Home > real-world economics review > RWER issue 57: Michael Hudson

RWER issue 57: Michael Hudson

How economic theory came to ignore the role of debt

Michael Hudson   

            Starting from David Ricardo in 1817, the historian of economic thought searches in vain through the theorizing of financial-sector spokesmen for an acknowledgement of how debt charges (1) add a non-production cost to prices, (2) deflate markets of purchasing power that otherwise would be spent on goods and services, (3) discourage capital investment and employment to supply these markets, and hence (4) put downward pressure on wages. 

            What needs to be explained is why government, academia, industry and labor have not taken the lead in analyzing these problems. Why have the corrosive dynamics of debt been all but ignored?

            I suppose one would not expect the tobacco industry to promote studies of the unhealthy consequences of smoking, any more than the oil and automobile industries would encourage research into environmental pollution or the linkage between carbon dioxide emissions and global warming. So it should come as little surprise that the adverse effects of debt are sidestepped by advocates of the idea that financial institutions rather than government planners should manage society’s development. Claiming that good public planning and effective regulation of markets is impossible, monetarists have been silent with regard to how financial interests shape the economy to favor debt proliferation.

            The problem is that governments throughout the world leave monetary policy to the Central Bank and Treasury, whose administrators are drawn from the ranks of bankers and money managers. Backed by the IMF with its doctrinaireChicagoSchooladvocacy of financial austerity, these planners oppose full-employment policies and rising living standards as being inflationary. The fear is that rising wages will increase prices, reducing the volume of labor and output that a given flow of debt service is able to command.

            Inasmuch as monetary and credit policy is made by the central bank rather than by the Dept. of Labor, governments chose to squeeze out more debt service rather than to promote employment and direct investment. The public domain is sold off to pay bondholders, even as governments cut taxes that cause budget deficits financed by running up yet more debt. Most of this new debt is bought by the financial sector (including global institutions) with money from the tax cuts they receive from governments ever more beholden to them. As finance, real estate and other interest-paying sectors are un-taxed, the fiscal burden is shifted onto labor.

            The more economically powerful theFIREsector (Finance, Insurance and Real Estate) becomes, the more it is able to translate this power into political influence. The most direct way has been for its members and industry lobbies to become major campaign contributors, especially in theUnited States, which dominates the IMF and World Bank to set the rules of globalization and debt proliferation in today’s world. Influence over the government bureaucracies provides a mantel of prestige in the world’s leading business schools, which are endowed largely byFIRE-sector institutions, as are the most influential policy think tanks. This academic lobbying steers students, corporate managers and policy makers to see the world from a financial vantage point.

            Finance and banking courses are taught from the perspective of how to obtain interest and asset-price gains through credit creation or by using other peoples’ money, not how an economy may best steer savings and credit to achieve the best long-term development. Existing rules and practices are taken for granted as “givens” rather than asking whether economies benefit or suffer as a whole from a rising proportion of income being paid to carry the debt overhead (including mortgage debt for housing being bid up by the supply of such credit). It is not debated, for instance, whether it really is desirable to finance Social Security by holding back wages as forced savings, as opposed to the government monetizing its social-spending deficits by free credit creation.

            The finance and real estate sectors have taken the lead in funding policy institutes to advocate tax laws and other public policies that benefit themselves. After an introductory rhetorical flourish about how these policies are in the public interest, most such policy studies turn to the theme of how to channel the economy’s resources into the hands of their own constituencies.

            One would think that the perspective from which debt and credit creation are viewed would be determined not merely by the topic itself but whether one is a creditor or a debtor, an investor, government bureaucrat or economic planner writing from the vantage point of labor or industry. But despite the variety of interest groups affected by debt and financial structures, one point of view has emerged almost uniquely, as if it were objective technocratic expertise rather than the financial sector’s own self-interested spin. Increasingly, the discussion of finance and debt has been limited to monetarists with an anti-government ax to grind and vested interests to defend and indeed, promote with regard to financial deregulation.

            This monetarist perspective has become more pronounced as industrial firms have been turned into essentially financial entities since the 1980s. Their objective is less and less to produce goods and services, except as a way to generate revenue that can be pledged as interest to obtain more credit from bankers and bond investors. These borrowings can be used to take over companies (“mergers and acquisitions”), or to defend against such raids by loading themselves down with debt (taking “poison pills”). Other firms indulge in “wealth creation” simply by buying back their own shares on the stock exchange rather than undertaking new direct investment, research or development. (IBMhas spent about $10 billion annually in recent years to support its stock price in this way.) As these kinds of financial maneuvering take precedence over industrial engineering, the idea of “wealth creation” has come to refer to raising the price of stocks and bonds that represent claims on wealth (“indirect investment”) rather than investment in capital spending, research and development to increase production.

            Labor for its part no longer voices an independent perspective on such issues. Early reformers shared the impression that money and finance simply mirror economic activity rather than acting as an independent and autonomous force. Even Marx believed that the financial system was evolving in a way that reflected the needs of industrial capital formation.

            Today’s popular press writes as if production and business conditions take the lead, not finance. It is as if stock and bond prices, and interest rates, reflect the economy rather than influencing it. There is no hint that financial interests may intrude into the “real” economy in ways that are systematically antithetical to nationwide prosperity. Yet it is well known that central bank officials claim that full employment and new investment may be inflationary and hence bad for the stock and bond markets. This policy is why governments raise interest rates to dampen the rise in employment and wages. This holds back the advance of living standards and markets for consumer goods, reducing new investment and putting downward pressure on wages and commodity prices. As tax revenue falls, government debt increases. Businesses and consumers also are driven more deeply into debt.

            The antagonism between finance and labor is globalized as workers in debtor countries are paid in currencies whose exchange rate is chronically depressed. Debt service paid to global creditors and capital flight lead more local currency to be converted into creditor-nation currency. The terms of trade shift against debtor countries, throwing their labor into competition with that in the creditor nations.

            If today’s economy were the first in history to be distorted by such strains, economists would have some excuse for not being prepared to analyze how the debt burden increases the cost of doing business and diverts income to pay interest to creditors. What is remarkable is how much more clearly the dynamics of debt were recognized some centuries ago, before financial special-interest lobbying gained momentum. Already in Adam Smith’s day it had become a common perception that public debts had to be funded by tax levies that increased labor’s living costs, impairing the economy’s competitive position by raising the price of doing business. The logical inference was that private-sector debt had a similar effect.

You may download the whole paper at: http://www.paecon.net/PAEReview/issue57/Hudson57.pdf

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  1. Robert Dulin
    September 6, 2011 at 9:24 pm

    Why does no one consider the rent on money (interest) In terms of deadweight loss where the loss is always more than the rent itself?
    What a despicable and inefficient way to make a dollar by costing some other person two dollars or more.
    Even the hated taxes might in some way assist with the production of a product (roads, security, defense, ect).
    Interest cost is almost exclusively unproductive and is spent on consumption or lent to create more debt.
    The cost is passed to and paid by producers with the lowest elasticities.
    Lenders should pay for all social security, welfare, food stamps, health care and most wars because they are the cause of all of these problems.
    Thanks, Robert

    • September 6, 2011 at 9:54 pm

      Interest is not economic rent. Pure interest has no deadweight loss – it is based on voluntary action rather than an imposed cost. Pure interest is based on time preference, as most folks prefer to get goods sooner rather than later, and are willing to pay the interest premium to shift purchases from the future to the present day. What is misleadingly called “interest” today is mostly premia from inflation, taxation, risk, and privileges.

  2. Robert Dulin
    September 6, 2011 at 10:08 pm

    That is an interesting way to look at it but someone has to borrow or else the money supply leaves the productive economy and returns to the financial economy (lenders).
    When borrowing slows, it creates a recession. People have to borrow to survive until better days.
    Although it looks voluntary it is not.

    Thanks, Robert

  3. Robert Dulin
    September 6, 2011 at 11:02 pm

    I should explain myself better. What you say is true for simple debt. We are dealing with “Lender Created Debt” which is caused by lenders (anyone with interest income) re-lending their interest instead of spending it (compounding interest).
    When the total debt being serviced equals the total supply of money, all money has to be borrowed.
    Wages are lowered because of interest, interest administration and interest deadweight loss in the cost of all products.
    Money is kept in short supply by the Fed to combat inflation.
    The debt proceeds to several multiples of the money supply until there becomes a shortage of qualified borrowers.
    Thank God there is the irresponsible government to borrow money at lower interest rates spend it on anything and keep a workable level of money in circulation.
    Lower quality debts are defaulted on until the debt is lowered and some balance is restored.
    So now here is the situation.
    My pay has been reduced to about 1/4 of what my product is worth.
    Do I want to wait and save to buy a house or am I willing to sign any kind of note as long as I can make the payments.
    In “Lender Created Debt”, interest is involuntary.
    Thanks, Robert

    • Alice
      September 7, 2011 at 11:03 am

      It all started with hire purchase in the 1950s and from there has got so much worse. Borowing substituted for saving. New substituted for make do. Keeping up with the Jones’s became the advertising push. Mum had to go to work to help pay for the never never system. Yet still the centrak baks want to keep the borrowing rates low. Why? And why now?

  4. September 7, 2011 at 1:43 pm

    “My pay has been reduced to about 1/4 of what my product is worth.”

    Robert, why don’t you quit and become self-employed, and thereby quadruple your wage?

  5. Robert Dulin
    September 7, 2011 at 2:23 pm

    The profit of all producers is a fraction of what there product is worth,self employed or not. There is no way around interest.
    Thanks Robert

  6. Keith Wilde
    September 9, 2011 at 12:02 pm

    It occurred to me this week on revisiting my ancient links to Club of Rome associates that Hudson provides an arrow that seems to have been hitherto missing from their quiver. An alliance is in order.

  7. Dave Taylor
    September 9, 2011 at 7:09 pm

    I’m lucky. I’ve got a pension, so I can work voluntarily at what needs doing. But Robert, it’s not the produce that is valuable, it’s the people …

    Thanks, Michael Hudson, for an instructive and significant paper.

  8. Bernard Sie
    September 10, 2011 at 5:25 am

    Great paper.

    As it happens I am reading Keynes’ General Theory right now so I will keep your remarks about him in mind. If there is one point of criticism it is that you don’t mention Hyman Minsky (his book about Keynes is next on my list).

  9. September 10, 2011 at 1:17 pm

    Michael Hudson
    I see that I’ll have to clear the air from the Austrian school nonsense that Fred Foldvary spouts about interest being “time preference.” Many years ago (1994?) he invited me to present a paper on economic thought and I addressed this very issue. He refused to publish it – the only unpublished paper in his volume.
    Subsequently, as a “Austrian-Georgist” (an oxymoron, I realize, but that’s what they call themselves) the very thought of interest being “economic rent” made any discussion of them with me anathema.
    The fact is that from the 13th century on, the FIRST concept of economic rent WAS the theory of a Just Price – for banking services. Georgists insist on applying the concept only to land rent (hence, their former name “Single Taxers”). This is tunnel vision – backed by a censorial approach typical of “free market” theorists.
    Viennese time preference for businesses is supposed to reflect the increasing capital-intensiveness of “roundabout” production. But this is not confirmed statistically. “Your money or your life” is not really the kind of choice that most people would deem to fall in the psychic utility range that “explains” consumer interest (as when you borrow to pay a hospital when an emergency arises, or to avoid starvation).
    The Austrians and Chicago boys have contributed an important insight: The only way to get a “free market” Chicago style is to exclude or even assassinate (Operation Condor) everyone who disagrees with you and seeks to have the government shape the markets within which choices and especially coercion operate.
    So if there’s a demand for it, I’ll publish my commentary on the Austrian school’s time preference theories of interest.
    The reality, of course, is that interest rates are set today by the central bank. That’s what QE2 was about, at 0.25%. No “psychology” here – except the wealth addiction of the financial sector, trying to enable the economy to pay interest by lending it the money. To do this, it promotes asset-price inflation, so that it can pretend there is more collateral.
    Michael Hudson

    • Mark
      September 11, 2011 at 4:51 am

      I’d be very interested in reading your commentary on the Austrian school’s time preference theories of interest. The Austrian school has been aggressively promoted especially on the internet and I think it’s important that people have access to critiques of the Austrian theories which are very dogmatic.

    • Alice
      September 11, 2011 at 10:55 am

      Occasionallly there is a comment that really nails it. Thanks to Micael Hudosn this time for this gem

      “That’s what QE2 was about, at 0.25%. No “psychology” here – except the wealth addiction of the financial sector, trying to enable the economy to pay interest by lending it the money. To do this, it promotes asset-price inflation, so that it can pretend there is more collateral.

      Yeah. Im a bit over the financial sector. So, it seems are a lot of people, whos money is involuntarily mixed up in the hype and nonsense. Here is an example…..

      Three nights ago I was watching Skybusiness on foxtel for Australia and along comes this “financial sector expert” for an interview, who claims to have examined every stock on the ASX rigorously for a range of common indicators such as ROI, ROE, Dividend payout ratio, debt/equity ratio bla bla bla

      He then concludes there are only 9 companies out of all 2400 odd that “met our strict criteria” and are really sound companies to invest in. So me writes them all down. In the morning I research all 9 of his recommendations on the ASX website to find that of the 9 stocks he chose only 7 have been actually listed on ASX longer than since March 2011..

      Newbies..the lot of them.

      But of course he did mention his firm owned a couple of the businesses…or did they own 7 out of the 9?

      so, as for the other 2 out of 9 – I concluded whilst the names were known, they were too highly priced in their cycles.

      • Robert Dulin
        September 11, 2011 at 12:03 pm

        That’s what QE2 was about, at 0.25%. No “psychology” here – except the wealth addiction of the financial sector, trying to enable the economy to pay interest by lending it the money. To do this, it promotes asset-price inflation, so that it can pretend there is more collateral.
        Michael Hudson
        That is exactly right. The money has to be borrowed or even pulled out of the lenders hat and given away to pay yesterdays interest. That is one of the reasons government borrows to pay for social programs. It assumes debt so lenders can be paid in a timely manner.
        Look how much the private sector debt in the US contracted as people were unwilling or unable to borrow when housing lending slowed down. The money (liquidity) had to to be created by government borrowing to keep the interest payments flowing in.
        Thanks, Robert

  10. September 10, 2011 at 2:54 pm

    In response to Michael Hudson, I am personally in favor of analyzing and discussing interest as economic rent. Georgists agree that economic rent exists other than for land, and their opposition to taxing wages that are economic rent is moral rather than economic. The Austrian (Viennese) theory of time preference applies to all human beings, not just business. In my analysis, time preference is not based on roundabout production, but rather on consumers seeking to shift purchases to the present day due to the uncertain future and the limited human lifespan. Thus they are willing to pay an interest premium to e.g. purchase a car today rather than waiting years to accumulate savings. Most borrowing is not the urgent type e.g. hospital treatment (for which usually the payment is from insurance or a medical plan). I know of no Austrian-school economist who advocates assassination.

    Yes, “interest” rates are today set by central banks. Time preference explains the natural rate of interest in a free market, and Austrian theory analyzes the distortions caused by the imposed rate being different from the natural rate, since we don’t have a free market. Time preference is still in effect, however, just as the desire of households to own cars exists, but their actual purchases are distorted by taxation and subsidies, hence the outcome cannot be ascribed merely to household desires. The Fed is in effect subsidizing “interest” rates to borrowers indeed to promote asset-price inflation as artificial collateral or to prevent greater asset-price deflation than has taken place in land values, and thereby also to prevent the greater loss of artificial bank-held collateral. The Fed-set rate of debt service is not pure interest but includes a subsidy discount from what would otherwise be the pure rate.

    • October 3, 2013 at 3:30 pm

      Lending money via loans is a product, the same as a car, or the house that may back the loan. It may or may not have a time preference, a need preference as the reason this loan was created was only for the purpose of profit for the Private For Profit Banks.With a very low production cost the PFPB can create a Note that could allow the PFPB to gain a revenue stream of over double the amount of the Loan (If at 6% compound interest that would occur in 12 years).
      How long would it take you to realize that if the PFPB were to take the production of the housing sector ( Example at $1.8 trillion) that they have taken a product , a goods and services that has benefited the entire social group and turned it it a Weapon of Servitude.
      If the $1.8 trillion was given by the PFPB so that the laborers were to be able to purchase these homes and the Notes were payable at a low 4.8% for 30 years, HOW, may I ask, HOW can they pay or even earn $7.2 trillion in order to own their home and not be in servitude ?
      How can you ignore $5.4 trillion in profits for the PFPB ? Thats $5.4 trillion taken out of the economy that goes directly to the owners of the PFPB to spend (perhaps as Soddy said,”(“The Role Of Money’ 1926,1931)
      says,”To allow it (Money)to become a source of revenue to private issuers is to create, first, a secret and illicit arm of the government and, last, a rival power strong enough ultimately to overthrow all other forms of government.”
      government.”
      .one.

  11. Dave Taylor
    September 10, 2011 at 3:25 pm

    Why should anyone have to rent out credit notes printed by bankers when the real credit is given – from surplus is already available – by those who supply real goods and services?

    Despite perhaps learning about compound interest at primary school, what economists are failing to see (or trying to prevent us from seeing) is that it is the percentage mark-up when charging for time that is logarithmic and causing our exponential monetary inflation. So much for all their hifalutin mathematics! Fair enough to pay 10 cents premium for a making a new dollar note “out of thin air”, but not ten cents a year.

  12. Robert Dulin
    September 10, 2011 at 6:55 pm

    “Why should anyone have to rent out credit notes printed by bankers when the real credit is given – from surplus is already available – by those who supply real goods and services?”
    Dave Taylor

    Now that is an excellent question that deserves an honest answer.

    Quick answer:
    Because the lenders own the money. They own the money because it has been paid to them as interest for the last several thousand years. All they have to do is not spend ALL of their interest and the productive people will have to pay more interest to rent it again and again and again.

    Long answer:
    The primary use of money is as a measurement tool. Rent on that money makes the measurement wrong.
    There are some things that you should not rent.
    1. Hamburgers. Because the only way to return a hamburger in usable form is to rent another one to return and then another one and then another one,ect.
    2. Tuxedos to bury people in. Because the rent goes on forever.
    3. Money. Because there is not an infinite amount of money in circulation, and if the lenders do not spent the interest, imaginary money has to be borrowed to pay the interest, again and again and again…….. The cost of that interest is included in everything that is produced.
    Example, Bread = $1.00 = $.25 flour + $.25 labor + $.50 interest = price wrong by 50%.
    It comes down to a choice.
    Is it better to get full pay for your product or is it be better for some people in the economy to be able to borrow and lend?

    Time preference doesn’t work.
    Say a person needs an economics degree to get a position with the Obama Administration.
    Why not just go to the university registrars office and pay the clerk to enter a degree on their transcript. Of course a promise must be given that a degree will be obtained within 4 years. It might work the first time and it might work again but eventually grades denoting competence in a subject will mean nothing at that institution.
    How about the qualified economist that President Obama was denied the service of?
    All “time preference” does is let one person jump place in line. The lender gets paid but not the others in the line that lost a turn.
    Paying to fake a measurement doesn’t work with money or grades. all you get is bad measurements. Bad measurements = bad data.

    Most loans are not positive sum.
    The fact that the baker gets a loan to buy flour that allows him to bake bread is meaningless considering the opportunity cost that was lost when he didn’t get the full pay the last time he made bread.

    Just because someone is willing to pay to jump place in line says nothing about his productive capacity or intentions.

    Interest does not benefit an economy. It is just an ancient and complicated way to steal.

    If the economics department could answer Dave Taylor, all society would benefit as we benefit from the disciplines of the engineering or chemistry departments.

    Thanks, Robert

  13. September 11, 2011 at 1:19 am

    Michael Hudson’s article “How economic theory came to ignore the role of debt” has brilliant insights and superbly traces the economic history of debt. However, I question the statement that interest cannot be assignable to factors. If a worker borrows funds to get training that increases his human capital and wages, then his payment of interest is part of his wage that goes to the lender. If he borrows for consumption, the interest payment is a portion of wage that reduces his future consumption. If one borrows to buy land, the interest is land rent paid to the lender. Thus the factor that borrows pays the interest from the income of the factor.

    As for Dave Taylor’s question regarding “exponential money inflation,” compound interest does not require exponential increases in the money supply. See http://www.progress.org/2011/fold710.htm

    • Dave Taylor
      September 12, 2011 at 3:49 pm

      Having looked up Fred as well as the argument link here, his Universal Ethic (http://www.foldvary.net/works/ue1.html) gets to the root of where I respectfully disagree with him. (I respect his having tried to consider his position, though Locke’s argument was based on 17th century science).

      In brief, he is seeing outcomes as the sum of independent actions, but actions change actors, who can respond only insofar as they are able to know what they are doing and how to respond. Thus, whereas Fred still sees actions as good, evil or neutral, I see actions as right or wrong, actors as good or bad, types of action as worthy or wicked, and actors able to lead OTHERS to become worthy as honourable, those and their creations evil whose lies create an ethos misleading OTHERS into performing wicked actions, thinking them good or even honourable.

      That people can be permanently influenced by what is communicated to them by others destroys Locke’s assumption that people are independent, while our having four parts to our brain but characteristically using only three leaves us dependent on others for doing what we can’t do. Fred’s economic argument seems to work when he uses marginal quantities, but it doesn’t where couples are having to pay so much for interest on housing they are struggling to eat, so if one opts out the other has no “future consumption” left to forego. That is a neutral act in Fred’s vocabulary, a case of the evil of selfish usury in mine.

    • October 3, 2013 at 3:42 pm

      Once again, THANK YOU, MICHAEL HUDSON. This reply is a rather long post but please allow for the sake of truth and understanding.
      As for “interest and compound interest” may one quote:
      Michael Hudson,”…. The Mathematics of Compound Interest A syndicate of less than one hundred American capitalists, if allowed to collect interest on their capital at a low rate and re-invest for 150 years or less, would at the end of that time own the earth and all real and personal property thereon. This is a simple mathematical proposition, capable of exact demonstration, and any one who doubts the truth of this statement may set all doubts at rest by computing compound interest on one and one-half billions of dollars for one hundred and fifty years, at five per cent per annum. …Flürscheim elaborated that “All exertions, all improvements in the methods and tools of labor, the strictest economy, the severest self-denial, are powerless to compete with the rapidity of self-increase possessed by capital placed at compound interest, and they cannot keep up with its demands.” To illustrate the dynamic at work, he composed an allegory (pp. 327ff.). Many ages after man was driven from Paradise and told “to earn his bread by the sweat of his brow, mercy began to prevail. A loving angel was sent down by the Great Master, charged with the task of lightening the burden. The angel’s name was Spirit of Invention. He began his work by teaching man to make useful tools” and tame animals, and in time to mobilize water power, air and wind power, fire and steam power to drive machinery. “It seemed that at last the golden era had come of which men had dreamed for ages past,” but “that envious spirit, that fallen angel, Satan,” was jealous that his own empire would soon be over for ever. Among the follies of man, one little imp, called Interest, managed to attract his attention. “‘What is the matter with you, Interest?’ he asked the saucy imp. ‘You don’t seem to be so dejected as your comrades are?'” “‘Why should I be dejected, master?’ replied the spirit, ‘Am I not one of your favorite soldiers? Haven’t I always been victorious under your august guidance?'” But Satan answered sadly, “Alas, You are no match for the Spirit of Invention.” The Interest imp, however, volunteered to demonstrate his prowess in a dual, helped by his son, Compound Interest. At this point, Flürscheim introduced an image that Napier had suggested at the outset of his second book on logarithms in 1617, the Robdologia, likening the principle of geometric increase to that of a chess-board on which each square doubled the number assigned to the preceding one. An old Persian proverb told of a Shah who wished to reward the inventor of chess, a subject, and asked what he would like. To the Shah’s surprise, the man asked “as his only reward that the Shah would give him a single grain of corn, which was to be put on the first square of the chess-board, and to be doubled on each successive square; which, to the surprise of the king, produced an amount larger than the treasures of his whole kingdom could buy. It is this kind of chess-game which capital is continually playing with labor.” The remarkable growth of compound interest soon swallowed “products, capital, the earth and even the workers.” This was in essence the ploy that Flürscheim’s Compound Interest demon used.”Look at this chess-board,” he told the angel against whom Satan had pitted him. “It seems just like any other chess-board, with sixty-four squares,” but it “had the peculiar quality of extending the dimensions of the squares, so as always to be large enough” to hold whatever was placed on them. Instead of asking for grains of wheat to be placed on them, the Interest Imp asked for soldiers. “Now, listen well to what I propose,” he said to the angel, pointing to the latter’s huge army. I enter the first square with my son, and you match one of your warriors against us. We enter the second square doubled in number; you send two more warriors – and so on every succeeding square. . . . When we arrive at the last square, and you have a single soldier left after occupying the same, we shall declare ourselves vanquished, and Satan with all his troops will leave this world for ever. If I win, you and your army are to be at the commands of my master. Are you agreed? The angel agreed, expecting his horde of soldiers to easily exceed the number that the Interest Imp and his son, Compound Interest, seemed likely to accrue. In the beginning the angel laughed, for, though twenty squares were passed, no noticeable diminution of his forces was perceptible. Demon Interest said nothing, but attended to business, quietly doubling his army on every succeeding square. At the thirtieth square the angel ceased to laugh, and soon saw he was lost. ‘I despised you, little fellow,’ he signed despairingly, ‘and I am punished for my vanity. I see there is no use fighting against you. Demon Interest is more powerful than the Spirit of Invention. I am your slave. Command your servant!'” (THIS IS THE TIPPING POINT ! (Where we went wrong) ‘I am the only servant of my great master,’ dryly replied the demon. “Here I see him coming. He will give you his orders.’ And Satan gave his orders. He commanded that the angel was to continue in his work with all his troops, which were to be increased with all possible exertion, so that humanity – which did not know the nature of the antagonist it had to fight against – would always keep in fresh hope of final success when the new troops were forthcoming. But as fast as they appeared, Demon Interest was to send forth a larger army to capture the new forces, to enslave them, and – instead of their benefiting man – make them increase the slave-chains which weigh him down. WHAT IF DEMON INTEREST WERE TO ANSWER? (How we can fix it). I will now be the servant of a new master,one that will pursue happiness for all mankind.” READ More economics-of-compound-rates-of-interest-a-four-thousand-year-overview-part-ii/(“HOW THE MOST POWERFUL FORCE IN THE UNIVERSE” COULD BE USED TO PUT MANKIND INTO SERVITUDE OR UTOPIA !

  14. Robert Dulin
    September 11, 2011 at 4:53 pm

    Michael Hudson’s article is very timely and provides a great foundation for further exploring the subject of debt which is on everyone’s minds today.
    The RWEB is also great for its providing a platform for discussions of this kind between so many knowledgeable and intelligent people. I feel very fortunate to be allowed to comment.
    Everyone should read Fred Foldvary’s link to debunking the “debt money fallacy’.
    Fred, I agree with everything you say and you say it well. I wish I could write that well.
    The problem is is that there are two kinds of debt:
    1. Simple Debt
    2. Lender Created Debt
    In an economy that has no debt, the first loan that is made is simple debt. It works exactly like you describe. A person or firm gets a loan buys education or tools of production, anything that increases the efficiency in productivity of needed things. Increased productivity benefits everyone in society. The loan is paid back and the lender spends their interest on something that is produced. Everything is great.
    In “Lender Created Debt” the lender does not spend his interest received but instead lends it again. He does it again and again and again (compound interest) until he owns the entire money supply of that economy.
    The example that demonstrates this mechanism is very tedious for me and the reader. I will only begin it here unless someone asks for the full version.
    The money supply is $100.00 in gold coins.
    The lender lends $5.00 at 10% is paid back $5.50 at the end of the year.
    Lends $5.50 and at the end of the second year is paid $6.05.
    Lends $6.05 and is paid $6.65.
    10 years payment is $12.96.
    20 years is $33.63
    32 years is $105.56
    There is only $100.00 in money the payment cannot be made.
    This problem is usually solved by the lender creating personal notes that take the place of money but of course, bear interest. From this point on all new money is created as an interest bearing loan.
    There are many variations that could be explored but all are dead ends in that they provide no benefit to the productive economy. I will list a few of them here.
    1. There could 2,3,4,5…… lenders. The “All of the money has to be rented date” occurs much in less than 32 years.
    2. With multiple lenders, loan maturity can be staggered effectively lending the same money many many times. If staggered correctly, a one year $100.00 loan could be made on Monday. That same money could be lent to someone else on Tuesday. On Wednesday the holder of the money could lend it again, and so on. If lenders worked on weekend and holidays maximizing this scheme $100.00 could result in $36,000 of loans in the first year with $3600.00 due in interest. Productivity cannot possibly maintain this rate of increase. How much lending can any given economy support.

    3. New gold could be found in quantities that could pay the interest. That is great, but the lender(s) still own it. If you want to use it you have to rent it.
    4. Fiat money can be issued in any quantity.
    5. The lender(s) could spend a portion of their interest income instead of compounding it.
    Their choices are:
    A. All of the interest income each year.
    They could spend this forever and the producers would have to produce just to rent the money.
    B. None of their interest income.
    Their principle and the productive economies total debt increases.
    C. A portion of their yearly interest income. (This is what really happens.)
    Say they spend on average 50% of their interest profit every year. They could spend this forever because the rent just keeps coming in and the total debt still increases, although slower.
    Quoted From Your “Debt Money Fallacy Paper”
    No new money is needed for Charles to pay the loan plus interest. The payment comes from the reduction in his future consumption, as the loan shifts $100 of consumption from the borrower to the lender. The lender will consume $100 more while Charles consumes $100 less.
    The lender could “consume” his interest on pizza, beer, a new computer or to help get his favorite public official elected. But if he decides to “invest” the money in creating more debt (rent seeking activity) someone will have to pay him to use his money.
    Total debt is at the discretion of the lender(s).
    Thanks, Robert

  15. September 11, 2011 at 7:10 pm

    Regarding Robert and compound interest, in the $100 gold coin example, if there are no money substitutes and no fractional reserve banking and the loans are for investment, that would create more output. With a greater supply of goods and the same amount of money, the price level would fall. When the debt becomes greater than the amount of gold, then the borrower would have to pay with a promissory note. By necessity they would create money substitutes that would limit the further fall in the price level. Unless prohibited, the supply of money substitutes (bank notes) would increase with the introduction of fractional reserve banking. A free market in money is not limited by gold, as money substitutes convertible into gold will be expanded to match the demand for the money substitutes.

  16. Robert Dulin
    September 11, 2011 at 9:51 pm

    We are in total agreement concerning the mechanics.
    It is the second and third effects where we diverge.
    Fred said,
    Regarding Robert and compound interest, in the $100 gold coin example, if there are no money substitutes and no fractional reserve banking and the loans are for investment, that would create more output. With a greater supply of goods and the same amount of money, the price level would fall.
    Robert reply’s,
    Higher efficiency of production means lower price per item.To that price is added the cost of the interest. This could be higher or lower than the original price depending on the % of efficiency increase vs the interest rate. That is the first effect. In the second effect we must consider that the capital purchase that increased the efficiency probably has a finite lifetime but the interest goes on forever until the lender spends all of the collected interest into the productive economy.
    Fred said,
    When the debt becomes greater than the amount of gold, then the borrower would have to pay with a promissory note. By necessity they would create money substitutes that would limit the further fall in the price level.
    Robert reply’s,
    Money substitutes can replace a shortage of gold but they all come into existence as an interest bearing note. That is what prompts the statements that “Today’s loan is necessary to pay yesterdays interest.” and “You can’t pay a loan with a loan.”
    Also even though the deflation can be somewhat checked with money substitutes, the distribution is not uniform among all of the various producers in an economy. The lower wage producers supply curve is more inelastic than the higher wage producers so they get screwed.The problem in the US today is not total production but the distribution of that production.
    Another thing is that we have not even begun to talk about the deadweight loss, negative externalities, ect from the paying of rent on the money. What would productivity be if not for Social Security. I have heard it estimated that playing the SS ponzi to replace workers wages lost to interest payments has reduced productivity increases by 1% per year for the last 80 years. 1.01 to the 80th power equals 2.22 times the productivity of what we have today. This would include medical productivity. Would you rather go to a doctor today or one that is 30 years ( just an estimate, put any number in here you like as long as it is positive) more advanced in medical technology.
    Fred said,
    Unless prohibited, the supply of money substitutes (bank notes) would increase with the introduction of fractional reserve banking. A free market in money is not limited by gold, as money substitutes convertible into gold will be expanded to match the demand for the money substitutes.
    Robert reply’s,
    Sometimes it does and sometimes it doesn’t. I understand that the idea of fractional reserve banking is to have a mechanism in place to coordinate the creation of money substitutes between lending institutions. The theory being the more money need in the economy the more loans will be taken out. At some production to debt ratio this might work but when this magic ratio is changed the economy cycles. If times are good too many loans are made on projects that don’t pay off. (remember each project must pay off and pay forever because the interest can go on forever.) When production doesn’t keep pace with loan payments that come due, some loans do not get paid so the lender gets screwed and has to go back to honest work.
    Why are they giving people rebates on cars and credits on mortgages to get them trapped into a loan that they otherwise would not accept?

    Interest bearing debt is a bad way to regulate a money supply. If it works at all it depends on someone getting screwed and taking it.
    Thanks, Robert

  17. Dave Taylor
    September 12, 2011 at 7:29 am

    @ #17. Whether or not compound interest requires exponential money inflation, we have it, and if Fred takes the trouble to count the year-by-year costs of interest charges on state, business and household mortgages, he will see why. Agreed, this is not logically required, insofar as those with the power to increase the money available choose (as they are now doing) not to do so; but really, we then still have what Fred says we have now: interest charges on past purchases going to ravenous bankers (and to those who as of now don’t need credit) from the already inadequate incomes of those who do, despite these earning their keep given half a chance. Hence the nursery rhyme:

    The king was in the counting-house, counting out his money.
    The queen was in the parlour, eating bread and honey.
    The maid was in the garden, hanging out the clothes,
    When down came a black bird and pecked off her nose.

    @#19, Fred says, IF the loans were for investment then output would rise. But back in 1998 Anthony Giddens, then director of the London School of Economics, so he ought to know, pointed out that “Of the trillion US dollars’ worth of currencies exchanged every day, only 5% relate to trade and other substantive economic transactions. The other 95% is made up of speculations and arbitrages, as traders wielding huge sums look for rapid profits on exchange rate fluctuations and interest rate differentials”. I understand that proportion is still higher now.

    The point is that buying and selling second hand shares isn’t productive investment, and these guys don’t usually gamble with their own money. Their huge short-term borrowings are more profitable to the banks than the relatively small amounts of long-term credit the rest of us need. Their interest charges and capital gains made on interest differentials are laundered by being paid as higher prices by the rest of us, to keep up the stock market profitability valuations on which banks rate the security of real and speculative borrowings alike. It is a moot point whether the best word for this is ‘complicated’ or ‘crooked’.

    In light of this, UK Chancellor Osborne’s proposals for reforming the banks (in 2019!) look like window dressing.

  18. September 12, 2011 at 4:13 pm

    Foldvary’s Austrian economics is a travesty of reality. Most loans are NOT productive.
    Take the case he cites: education loans. These are in many cases bankrupting gullible students who went to technical schools. The effect of student loans has been to let colleges and universities raise tuition fees far further than was formerly possible — and to “privatize” public education.
    Making the population take on a lifetime of debt to get a job enables the banks to siphon off wage and salary revenue.
    It’s the same with mortgage loans: Easier credit terms have led to debt-leveraging, with home buyers able to afford loans only by paying the rental value (that used to be taxed) to the banks — forcing local government to tax labor instead of property.
    that’s what Austrian economics is: disinformation that bank lobbyists use to depict a happy-face world where lending is productive, not parasitic.
    Economists who promote this unrealistic picture are part of the banking system’s parasitic and destructive ideology.
    Don’t let them get away with it!

    • Alice
      September 13, 2011 at 9:36 am

      Oh mi god – I have had three students cry o mne at the end of my class today downunder – they have failed micro not once but twice a nd one three times but are are paying $3000 $A each time (one subject one semester) at a private college that gives them uni entry if they pass diploma level. The Government of Australia has apparently booked their fees to Hecs – higher education contribution scheme and hey presto the govt has created the loan to the student.

      The students dont have to pay back till they start earning money, so they tell me. Nice little earner for the government because its plus interest. We have an entire generation of uni students being impoverished by BS (double BS) high tuition fees and fake “low interest (ha ha) loans” and even the government is on the cheap loan provider bandwagon……

      Curse the government for impoverishing a younger generation and turning the government itself into a cheap loan banker to our young who are only trying to get a real job while the government ignores bloody rising unemployment and marginal labour force attachment.

      The students will do what it takes. They are slaves to this system of usury.

      Sack the government I say, for the reason being that they have joined the profligate banks and are trying to profit intrusively (and this is no public service) from their citizen voters.

      Out with them. What will it take? A revolution to stop them bleeding us dry?

    • October 4, 2013 at 3:45 pm

      #26 Michael Hudson:
      Perhaps really all loans are productive, they do allow a positive action to occur in the present. The problem is : The terms and conditions that are placed on the loans. Where would anyone find fault with a student loan if set with the terms and conditions of :”with a rate of 0.50% interest until the note is paid or the borrower is deceased,also the note is to be paid in monthly installments of 5% of monthy income until paid in full” ? And IF the government is the direct lender the payment is a 100% federal income tax credit.
      Where would anyone find fault with a home mortgage if set with the terms and conditions of: “with a rate of 2% for 36 years and the mortgage is assumable because the home is the real value to the loan.” And IF the government is the direct lender the payment is a 100% federal income tax credit. These payments really just becomes the means to (as stated on ” 60 minutes” (12/11/11)” President Obama said,”You can’t raise revenues by lowering taxes unless you get the money from somewhere else.”
      If present economist are correct, @ 73% of all Private For Profit Bank (PFPB) loans are made with “fictitious” money, or “temporary” money, whatever they wish to call it. Just perhaps, maybe this allows PFPB “. to gain profits of at least DOUBLE the amount of the loans!
      Why have we legislated for the PFPB this right to issue our money and to tax it for sure interest is a tax only by another name.
      Please paraphase: “You can raise revenues by lowering (Federal Income taxes and F.I.C.A. to ZERO) ‘when’ you get the money from somewhere else”
      Once again ,please challenge or endorse some of the ideas of Frederick Soddy. Read a free download of his book “The Role Of Money”
      http://archive.org/details/roleofmoney032861mbp

  19. Dave Taylor
    September 13, 2011 at 7:16 am

    Well yes, Michael. But are Fred’s evil Austrian arguments all his own work, or has he himself been taken in by the likes of the dishonest Hayek? (“The Road to Serfdom” perversely used Belloc’s “The Servile State” as an argument against socialism, only those who have read that knowing it was a seminal argument against BOTH liberal and state forms of Capitalism).

    Better to cure Fred than condemn him?

    • Alice
      September 13, 2011 at 10:16 am

      Indeed better to sure Fred because he doesnt relaise that free markets are just as much a road to sefdom as his despised state control.

      I just keep saying to myself “economics is all about equilibrium”. Shame so few economists recognise it. Ego in this profession always wants to model a brave new world yet ignores the world we live in.

  20. September 13, 2011 at 1:24 pm

    In response to where I got my ideas, I studied Austrian economics in graduate school at George Mason University, where I read the works of Menger, Mises, Hayek, Selgin, White, Rothbard, Garrison and others. I had previously read the classical school works of Smith, Ricardo, and George, and I retained my Georgist ideas, so I was not easily brainwashed.

    I have yet to read a warranted statist explanation of why freedom is evil. When I was an undergraduate, the Vietnam was was raging and the government wanted to force me to join the army and possibly get killed. I would like an explanation of why it was morally good for the government to kidnap me and force me to kill others. Also explain how central banking, income taxation, and the war on drugs are free-market institutions.

    I never said that all loans are productive. I divide loans into those for productive investment and for consumption. Most of college schooling is consumption. Much of this schooling is probably a waste of resources. Note that students loans are a government program, part of the governmental push for college schooling (see my commentary http://www.progress.org/2010/fold678.htm)

    In a pure market, labor would not be taxed, and enterprise not arbitrarily restricted, so that students would find ready employment in part-time jobs and not need student loans. Many students would get training in practical skills rather than spend huge amounts of funds for unproductive schooling.

    If you want to cure me of Geo-Austrian ideas, please explain with logic and evidence why freedom is evil and why slavery is morally good.

  21. September 13, 2011 at 2:08 pm

    In response to Dave Taylor’s arguments regarding ethics, I don’t see how “actions change actors” rebuts my categories of actions as good, evil, and neutral. The proposition that “actors are good or bad” is unclear, since in my judgment, ethics can only judge actions, not the actors. People engage in actions that are good as well as bad, so to label a person as “good” is essentially a poetic metaphor. Locke’s premise of human independence is that persons think and feel individually, not that we are socially unconnected.

    Dave Taylor needs to analyze why people are paying so much interest for housing. The portion of interest that pays for land value is unproductive and a result of government subsidies to land value, including tax deductions, exemption for capital gains, and the generation of land value from public works. Governmental redistribution of wealth from workers to landowners is indeed an evil. Dave, do you advocate land-value taxation, and if not, why not? Do you advocate the elimination of taxes on labor? If not, why not?

    • Alice
      September 14, 2011 at 9:53 am

      Fred says
      “Dave Taylor needs to analyze why people are paying so much interest for housing”

      This sounds alot like “why are people paying do much for petrol? Why are people paying so much for electricity?”

      Maybe its because they cant live without it (housing). Maybe because a permanent address is better than an impermanent address.?

      Maybe housing its overpriced but people still need a roof over their heads Fred….and that beats sleeping rough.

      Is Fred sure he has looked at all the costs and benefits when it comes to people paying a lot for interest on their houses and has he researched why people are paying so much interest for housing ??(and hey – poor people pay more interest than rich people as well – u know risk and all that ..)

      Seems a strange request in these times/

  22. merijnknibbe
    September 13, 2011 at 3:14 pm

    Order, order, order!

    Debt can, literally, lead to slavery – this even happens in our societies: http://rmfoundation.arsls.net/DebtBondage.HTMLHowever.

    Which is nothing new: it happened already in Mesopotamia and even seems to be intimately connected to the develoment of money. See the fabulous new book: ‘Debt, the first 5,000 years’ by David Graeber. http://www.ritholtz.com/blog/2011/09/debt-the-first-5000-years-dr-david-graeber/

    And all of us seem to have problems with the neo-liberal insistence on ever increasing private debt (mortgages, consumer credit, student loans) as a solution to all problems. And indeed: when asked, I advise my students to take side jobs instead of taking loans (except for international internships). It’s ridiculous that our society (indeed: read “the state”) burdens young couples who want to raise a family not only with two jobs, high study loans, the necessity of a taking a high mortgage as well as with high taxes and, increasingly, the care for their parents. While their parents could retire at 55, profited from the housing boom and inflation and somehow lived in a time when one income was enough to provide for a family.

    All of us will probably agree that ‘debt’ should be an independent category in the textbooks – which it isn’t today. Such a section might include ideas like those of Steve Keen (a situation of literally exponential increasing private debt (as a % of GDP!) with Austrian ideas on ‘easy credit induced’ booms and busts, as well as some information on the importance of credit/boom induced value increases of collateral like ‘land’. In my view, this squares completely with Minsky-like ideas on speculation and the like! Debt can be quite toxic – on an individual as well as on a macro-scale.

    But debts can be productive too. We borrowed money to finance the building of the house we live in. Companies often provide credit to other companies, to facilitate trade (and often for very good reasons: for instance in the case of farms the seasonal pattern of proceedings often differs quite a bit from the seasonal pattern of expenses). Or lok at tose sixteenth century farmers (my area of expertise) who borrowed money to invest in drainage windmills, to improve their lands…

    I’m not an Austrian. Though I admit that markets can often work miracles (Australian aboriginals smoked tobacco, obtained via trade contacts with Indonesians, before they were ‘officially’ discovered… Note how fast this drug spread over the globe!) – I do think that they have limits. For one thing – not every service of commodity lends itself to ‘explicit pricing’ and I do think that the phrase ‘implicit prices’ used by many economists to get around this problem is the very negation of the essence of markets, which ‘by definition’ rely on ‘explicit prices’ and ‘explicit agreements'(well, ‘by definition’- try to find a definition of ‘markets’ in a standard textbook!). And I do think that governments so now and then have done something for the better during the last century – and might somedays even have to act as the spender of last resort (I’m afraid I’m something like a ‘Radfordian’ on such issues). But that does not mean that all Austrian ideas are necessarily evil – for one thing, thanks to Fred mentioning this, I read a little (a little!) on free banking. I do not have a final opinion on this – but we surely do need an alternative to the present situation, and such ideas might help (might there once be a kind of e-bay for households and companies who want to lend to other households and companies, therewith rendering the existing banks partly redundant?).

  23. Dave Taylor
    September 13, 2011 at 11:54 pm

    @#27,28. So, aren’t we all being brainwashed? How do we know when our teachers are deceiving us? My economics started with Catholic Social Teaching, with roots in Aristotle and Aquinas to contrast with the appalling economics of the new era (Leo XIII’s ‘Rerum Novarum’ of 1891). Awareness of alternatives is the necessary condition of being able to evaluate them, and thus the reliability of one’s teachers. So, my shelves are full not of the views of one school but of many, along with those of the philosophies of science which motivate them and the historic science and mathematics informing them. My own work has ranged from quantum physics to logic circuits to personality and communications psychology to the reliability of probability theory to the use of information processing languages in the mathematisation and organisation of scientific models and administrative systems. I have yet to meet an economist who understands the twentieth century developments in the understanding of logic, language, power and information flow systems and human diversity which have provided my bread and butter and (along with key insights gleamed from my studies) informed my own “revolutionary” systems analyses of political economics. That (alongside trade built on wage slavery and rank dishonesty like Hayek’s) is the reason I agree with a recent contributor that it is time to “scrap the lot and start again”. It may also be why Fred hasn’t understood my ethics, and wouldn’t immediately grasp the conditions of the possibility of ‘freedom’. Let us see, anyway, how far he can be answered in a few words

    Nobody said it was morally good for the government to kidnap him etc; I say the answer involves reducing government to guiding rather than forcing. (Changing “commandments” into “commendments”).

    Taxation and wars don’t have “free-market” origins, but nor do the existence of us flawed human beings. Central banking is another matter: Fred should take the trouble to watch and reflect on http://video.google.com/videoplay?docid=-515319560256183936#. Likewise schools: see Mill’s “On Liberty” for those whose parents could afford it, and Newman’s “Idea of a University”: on the need for liberal education as against brainwashing in conflicting traditions.

    The logic of freedom (brain logic being equivalent to computer circuits) is not a given, it has to be learned. It has an input and an output, so is always “freedom from” [powerlessness or error] or “freedom to” [recreate and broadcast "freedom from"]. The trick of being free to do the right thing is to not do what you see/know is wrong until your impulse to do it has subsided; the right thing then has a chance of becoming conscious.

    No-one has suggested slavery is good. What has been suggested is that its powerlessness can be nullified by willing service even in slave states, but not by killing communists.

    Mu ethical arguments are based on the developments of language mentioned earlier. An action isn’t an OBJECT to which you can attribute goodness; it is right or wrong. Agreed the idea of a good person is fuzzy, but if you study fuzzy logic you will find one can still draw firm “more or less” conclusions with it, where all things are not “equal”.

    Fred, I analysed why people are paying so much interest on their mortgage thirty years ago, and paid mine off as soon as I could. I was sympathetic to land-value taxation until I realised how it is possible to eliminate taxation altogether (not just tax on labor). The answer is to live on credit and pay it back by regenerating (and improving) what we use. Since money used represents debt, “of those who have more, more should be expected”. Tax is one way of achieving that, freely given service is another.

  24. September 15, 2011 at 1:50 am

    In response to the comments by Alice on why people pay so much interest for housing, we need to understand that we lived in a mixed economy, so any outcome has to be analyzed as to the extent to which it is caused by the market or by governmental intervention. In the case of real estate costs, government subsidies puff up land values, and then folks have to borrow that much more to pay for this higher price of land. If the market price of land were near zero, with no subsidies, then folks would not have to borrow so much, and they would pay much less interest.

    • Alice
      September 16, 2011 at 9:30 am

      Now hang on a minute Fred…you state “In the case of real estate costs, government subsidies puff up land values,”

      I really have to make a comment about the woeful (woefil at their job) and semi corrupt US ratings agencies here, the enormous funds under the command of the enormously powerful financial sector etc. Now you want to talk about government subsidies to a sector – then lets talk about taking life savings away from individuals hands and handing it to the financial sector in the form of superannuation.
      Right now Id like mine back in my hands.

      Then lets talk about cheap finance offered to people who cant pay. It wasnt the cost of land that got overblown in the recent housing bubble Fred – it was the cost of the bricks on it.
      But sure Ill grant you this…the government has been protecting one sector of the economy way too long (the financial sector) and in true human quirkiness it is this sector that cheerleads for the most “market freedoms” to be applied to the rest of the sectors in the economy.

      Lovely how some crow about whats good for the rest of us while they are making a killing.

      • Dave Taylor
        September 16, 2011 at 1:35 pm

        Alice, I’m glad you reacted so fiercely to this. A kindly government lowers the price of land for the poor, bankers and estate agents on the make (your rating agencies?) see an opportunity to “make money” (not profit the community) by pushing up land values, and Fred blames the government, not those enlarging their cut by persuading owners to sell their property at “puffed up” prices!

        Fred was, however, defending George’s land value tax on the ground that it would reduce land prices. I argue it wouldn’t: sellers simply pass Value Added Tax on to customers. Therefore I deny his big IF, which makes his truism into a red herring. But when it is virgin land which is sold it can’t be the bricks on it which “puffs up” prices. Quite apart from puffed up prices, there are real differences in land value, and you are nearly right, but your figurative “bricks” are those on NEIGHBOURING land.

        An increase in value comes from costs avoided because of local value previously added by and at the expense of government, local government and businesses providing infrastructure and services satisfying the local community. It is these (which may, of course, include the land owner) which deserve recompense for adding value.

  25. Dave Taylor
    September 15, 2011 at 8:33 am

    Going back to Michael’s original questions in light of what Fred is saying, one factor he hasn’t considered is the use of interest as both “carrot and stick”: to encourage the provision of credit and punish those who use too much of it. Tax (such as Fred’s land tax) is naively envisaged as having the reverse effect, though when applied to the USE rather than the hoarding of money, it has the effect of discouraging the supply of the land, labour etc the credit was supposed to be buying. (Gesell had a better idea: taxing the HOLDING of land or money, so hoarders will be glad to get rid of their excess at lower prices). What Fred is not admitting is that interest is simply privatised taxation, that what is credit from one is debt to another, and that those who can’t afford to pay tax can’t afford to pay interest either.

    Logic doesn’t work reliably if variables are eliminated or terms ambiguous. An important requirement in theorising is the separation of variables. It is, however, in the interest of thieves and other free-riders to prevent our getting at the truth. Besides keeping debt charges off our agenda, they deliberately conflate variables, as when toxic debts were sold on by bundling them with sound investments. That’s Michael’s “How economic theory came to ignore the role of debt”.

    So how should we react to this? Maybe retribution is due, but it seems to me much more important that independent thinkers get together to perform a proper systems analysis of economics. Codd’s relational algebra and Algol68 logical types are already available to account unambiguously for all the variables. Until that is done, we will have no way of refuting the reduction of economics to freedom for financial traders to manipulate supply and demand, no way of re-establishing an honest economy.

    • Alice
      September 18, 2011 at 12:35 am

      Dave – you are dead right. Metaphorical bricks – yet it never ceases to amaze that the old grandfather of current policies coined a phrase once…for inflation “too much money chasing too few goods”.
      Yet the world is awash in pumping money now precisely because too much money was pumped to the financial sector in the first place. We wonder why house prices got so high. We sit and wonder how company shares could possibly have PE ratios in the stratosphere. We sit and wonder why there is so much volatility (read pumped up prices and the pumping goes on) in stock markets. There has been too much money chasing too few goods but it has been the financial sector doing all the chasing and the great majority of the rest of us are just paying the high prices for what could be termed “fairly importants” if not quite “necessities” Im damned if I know how they come up with low inflation figures – they must have dropped the basket and everything fell out). If we were supposed to save for our retirements …well we have all been conned on the grandest of scales.
      So the mainstream remedy – global austerity measures to save the banks?. Sounds a lot like global oppression to me.

      Michael below comments “Taxing the land would leave LESS rental income to be capitaiized into bank loans. That is the key here.”

      Its not the main key. Property investment came after the redirection of labour wages into money to play with (“invest”) in the financial sector (super). So how to develop a tax that effectively leaves less super funds available to banks? Its quite clear that cheap credit is a massive part of the problem of instability in financial markets and methinks you are looking in the wrong place by suggesting a tax on land.

  26. September 15, 2011 at 2:05 pm

    A tax on land value is equivalent to taxing the rent, and that cannot possibly reduce the supply of land, since space cannot shrink. A land-value tax also does not reduce the supply of lots offered for rent or sale.

    Those who cannot afford to pay a tax on land rent would also not be able to afford to pay the rent to a landlord. They would not buy the land in the first place. Someone who lost his job and had no savings would indeed no longer be able to pay rent, but that is not the fault of the tax on rent. He would also not be able to afford to pay a landlord.

    I am not admitting that pure interest is privatized taxation because taxation cannot be private.

    I watched part of the video you provided the link for, and it seems like the usual conspiracy theory proposed by monetary cranks.

    Your proposition “The answer is to live on credit and pay it back by regenerating (and improving) what we use” seems like my category of loans for productive investment. Credit implies interest.

    At any rate, I think our dialog here has reached diminished returns.

  27. Dave Taylor
    September 16, 2011 at 7:25 am

    You can take a horse to water but you can’t make it drink.

  28. Dave Taylor
    September 16, 2011 at 9:47 am

    Other bloggers may be interested in a discovery I’ve just made. Michael started “from David Ricardo in 1817″, so I was curious what Adam Smith (moral philosopher and student of David Hume) had to say. Smith’s argues for interest (on gold – he has no time for paper money) along the lines of a share in trading profits.

    So what of my bogey-man Hume (not just in my opinion the source of perverse mainstream economic morality)? Reading his 1751 “Inquiry”, he asserts that “All reasoning may be divided into two kinds, namely demonstrative reasoning, or that concerning relations of ideas, and moral reasoning, or that considering matter of fact and existence”. A footnote adds that in later editions Hume said “moral or probable”. It turns out the word ‘moral’ came from a Latin word meaning tradition or custom, and the French ‘morale’ dated from 1752! So Hume had no time for either conscience or intuition, dissolving the Christian connection of morality with ethics (you won’t want to offend those you love) and spreading the virus which has reduced most of our generation (including Fred, and despite Copernicus) to mistaking what they will probably see for demonstrable economic law.

    As a matter of fact, the brain has four parts, which in combination produce four, not two ways of thinking, while selecting an object creates a context, both of which need to be represented in relational thinking. The omission of context is perhaps why the Freds of this world don’t see the reality behind monetary debt and the realists tend to trivialise the role of money. Hume, therefore, was wrong – not surprisingly, since it was 1938 before it was realised that logic is performed by electric circuits, which have parallel (many things happening at once) as well as serial (sequential) forms, but only when switched on (motivated).

  29. September 16, 2011 at 2:39 pm

    Wait a minute. You know that I hate to defend Fred, but he is right on this point.
    The concept of economic rent is of critical importance to this group’s endeavor to provide an alternative to post-classical neoliberalism and junk economics.
    Economic rent — the excess of market price over cost-value — CANNOT be passed on. This is basic classical economics.
    I think that what you are thinking of is that if someone NOW taxes land whose rent ALREADY is being paid out as interest to the banks, something will have to give. Fully mortgaged holders can’t afford to pay the land’s site-value rent twice.
    But what has occurred is that the past half-century’s replacement of land taxes by income and sales taxes has left MORE rent free to be pledged to banks.
    A return to land tax seeks to reverse this. And by taxing the “free lunch,” enable taxes on labor and industry to be cut.
    Taxing the land would leave LESS rental income to be capitaiized into bank loans. That is the key here.

    • Dave Taylor
      September 16, 2011 at 8:09 pm

      What you are missing, Michael, though I accept your interesting point about the shift to income and sales tax, is that basic classical economics is static but reality dynamic. Also, I am thinking of the 80% owned by the 5% super-rich rather than banks and mortagees. Set a tax now based on the excess of market price over cost-value, and as of now wealthy landlords will try to up their rents to pay it, tenants will have to up the prices of his produce to pay the landlord (or go out of business), and the consumer (with inelastic necessities) will have to pay the the higher price (or go out of life), on average by going deeper into debt and allowing the banks to profit by printing more money. As the landlord is letting his surplus land, if at whatever level someone baulks he can afford to leave it idle until desperation encourages them (or the government) to borrow and pay up. The value of the necessities to the consumer does not change but the price does, and insofar as the necessities get bought the the excess of market value over cost-value has not much changed, but it HAS been passed on. As I suggested, the same is true of VAT, but starting lower down the chain. The point being that the theories of not only neo-classical but basic classical economics are wrong, satisfying those at the top of the food chain but at the cost of desperate injustice to those at the bottom, and indeed to Nature, which is our ultimate support.

      So what exactly do you mean by “junk economics”, Michael? Economies selling junk, or economists selling what Fred called (doubtless without following up the evidence referred to) “the usual conspiracy theory proposed by monetary cranks”?

      I have a great respect for Henry George, and having fortuitously opened him at exactly the right point will let him state his position himself. However, having finally understood the reserve banking system, how 95% of our money is circulating uselessly in the stock exchanges, how VAT taxes the poor and how tax enables governments to wage wars, I have come agree with Keynes that Gesell was about right.

      Says George: “Taxes on the value of land not only do not check production as do most other taxes, but they tend to increase production, by destroying speculative rent. How speculative rent checks production may be seen not only in the valuable land withheld from use, but in the paroxisms of industrial depression which, originating in the speculative advance in land values, propagate themselves over the whole civilised world, everywhere paralysing industry, and causing more waste and proably more suffering than would a general war. Taxation which would take rent for public use would prevent all this; while if land were taxed to anything near its rental value, no-one could afford to hold land he was not using, and consequently, land not in use would be thrown open to those who would use it. Settlement would be closer, and consequently, labor and capital would be able to produce much more with the same exertion. The dog in the manger who, in [the US] especially, so wastes productive power, would be choked off” [Progress and Poverty, Book 8 Ch 3].

      Thinking of land value taxes having to be paid year on year, almost he persuades me! But wouldn’t the value of unemployed land go down, like that of unemployed labour?

  30. Robert Dulin
    September 16, 2011 at 3:35 pm

    Dave and Alice are right.
    I had never studied the Georgist stuff very seriously. Always gave them the courtesy of the benefit of the doubt. Looks like they are nuts. The claim that one tax on land will not hurt anyone is crazy. Of course the tax will be added to the cost of anything produced on the land. An extra charge will also be added. to cover times of slow or no production ( going into business changing product lines ect). Anyone that can not afford their “land rent” for even a short period of time would be evicted becoming a transient along with the rest of their family or dependents. Losing any investments or improvements they had made on the land. (houses, gardens, buildings ect) Any land not abandoned would be owned by big business or bankers.
    In Texas where I am at, the property tax is about 2.6% of the total value of the property and everything on it each year. Even at this rate many people have to sell their homes because they can not afford the tax. In some counties to avoid foreclosure which is always politically unpopular, they let the tax accrue if you are over 65 years of age or disabled until you die, then seize the property leaving your heirs nothing.
    Everyone deserves a place to call home especially if they have worked all of their lives to pay for it.
    Why not charge a single tax on anything rented including money. Total credit market debt in US is approximately 50 trillion dollars. An annual 10% tax on lent money paid by the lender not the borrower would yield 5Trillion a year. No one would be subject to the tax if they did not lend their money. If they wanted to “invest” for a return, it they would have to use it to produce something and only get paid if they actually did produce something of value..

    Total local, state and federal taxes in the US are about 5 trillion so all other taxes could be eliminated. Sure interest rates would be about 25% but that just means less debt and insures that the money is borrowed for a really productive purpose.
    No taxes. No unproductive or consumption debt. I would go for that.
    Still would like to see Michael’s critique of the Austrians. They are on Fox News all the time talking about Austrians says this or that. Are they nuts too.
    Thanks, Robert

  31. September 16, 2011 at 4:19 pm

    Responding to Robert Dunlin, rent is set by supply and demand, and a tax on rent does not change supply or demand, so it cannot raise the rent. If a lazy landlord was not charging what the market can bear, then an increase in the tax could make him raise the rent paid by the tenant, who in effect was taking some of the economic rent.

    The Texas property tax includes a tax on the buildings and other improvements. That is bad, and a land-value tax would exempt these capital goods. If you want to argue about Georgist stuff, I suggest you first study it.

    • Robert Dulin
      September 16, 2011 at 4:43 pm

      Fred, To get a perspective on the land tax proposal I am going to say that all land (not improvements just the land and not government owned land) in the US is probably worth about 20Trillion. All local state and Federal taxes are about 5Trillion. To pay all taxes now collected would take 25% of that land value a year.
      Unless you have a Walmart , auto plant or other super productive facility on your property you couldn’t afford to to pay the land tax. Good corn land can be $6000.00 per acre. It might produce 150 bushels per acre but the average is about 115bpa. $1500.00 divided by 150 = $10.00 plus the $5.00 it now cost equals $15.00 a bushel corn. Even if by some rent shifting magic the $5.00 was reduced to $1.00 we are still talking $11.00/ bushel corn. Prices are set by comparison to their alternatives. What will people eat? Federal Reserve Notes? We know that they don’t print those unless someone is on the hook for the interest. Just that added interest makes the proposal a non starter.
      Thanks, Robert

  32. Robert Dulin
    September 16, 2011 at 4:22 pm

    Michael, I didn’t see your post until after I had posted mine. I still do not get the concept of a cost that can not be passed on. Do you mean that if I had a farm and grew potatoes the land tax could not be paid with the proceeds of potato sales? Do I have to get another job on the side to pay the land tax?
    I think economics needs to look at the concepts of Yours, Mine,Their, and Ours concerning who gets the product that the property produces. We also need a money that enables Yours, Mine Theirs and Ours to be exchanged without a rent on that exchange.
    Thanks, Robert

  33. September 17, 2011 at 1:48 am

    Suppose you wanted to grow potatoes but did not own land. You rent the land from a landlord. A tax on the rent would reduce the rent kept by the landlord, but not affect the rent paid by the farmer tenant. If instead you own the land, you would have paid almost nothing for the land, and instead of paying the landlord, you just pay the same amount to the government. So the farmer pays the rent from his output just as we would pay rent to a landlord.

  34. Dave Taylor
    September 17, 2011 at 9:42 am

    Fred, the structure of this is government allowing landlords to charge rent, then taking it back again. Surely it is much better to dissuade them from charging rent (as against expenses) in the first place? Gesell’s idea (which was tried out and worked) was to tax the holding of money, so people wouldn’t want to accumulate it in the first place.

    As a scientist I wanted to understand exactly what was happening here, and eventually realised that the banks were making money out of nothing, which added nothing to the real value of the world. Yet we act as though someone with $100,000 and $100,000 worth of land was himself worth $200,000! Even if he had earned the $100,000 rather than borrowed it, stolen it or won it in a lottery, that was water under the bridge: his past value, not his future value.

    My first conclusion was that trading with gold was barter, but trading with paper money is a con trick which now works by people being persuaded it is valuable: initially by misrepresentation (“I promise to pay…” gold?), then by custom, and in succeeding generations by what they see happening. Persuasion is not about value, it is about linguistic communication, so the relevant questions are, whether allowing gold to be valuable makes bankers’ monetary reference to it valuable and bankers honest. Since it turns out that money is generated by authorising (not giving) credit, the use of which creates debt, the value of both money and misrepresentation are arguably both negative rather than zero.

    The negatives both cancel by being honest, trusting Adam Smith’s butcher to give us credit and return our paper money to the banker, whose accounts constantly remind us of our debts. Governments should automatically authorise the credit we all need to live on, leaving banks to vet and advise on business loans and businesses to provide for necessary and satisfying work.

    @ #37 you say “Your proposition ‘The answer is to live on credit and pay it back by regenerating (and improving) what we use” seems like my category of loans for productive investment’. Credit implies interest”.

    I agree with your first comment. The AUTHORISATION of credit, however, doesn’t imply interest, nor does the GIVING of credit imply monetary interest, any more than my giving a hitch-hiker a lift implies my having a right to his giving me one back. I already have the satisfaction of making his world a better place, and my interest in the future is that his gratitude will encourage a graceful chain reaction. “Imitation is the sincerest form of flattery”.

    • September 17, 2011 at 5:04 pm

      “Fred, the structure of this is government allowing landlords to charge rent, then taking it back again. Surely it is much better to dissuade them from charging rent (as against expenses) in the first place? Gesell’s idea (which was tried out and worked) was to tax the holding of money, so people wouldn’t want to accumulate it in the first place. ”

      If you extract all the land rent for public benefit the only people who would want to own land would be those who want/need to use it. Who would be a landlord if someone else was extracting the rent.?

      LVT corrects the land market which otherwise does not allocate to best use.

      This is the most basic economics and it’s really depressing that so few economists cannot work this one out for themselves and want to cling to what they have been fed by the neoclassical school who have written land out of the text books (almost). Certainly there is no clear definition of what land means in economic terms, let alone a discussion about its attributes.

      Have you all become just bean-counters who understandably conflate land and capital?

  35. Dave Taylor
    September 17, 2011 at 7:21 pm

    Carol, as I said earlier I have a lot of time for George and LVT and perhaps I should be persuaded. However, I was trying to work out what would happen, from knowledge of human nature, in the absence (since 1880) of experience with LVT in practice. Lets just say there’s more than one way of skinning a cat. So far as I can see, what Keynes INTENDED at Bretton Woods (as against what happened besides progressive taxation and currency controls, i.e. the US oil dollar and throw away society rather than maintainable products and an international currency) would have worked. Likewise an even stronger Catholic (“for everybody”) emphasis on local self-sufficiency and international cooperation rather than competition (as was intended in post-war Europe but powermongers have turned into the EU). Likewise (as Keynes anticipated) free credit along the lines of Gesell, though being a thinker, I’m aware of all the work which goes into pre-production (paid for one way or another on credit), and believe market price competition should be for quality, with patents replaced by prizes for developing products worth producing.

    As for LVT, there is a saying, “an engineer can produce for a penny [cent] any fool can produce for a pound [dollar]“. LVT might get the cost of the present foolish system down to a shilling [dime], but using credit cards with generous rations of credit and responsibility would do away with the costs of acquiring, hoarding and insuring ourselves against theft and loss in the belief that money is scarce and has real (rather than notional) value.

    I certainly don’t “want to cling to what [I] have been fed by the neoclassical school who have written land out of the textbooks (almost)”. On the contrary, I don’t count that as economics (household management), for it is at best only a theory of free trade determined solely by supply and demand. In human terms my analysis of economics takes account of the biological cycle of dads and mums providing for the kids by helping nature regenerate what they have used, with those not so tied up trying to make life easier for them and bankers accounting for what they have had and so what they need to replace.

    • September 18, 2011 at 10:13 am

      There are some who consider LVT as a panacea. I don’t. But it is an extremely simple solution to a complex problem. Yes, Gesell was correct to see both money and land as the source of trouble but I think that neither of his solutions are sound; land nationalisation was, I believe, one of them. Fixing the land problem, with LVT, would largely solve the credit problem because, as Hudson tells us, most loan collateral is land. If all land rent were collected for public benefit the market price of land would tend to zero and the banksters would have to work for their bread.

      • Dave Taylor
        September 18, 2011 at 2:58 pm

        Even accepting that LVT will work, my problem with it is that it still takes money at face value, sustaining the illusion that money rather than human good will is what is really valuable in life and our ultimate collateral. This diverts attention from the love of money being the root of all evil, and from not all that glitters (or in the case of paper money, proclaims its equivalence) being gold.

        In a way, what I am objecting to is governments and usurers taxing people, sending out the message that money is valuable. The message Gesell’s “free money” sends out is that money is neutral, but holding it bad. Prior to the Reformation, Christians simply banned usury. Mohammedans still do, and in Britain are thriving compared to the rest of us because they finance each other and don’t gift half their income to bankers to waste by betting on the prices of second-hand shares.

        @ #37. I would like to thank Alice, the only person so far to see I am “dead right”, presumanbly about the need to do a proper systems analysis of all this so that we “independent thinkers can get together to perform a proper systems analysis of economics. … Until that is done [and it is not difficult], we will have no way of refuting the reduction of economics to freedom for financial traders to manipulate supply and demand, no way of re-establishing an honest economy.”

  36. Dave Taylor
    September 18, 2011 at 3:23 pm

    It is a bad workman who blames his tools, so I would like to apologise for all the typos I’ve been delivering lately, as I struggle with a “leave a reply box” which from time to time gets superimposed with invitations to log in to twitter etc.

    My last bit should have begun: ‘… I am “dead right”, presumably about the need for us ‘independent thinkers to get together to perform a proper systems analysis of economics’…”. As I said, that is not difficult.

  37. February 10, 2012 at 8:58 pm

    I regret the important topic is discussed in a partly polemic way.
    I would offer another way to look at it, different, but simpler, with staying much more on the grounds of elements we know and not claiming they all behave in a different way than economic theory tells us – just combined in a way, that macoeconomists not seem to be interested in.
    Interest is nothing but a price for exchanging future dispositive rights against present and vice-versa. The price evolves from the last one buying and the last one selling agreeing on the price.
    The problem with the public debt is external effect. Politicians elected for one period in time make a deal with lenders. The politicians are in competition to please the majority of voters. The external effect is, that they do damage to non-participants in this deal – FUTURE taxpayers, voters, old workers that need pensions, medical treatment and a return from their savings.
    The equilibrum with external effect is, just like standard economic teaching, where the external effect has done so much damage, that its effects cancel themselves out. That means, where the advantage for politicians of having additional funds to please THEIR PRESENT voters is giving as much as the imbearability of the debt causes crisis, damage and bad feelings already with the present voters majority.
    That’s where it is heading.
    And to say it with Douglas Adams: And some people think, this has already happended.

  38. May 6, 2012 at 9:53 am

    I’m coming into this conversation rather late, but that turns out to be a good thing.
    I believe this thread is confused on the nature of money.
    Money is NOT debt. Debt-money (or, credit-money from the lender’s POV) is a form of money, but not the only one, despite the desire to meet double-entry accounting rules.
    The government produces debt-free money in the form of coins all the time, wherein every quarter simply adds to the money supply. It has also done so historically with United States Notes, not borrowed into existence from a Central Bank, but simply created by Treasury (though, very tellingly, NOT counted, by LAW, against the national debt – which is in that “alternate” currency, Federal Reserve Notes).
    Modern Monetary Theorists argue that taxes then, are used to contract the money supply (and not to raise revenue, which, they argue, is raised by credit-money expansion whenever the “government” (which they mis-classify the Fed as being part of) determines to do so). This is incorrect, as I have a 1928 United States Note which has yet to be taxed away. Just how long is one supposed to wait for the “adjustment”? Also, and this should be so obvious as not to need stating, but perhaps it is to those who still insist that money is a “thing” that can be run out of, if Government truly reclaimed its sovereign right to “coin Money” (Art. 1, Sec. 8 – U.S. Constitution), it would not need to tax anything. (We should still tax Land as a matter of fairness, to discourage Land monopolies and encourage true production – this would be better done on the state and local level anyway. People have a right to Land to live on, yes, but they don’t have a right to live on Park Avenue, NY! And the value of the Land should be returned to those who created it in the first place – the community).
    It is, therefore, not DEBT that needs to expand to fuel a growing economy, but MONEY. Right now, aside from the Fed-favored 1% FIRE sector, we have money (or, if you prefer, credit) contraction for the 99%. This creates the worst of all worlds: asset inflation and wage deflation. This displaces the middle class, further impoverishes the poor, and leads to the “Ponzi economy” Steve Keen writes to eloquently about:
    “There isn’t a one-to-one link between accelerating debt and asset price rises: some of the borrowed money drives up production (think SUVs during the boom), consumer prices, the fraction of existing assets sold, and the production of new assets (think McMansions during the boom). But the more the economy becomes a disguised Ponzi Scheme, the more the acceleration of debt turns up in rising asset prices.”

    This is no way to run an economy, and can only result in more extreme and frequent booms and busts.

  39. August 21, 2012 at 2:21 pm

    Coming back belatedly to this thread (having commended Michael Hudson’s article at http://groups.yahoo.com/group/distributism/ and re-read it to remind myself of what it was all about), I first want to say again how valuable I found it (and now the subsequent discussion). What I am a little disappointed about is the lack of response to my argument at #36 and #52/3 about the need for a systems analysis of economics so that we “independent thinkers can get together”, i.e. argue constructively within an agreed framework instead of destructively disagreeing. I would of course have particularly liked Michael’s reaction to this.

    As I said at #52, this systems analysis is not difficult. It starts by listing relationships within the system, then studies the processes necessary to sustain these relationships, then the life history of each relationship to account for the creation, elimination and interaction of processes. What simplifies it is its reliance on logical rather than numerical quantification, i.e. the distinctions between all, some, one and none. In ordinary “family tree” logic, Levi-Strauss pointed out, all mankind is accounted for by mothers, fathers, girls and uncles. Similarly, at the “all” level, a dynamic analysis containing just four types of entity, though virtually empty, can be complete and necessarily true.

    The necessary biological economy can be characterised as Dads and Mums feeding the Children by producing and managing distribution to feed the Children, with older Uncles contingently helping them develop education, technology and economics. Insofar as is necessary such analysis proceeds from the all to the individual level by cross-indexing related groups or individuals, as suppliers and customers are cross-indexed through the existing hierarchy of trading records. This analysis resolves ambiguities and picks up relationships which, though logically necessary, are at present missing. In the subsequent redesign phase, an audit trail is added to pick up errors in the operation of the system.

    When re-reading Michael Hudson’s piece, I found it tremendously helpful how he explained the origin of Ricardo’s ideas, this putting them in historical context enabling him to emphasise the significance of what they DIDN’T say. This sort of thing happens in SSADM when cross-checking the understanding of relationships and procedures with entity life histories. Analysts with different backgrounds tend to pick up different things.

    • August 21, 2012 at 2:30 pm

      Ugh, typos! My apologies. “My eyes are dim, I cannot see …”. Please delete “feeding the Children by”!

  40. Vilhelmo
    October 3, 2013 at 2:23 pm

    Dave Taylor :
    Set a tax now based on the excess of market price over cost-value, and as of now wealthy landlords will try to up their rents to pay it, tenants will have to up the prices of his produce to pay the landlord (or go out of business), and the consumer (with inelastic necessities) will have to pay the the higher price (or go out of life), on average by going deeper into debt and allowing the banks to profit by printing more money. As the landlord is letting his surplus land, if at whatever level someone baulks he can afford to leave it idle until desperation encourages them (or the government) to borrow and pay up. The value of the necessities to the consumer does not change but the price does, and insofar as the necessities get bought the the excess of market value over cost-value has not much changed, but it HAS been passed on.

    This is inaccurate.

    An Economic Rent Tax does NOT distort market mechanisms nor economic activity, neither does it deter production the way other taxes do.
    The tax does however encourage landowners to develop vacant properties or to make way for those who will, and deters speculative land holding.
    It can also lead to a reduction both in the cost of living/doing business & in urban sprawl.

    Most importantly, this means that an Economic Rent Tax CANNOT be passed onto consumers & does NOT add to price.

    The efficiency of an Economic Rent Tax has been established knowledge since Adam Smith wrote of Land Value Taxation.

    • davetaylor1
      October 4, 2013 at 3:13 pm

      Vilhemo, thanks for resurrecting this lively thread.

      Don’t misunderstand me, though: I appreciate the objectives of LVT but have seen it in practice applied not to receivers of rents but to the occupiers of property (as in our UK rating system) without regard as to whether the occupier has the financial means to pay. In the old estate system, landlords often accepted rents in the form of a tithe or share of one’s produce, but even “the supreme economist, eating the apples off his own tree”, can be forced into paid employment merely to get money to pay taxes to governments and rents to absentee overlords. We’ve even had a case here recently of an old lady sent to prison for refusing to pay rates because, short of selling her lifelong home, she didn’t have the wherewithall to pay them. Absolute power corrupts absolutely?

  41. Vilhelmo
    October 3, 2013 at 2:37 pm

    Scott Baker :
    I’m coming into this conversation rather late, but that turns out to be a good thing.
    I believe this thread is confused on the nature of money.
    Money is NOT debt. Debt-money (or, credit-money from the lender’s POV) is a form of money, but not the only one, despite the desire to meet double-entry accounting rules.
    The government produces debt-free money in the form of coins all the time, wherein every quarter simply adds to the money supply.

    Debt free money is like dry water.

    Coins, just like notes, are, in fact, debt.
    They are a transferable, non-interest bearing debt of the Federal Government.
    No Monetarily Sovereign nation needs ever to issue interest bearing Federal debt.
    Any such issuance is voluntarily imposed.
    I would advocate its issuance only for the purposes of advancing the public interest.

    • October 3, 2013 at 4:37 pm

      Not so. Coins provide direct seingiorage to the government, increasing the government’s account every time they are issued by the full face value minus the relatively trivial cost of production. U.S. Notes effectively did the same thing when they were issued (1862-1996 – 14 series), since the Treasury specifically prevented them from being used to pay off the debt, even when the last $251m was burned in 1996 (this then, was simply the government literally burning $251 million dollars!).
      Although Julliard v. Greenman, decided by a SCOTUS 8-1 decision in 1884, upheld Art. 1, Sec. 8 under only the “borrowing” clause of the constitution, United States notes are in effect, debt-free money for the de facto reason that the private banking sector refused to accept them as a way for the country to pay its debts practically since their beginning in 1862, and has never wavered in that.
      So, fine. Those of us in the progressive monetary reform movement can think of much better uses for U.S. Notes (paper or electronic) than paying the greedy rent-seeking bankers anyway. HR2990 (Kucinich) would have used them to pay for infrastructure ($2T) and Social Security, etc. They could be used to pay for medicare for all.
      None of this need be inflationary, since we are, even according to the FRB, $2T below our productive capacity already, and would just use the new money to close that gap. Many of us argue that the deadweight loss of taxes on production means we are even more behind our productive capacity than that, and further, that the middle class has not seen an inflation adjusted raise in nearly 40 years, so we need to close that wealth inequity gap too, so even a little inflation for the middle class in wages would not be such a bad thing.
      Of course, this will not end rent-seeking. It will enable it, eventually, as leases and various other rents start to be raised to claim the “surplus” over time. The solution to that is a Land Value Tax, more broadly applied not only to locational advantages, as in Henry George’s prescription, but to anything that Man uses but does not produce – such as use of the air, water and land in the form of pollution (Pigovian taxes), etc.

    • October 10, 2013 at 3:22 pm

      #63, Vilhelmo: “Coins, just like notes, are, in fact, debt.
      They are a transferable, non-interest bearing debt of the Federal Government.”

      Let’s take that statement as true. As all forms be it ‘coin or ink or metal’ are in fact physical forms that represent “what you get for your SOMETHING in order to exchange for ANYTHING. Therefore one would say that ‘coin’ or for that matter any sovereign currency issuance is Federal debt. Debt that is equal to “its exchange for anything” which is backed by the ‘good faith and credit’ of the Fed. government.

      But who is the owner of that which is to be exchange ?

      Is Frederick Soddy correct, “Money is the NOTHING you get for the SOMETHING you get in order to exchange for ANYTHING.”

      You being the group of people that are united as that sovereignty that give up their SOMETHING for this “Money”-(to their government to protect, transmit, and finnally return to them.

      Is the basic “flaw” to the American capitalistic system : self imposed flaw?, That we have legislated to Private For Profit Banks (PFPB) the right to “coin” sovereign currency and allow the PFPB to not only use it to “maximize profits for themselves but to also ignore To protect, to transmit, and to return THE RIGHT TO EXCHANGE .

      Quote #63:
      “No Monetarily Sovereign nation needs ever to issue interest bearing Federal debt.
      Any such issuance is voluntarily imposed.”
      Is the basic “flaw” to the American capitalistic system : self imposed flaws ?, That we have legislated to Private For Profit Banks (PFPB) the right to “coin” sovereign currency and allow the PFPB to not only use it to “maximize profits for themselves but to also ignore To protect, to transmit, and to return THE RIGHT TO EXCHANGE .
      While at the same time either charging interest or having interest paid to them simply for allowing the people to use their own “Money” that which they have never given up the right to exchange.

  42. Vilhelmo
    October 3, 2013 at 3:12 pm

    Dave Taylor : I was sympathetic to land-value taxation until I realised how it is possible to eliminate taxation altogether (not just tax on labor). The answer is to live on credit and pay it back by regenerating (and improving) what we use. Since money used represents debt, “of those who have more, more should be expected”. Tax is one way of achieving that, freely given service is another.

    So basically you’re advocating the abandonment of the monetary system & the modern economy along with it and you want to replace it not with an alternative set of norms & institutions but with ” freely given service”.
    Could you be any more vague?
    Not much of an alternative.

    • davetaylor1
      October 4, 2013 at 2:43 pm

      I’m here proposing an alternative principle from which an appropiate set of norms and institutions can evolve. If the Government (or the management of a company) lives on credit, using employees who live on credit so don’t need paying, then they incur debt when they spend the credit, and get it written off when they have shown they are credit-worthy, by having done sufficiently well the jobs for which the credit was authorised. Nothing need change, except that bankers, businessmen and pensioners etc no longer depend on shares of profits for their livelihoods. The money system still accounts for transactions, bankers still have to vet exceptional borrowing and one still pays no interest if one works (i.e pays off in full what’s owing on one’s credit cards).

      The big difference is in who trusts who. Do you have to work before you get paid (so your employer is in debt to you but doesn’t trust you)? or do you get paid before you work (so you are in debt to your employer, motivated to be trustworthy and trusting employers to find you work worth doing)? One of the big advantages of the latter is that work can be done seasonally or as necessary, e.g. timesharing between production, social maintenance and mutual development, without causing financial booms and busts.

  43. Vilhelmo
    October 3, 2013 at 3:41 pm

    Dave Taylor :
    “land value tax on the ground that it would reduce land prices. I argue it wouldn’t: sellers simply pass Value Added Tax on to customers.”

    The efficiency of a land value tax has been established knowledge since Adam Smith first rigorously analyzed the effects of a land value tax, pointing out how it would not hurt economic activity, and how it would not raise land rents.

    “Economists have long singled out [Economic Rent Taxation] as the one form of taxation that does not increase prices: taxes on the land’s rental value, natural resource rents & monopoly rents. These payments for rent-extraction rights are not a return to “factors of production,” but are privatized levy reflecting privileges that have no ongoing cost of production. They are rentier rake-offs.”

    As the supply of land is inelastic, market land rents depend on what tenants are prepared to pay, rather than on the expenses of landlords and so LVT cannot be directly passed on to tenants.

    Economic Rent – “The difference between what a factor of production is paid and how much it would need to be paid to remain in its current use”

    • rddulin
      October 3, 2013 at 5:01 pm

      Land prices are not in-elastic as is commonly stated. They are not even in-elastic enough to use as an example of in-elasticity. Have you ever heard of a two story building or filling in a swamp? Maybe in 1700s this was true but not anymore. Technology can change the use and amount of land required a hundred times easier than it could in the past.
      Land tax obviously changes who gets to own or use land, It is just another way that poor people get screwed. Even if a person manages to acquire a piece of land for a home, many are taxed and forced to sell because they can not afford the tax burden. He must wander the earth with no place to call home but providing low cost labor to pay for the wealthy peoples toys. In a big part because of land taxes.

      • Vilhelmo
        October 17, 2013 at 4:10 am

        rddulin – “Land prices are not in-elastic as is commonly stated.”

        It is never stated.
        It is the supply of land that is claimed to be in-elastic.

  44. October 3, 2013 at 3:52 pm

    Justaluckyfool has a foolish question:
    Who really has the monetary power ? The Fed that can issue sovereign currency but must pay interest on it, or the PFPBanks that can create money ‘out of thin air’, charge interest on it and thereby create a stream of revenue for their own use that could over time exceed all that is printed even to a point where the interest due payable by the Feds becomes ‘unpayable’ without more issuance ?

  45. Vilhelmo
    October 3, 2013 at 4:46 pm

    justaluckyfool :
    “Who really has the monetary power ? The Fed that can issue sovereign currency but must pay interest on it”,

    The government doesn’t pay interest on its currency.
    Government money is a non-interest bearing Federal debt.
    It only issues bonds (interest bearing Federal debt) because of a voluntary policy choice.
    No Monetarily Sovereign nation ever has to issue interest bearing Federal debt.
    Any such issuance is completely voluntarily.

    • October 3, 2013 at 5:21 pm

      Help me. The national debt is aproaching $16 trillion, how much of that debt is ‘voluntary interest ‘ ?
      Help me. Can the Feds spend more than they receive as revenue income without having to issue ‘voluntary interest’ paying debt instruments’ ?
      OH NO, I guess because of the ‘voluntary legislation of the debt limit’ ?
      Maybe we could state: “No Monetarily Sovereign nation ever has to issue interest bearing Federal debt.”…so long as they do not legislate a self emposed restriction.
      But wait a minute, this MS has also legislated that PFPBanks can not only issue currency on which they not only do not have to pay interest, but also they (PFPB) may charge a taxation (a/k/a. interest) on what they ‘print’ via loans.
      Please help me understand where Frederick Soddy went wrong. “As Soddy (“The Role Of Money’ 1926,1931)
      says,”To allow it (currency)to become a source of revenue to private issuers is to create, first, a secret and illicit arm of the government and, last, a rival power strong enough ultimately to overthrow all other forms of
      government.”
      PLEASE,
      Challenge or
      Endorse.

      • Vilhelmo
        October 4, 2013 at 4:41 am

        Money is debt.
        There can be no supply of government money without a national debt.

      • October 4, 2013 at 7:50 am

        Not so. Coins produce seigniorage directly equal to face value minus the small amount it costs to produce them. United States Notes did the same thing from 1862-1996, and were specifically excluded from the national debt by Treasury (at the demand of the banks, who wouldn’t accept them as payment, all the way back to 1862. No surprise!).
        Money is debt only because we allow it to be. Aside form changing the double-entry accounting rules, which can be done, there is no reason money has to originate as debt, except to satisfy the greed and corruption of the rent-seeking banking elite.

  46. October 3, 2013 at 4:49 pm

    ),”WHAT IF .. the Federal Reserve Bank were to mandate:
    The Federal Reserve Bank is the ONLY source for currency issuance.
    All bank loans must be 100% capitalized? All loans must be backed 100% by
    the ‘good faith and credit ‘ of the Monetary Sovereignty.(currency issued by the FRB, be it coin,
    note,or digital imprint.)” Since this would perhaps cause “systemic failure” since there is not enought
    real money in existence to cover, included in the mandate would be that banks
    would be allowed to borrow the amount needed to be solvent at 2% compound interest for 36 years.
    OMG, if $72 trillion were needed that would produce ‘a revenue income of $4 trillion per year.
    OMG,eliminate federal income taxes, eliminate FICA, reduce student loans to 0.25% !
    Prepare the people for prosperity.”

  47. October 3, 2013 at 5:00 pm

    Justaluckyfool says, “THE SOLUTION: Lower FICA and federal personal income taxes to ZERO while at the same time raise even more revenue by a fair and equitable “taxation”.

    As Einstein said, “Keep it simple”
    **** Stop the CB from working for the Private For Profit Banks(PFPB) and have them become a Central Bank Working For The People (CBWFTP).The solution is a CBWFTP instead of PFPB”.Have the CBWFTP take away from the PFPB the taxation (interest) they collect for themselves as “profit” and give it back to its rightful owners: the people..
    A CBWFTP doing FOR us. what PFPB are doing TO us.
    ***WHY NOT do what your economist (those you believe to be correct in many matters) have said.”SEPARATE” banks from government; not nationalization; separation.
    Keynes, Minsky,Desoto, Soddy, hundreds of others: SEPARATION.
    Or as Mosler and Wray suggest “nationalization” (albeit that is more totalitarian than capitalistic).

    “A Simple Two Step Program”

    (1) Separate the government bank from the PFPB (private for profit banks)
    Mandate 100% capitalization for all financial transactions..
    (2) To prevent “collapse of the currency” the Fed can lend them the $200 trillion at 2% for 36 years.
    There would be no TBTF, or need for FDIC if TBTF were 100% capitalized. Mandate two types of accounts-1.Deposits owned by the people are “safe storage”, escrow that would be criminal to violate that safety. 2. Deposits that pay interest because they will be legally allowed to be used by the banks for ‘investments’ with the owners willing giving up that safety for the interest reward. As an unintended consequence of this action the Fed would become a CBWFTP.. It would turn over to the US Treasury revenue for Congress to spend, just a little over $11.1 trillion a year with a mandate to spend: (SS, Medicare, Jobs,etc.,) so as to prevent deflation! This would put an end to F.I.C.A. taxes and federal income taxes as it would be more income than both of those taxes could ever be. As an unintended consequence, interest earned on our own money would surely be a fair taxation.
    How’s this for a win-win. Working toward equality while at the same time preventing deflation?

    IT’S FREE !!

    Read: “The Role Of Money” Frederick Soddy, “As Soddy (“The Role Of Money’ 1926,1931)
    says,”To allow it to become a source of revenue to private issuers is to create, first, a secret and illicit arm of the government and, last, a rival power strong enough ultimately to overthrow all other forms of
    government.”
    PLEASE,
    Challenge or
    Endorse.

    As Soddy (“The Role Of Money’ 1926,1931)
    says,”To allow it to become a source of revenue to private issuers is to create, first, a secret and illicit arm of the government and, last, a rival power strong enough ultimately to overthrow all other forms of
    government.”
    PLEASE,
    Challenge or
    Endorse.

  48. Bruce E. Woych
    October 4, 2013 at 3:59 pm

    Uploaded on Feb 10, 2012

    the GDP of the entire world is 60 to 70 tillion dollars. The derivatives market just reached almost 1.5 quadrillion dollars.
    (You might ask, “What the hell is a quadrillion?” Take a million. Now take a thousand of those (which is a billion), and then take a Million of those. Meaning it’s a Million Billions. That’s a Quadrillion.)

    A trillion is a million millions, and a quadrillion is a thousand trillions.

    It’s 23 times the GDP’s of the entire world put togetrher, and more than 40 times the sum of all the stock markets in the world combined.

    • Bruce E. Woych
      October 4, 2013 at 4:00 pm

    • October 5, 2013 at 1:44 pm

      But ‘they ‘ will tell you, “No problem”. Hell a ‘Black Swan’ event would ONLY need 10% printed to prevent ‘systemic failure’? The central banks need ONLY ‘print’ $150 trillion.
      A simple key stroke. A foolish question. IF, if there were to be a sudden increase in 10 year interest rates, by 2% to 4%-Would they be a “Black Swan” event ?

      • Bruce E. Woych
        October 5, 2013 at 2:28 pm

        The question may really be as to whether anyone would spot a “black swan event” that is in the “shadows” of mass quantitative trading where everything is more or less transparent or actually hidden?

        More Derivatives Trading Now In The ‘Shadows’
        Sept 13 2013, by John M. Mason
        [excerpt]
        “there is very little way that governments or regulators are going to be able to keep up with what is going on in the financial sector when it comes to doing business.

        Finance is nothing more than information … it is just zeros and ones! Information can be sliced and diced almost anyway one wants to cut it. Information is available almost anywhere in the world … instantaneously. And, one does not need massive scale in terms of computer equipment in order to be a player.

        As the U.S. government began putting together the Dodd-Frank Wall Street Reform and Consumer Protection Act I was arguing that in terms of financial regulation the government always fought the last war.”
        [and]
        “And, as many others are now arguing, the things that the governments have done over the past five years or so have just helped the wealthy get wealthier … as most of the date being released on income/wealth distribution now confirm http://seekingalpha.com/article/1692782-more-derivatives-trading-now-in-the-shadows.” “Furthermore, as is seen in the numbers presented earlier, the “shadow” banking system is growing by leaps and bounds! Right now, there is little or nothing that can be done to stop the movement. There is little regulation in these “shadows” and, as should be obvious by now, the “shadows” move as the environment changes.”

  49. Vilhelmo
    October 10, 2013 at 12:31 am

    scottonthespot :
    Not so. Coins produce seigniorage directly equal to face value minus the small amount it costs to produce them…. Aside form changing the double-entry accounting rules, which can be done, there is no reason money has to originate as debt, except to satisfy the greed and corruption of the rent-seeking banking elite.

    Coins represent a transferable, non-interest bearing debt of the Federal Government.
    It is an asset to the bearer & a liability to the issuer.
    You can’t have a financial asset without a corresponding liability. Without the matching liability, a financial asset isn’t an asset.

    The rules of double-entry accounting cannot just be changed. Assets must equal liabilities.

    • October 10, 2013 at 12:41 am

      A. The rules for double entry accounting are not natural laws and they CAN be changed. See here, about halfway down the page: http://moneyreform.wordpress.com/2010/07/05/heres-the-blueprint-for-prosperity-for-all/
      B. Coins are not a debt. They are debt-free money, whose face value minus the small cost of producing them, accrues directly to the government’s account every time they are manufactured. This is seigniorage. Look it up.
      C. If we always had to match liabilities to assets, the money supply could never expand, and it has, greatly. It needs to expand more, but only in areas that benefit the middle class, and don’t just create more asset bubbles.

  50. michael hudson
    October 10, 2013 at 1:31 am

    Unbeknownst to georgists, debt charges involve interest — and also amortization and fees. This is concealed by George’s bizarre terminology calling profits “interest” (after Austrian usage) and conflating finance capital with industrial capital.
    I feel that I should apologize to the group for even agreeing to answer such nonsense, but somehow georgists follow me around and try to make my articles into a georgist blog.

  51. davetaylor1
    October 13, 2013 at 5:49 pm

    In this important discussion, on-going since September 2011, I can’t see the proportion of Georgism justifies Michael Hudson’s “apology” here. Back in August 2012 (at #59), I was myself “a little disappointed at the lack of response to my argument at #36 and #52/3 about the need for a systems analysis of economics so that we ‘independent thinkers can get together’, i.e. argue constructively within an agreed framework instead of destructively disagreeing. I would of course have particularly liked Michael’s reaction to this”. Needless to say I didn’t get it. Is it perhaps his failing as a historian that he is interested only in the history of events and not that of potential solutions to recurrent problems?

    Reading “Progress and Poverty” Book III Ch 1 in light of his ridiculing Henry George’s “bizarre terminology”, I wonder why Michael was not struck by the parallel between the recent sale of “derivatives” and the 1860’s hiding of junk interest (and the claiming of it by those no longer dependent on debt finance) in a portmanteau useage of the word “profit”. Though I have my doubts about Land Tax as a panacea, the opening of Book IX Chapter IV makes it obvious there was more to George than that, with the promise of the baby in the bathwater being so big I wonder why Michael seems so anxious to discount it.

    Seemingly unbeknown to Michael, after the pre-Christian enslavement of the Jews by their own money lenders (the story is eye-openingly told by Peter Selby in “Grace and Mortgage”), for centuries in Christendom and even now in Islam, debt CHARGES did NOT involve interest. He’s misinterpreting his own interesting remark at #11: “The fact is that from the 13th century on, the FIRST concept of economic rent WAS the theory of a Just Price – for banking services.”

    If Henry VIII had not got his matrimonial knickers in a twist and overloaded his navy’s flagship with all the latest 1540’s canonry, our law might still have been Christian rather than subservient to Shakespeare’s figurative Shylock: willing – as it seems again – to have his pound of flesh even if that means destroying life on earth.

    Even before this latest comment from Michael arrived, I had started reviewing this thread in order to see how to answer Vilhelmo’s destructive critique of my attempts at #9 thru’ #67 to be constructive. Critique can reinforce attention to important points, but when I refuted Vilhelmo’s #66 at #67, his #68 diverted attention from this back to Land Tax, claiming the authority of Adam Smith to contradict me. However, the relevant pages in “The Wealth of Nations” (Book V Ch II Part II Article 1), actually say that because land taxes were (then) based on traditional rather than market values, the taxes don’t rise and therefore more or less what I was saying: the tenants paid the tax IN ADDITION to having to pay “economic” rent.

    Michael’s analysis, for all it enthused me enough to re-blog it elsewhere, is a bit thin when it comes to the nature of (as against accounting for) credit and interest, and #44 shows him thinking of “profit” as tribute obtained via monetary excesses rather than as improving the world we all live in. He was right that “The concept of economic rent is of critical importance to this group’s endeavor to provide an alternative to post-classical neo-liberalism and junk economics”, but wrong to accept Ricardo’s version of it. How crucial, too, Scott Baker’s belief “this thread is confused on the nature of money” (cit. #63). I’ve been glad to have not-so-foolish “Justalucky****” reminding us again of the clear-minded Soddy.

    My argument here was basically that tax – the idea that anyone powerful has a right to tribute from other’s hard-won livelihoods – tends to arouse opposition and avoidance, whereas agreeing to pay interest does not. I’ve traced that back to people being brainwashed into thinking money still valuable, in ignorance of facts like how it is generated with a few strokes of a pen, and the amount swilling around in stock exchanges now being 23 times the amount needed to account for trade in produce, as against legal rights of second-hand ownership.

    Think about that. It means prices are 23 time as high as they should be, this increasing as more “debt money” is created to extract Michael’s economic rent from the real economy. At #44 he says “Economic rent — the excess of market price over cost-value — CANNOT be passed on”. What nonsense. We can give away (not overprice) what we don’t need, write off its monetary equivalent once it is accounted for in the banking system, and regenerate credit authorisation (money) when we (or our work) need it. What everybody needs in a monetarised economy is a guaranteed monetary income proportional to the real goods we use and Nature can reproduce, information as to what needs doing when, and practical availability of the means of doing it.

    On money, who actually offers GOODS on credit? Traders willing to GIVE credit or accept monetary IOUs in one of their recognised forms; not banks. Banks only offer misleading receipts for “thin air”! If Governments that print money account for their spending on behalf of the public by taxing the public, what spending do Banks that print money account for by surreptitiously taxing the public via interest repayments?

    Vilhelmo claims at #7 on a recent Hudson blog (America’s Deceptive Fiscal Cliff, 1): “There’s nothing stopping you or anyone else from issuing their own credit (IOUs)”. Actually, there is, more or less for the reason BFWR offers at #8. So Vilhemo continues at #9: “All credit is issued ‘out of thin air’. You can issue IOUs without limit. The problem is finding people to accept them. Unlike the government you can’t impose taxation payable only in your IOUs”. Well, this last is exactly what banks do, only they call the tax “interest”, not tax.

    It seems also that Vilhelmo has already forgotten what I pointed out at #51 here: that close analysis reveals “money is generated by AUTHORISING (not giving) credit”. Nor did Michael rise to the bait. We have difficulty writing our own IOUs because we are not authorised to do so. Whereas the commercial banks on average print 23 times as many IOUs as they have real trade to cover them (nearly all tied up in stock market gambling), the currency of Scotland’s banks is legally required to be backed 100% by English pounds stirling. Local forms of credit like LETs and small shopkeepers’ “town money” seem to be surviving largely because they are too small to threaten the 1%’s banking monopoly.

    Central governments corrupted by financiers now not only do not print their own money, they even prevent local governments (but not big businesses with “store cards”) from doing so. Instead, they print and sell bonds authorising banks to authorise as much government, business and private credit as they see fit, conning the public into paying interest to the banks (collected as taxes) even on a fictitious “National Debt” generated by the government “borrowing” from the banks what it itself authorised. What to about it I’ve already discussed at #51 (motivation), #59 (methodology) and #67 (outline practice).

    • Vilhelmo
      October 17, 2013 at 6:53 am

      “We have difficulty writing our own IOUs because we are not authorised to do so. Whereas the commercial banks on average print 23 times as many IOUs as they have real trade to cover them ”

      What are you talking about?
      I, as anyone else, can issue as many IOUs as I want.
      The government has nothing to do with this.

      Commercial banks issue bank credit that is convertible on-demand into government money.
      Unlike us, non-banks, banks are granted a special privilege that guarantees convertibility.
      But as with any privilege comes obligations.
      In this case, the banks must obey specific lending standards along with other rules & regulations.

  52. Vilhelmo
    November 29, 2013 at 10:44 am

    [

    davetaylor1 :
    I appreciate the objectives of LVT but have seen it in practice applied not to receivers of rents but to the occupiers of property (as in our UK rating system) without regard as to whether the occupier has the financial means to pay.

    That would not, by definition, be a LVT.

  53. Vilhelmo
    November 29, 2013 at 2:12 pm

    justaluckyfool :
    #26 Michael Hudson:
    Perhaps really all loans are productive, they do allow a positive action to occur in the present.

    That is not what is meant by “productive”

  54. Vilhelmo
    March 6, 2014 at 7:36 am

    scottonthespot :
    A. The rules for double entry accounting are not natural laws and they CAN be changed.

    B. Coins are not a debt. They are debt-free money, whose face value minus the small cost of producing them, accrues directly to the government’s account every time they are manufactured. This is seigniorage. Look it up.

    EVERY Financial Asset MUST have a corresponding Liability.
    This is a basic Accounting Identity, true by definition.
    Accounting doesn’t create reality, it merely reflects it.
    You can change the rules of accounting all you want but the facts of reality will remain the same.

    The Looney (Canadian $1 coin) in my pocket represents a financial, NOT a real, asset. It’s not worth $1 CAD because of its metallic content but because it represents a contractual claim.
    If the Looney is my financial asset (credit) then it MUST be someone’s liability (debt).
    That someone is the Issuer, who, in the case of the Looney, is the Canadian Federal Government.
    Money, in any form, be it coin, tally stick, paper note or electronic entry, is a Financial Instrument & as such, gives rise to the Financial Asset of one entity (the holder) & the Financial Liability of another entity (the Issuer).

    scottonthespot :
    C. If we always had to match liabilities to assets, the money supply could never expand, and it has, greatly.

    That simply is NOT true.
    I’m speechless. I give you points for originality.

    When the Federal Government spends $100 into the economy, there is an $100 increase in its liabilities & a corresponding $100 increase in the financial assets of the Private Sector. This addition of money into the economy thus increases the Money Supply by $100.
    When a bank lends $100, it creates both a deposit & an IOU in the borrower’s name. The deposit represents the borrower’s asset & the bank’s liability. The IOU represents the bank’s asset & the borrowers liability. The $100 deposit also represents an increase in the Money Supply.

  55. Bruce E. Woych
    March 6, 2014 at 8:09 pm

    Still relevant and somewhat shameful that a century of involuted sophistry still obfuscates the fundamentals exposed in this macro-analysis.
    http://www.marxists.org/archive/lenin/works/1916/imp-hsc/

    Vladimir Ilyich Lenin
    Imperialism, the Highest Stage of Capitalism[1]
    A POPULAR OUTLINE
    Written: January-June, 1916
    Published: First published in mid-1917 in pamphlet form, Petrograd. Published according to the manuscript and verified with the text of the pamphlet.
    Source: Lenin’s Selected Works, Progress Publishers, 1963, Moscow, Volume 1, pp. 667–766.
    Transcription\Markup: Tim Delaney & Kevin Goins (2008)

    Public Domain: Lenin Internet Archive 2005. You may freely copy, distribute, display and perform this work; as well as make derivative and commercial works. Please credit “Marxists Internet Archive” as your source.

    Contents
    PREFACE 187
    PREFACE TO THE FRENCH AND GERMAN EDITIONS 189
    I. CONCENTRATION OF PRODUCTION AND MONOPOLIES 196
    II. BANKS AND THEIR NEW ROLE 210
    III. FINANCE CAPITAL AND THE FINANCIAL OLIGARCHY 226
    IV. EXPORT OF CAPITAL 240
    V. DIVISION OF THE WORLD AMONG CAPITALIST ASSOCIATIONS 246
    VI. DIVISION OF THE WORLD AMONG THE GREAT POWERS 254
    VII. IMPERIALISM AS A SPECIAL STAGE OF CAPITALISM 265
    VIII. PARASITISM AND DECAY OF CAPITALISM 276
    IX. CRITIQUE OF IMPERIALISM 285
    X. THE PLACE OF IMPERIALISM IN HISTORY 298

  56. Vilhelmo
    April 10, 2014 at 10:18 pm

    Michael Hudson :
    The concept of economic rent is of critical importance to this group’s endeavor to provide an alternative to post-classical neoliberalism and junk economics.
    Economic rent — the excess of market price over cost-value — CANNOT be passed on. This is basic classical economics.

    Dear Mr. Hudson,

    I don’t mean to badger but I was wondering if you could recommend any works on the topics of Economic Rent & the Labour Theory of Value?

    Sincerely,

    Vilhelmo De Okcidento.

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