Why do not the economists notice it?DOI-IV-3.55Do you really wish to refute the ideas of Socialism on the question of Interest? Listen, then, to the questions which you must answer: –DOI-IV-3.561. Is it true that, though the loaning of Capital, when viewed objectively, is a service which has its value, and which consequently should be paid for, this loaning, when viewed subjectively, does not involve an actual sacrifice on the part of the Capitalist; and consequently that it does not establish the right to set a price on it?DOI-IV-3.572. Is it true that Usury, to be unobjectionable, must be equal; that the tendency of Society is towards this equalization; so that Usury will be entirely legitimate only when it has become equal for all, – that is, nonexistent?DOI-IV-3.583. Is it true that a National Bank, giving Credit and Discount gratis, is a possible institution?DOI-IV-3.594. Is it true that the effects of the gratuity of Credit and Discount, as well as that of Taxation when simplified and restored to its true form, would be the abolition of Rent of Real Estate, as well as of Interest on Money?DOI-IV-3.605. Is it true that the old system is a contradiction and a mathematical impossibility?DOI-IV-3.616. Is it true that Political Economy, after having, for several thousand years, opposed the view of Usury held by theology, philosophy, and legislation, comes, by the application of its own principles, to the same conclusion?DOI-IV-3.627. Is it true, finally, that Usury has been, as a providential institution, simply an instrument of equality and progress, just as, in the Political sphere, absolute monarchy was an instrument of liberty and progress, and as, in the Judicial sphere, the boiling-water test, the duel, and the rack were, in their turn, instruments of conviction and progress?DOI-IV-3.63These are the points that our opponents are bound to examine before charging us with scientific and intellectual weakness; these, Monsieur Bastiat, are the points on which your future arguments must turn, if you wish them to produce a definite result. The question is stated clearly and categorically: permit us to believe that, after having examined it, you will perceive that there is something in the Socialism of the nineteenth century that is beyond the reach of your antiquated Political Economy.P. J. PROUDHON.Quite !https://www.marxists.org/ar...
Steve Keen tried this already in his Forbes article the reality nheld up against Keens own beautiful theory is amply scothced in the comments.
http://simonthorpesideas.bl...All Risk No Reward 2 years agoYes, the money flows, BUT NOT TO THE MAIN STREET DEBTORS IN AMOUNTS THAT MAKE THEIR DEBTS PAYABLE. Therefore, the choice is to exponentially grow the debt until the exponential debt-money growth implodes on its own or allow Main Street to implode sooner because there simply is not enough money available to Main Street in order to pay their debts.That concept isn’t complex, rather it is extremely simple.There is absolutely a positive net annual income flow into the Debt Money Monopoly Corporate Borg System and away from Mr. and Mrs. Main Street… and that annual income flow represents INEXTINGUISHABLE DEBT TO MAIN STREET CITIZENS…The complexity you inject into your examples actually works to obfuscate the simple truths behind debt-money systems. It really isn’t complicated.Two comments of note on the Keen article, also good to see others here are equally tunes into the Usury problem.
Test Comment for Zack
Thanks for linking the Steve Keen article and the comments section there, it was an interesting read.
I would like to note that when Bob charges interest on his lended money, there's actually nothing guaranteeing us that he wants to spend it once collected. As you well know, money is used not only to buy things but also to make us fell more protected against unforeseeable events in the future. That's what some economists call "the liquidity preference" of people. After all, why would Bob have a chest of gold coins if he only wants to spend?
Also, in the real world Alice doesn't know (and actually doesn't care) what Bob will do with the interest paid. In the real world when someone borrows money, she just assumes that the money borrowed is not the only money in circulation, and therefore she can pay interest.
Sorry to say it, but this would be a good article if it weren't so misleading. Especially when it suggests that in the real world people only want money for spending. Definitely not true.
However your conclusion is actually right. It is indeed possible to Alice to pay down her debt without incurring in more debt, but only when there is a source of money issued without debt. In this case it would be Bob again.
Finally, i want to say that in a world without interests on loans, you could still have an aggregate debt that is impossible to pay. Usually because a small elite end up hoarding in a way or another a good chunk of the money, that is supposed to be used when time comes to repay debts..
Circulation is important. If Alice had costs (raw materials, paid one of the cooks to do some manufacturing for her) and wanted to make a profit there's a problem in that the employees aren't paid enough to buy all goods. Banks actually help here: see Keen, S. (2010). Solving the paradox of monetary profits. Economics Discussion Papers, No. 2010-2.
This is why wages are suppressed, 'loans' are added to the nations GDP, that is the 'growth' in the Economy. The amount of loaned money spent v actual money.Look closely at all western nation figures, not one make money trading, it all comes from 'Consumer Spending'. The UK loses circa £5bn each year on trade deals, the last and only time we had a 'positive' balance was 1983. Which leads me to believe the 'Economy' is a numbers racket, ran by the Central Banks!Think back to the Referendum and the 'Leave vote', the Government said they "may have to raise student loans", this is because it was the only way to maintain GDP, if their prediction came true [recession]
Governments create money free and clear, no loans required. That's how this conundrum is answered.
Which is why we're pushing for Sovereign money.We have no chance of achieving this while the Rothschild banks control Governments.This was the real reason for WW2, Hitler was using Sovereign money to make cheaper and better goods than the west and the banks couldn't profit from it.
Once people become educated about how it all works they'll realize that, we the people, control our governments and thus our money and we can put our banks in line again!
This is going to be either a long time coming, or the banks will capitulate. I've been exposing this ponzi scheme for years and it doesn't appear to have impacted. Far to many are ignorant of how we are fooled, it's why Unions were handcuffed. The anti-union laws came about as the EU was preparing to take over from EEC, another 'stealth' move. For my part, I haven't had a bank a/c since 2010, don't need one.
What is sovereign money? From where what source did the term sovereign come from? What is your reason for thinking or deciding for the unqualified supremacy assumed by one or a small group or a larger group over the rest. WW2 was bourne out of WW1 and the crushing repayments inflicted by the French at the Treaty of Versaille.Why do you suppose a group of people who call themselves governemnt is going to be any more angelic or more virtuous than another group of people who call themselves bankers. Are you under the illusion that you are living in a free society? That the government will wave its magic wand and all will be ok?
All the fruits of the earth belong to everyone and the earth to no one. If I grow tomatoes and want to trade them with you who has apples but you don't want tomatoes we can still facilitate that trade through an IOU. Why do I need a banker or a government to create money to facilitate that transaction. Surely we can agree on something to facilitate that transaction i.e, gold, sea-shells, bitcoins or whatever because surely we humans are sovereign? We could even agree on an IOU written on a piece of paper. I could keep taking your apples and giving you lots of IOU's written on paper, then one day you come to me and say "I would like to cash in these IOU's" and I say "I don't have anything to give you, sorry" so you are left with worthless bits of paper.
That is the real scandel, paper is worthless so are 0's and 1's but while-ever we close our eyes and keep wishing maybe we might not confront reality.
You give weird examples, it doesn't work like that in the modern industrial world. You need some kind of standardized measure of value, that's where a government usually comes in. A democratic institution should at least in theory look after the common good - banks are not even supposed to do that...
Yes, This is how Mr. Mugabe solved the problem of money :) and at the same time contributed to the destruction of the economy.
Here we go again... Zimbabwe... Weimer Germany... inflation... it's a false argument for the following reason. Money is backed by the amount of goods and services that can be created in the economy right up to full employment being your limiter on how much money to create. Go above full employment and you get inflation. The way you get hyper inflation like Zimbabwe and Weimer Germany is when you destroy the productive capacity of your economy.. (Zimbabwe) or have it destroyed (Weimer Germany)... http://m.huffpost.com/us/en...
Hyperinflation is the argument that the banks want you to believe because it scares people from being able to see how the system really works.. and forces us all to believe that COUNTRIES have to borrow money from PRIVATE banks in order to function??? What a ridiculous notion if you think about it.
Bankers prefer to have them the power because they are not elected and have a DE FACTO immunity from Court criminal prosecution.
Actually, there were more than one or two hyperinflations. https://object.cato.org/sit...
Yes, and those situations were caused by either corruption or stupidity or both... pegging the currency to another country's currency (i.e.: it's no longer your own currency), borrowing massive amounts of money denominated in foreign currencies, artificially creating shortages of goods by cartels, etc.
In every instance, it's the lack of understanding of how it all works that allows these countries' economies to be destroyed (by inside or outside forces). And it will keep happening until people finally understand how it all works.
Great to see some other intelligent comment here.
Hjalmar Schacht was a German economist, banker. He served as the Currency Commissioner and President of the Reichsbank under the Weimar Republic and President of the Reichsbank (1933–1939).
"What actually drove the wartime inflation into hyperinflation,said Schacht, was speculation by foreign investors, who would bet on the mark’sdecreasing value by selling it short."
"At first, the speculation was fed by the Reichsbank (theGerman central bank), which had recently been privatized. But when theReichsbank could no longer keep up with the voracious demand for marks, otherprivate banks were allowed to create them out of nothing and lend them atinterest as well"
"...not only did the governmentnot cause the hyperinflation but it was the government that got the situationunder control. The Reichsbank was put under strict regulation, and promptcorrective measures were taken to eliminate foreign speculation by eliminatingeasy access to loans of bank-created money."
What happened next ?
From Ellen Brown's "Webt of Debt" website:
"More interesting is a little-known sequel to this tale. Whatallowed Germany to get back on its feet in the 1930s was the very thing today’s commentators are blaming for bringing it down in the 1920s – money issued by seigniorage by the government. Economist Henry C. K. Liu calls this form of financing “sovereign credit.” He writes of Germany’s remarkable transformation:
“The Nazis came to power in Germany in 1933, at a timewhen its economy was in total collapse, with ruinous war-reparation obligations and zero prospects for foreign investment or credit. Yet through an independent monetary policy of sovereign credit and a full-employment public-works program, the Third Reich was able to turn a bankrupt Germany, stripped of overseas colonies it could exploit, into the strongest economy in Europe within four years, even before armament spending began."
Summary & Warning:
Sovereign Money or Credit Works. But we need to start to use it BEFORE the economy Collapses - otherwise, we may end up with a plague of Hitlers coming to power around the World.
I suggest to read, for example, J. Adam Tooze (2006) The Wages of Destruction, _The Making and Breaking of the Nazi Economy, Allen Lane, esp. ch.9. about how sovereign money creation between 1933 and 1939 to finance war machine build up and expansion to state involvement into the economy had built up inflationary pressure and how it forced Hitler to jump into war to avoid to end money creation to quell inflation, which would have caused economic depression.
Happy to hear any thoughts you may have on these: http://positivemoney.org/20... and http://positivemoney.org/20...
Hyperinflation is not at all a rare one-off event. There were more than 50 hyperinflations, as you also underlined. Thus hyperinflation is a phenomenon, which happens too frequently to shrug off easily and to blame one-off bad steps and special conditions. Hyperinflation is a monetary phenomenon. One of the key conditions of hyperinflation is that money is outlawed and substituted with quasi money by the state. Money, according to Carl Menger, is the most marketable good, which accepted to be function as money by commercial actors (and may be sanctioned by the state as legal tender). Quasi money: money receipt, which seems to be money, but in reality, it is divorced from the most markateble good by a law of the state, and which money-receipt is forced on market actors to accept as legal tender by the state. The issuing of the money receipt is under the monopoly command of the political leadership of the state and at the same time the state constrains the sphere of action of market actors in the monetary sphere of the economy by legal rules. The hyperinflation is a lurking option once a political leadership of a country outlawed money and introduced quasi-money. A clear and real danger – as the high number of hyperinflations are signalling. None the less, to reach the stage of hyperinflation – which also means an immense destructive force in the real economy – a country needs an especially wicked and/or corrupt and/or ideologically and/or hatred driven political leadership, which disregards for their own political purpose the basic laws of economics and intends to destroy the proper functioning of the market. Your description of Zimbabwe nicely underpin my reading: 1) you have a monetary regime, which is based on quasi-money (paper receipts which are divorced from the most marketable good) created and commanded by the state, 2) The political leadership of the state had acquired quasi monopol position, which includes the command over the policies of the Central Bank 3) There is a higly a corrupt political leadership, which expands welfare state beyond the means of the economy by the „increase pension payments and other forms of benefits” in order to placate the electorate (in this case: “war veterans, who fought for independence and had traditionally been loyal to the ZANU-PF, became ever more disgruntled with the ruling elite’s growing wealth and began demanding a bigger stake”). 4) This highly corrupt political leadership embarks on a highly costly military venture in the territory of a foreign country to increase personal wealth (in this case: to protect the mining investments made by members of the Zimbabwean ruling elite). 5) Destroys the right to property and thus a sizeable part of the private economy, which leads to economic decline, decline of tax receipts and widespread dislocation in the economy and suffering (in this case agriculture “reform”).
I would like to add: there were many countries who disrupted sizeable part of the private economy, including the agriculture and this folly did not lead to hyperinflation. Of course, avoiding hyperinflation meant only that these countries escaped only the phenomenon of hyperinflation and not the consequences of political actions against market order based on private property, rule of law and freedom of action, which could be famine, poverty, economic dislocation, etc. The difference is that the political leadership of Zimbabwe have chosen to mask the economic dislocation caused with her wicked policies (of which included not only the disruption of agriculture and rule of law, but military adventure, expansion of welfare state, corruption) with careless printing money, which led to hyperinflation. Unfortunately, one of the problems of state issued and controlled quasi money is that it allows wicked political leaders to build political support through inflationary measures and to disregard laws of market hoping that money printing solve the problem.
So, I partly share your conclusion: “it is not the case that money printing always leads to high or hyper-inflations. Rather, it was the printing of money to finance expenditure, with no regard for the inflationary consequences, and the preceding collapse in the productive capacity of the economy, which pushed Zimbabwe into hyperinflation. Had Zimbabwe’s central bank been independent of politicians, and focused on price stability rather than facilitating government spending (with more careful control over money creation), the hyperinflation would have been impossible.”. Only partly, because the real dynamic is that since a government has the option to print money to cover up wicked policies, hyperinflation is an ever present lurking option.
I do sympathize with your policy descriptions as far as the division of power and central bank policy concerned as the second best option. Central bank managed monetary economy, even if the central bank is independent, still a non-market order: it is based on the policies of a monopol agent, which is not under the control of market actors, or under very limited control. The monopol position of this Central Bank is the consequence of the policy of the state, which is the principal monopol-agent. Thus, the the monopol position of the central bank depends on 1) the voluntary withdrawal of the state from the monetary issues and at the same time 2) the same state grants and ensures the monopol position of the Central Bank by force. Thus, even the most independent central bank – is the derivative of the state and thus part of the “deep” state (to use a widely popular notion, which became viral nowadays). Consequently, at the end, sooner or later, central banks, as part of the state, succumb to the determined pressure of political leadership of the country if that leadership has enough power and popular support to choose the inflationary path to allow to run certain policies and later to mask the consequences of their wicked and folly policies. The only real safeguard against hyperinflation is the restoration of the commodity character of money and at the same time restoration of free market in the monetary sphere of the economy. These are only the technical condition of the good monetary regime. To restore the commodity character of the money and free market in the realm of monetary regime also needs a major change in public opinion and political philosophy of political and economic thinking: the realization that Hayek had right when he said that: The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.
"The only real safeguard against hyperinflation is the restoration of the commodity character of money and at the same time restoration of free market in the monetary sphere of the economy."
Not exactly sure what you mean by that. I think you're saying (1) we cannot trust fiat money to work so we'd better not use it, use commodity money instead, at the same time (2) restore the free market in the monetary sphere of the economy (I didn't know we ever had such a free market).
AISI and FWIW, I think states (actually central banks) can, and will, continue to issue fiat money but they will make reserve currency accounts available (likely through Digital Account Providers) so that people have access to "sound" money (likely only in digital form). The money is "sound" in that it won't be used to bail the central bank but it will be possible for negative rates to be applied (and for tax to be deducted on the fly as well as all transactions monitored).
Private banks will continue, more or less as they are, but will not be supported by the state. So they will have to fund their own FSCS, if they want one, and so will become more like P2P lenders. Any money you deposit with a bank will be at risk, which it ought be if earning a return.
We will see the likes of bitcoin, and/or products based on it, being used as a store of value (as it's deflationary) as well as a means of exchange. This'll help deflate the property bubble, I hope, but not totally as it seems the state is intent on ever rising house prices or, at least, chasing 2% inflation (which effectively drives up house and land prices).
There's also the problem of Consumer Protection vs Money Laundering to consider, which distorts the state's decisions, but that's enough for now.
 But likely won't, as they don't trust each other not to over leverage (Tragedy of the Commons?).
Until 1914, we had commodity money in the form of gold and silver. Unfortunately very early on the money markets was distorted by the establishment of Bank of England with monopol rights and with the cartellization of the banking sector in England, which was the key country in th early modern period and whose example was followed across the world. None the less, the Scottish banking system until the Peel Act had considerable freedom in its operation. Of course, there was never a perfectly free money market, but there were moments when there was more freedom and more market control. Despite the fact that to achieve a perfect system is difficult given the complexity of human societies and human behaviour, we still could think how to build theoretically a monetary regime, which serves the best the need of producers and customers, the voluntary actions of human beings and their communities.
Frank, if you happy to hear any thought, why was deleted my comment?
Thanks Andras. Your comment was not deleted, we have a strict policy of not deleting comments at Positive Money (unless they are commercial advertisements). However, it was so long that our spam filter automatically removed the comment. As you can see below it has been published.
How do the banks control the world if the it's not in a debt cycle? hahahaha
Oh very nice! So on the desert island with just Alice and Bob the banker, Alice can pay the principle plus the interest because alice can acquire the interest portion from the banker after she has payed it to Bob so she can collect all the money needed in order to pay her debt.
Hello.I am Japanese.I reading and writing with machine translation.
On this issue (ie mathematically, interest can be paid), detailed calculations were made by Ardeshir Mehta.Please refer to the following URL.
Debunking the “Debt-Virus Hypothesis” by Ardeshir Mehtahttps://docs.google.com/doc...
Download Page (Click Download on the top right.)https://www.dropbox.com/s/g...
The problem with this example is that Bob is operating like a savings bank rather than a commercial bank. They are completely different. Savings banks, like Bob, lend out existing money. When the loan is repaid with interest, the money can be relent. Commercial banks don't do that. They create money. When you sign a note at the bank, it becomes an asset for the bank, which balances the books by creating an account for you as a liability for the bank. The money supply is thus increased. When you repay the loan, the note is cancelled, the money is destroyed, and the interest payments become stockholder equity. Since 97% of money is created by bank loans, someone, somewhere, needed to borrow it and is paying interest on it.
What happens when a loan is defaulted on or the interest is not paid back?
During that 100 years, there would be an instance when Alice or the Cooks would fail to pay back all or some of the money.
Does Bob the Banker just say - "Fine"? As Bob the Banker doesn't produce anything - how does he buy food when the others fail to pay back their loans? He starves right?
Not only that but who pays for Bob's massive Salary, Bonus and Yacht repayments?
In the real World - a Bank (like RBS for instance) can make £7 Billion of losses and yet the Boss can recieve a £3 Million salary and still find £340 Million for bonuses for other staff. Is he a magician?
Where's the Central Bank in the desert Island Scenario?
The right explanation - that the author miss completely - is that banks don't create all the money for lending, they also create new money when they buy things and pay for services ! I.e. there is some money creation that is completely decoupled from debt - called in central banking jargon "Open Market Operations". When the ECB bought a new skyscraper in Frankfurt for their new headquarters, 1,3 billion euro was created out of thin air - no real debt attached. The same apply to all commercial banks in similar situation because the liability called "demand deposits" it's like pretending that banknotes are 'payable to the bearer'.
The point of this blog was to show that it is actually mathematically possible for Alice to pay off Bob. The point you make will be addressed in part 2 :)
Very good. Another point is to identify the profits from money creation. Actually banks do create money "off-the-books". I.e. they don't accrue the cash flow of the bank upon creation. The possible source of tax legislation in the US is addressed by IRS here: https://www.irs.gov/pub/irs...Question number 9, by similitude.
I don't think anyone has ever argued that interest is always impossible to pay. The argument is rather that private banks never in history have been re-circulating 100% of the interest money back into the real economy. Private banks just can't do that. Instead, most of the interest money is continously and increasingly hoarded in the financial sector by the biggest and richest depositors and shareholders. Because of the hoarding the politicians have to deal with a never-ending underlying necessity for the real economy to continually increase its debt to private banks in order to maintain an available money supply.
There is no such thing as the desert island "myth". Why would there be, Frank? When you come to the point where you realize that there is no money to pay the interest, the society had already completely run out of money, and this would certainly be a bigger problem.
However, the situation caused by hoarding is SIMILAR to the desert island myth, and this has obviously confused some economists. For example, professor Steve Keen made the same false assumptions about the existence of some "myth" flowing around . Here is one of the angry comments at his blog:
" .... but when on earth have the Interest been equal to consumption of bankers? If you just consider that a part of interest is not consumed by bankers and can only come back to firms if it is lent again through banks, your argument falls down. And this is not a very unlike event; in fact, as Keynes argued and you perfectly know, the marginal propensity of consumption of the bankers is much lower than the worker’s."
Whats the difference b/w a bank hoarding vs a business hoarding? Whats the difference b/w a bank investing its profit into real economy vs. FIRE sectors, and other big businesses investing money into real economy vs FIRE sectors? But outside of that, PM is well aware of where the interest is re-circulated http://positivemoney.org/is...
When loans are paid back that money is destroyed, no longer in the 'Economy', so more must be created. What is not taken into account, the 'cash' siphoned off by the unscrupulous and stashed away, out of the Economy.
The money that was created "off-the-books" (not credited in the cash flow of the bank) is technically "shadow money" and is NOT destroyed at all.
You refer to QE, I was referring to all loans, including Government and Student. This is why Government said, right after the leave vote, they may have to raise Student Loans, as it was the only way to maintain GDP, if their prediction [recession] came true. Tell me, what is 'growth' and how is it measured?It's not the difference between last years figures and this, but the measure of loans spent into the economy. Without these 'loans' we'd have no growth, because people only just earn enough to live, never mind buy luxury products.Banks describe it as 'inflation adjusted market value of goods & services'?
All loans are made with new money created by commercial banks off-the-books. Don't appear in their cash flow. See here: Cash Flow Accounting in Banks— A study of practice, Ásgeir B. Torfason, University of Gothenburg, 2014https://gupea.ub.gu.se/hand...
Of course it doesn't appear in the cash flow, it doesn't exist, it's digital 1's & 0's on a PC. Then when it's paid back it's destroyed, no longer in the economy.If all these loans were placed on the books, we'd be obliged to ask to see the cash?