The money system

[skc]

The clearest point I think I can try and make is that our current money system is viewed as in crises in many places around the globe where growth has stalled. Because it is not designed to operate at zero growth, it hums along fine with growth and the underlying design component that causes this situation is positive interest rates.

We cannot have infinite growth in a finite world – we need to redesign the money system to suit the next phase where we seek quality over quantity.

Well... they are actually trying to fix it now.

First they adjust the nominal interest rate to be very very low, then they pump supply into the system to create inflation, (which is nominal growth, not real productivity growth), you can sort of get away with the current system whilst having zero real growth.

Japan might be a good example... there's little real growth but people are still living/working/consuming. So I guess what I am saying is, whilst the current system may not be ideal, a radical redesign or catastrophic collapse may not be the only outcomes.

 

[Trembling Hand]

Agreed on all of that - except perhaps your definition of 'physical' growth (assuming you mean physical in the literal sense of the world). I concur that we have limited physical goods and services, but there's also the growth of the virtual ones that could grow the economy.

Not sure if it'll ever be enough, but thinking about how large and quickly this can grow, there's no reason why transactions, incomes and therefore overall growth can't hinge off of this.

I much prefer the idea of reducing the debt burden and going through a period of austerity and defaults. Start from a clean slate.

Yeah thats a good point. It would be interesting to see what percentage of GDP from 50, 20 and 10 years ago was from 'goods' which require energy and stuff to be consumed compared to a service based economy where you just move around some electrons, like music & internet for example. (then again we probably consume same amount of goods, if not more and have just added services)

 

[McLovin]

Agreed on all of that - except perhaps your definition of 'physical' growth (assuming you mean physical in the literal sense of the world). I concur that we have limited physical goods and services, but there's also the growth of the virtual ones that could grow the economy.

Not sure if it'll ever be enough, but thinking about how large and quickly this can grow, there's no reason why transactions, incomes and therefore overall growth can't hinge off of this.

I much prefer the idea of reducing the debt burden and going through a period of austerity and defaults. Start from a clean slate.

I think the point craft is making is that the current system requires perpetual growth in credit because that's what keeps it afloat. Eventually you hit a wall and the real economy can no longer support the debt burden. That's where we are at now, that there's trillions in excess reserves but no one wants to borrow. So the problem isn't a lack of liquidity it's a lack of borrowers. Without credit creation, there is no growth, but eventually the real economy can't keep fuelling the debt furnace that supports it. It's like a catch-22.

Well that's what I think he's saying.

 

[craft]

Well... they are actually trying to fix it now.

First they adjust the nominal interest rate to be very very low, then they pump supply into the system to create inflation, (which is nominal growth, not real productivity growth), you can sort of get away with the current system whilst having zero real growth.

Japan might be a good example... there's little real growth but people are still living/working/consuming. So I guess what I am saying is, whilst the current system may not be ideal, a radical redesign or catastrophic collapse may not be the only outcomes.

The current fixes - mainly Austerity and Financial repression depending on where you are, are fixes for the insolvency issues. The insolvency issues are a temporary fix for excessive growth in a finite world. (you don't need a very high exponential growth rate before it must exhaust itself) The finite growth issue clashing with the money system re-appears once the insolvency issue is fixed. We'll be out of the frying pan and into the fire if nothing changes.

Agree - solution/fixes will most likely be evolutionary rather then revolutionary. Well lets hope so.

 

[Value Collector]

I think the point craft is making is that the current system requires perpetual growth in credit because that's what keeps it afloat. Eventually you hit a wall and the real economy can no longer support the debt burden. That's where we are at now, that there's trillions in excess reserves but no one wants to borrow. So the problem isn't a lack of liquidity it's a lack of borrowers. Without credit creation, there is no growth, but eventually the real economy can't keep fuelling the debt furnace that supports it. It's like a catch-22.

Well that's what I think he's saying.

the money supply can expand and contract with the economy, the credit portion is elastic and provides the expansion or contraction.

The fed and other reserve banks generally want a little inflation rather than deflation, and they have the ability to offset deflation by injecting more money (through buying bonds and if needed injecting physical cash).

If we got to the stage where credit growth was stagnate permanently, I don't think it would be a problem, the money supply can be adjusted accordingly.

 

[Value Collector]

Re: The official "ASX is tanking!" panic thread

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It is this growth forced upon the physical economy by people creating production to pay back the original debt and then EXTRA to pay back the interest component which is the current money system’s Achilles heel in a finite world. It’s a physical growth problem.

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I can't see why growth in the physical economy is needed to repay the interest component, especially when its long term debt.

All it requires is that the borrowers have the ability to earn money which doesn't necessarily require that the economy grow.

Do you have an example of borrowers who need to grow to make their payments.

 

[craft]

Re: The official "ASX is tanking!" panic thread

I can't see why growth in the physical economy is needed to repay the interest component, especially when its long term debt.

All it requires is that the borrowers have the ability to earn money which doesn't necessarily require that the economy grow.

Do you have an example of borrowers who need to grow to make their payments.

Think about the whole system not just one player in the system.

I can't explain it any further, it is counterintuitive and I have no chance of putting down all the associated points that fill out my understanding. Perhaps also I'm wrong; perhaps we are just misunderstanding each other.

 

[craft]

Re: The official "ASX is tanking!" panic thread

I can't see why growth in the physical economy is needed to repay the interest component, especially when its long term debt.

All it requires is that the borrowers have the ability to earn money which doesn't necessarily require that the economy grow.

Do you have an example of borrowers who need to grow to make their payments.

Actually after giving up I thought about it a bit more and perhaps (but maybe not) I can explain it a bit better with your original island example.

You are on your island, you forgo $100 worth of consumption to make a loan in return for the promise that $120 worth of production is returned to you. Forget about money supply and velocity and all the other nitty gritty (as I agree $20 money supply can pay off $120 if the velocity is adequate). The positive interest rate agreed to as part of the loan transaction dictates growth in production for the debt agreement to be honoured. This is the money system driving the physical growth that I refer too.

Even if credit growth is stagnant production must still increase to meet interest burdens already agreed; unless interest rates are zero. It is only when no interest is charged that money does not drive production increases or if money is created without a corresponding debt obligation.

If the economic production does not increase the system wide debt obligations already in existence cannot be honoured.

The scarcity is not the money itself because its liquidity can be managed adequately (theoretically) by the central banks but the scarcity is the economic opportunity to increase physical production, timely and profitably(or at least at the cost of capital) which the money system dictates via fiating into existence as debt agreements bearing positive interest rates.

I’m sorry if I have confused you further – Promise to stop now.

 

[skc]

Here's a video that talks about this very issue.

 

[Value Collector]

Re: The official "ASX is tanking!" panic thread

Actually after giving up I thought about it a bit more and perhaps (but maybe not) I can explain it a bit better with your original island example.

You are on your island, you forgo $100 worth of consumption to make a loan in return for the promise that $120 worth of production is returned to you. Forget about money supply and velocity and all the other nitty gritty (as I agree $20 money supply can pay off $120 if the velocity is adequate). The positive interest rate agreed to as part of the loan transaction dictates growth in production for the debt agreement to be honoured. This is the money system driving the physical growth that I refer too.

Even if credit growth is stagnant production must still increase to meet interest burdens already agreed; unless interest rates are zero. It is only when no interest is charged that money does not drive production increases or if money is created without a corresponding debt obligation.

If the economic production does not increase the system wide debt obligations already in existence cannot be honoured.

The scarcity is not the money itself because its liquidity can be managed adequately (theoretically) by the central banks but the scarcity is the economic opportunity to increase physical production, timely and profitably(or at least at the cost of capital) which the money system dictates via fiating into existence as debt agreements bearing positive interest rates.

I’m sorry if I have confused you further – Promise to stop now.

I must be missing something because i see no reason that the interest can not be covered by normal turnover in the economy, because the money once its created can just keep recycling, and the interest that gets earned continually gets recycled back into the economy.

It doesn't mean more production is required, it just means production shifts more so to the people that have to earn money to make the payments, like in the island example, you would be running doing all the production while i sit and eat the fish and the coconuts, no extra coconuts and fish need to be produced, its just you have to produce them instead of me.

 

[Value Collector]

Here's a video that talks about this very issue.

I have watched all three of the money as debt series several times, and there is a lot of misinformation and half truths in there. And i completely disagree with their version of why the interest can not be paid, if that is what craft means i completely disagree.

 

[craft]

Re: The official "ASX is tanking!" panic thread

I must be missing something because i see no reason that the interest can not be covered by normal turnover in the economy, because the money once its created can just keep recycling, and the interest that gets earned continually gets recycled back into the economy.

It doesn't mean more production is required, it just means production shifts more so to the people that have to earn money to make the payments, like in the island example, you would be running doing all the production while i sit and eat the fish and the coconuts, no extra coconuts and fish need to be produced, its just you have to produce them instead of me.

If interest is at a positive rate - then a debt agreement is for more to be paid back then is given/received initially.

In the example I would have to do 20% more then you did to accumulate your $100 to repay you the $120 we agreed to.

Not only does the production shift to repay the principal of $100 but I have to produce 20% more to pay the interest - this is the physical growth money as debt forces.

Even if there is only a single $20 note (physical coinage) available on the island and that doesn't change - we have to recycle(velocity) it 6 times which requires me to produce 6 lots of production worth $20 a throw.

Under your understanding - How do I NOT physically produce more and still honour our agreement for repayment of principle + interest in full?

 

[Value Collector]

Re: The official "ASX is tanking!" panic thread

If interest is at a positive rate - then a debt agreement is for more to be paid back then is given/received initially.

In the example I would have to do 20% more then you did to accumulate your $100 to repay you the $120 we agreed to.

Not only does the production shift to repay the principal of $100 but I have to produce 20% more to pay the interest - this is the physical growth money as debt forces.

Even if there is only a single $20 note (physical coinage) available on the island and that doesn't change - we have to recycle(velocity) it 6 times which requires me to produce 6 lots of production worth $20 a throw.



Under your understanding - How do I NOT physically produce more and still honour our agreement for repayment of principle + interest in full?

Again I will use the Island example, I catch 1 fish everyday for 5 days for you for $20 per day, You now owe me $100 + $20 interest which we agree on. To repay me, you go and catch 1 fish every day for $20 per day for 6 days
generating $120. The production rate didn't have to increase by 20%, the production rate was steady at 1 fish per day

 

[craft]

Re: The official "ASX is tanking!" panic thread

Again I will use the Island example, I catch 1 fish everyday for 5 days for you for $20 per day, You now owe me $100 + $20 interest which we agree on. To repay me, you go and catch 1 fish every day for $20 per day for 6 days
generating $120. The production rate didn't have to increase by 20%, the production rate was steady at 1 fish per day

The finite world had to give up 6 fish as opposed to 5. Interest is charges on a time basis so you can't just stretch the time frame to make the production rate appear the same.

 

[Value Collector]

Re: The official "ASX is tanking!" panic thread

The finite world had to give up 6 fish as opposed to 5. Interest is charges on a time basis so you can't just stretch the time frame to make the production rate appear the same.

the finite world was always going to be asked to give up 1 fish per day regardless of who caught it, the fact that the loan was made didn't mean any extra fish had to be caught, it just meant you had to do a bit more work.

But fish are not really finite, they breed, as long as the production rate does not go over their reproduction rate we will always be able to get our 1 fish every day.

 

[craft]

Re: The official "ASX is tanking!" panic thread

the finite world was always going to be asked to give up 1 fish per day regardless of who caught it, the fact that the loan was made didn't mean any extra fish had to be caught, it just meant you had to do a bit more work.

You have seemed to miss the implication of interest being a function of time. Production time frames can not just be extended without compensating via the interest component.

But fish are not really finite, they breed, as long as the production rate does not go over their reproduction rate we will always be able to get our 1 fish every day.

The problem the money system now faces as opposed to when it was designed is that for many products we are now extracting at rates far higher then they are replenished(oil etc) and polluting at rates far higher(co2 etc) then can be absorbed/repaired.


And the growth required is exponential (compounded) so we need to take more and more every year just to maintain the same growth rate.

The change to money design needs to make it function at sustainable environmental levels without causing cyclical insolvency events (or the ultimate destruction of an environment capable of supporting us). That means changing the element (Interest) that drives the physical growth requirement. Trick will be to do it in a way that still drives technology /social /cultural advancements etc to make life better whilst laying off the plundering of nature.

 

[Value Collector]

Re: The official "ASX is tanking!" panic thread

1,You have seemed to miss the implication of interest being a function of time. Production time frames can not just be extended without compensating via the interest component.




2, The problem the money system now faces as opposed to when it was designed is that for many products we are now extracting at rates far higher then they are replenished(oil etc) and polluting at rates far higher(co2 etc) then can be absorbed/repaired.


And the growth required is exponential (compounded) so we need to take more and more every year just to maintain the same growth rate.

The change to money design needs to make it function at sustainable environmental levels without causing cyclical insolvency events (or the ultimate destruction of an environment capable of supporting us). That means changing the element (Interest) that drives the physical growth requirement. Trick will be to do it in a way that still drives technology /social /cultural advancements etc to make life better whilst laying off the plundering of nature.

1, Our example used an interest rate of 20% over 5 days, In reality interest is far lower. As long as in general borrowers can pay the annual interest bill and make a principle reduction they will be fine, I can't see it being a problem. But also It doesn't require an extension of production time frames, It just requires the borrowers to take of a larger portion of the future workload.

2, That's not related to the money system, that's a problem we would have with any form of trade system, humans use resources and currently some of those resources are non renewable, that's a fact. But that's not caused by the money supplies interest rate, that would be the case at 0% interest.

 

[craft]

Re: The official "ASX is tanking!" panic thread

1, Our example used an interest rate of 20% over 5 days, In reality interest is far lower. As long as in general borrowers can pay the annual interest bill and make a principle reduction they will be fine, I can't see it being a problem.

2, That's not related to the money system, that's a problem we would have with any form of trade system, humans use resources and currently some of those resources are non renewable, that's a fact. But that's not caused by the money supplies interest rate, that would be the case at 0% interest.

As interesting as I find this topic, I'm going to have to invoke the agree to disagree and get on with other things.
Thanks for the discussion.


If anybody is interested I have found Bernard Lietaer encouraging reading on how monetary systems may evolve to be more accommodative to our changing needs.

Probably wont grab your attention if you don't see any floors in the current system.

http://www.lietaer.com/

 

[burglar]

Trouble with islands, the currency used is often pearls or shells.
So this leaves you with the double problem of calculating the intrinsic value of the fish and the currency.

 

[craft]

A bit of vision around an end to the growth paradigm.

Acceptance that growth is not necessary for an enriched life is a stepping stone to redesigning the money system to work efficiently without growth.