The endogenous definition of money (business accounting view)
What’s money? According to Hyman Minsky (emphasis added):
‘Modern capitalist economies are intensely financial. Money in these economies is endogenously determined as activity and asset holdings are financed and commitments of prior contracts are fulfilled. In truth, every economic unit can create money – this property is not restricted to banks. The main problem a ‘money creator’ faces is getting his money accepted’
Does everybody agree? No. According to a very recent ECB study about international liquidity (emphasis added):
The concept of monetary liquidity attempts to capture the ability of economic agents to settle their transactions using money, an asset the agents cannot create themselves. Money is typically seen as the asset which, first, can be transformed into consumption without incurring transaction costs, and second, has an exchange value that is not subject to uncertainty in nominal terms, rendering it the most liquid asset in the economy. Strictly speaking, these characteristics apply only to currency. The question of which other assets can be defined as money depends on the degree of substitutability between currency and these other assets. In practice, the definition of money in an economy generally includes those other assets which can be easily converted into currency: short-term bank deposits are an obvious example.
Who’s right? According to business accounting: Minsky.
Main stream economists define money as a combination of a
* unit of account (which by the way existed long before currency)
* means of payment
* store of value
Which means that the ‘receivables’ on the balance sheets of companies are money, too.
An example: company A buys stuff from company B and promises to pay within six weeks (which happens all the time and provides the liquidity which make markets work). According to the law, according to business accounting and, last but not least, according to the the tax man this is a legal and binding transaction – even if the debt is not settled you will have to pay taxes and you have to add it to your turnover data. The unit of the ‘receivable’ (might be Euro 15,79 but that’s a unit, too) enters the balance sheet and the profit and loss account (as it’s a store of value) and was used as a means of exchange. It’s money. Temporary money, yes, but that’s money too. So, Minsky is right, according to business economics – and the fact that transactions create payables (the debt which serves as the collateral of the receivable) means that transactions lead to money creation. Minsky is right and the ECB isn’t, which makes these ECB economists misunderstand the deeply financial nature of our economy. Money is an social act, not a good.
And this is not a measly amount of money. I’ve checked the balance sheets and profit and loss accounts of five large Dutch companies, ‘receivables’ alone are 90 billions of Euro’s and sometimes over 20% of total sales.
P.S. – the idea that using money does not involve transaction costs is bonkers. Last time I checked interest on my mortgage was still 4,6%, money which I have to pay as I once needed money to use money to buy a house. And see also this recent ECB study, which estimates that making retail transactions alone cost us about 1% of GDP, not counting transport costs to and from the shops (those are market and not paying transactions costs).
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Real-World Economics Review Blog 
Yes, Money is basically accountancy. Minsky was onto things, but failed to recognize the importance of the subset of double entry bookkeeping known as cost accounting. Cost accounting enforces the REALITY of scarcity of individual incomes in comparison to prices because labor costs are always less than total costs….and total costs must always be recouped in profit making enterprise. Furthermore, debt is the NATURE of exchange, and so enforces the above scarcity on every dollar actually entering or re-entering the economy/commerce. This means the quantity theory of money is largely erroneous, and the velocity theory of its circulation is completely bogus because only one unit of credit is able to cancel one unit of debt. The ONLY way out of this systemic conundrum is to incorporate a POLICY of Grace, the free gift into it. The LOAN ONLY paradigm for consumer finance must be overthrown in favor of the new Individual Dividend, and loan if desired and creditable one.
Confidence, Hope, Love and Grace is a canon of the human world, and conceivably of the Cosmos. As above, so below. As within, so without. Unless of course…you care not to be truly human or in opposition to the Cosmos.
Money velocity can be precisely defined. Consider a simple loan. A retailer who turns over his inventory V times per year borrows at an annual interest rate of i% to pay the present value(pv) for an order from a supplier. Out of the sales of this inventory he repays the principal and accrued interest (future value fv) of the loan. In terms of the fv, the lender’s money pile has grown from M to M+M’. The percentage growth rate is (fv-pv)/fv = 1-u
where u = pv/fv. Also, pv = (1-iT)fv, so that (fv-pv)/fv = iT . Now T = 1/V, so that in comparing the two identical expressions one can write 1-u = iT = i/V so that i = V(1-u), or in other words, V = i/(1-u)
The same definition of velocity V applies on a macro scale. A problem arises when, in addition to interest accrual, the money supply increases to finance public debt. In that case
M’/M = i + g . Since the time T2 required to repay i+g is greater than T, both at interest rate i, 1/T2 < 1/T, which is to say that V2 < V, so that one can conclude that money creation to finance public expense causes money velocity to decline. Also, since V2 < V and since
V2(1-u2) = V(1-u) = i one can also conclude that u2 < u which is to say that the present value (or wage share) also declines as a result of public debt financing.
One ought to properly understand the Quantity Theory of Money before denouncing it. The GFC can be thoroughly explained by QTOM without resort to any Minsky hypothesis or other religious revelation.
Quantity and velocity theories are just that…THEORIES. Cost accounting’s enforcements are REALITIES, in fact the most deeply and ever present reality in all of commerce. Economists have missed this FACT. Please re-read my prior post which explains why velocity theory is actually fallacious. Quantity theory is NOT the basic reason for inflation. Yes, if you keep throwing money into a system without actually controlling where it goes and what it is used for you’re going to get some inflationary effect, but again, the PRIMARY cause of inflation is the current enforcements of cost accounting.
As for any religious revelations I’m not advocating any specific or parochial ones. I AM advocating that a POLICY of monetary Grace, the free gift simply because that actually IS the only way to overcome cost accounting’s enforcements. It indeed IS coincidental that an outward, temporal policy of Grace sets the economic and monetary systems free and an inward/psychological sense of Grace sets one free from the inevitably negative inward and outward experiences one accumulates in Life. As I said, so inside, so outside, as above so below. Amen, so be it.
Warren,
A. does the money supply increase when the government taxes you or borrows money from you to finance government expenditures?
B. Government excpenditure consists largely (surely not entirely) of wages paid to usefull people like teachers and IRS employees
C. Sadly, economists calculate the velocity of money by dividing GDP by the stock of money (M-2 or M-3 defined). However:
* money is also used to buy items not covered in GDP, like already existing homes
* GDP is, from the production side, defined as (total expenditure – purchase of goods and services) by companies and the government and households as producers). From the value added side of tings this is correct, but these purchases have to be added when you want to calculate the velocity of money
* and value added created by companies, households and the government is also used to pay wages, rents and interest – and money is used to do this
I can go on, for a while. But the point is:
The way velocity is estimated by economists is wanting, to say the least. Minsky is by the way empirically consistent with estimates of ‘financial stress’ in the system. The quantity theory of money does not say anything about financial avalanches.
Warren, Steve’s bottom line in his picture at #49 is where I’m at: the need effectively to recapitalise the class of people whose ancestors had their land stolen from them, and to separate provision of necessary incomes not from employment but from the ability of employers (including governments and banks) to pay wages. Considering that in terms of the real political economy rather than current economic theory, it is also necessary to cut down the size of governments – whether formally or financially constituted – by delegating their executive functions to functional authorities sufficiently local for them to become competent and directly responsible to those affected for what they are doing.
That would leave governments at different levels advising on what needs to be done rather than managing activities of international, national, regional, city or local significance. Since these would not be employers it would hardly matter whether the organisations doing the work of meeting needs were called charities, companies or local authorities; local banks would authorise and account for local credit and the larger ones act as servers co-ordinating business credit and inter-regional trade.
On the quantity and velocity theories of money, I agree with Steve at least about them being fallacious theories, if not red herrings. “If you keep throwing money into a system without actually controlling where it goes and what it is used for”, he says, “you are going to get some inflationary effect”. True; and if your theory of money is purely quantitative it remains arithmetical, accounting for the fact that 1 + 1 = 2 but not for the fact that you can’t add apples and bananas. Likewise, if your theory of the velocity of circulation is purely quantitative, it cannot account for money circulating in both a productive and a second-hand economy, and so fast in the second-hand (stock-market) economy that (to use a physical model by way of analogy) it sucks in money from the real (i.e. productive) economy faster than it can return by speculators spending it.
The ironic thing is that any one doesn’t need to know real quantities to see this, only relative quantities. As Dickens puts it fictitiously via Mr Micawber: “Annual income £20, annual expenditure £19 19 6d, result happiness. Annual income £20, annual expenditure £20 0 6d, result misery”. Sufficient that those expenditures were ‘less’ and ‘more’ than the income.
Your gratuitous remark about Steve’s use of Christian language shows you don’t understand what religion is: “re-binding” as grateful commitment to a historic person who, by acting out God’s love to the point of dying for us, and the existence of God by rising again, offered hope of justice to a conquered and wage-enslaved nation. In my case that motivated me to seek a better way of doing things, but the way I’ve found came from my science and mathematics. Only in retrospect have I appreciated how seemingly irrelevant details in parables of the Good News (e.g. of three ways in which seed can fail to be fruitful), coincide with my paradigm of PID servo control theory for 21st century economics.
Steve, “REDISTRIBUTION, but DISTRIBUTION. There is no theft from anyone to go to others.”
Question; How do you distribute “receipts for goods and services” that are in the form of the national currency that you do not own? How do you transfer the rights of redemption of these colorful papers without transfering the rights from the lender to the borrower, where 100 trillion of wealth equals 100 trilion of the same wealth being transfered, not as it is now where 100 trillion of wealth becomes 200 trillion thereby creating an unsusstainable position?
This may be where we will soon discover that “credit expansion” and leverage may have turned the wealth of this nation if today is for example $200 trillion into “a demand for redemption by the good faith and credit of the people” of , as Keen says, “uncomprehensible amount”.
Steve, ” but interest is not the BASIC problem .”
***Correct ! Interest is not the problem, Who is getting paid that interest and what they are doing with that gain IS THE PROBLEM.
WHY ,why are we paying compoud interest on our own “goods and services”.
Why, why are we paying to private for profit banks our right to pursue happiness?
Why, why are we allowing, over time the only result of this action to be ownership of all goods and services by “private for-profit” financial corporations, and servitude because it would be impossible to redeem all that would be owed.
Why, why are we allowing the most powerful economic force in the universe to be used against us, rather then for the betterment of mankind.
May God continue to bless America, and with the aid of “social media” educate and inform
“we the people”, and allow us to “form a more perfect union…”
Thank you, RWER for allowing this forum.
getting money accepted by all is the process of creation of money. If “money” are not accepted at all or accepted only in limited number of transactions, then it is not money.
Hi Steve, why don’t you provide a link to your new book?
Why not. Here it is:
What is money?
Money is an imaginary mathematical representation of quantity of property and the value of property in the real world.
This is derived from the concept that all mathematical representation is an imaginary model of other realities. The usefulness of mathematical representation will be taken as a given.
Money’s value is dependent on the ratio of money in the hand of a willing buyer (demand) to desirable property in the control of a willing seller.
As time goes by, one unit of money can measure and facilitate the exchange of multiple units of property as the buyer pays the seller and the seller with money in hand becomes the next buyer. This is of course known as velocity of money.
Total property exchange in say one year in the imaginary world of money becomes M x V.
The problem comes, when the buyer with money in hand, lends his money. He may lend it WITH or WITHOUT requiring interest. The lender has now increased the velocity of the imaginary side of the M x V = P x Q representation. At this point the M x V side of the equation no longer ACCURATELY represents reality.
This is the problem with economics. There is not an ACCURATE unit of measurement.
If interest is charged, an additional transaction cost must be added to P when this buyer again becomes a seller, to balance the representation.
When the interest is paid, money is transferred from the hand of a willing buyer, to the hand of a willing lender. In a short time the lender or lenders have all of the money and any money in circulation in buyers hands is represented by debt.
” In truth, every economic unit can create money – this property is not restricted to banks. The main problem a ‘money creator’ faces is getting his money accepted”
These “UNITS” do not create money but velocity. This bypasses the “acceptance” problem.
Only the central bank creates money. All other fractional reserve activity creates velocity.
Most endogenous “creation” of “money” in reality creates velocity for a price(interest).
All of these firms mentions that are involved in real products or services (not financial) would prefer to be paid when they deliver their goods, but have to extend “credit” waiting for enough “VELOCITY FOR HIRE” to be contracted for in the imaginary money dimension so they can get paid.
The problem here is that Mnsky and others do not recognize that money is a legal institution Accordung to Keynes in his TREATISE ON MONEY, money comes into existence with the legal institution of money contracts.
Money is that thing that the State, as enforcer of civil law of contracts , declares will settle any legal contractual obligation. This is important — as I point out in my book THE KEYNES SOLUTION: THE PATH TO GLOBASL ECONOMMIC PROSPERITY
. This does not only mean legal tender but alsobank money that is immediately convertible into legal tender –as overrseEn by the Central Bank as the holder of bank reserves.
The writer confuses the legal and economic meanings of ‘promise to pay’, or debt.
Legally, a promise to pay must be assumed to be as good as money, or else, no business transaction (and therefore, book entries) based on promise-to-pay would have taken place. This is a legal convention, one of those we cannot live socially without, forming also the basis of business accounting.
Economically, a promise to pay made by a debtor is the creditor’s financial asset, not money, for the difference between money and financial assets is that money constitutes, as such, the closest thing to a direct claim on goods, and thereby on labour time, whereas financial asset is a claim on money.
‘Receivables’ must be referred to as money, but only in the legal sense, since the money in the economic sense is not necessarily there, and neither debtor nor creditor can create it, when payment comes due (the debtor can borrow, but this is another issue).
If I am not mistaken, according to the endogenous money perception, not even a bank can create it if that same bank happens to be the debtor (it can borrow, but this is, again, another issue).
Thanks for introducing the real-world economists present to the ‘real’ nature of money. But let us take this revelation further. Since money is a social act created by a real economy transaction, the lending of money into existence by banks is superfluous. Any club, or clearing house, in which all members agree to honour their receivables and invoices can obviate the need to borrow money at interest in order to settle debt between them. This is called credit clearing. In this way businesses could work together to protect themselves from the ‘business cycle’ imposed on them by banks. The unit of account would still be the national currency. Some kind of auditing would be required between members.
This is a rather bizzare debate. Minsky and the ECB don’t really disagree. Yes, private businesses to engage in money creation. But even in Minsky’s world money demand is determined by the interest rate, which is set by the ECB. You can only argue one of two scenarios: 1) the ECB does control the interest rate, and therefore controls the supply of money by way of the money demand curve, or 2) the ECB controls neither the interest rate nor the supply of money.
Is there anyone arguing that the ECB doesn’t control the interest rate?
Yes – or in any case, the Bank of England doesn’t in Britain. It decides what – in the circumstances – it is reasonable to ask in exchange for government bonds (as of now 1/2%) but no way can you borrow money at anything approaching that rate for business purposes or a house mortgage. That rate tends to depend more on what one profit one can make from speculation in alternative ways of “making money”.
Yes, as an economist, I have heard of fractional reserve banking–this is exactly what I’m referring to when I say that the ECB knows that private banks create money. I’m uncertain exactly what you are arguing there, but I will attempt to respond point by point.
“when 96% of it is whistling round the stock market changing uses automatically in fractions of a second”
I interpret this to mean that each dollar is potentially spent more than once in each time period, because each time it changes hands, it can be used again. This is true. In fact the federal reserve tracks the number of times per year that the average dollar spent–it is called the “velocity of money.” Obviously, the velocity of money they calculate depends on how money is defined, but the most common one to use is the velocity of M2 money, which includes currency in circulation, bank reserves, bank loans, travellers checks, and a handful of other types of money, but excludes other things, such as consumer credit and commercial paper.
“[money demand] is how much they want to USE at a give time, the interest per second being negligible”
In a world with no frictions, we could settle all transactions by barter and we wouldn’t need any money at all. But this is unrealistic–barter is usually incredibly inefficient, so we use money to make markets more liquid. The cost of that liquidity, however, is that we cannot invest those resources into interest bearing investments, like stocks and bonds. As a result, we are forced into a trade off between the convenience of holding money and the profitability of investing in other assets. The amount of money we choose to hold at any point in time is our money demand. We do, in fact, hold positive money balances well in excess of what we are actually spending at any given moment (I have money in my checking account even though I’m not spending any money right this second. How about you?) You can think of the liquidity function of money as being a kind of self insurance–we hold money balances we don’t need right this second because of uncertainty about when and how much we will spend money on our next purchase. The interest we forego by not investing that money in stocks and bonds is the insurance premium we pay for this liquidity.
“the money-spinners use money to inflate prices in the hope of passing on purchases at an inflated prices before time is called.”
I’m going to be extremely generous in interpreting this as a reference to speculative hyperinflations, in which people bid up prices because they expect others to bid up prices (in the process driving real money balances to zero). This is entirely consistent with mainstream macroeconomic models, and has been extensively studied from a theoretical perspective, but have never actually occurred in the real world. If you’re interested, a sufficient condition to ensure that this never happens is that marginal utility approaches negative infinity as real money balances approach zero. That’s equivalent to assuming that money is necessary for consumption, which isn’t completely true (it is possible to barter) but a pretty good approximation for a modern economy.
Mathew ? “We do, in fact, hold positive money balances well in excess of what we are actually spending at any given moment ”
Please advice as to where that $16 trillion was held that the Fed “printed” to stem the “systemic failure” in 2008. Buth domestic and foreign banks received funds.
And just in case, where is the $23 trillion stached IF needed if a 10% loss in derivatives has to be paid by the TBTF banks should that occur-oh, I’m sorry , “housing prices can not go down and of the over $800 trillion in devivatives, please check my math, the TBTF’s will swear that the risk probability is less than 2%. (duh, isn’t that $16 trillion). But not to worry,
if Ben doesn’t give them the money can can default. We get to start all over again.
Maybe we could go back to “wampoon”.
Cook the books any way you wish,but the bottom line is “due to credit expansion in an amount so inconceivable…” as per Keen. We add von Mises, “”There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” — Ludwig von Mises
BUT YOU HAVE DISCOVERED THE ONLY SOLUTION WHICH COULD PREVENT A BUST ! IF.. ” We do, in fact, hold positive money balances well in excess of what we are actually spending at any given moment .”.
Operating on a 100% reserve balance THERE COULD BE NO CRASH !
Challenge: Frederick Soddy, “The Role Of Money”
Open a debate: Topic, “Where we went wrong and how to fix it”
Demand Keen,Hudson,Black, Wray, Mosler, and any one of those listed on the right hand side of this site.
“Let the truth set us free”
I think you have misunderstood what I was saying. If we, as individuals, did not hold positive real money balances at times when we are not literally spending money, then the velocity of money would be infinite. All I’m saying is that if we looked at people’s checking accounts at any point in time, we would find that they have a positive aggregate balance. This is money demand, and in turn constrains the money supply.
Just to be clear, my last comment was in response to davetaylor1’s other comment below. As for this comment, I want to point out that the BOE doesn’t actually target interest rates on government bonds. Rather, monetary policy targets the interbank overnight loan interest rate (this is what we call “Fedfunds” in the US). This is accomplished by buying and selling government bonds off of private banks’ balance sheets. Yes, the interbank interest rate is highly correlated with the rate on government bonds, which brings me to my second point which is that because of financial arbitrage, all interest rates are interdependent. So targeting one interest rate implicitly targets all interest rates. Intuitively, the reason is that if we change one interest rate but not all of the others, then it would be profitable for private investors to trade assets until all interest rates have compensated for the one that we changed.
Matthew, can you demonstrate the arbitrage which maintains credit and store card interest rates at the same level as the BOE rate? (I don’t think)! More to the point, have you come across the supermarket discovery that you can make more by overpricing competing brands (making them unaffordable for some customers) but selling the same “essentials” in plain packaging at a price the excluded customers CAN afford. Life ain’t as simple as you seem to think.
If a security is perfectly liquid, then it becomesa means of payment, even if it is not legal tender. When indices on the financial market grow continuously, securities become liquid and can be regarded as money; leverage is the origin of liquidity in this case. Tobin, I think, surmised that much. This is, in my mind, true endogenous money: that fails miserably, as soon as leverage fails, when indices start going down with some regularity. The Great Moderation is the period of endogenous money.
Gentlemen, please consider that the cumulative compounding interest to term of total US credit market debt owed is now equivalent to GDP. Increasing debt-money reserves by central banks or gov’ts borrowing and spending at deficits of 10% of private GDP will not result in growth of private capital accumulation, profits, investment, production, employment, and real GDP per capita.
Add the effects of the exergetic log-limit bound having been reached because of peak global crude oil production and oil exports (and falling production and exports per capita), and population exceeding the carrying capacity, and growth of real GDP per capita is no longer possible.
Effectively, banks and non-bank financial conglomerates have a claim in perpetuity on virtually 100% of wages, profits, and gov’t receipts owing to the level of debt and debt service to wages, profits, and gov’t receipts.
What we as a species face is a last-man-standing “war of all against all” for the remaining vital resources of the planet to sustain the western standard of material consumption and well-being of what will be no more than 10-20% of the current human population of “Spaceship Earth”.
As grim as this is to contemplate, and cognitive dissonance will be the likely initial response, no doubt, the process is one of evolution and the characteristic low-to-high-entropy hierarchical flows of net energy from low to higher order complexity at the scale constrained by the exergetic log-limit bound of a finite planet. Most of us are wholly incapable of competing for the necessary net energy flows and 100-150 net “energy slaves” required to sustain a western material standard of consumption.
IOW, 80-90% of us will become irrelevant and “useless bread gobblers” over the course of the next generation and beyond to the evolution of the human species hereafter and to the Power Elite top 0.01-0.1%.
“Soylent Green” is among the more benign outcomes we as a species face. Let us hope that those among us with the power and authority grant the vast majority of us Sol’s option of “going home” when the time comes.
Quote Frederick Soddy, “Money now is the NOTHING you get for SOMETHING before you can get ANYTHING.”
If you take the sum total of comments made about “money” over time, I think you can conclude that this is a most nebulous concept. The best analogy I have come across is that of comparing money to clouds in the sky: They form, they move and they disappear in a most unpredictable way.
These “clouds” are earned by someone’s hard work, then they move to other’s pocket and “disappear” in most unpredictable way, as it happened in September 2008.
The open-ended way Minsky defines money, it’s no wonder “The main problem a ‘money creator’ faces is getting his money accepted’.” A stricter definition would be: money is that which is available for the payment of all debts within a recognized political entity, especially for taxes. This would allow for everything from cowrie shells to tally sticks, all of which at some point were used as money. It would NOT allow for an exchange of baseball trading cards, as baseball cards lack universal “acceptability.” LETS’ money falls into a gray area, producing “Local Exchange” credits/debits which are accepted by the participants of the LETS, but not outside it by the surrounding government entities, including the tax collectors. Nevertheless, there could be a system to convert LETS’ currencies into more recognized forms of money, at a consistent rate of exchange; i.e. any system can be devised that will convert a unit of work into money that can be used to pay all debts, including taxes.
Taxes are important, because it seems there is no such thing as a government, so far, that has existed without them. One COULD imagine a government which just creates its own currency – under its sovereign powers (we do not have such a government at the moment, except for coins and formerly, U.S. Notes), but some means must be found for taking back excess money created, or else there will be times when wealth creation will be insufficient to absorb all the money such a government can create, and you’ll have inflation, which acts as a tax, accruing positively to government accounts, but negatively to ordinary citizens.
Just one final word to everyone contemplating “Credit Money Systems”.
They do not work.
It is overwhelmingly seductive, indeed irresistibly seductive to think that anyone can be given any product at any time with just the promise to pay when they can in the future.
It is impossible to design a money system that is more efficient than exchanging a universally accepted token at the time of the sale so that the transaction is complete.
Credit has developed as a stop-gap to keep transactions flowing in the shortage of a universal token money.
Credit does not work even if interest is not charged per se. Credit has costs above a token exchange transaction that someone,somewhere has to pay.
A few of the costs;
1.Deadweight loss on the transaction can be substantial depending on the elasticities or the respective parties.
(If you do not understand “Deadweight Cost” look it up on wiki. Money can not be intelligently disused with out an understanding of this mechanism.)
2. Cost of defaults. Someone not only has to pay the costs of the inevitable defaults, but also has to implement (and pay for) default avoidance and control systems.
3. Everyone in the credit money issuance and default control departments produce essentially nothing of real value to society. Some producer somewhere has to feed these “parasites” .
4. To cover operating costs,(even disregarding making a profit) the cost will exclude a portion of society that can not pay these costs.
The credit has to be restricted to those that can pay all included costs.
5. Issuing “credit” to “pay for” all desired transactions causes inflation.
6. All of these costs are passed to the worker as a reduction in their pay.
To sum up: Would you rather be paid full price for your work (100%), or partial pay and the ability to borrow?
Even if you think that this is acceptable please consider this question: Would you take partial pay (say 20%) without the ability to borrow (because you do not make enough to pay it back) for someone else in the economy to be able to borrow?
Someone has to pay and it always turns out to be the peons because they can not pass it on except by working for lower pay.
rd,
the point is that though a universal credit system might not be possible, credit between buyer and seller still is extremely important – solving liquidity problems in an efficient way. This was the case in the seventeeth and eighteenth century (you might consult the Frisian ‘hypotheek’ or loan books from this era or comparable english documents, lots of these are on the internet nowadays) and it still is today, especially between companies. When companies buy from other companies credit is the rule, not the exception. Buyers have to pay off these debts with legal tender, to be sure, but that’s a seperate transaction. In the meanwhile, ‘credit’ was used to pay for the initial, legally binding transaction. The buyer emitted temporary money, a ‘receivable’, the seller accepted it and the rules of accounting (and the tax man) stipulate that the ‘receivable’ has to be added to ‘total turnover’ at face value, even when the debt has not yet been paid off. Money does not have to be a good – or even a token.
Merijn,
My point is that any credit system has associated costs that must be included in the price of the associated goods or services. This cost, hidden or specified such as interest excludes some members of any specific economy from participating.
A universal “unit of account” with minimal cost is possible.
I used the word “token” when it would have been more accurate to say “unit of account”. To further clarify, I am not suggesting “specie” such as gold or the like.
Trade credit becomes necessary when a shortage of tokens representing the agreed upon “unit of account” exists.
This shortage has existed for a very long time as documented in David Graeber’s book.
I do see a place for ” Owner-Seller Extended Credit” in some instances such as houses, or other large capital purchases.
Trade credit( and indeed most credit schemes) are still dependent upon a “unit of account”, even if it is a ghost that is rarely or never seen.
There is no argument that a substantial amount of business (possibly 90% of all business) has and is being conducted utilizing trade credit.
This does not exempt trade credit from the costs listed in my previous post. (all trade credit must allow for defaults and paying the expenses of their accounts receivable and payable departments.)
Is there an argument that both the buyers and sellers would not prefer to settle accounts at time of delivery?
Why not strive for an honest (minimal associated costs, debt free) “unit of account” with appropriate issue of corresponding tokens, for all members of the economy to use?
Why not develop a “model unit of account system” to be used as a baseline to aid economic calculations in the current academic economic community?
Thank you for the reference to the historical trade credit records.
rd dulin,
You are absolutely correct about the costs of the money system. However, you’ve missed the most significant one: the enforced scarcity of individual income in comparison to prices imposed by the conventions of cost accounting. This commercial and monetary REALITY, NOT THEORY is at the root of the business cycle and the money system’s instability. And velocity THEORY is bogus because it ignores the fact that the vast majority of our money is debt based, and hence only one unit of money can liquidate one unit of debt. Thus the scarcity REALITY ENFORCES a debt build up.
I’ll add here that the only way to rectify this flaw in the cost accounting system without adding cost to prices is a monetary policy of Grace, the free gift in the forms of an individual citizen’s dividend and a general compensated retail discount to consumers in order to balance out any cost push or demand pull inflation for the predetermined period of time. again, the basics of this are put forth in my book entitled: Monetary, Economic and Spiritual Synthesis Theory (MESST) which you can find here:
Steve,
Just ordered your ebook. I think it is great for someone to supply the discipline of organizing their thoughts in book form.
That’s a pretty good summary, Scott.
Both credit and money tokens have been around since time immemorial, I believe.
I see the money token as “fluid credit” that can migrate around amongst people because of the universal belief in the integrity (credibility) of its backer.
For example, a promissory note given by one person to another can become “money” if enough people believe in its value.
I guess this has been recognized by differentiating between different kinds of “money”:
M0,M1 etc…
Just one final word to RD Dulin: you’ve missed the point of the credit money system I’ve been advocating, which is that real credit is goods and repayment has to be by doing good. Money is (i.e. functions as) merely an accounting device which enables one to keep track of credit received from society and what one has contributed in return: as a seller by giving credit and as a buyer by maintaining one’s self and earning one’s keep helping mankind do what is necessary to “renew the face of the earth”.
Efficiency isn’t everything, Robert. Giving the impression that a transaction is complete has the effect of encouraging fly-by-nights to give less or charge more than is just. The same transaction counted for specifically as a debit to the receiver of goods and a credit to the distributor of them enables what is now called the “banking” system to create a record accounting for what Good Pope John called “the reciprocity of rights and duties”. Whether anyone will employ us or not, we have a right to our keep and a duty to do what we can to earn it.
Since we start off too little to earn, we start off in debt to society, and (re your (2)), it won’t really matter if some individuals remain permanently indebted just so long as together we enable nature to produce more than we need. What we do need is to know what needs doing that we can do. I don’t accept your (3), though of course I would prefer everyday credit issuance to be automated and personal responsibility (encouraged by those who know our circumstances) to control defaults. At (4) there is thus no need to exclude those who, through force of circumstances, cannot pay in real terms: debts not repaid by their survival will simply accumulate and be written off as un-payable when they die. At (5) I agree: personal credit should be rationed (c.f. credit card limit) and business credit judged on the value of the business being conducted. At (6), what pay? With enough credit, work can be worth doing voluntarily because it is necessary or honourable, not rent-collecting for fraudulent banksters and their puppet governments.
So at your summing up, no, I wouldn’t prefer to be paid the full price for my work, for spending that pay would indebt me. Like a hitch-hiker I would be glad of a lift when I need one, and glad to give others lifts at times when I have more than enough and the need is theirs. Over my lifetime I would prefer to have done sufficient work to more than repay my real cost.
I’m not going to argue about your 20%, for you are still thinking in terms of today’s highly fraudulent and problematic monetary system. I seem to remember a quote describing that recently as the worst of all possible systems.
Dave,
I am a rather intermittent reader of this blog. Would you refer me to your credit system explanation and proposal?
I think that efficiency is everything for several reasons.
1. We are talking about “other peoples property” Just as with safety, due care must be exercised not to hurt someone else. Reciprocity of this care should be expected.
2. There are two explanations for inefficiency.
a. waste
b. one persons property being given to an undeserving person.
Waste obviously should be avoided because its effect is no different than stealing.
If property is given to undeserving people, an industry to encourage this “misappropriation” is created when the undeserving take steps to encourage their win-fall. (banksters and for hire politicians.) It is a fact of life that some people will steal other peoples stuff if given the chance. Pay everyone their due for their work and lock them up if they are thieves
3.Under an accurate money system, your pay for honest production, supplies information on how much you are contributing to society. Otherwise only God knows. Maybe you are doing something for you own amusement that benefits no one.
I would rather be paid full price for my labor because I don’t have to spend it. I can help other people as necessary by giving it away, (maybe buy a car to give others a lift)or save it to take care of myself so as not to trouble others.
Dave,
Sorry , I forgot the most important problem of inefficiency.
It does not distribute evenly. A theoretical 10% average inefficiency in practice means the the price fixing plutocrats can actually make money by taking advantage of the people of lesser means so their efficiency is 200%. The lowest price takers have to settle for what they can get which could be as low as 10%. (or lower even 0%)
Averages don’t tell the whole story.
Allocation of efficiency is what causes today’s inequality in pay.
Robert, you can follow what I’ve written on the RWER blog by accessing the archives via the index, well below the quick index to latest responses. The issue, however, is not as simple as an explanation and proposal: indeed so specialised is our society that I’ve not found a publisher who understands its depth sufficiently to dare to be interested in it. What I’ve been arguing here (in bits relevant to particular discussions, and without being able to present and discuss diagrams) is for an ethical philosophy of science, the shameful neglect of information science, the analytical methods used for IT systems offering a much more honest, complete, realistic and simple interpretation of political economies now controlled as much by mis-information and legalised theft as by corrective information, the need for Copernican revolutions in the interpretation of ownership and money, and a bottom line that the whole system would work much more simply if money were replaced by interest free credit cards and incomes by credit limit adjustments. Giving everyone a generous living allowance rather than a wage would mean that government employees, bankers and traders would not need tax, interest payments and profits to provide them with an income, while motivation could be provided by means of prizes for good work in any field. In any case, this discussion is at the level of concepts. Any detail is up for discussion.
On inefficiency, it may interest you to know that in physics it amounts to the ratio of useful work done to energy expended (the difference being your “waste”), but in information science these become the ratio of the information content of the message to that of the signal, and the problem is not waste but incorrect information. The genius of Shannon was to use the “waste” information capacity for error-correcting information, much as we do when we see a typo and work out what was intended from the rest of the message. In effect there is a trade-off between efficiency and reliability, and when there is more than enough for everyone, making an adequate distribution of it 100% reliable is far more efficient overall than 100% efficiently producing waste for 1% and scarcity for 20%. I don’t think we disagree on this, since it seems to be what you are trying to say at #26.
Dave, although I have no technical knowledge of information since, I do have some of its non-technical developmeent after WWII. And I understand the “shameful neglect of the information sciences” by economists bcause of their shameful neglect, while wallowing in a sea of ignorance, of almost every intelligent system outside their bslliwick. What you are trying to do is a hard sell in this environment.
Of course, Robert L, and thanks for the sympathy. I keep trying on the basis that if one doesn’t keep trying one won’t succeed!
can someone please explain to me why, aside from economists, and cranks who want a return to specie, anyone should care about this seemingly arcane argument over the definition of “money”.
also, i think the original poster is giving a somewhat crabbed view of the ECB definition; they didn’t say money (cash) can always be traded with no transaction cost, merely that it can be.
it is this sort of angels dancing on a pin kind of nitpicking that makes me feel this discussion isn’t very important in teh real world.
also, the length of the replies – in bloggerland, there is usually an inverse relation between number of words and importance of subject
Ezra, I’ll give it a short shot. In many economic models the central bank is a potentially benign and in any case very powerfull institution. In these models it’s the central bank which creates the money ‘at will’ and which therefore by consistent responsible behaviour (i.e. keeping a lid on the money kettle) can also influence ‘expectations’ about the monetary environment at will. This means that in models (and therewith in policy) central banks are supposed to have an undue amount of power and influence: as long as the central banks function smoothly, financial instability is ruled out, in these models (and ‘normal’banks can be deregulated). This is called ‘exogenous’ money. Things are shifting, but especially academic neo-classical economists still like to think this way. I won’t deny that central banks have a lot of power – but it’s not them who create the money (in Post-Keynesian/Austrian/Institutional economic thinking). Which means that despite ‘responsible’ behaviour of central banks financial instabiity (think 2008) can be, ESPECIALLY WHEN ‘NORMAL’ BANKS ARE DEREGULATED in the realm of money creation. I wanted to highlight an (in my view) sorely neglected part of this process of creating means of payment. With as a hidden agenda highlighting that central banks, even when responsible, are not all powerfull. And as a ‘colleteral’ agenda highlighting that markets themselve often create the money to make markets work (albeit of course based upon an existing monetary/legal/cultural framework). The exiting possibilities of this are, to me, the possible combinations of the internet with a kind of clearing system of these receivables with the ideas of somebody like davetaylor1, on this blog.
So, it’s not just an arcane discussion. The amount of disagreement between economists is indeed baffling and shamefull, but that’s another question.
Thanks for acknowledging my existence, Merijn – a rare event!
Ezra, on the issue of brevity in blogging: like Justaluckyfool’s Frederick Soddy I’m coming at economics from a scientific background: in my case information science. One of two key conclusions I’ve come to (it becomes obvious when you work with information systems) is that words act as indexes. What you are suggesting would be equivalent to not reading a book but judging the importance of a word/opinion by how often it appears in the index. Where then, if not by writing and reading the book, are people who don’t understand each other’s definitions, arguments and conclusions or arguments to learn from each other before life moves on?
This is mostly an argument between mainstream macroeconomists, whose models usually assume that the supply of money is determined by a central bank, and less mainstream economists believe in so-called “endogenous money” theory in which the central bank can create money, but does not significantly influence the overall supply of money because private sector money creators will simply offset the central bank’s action.
However, the point that I’ve made above is that there is no real disagreement between the two camps. First, this post mischaracterizes the mainstream view–the ECB is well aware that private banks also create money. But that does not mean that the ECB doesn’t control the money supply. The reason is quite simple: in equilibrium, money supply equals money demand. Money demand is the total amount of money that the public wants to hold at any given interest rate–at high interest rates they want to hold very little money (since they will invest it all and earn interest), while at low interest rates they want to hold more money. Both the endogenous money and the mainstream camps agree that the ECB controls the interest rate, so they both actually agree that the ECB controls the money supply by way of money demand. Hence, both endogenous money and mainstream models produce the exact same results.
It is worth noting that in mainstream models, money creation is usually not explicitly modeled. Since we know that money demand depends on the interest rate, mainstream economic models (such as New Keynesian models) simply assume that the central bank controls only the interest rate, and everything else works out. This is also exactly how endogenous money models work, so the nature of money is not actually a point of disagreement.
Matthew, have you never heard of reserve banking? Money demand isn’t anyway what the public wants to hold at a given interest rate; when 96% of it is whistling round the stock market changing uses automatically in fractions of a second, it is how much they want to USE at a give time, the interest per second being negligible, and how much (and how inelastically) they NEED it at a given time, notably to buy houses when they don’t have any significant options other than to let the bank buy their house for nothing and rent it back to them until they’ve paid for it, usually in work paid for in the same type of ‘nothing’ money. The name of the game is musical chairs: the money-spinners use money to inflate prices in the hope of passing on purchases at an inflated prices before time is called. If you think this is daft you haven’t done your homework by looking at reality rather than books purporting to be about economics.
Matthew @ #9, #11, #12, 33 and my response at #10 to “Is there anyone arguing that the ECB doesn’t control the interest rate?”
One doesn’t have to be a mainstream or less mainstream economist to see for oneself that some people buy and sell or rent out property, labour, goods and indeed money in the hope of inflating its price and thereby making a profit on it. That Matthew at #9 was positing absolutes and not seeing reality or significance suggested to me he was one of those autistic economists that the PAE/RWER movement has attempted to respond to. I perhaps owe him an apology for wondering if he had heard of reserve banking, but I was responding belatedly to #9 where he refers to “private businesses” and hadn’t got round to #33 where he refers to “private banks, saying:
“First, this post mischaracterizes the mainstream view–the ECB is well aware that private banks also create money. But that does not mean that the ECB doesn’t control the money supply. The reason is quite simple: in equilibrium, money supply equals money demand.”
Well, even if the ECB/BoE controls the amount of money swilling around in the banking system as a whole (including the money and second-hand stock markets), it is notoriously not controlling the tiny fraction made available to the large small-scale fraction of the real economy. As to equilibrium, let’s here what one of the saner economists, Kenneth Boulding, had to say about that: (Economic Analysis, 1969):
“The pursuit of the equilibrium price by the actual price is rather like the activity of a dog chasing a rabbit. The position of the rabbit at any one moment is the equilibrium position for the dog, for that is where the dog wants to be, the spot towards which all the forces acting on the dog are driving him. Nevertheless, the dog may never reach the rabbit because by the timee he has reached the rabbit’s original position the rabbit is no longer there, and the dog starts too to a new ‘equilibrium position’. In much the same way the actual price at any moment may be moving toward an equilibrium price which itself changes as the actual price approaches it. But the fact that the equilibrium price may not be the actual price does not mean that it is not important. The rabbit in the above illustration is absolutely necessary for the explanation of the dog’s behaviour, even if it is never caught”.
So the chance of two continuously varying quantities actually equalling each other is minimal, Matthew, and even this does not address the real problem, which is the monetary tail wagging the economic dog.
Apologies for lack of para spacing (removed by the system) and residual typos (my wife wanted something just as I was preparing to post this).
We can do without the reference to autism. I happen to know a mathematician with autism who is way smarter than any of us.
“people buy and sell or rent out property, labour, goods and indeed money in the hope of inflating its price and thereby making a profit on it.” Perhaps I misunderstood what you were trying to say. Yes, people invest in assets in order to earn profit when the price goes up. The amount of profit they earn on these assets is a type of interest rate, so cross apply all my argumentation. But this is quite different from “inflation” which is what I thought you were talking about. If you want real-world data rather than theory, just look at how inflation fell during the stock bubble of the 1990s and the housing bubble of the 2000s in the US. The fact is that we’ve never experienced a hyperinflation driven by money velocity rather than money supply. In the long run there is a near-perfect 99% correlation between price level and money supply both when you look at cross-sectional data across countries, and when you look longitudinally within each country.
Kenneth Boulding’s critique is fairly immaterial, because the equilibrium framework is flexible enough to capture the transition dynamics he describes. If you observe price data that deviates from the equilibrium behavior in your theoretical model, the problem is not that the data is off the equilibrium path, but that the model is predicting the wrong equilibrium path. I’ve never found an example where there was no possible way to model a real-world phenomenon within the equilibrium framework.
“this does not address the real problem, which is the monetary tail wagging the economic dog.” Ok, the feature that defines the New Keynesian models is nominal price rigidity. Without it, monetary policy would have no effect on any real economic variables except real money balances. But because in the real world prices are sticky, monetary policy matters (sticky prices cause the short run supply curve to be upward sloping). Where the mainstream New Keynesians differ from endogenous money proponents is on the source of monetary policy: the mainstream typically describes central banks fixing the money supply and affecting interest rates by way of equilibrium, while endogenous money proponents say that central bank actually only controls the interest rate, leaving money supply to be determined by profit-maximizing firms in equilibrium. My point is that these are two sides of the same statement: the only way it can be true that private sector firms are maximizing profits is if, at the interest rate targeted by the central bank, money supply equals money demand. If you control the money supply, you control the interest rate; if you control the interest rate, you also control the money supply. Who actually does the money creation is completely irrelevant to the results of the model.
I have a mathematically brilliant autistic in my family, who remembers everything he’s told but doesn’t observe or question it, which is the point of the analogy with economists.
My point on the velocity of speculative transactions in the stock markets was that they have been automated, leaving no time for validation of legitimacy, human judgement or adjustment in light of changing circumstances. As for lies, damn lies and statistics about inflation in undefined markets, the lovely house I bought forty years ago for £4,500 is on the market today, in the midst of a housing market depression, for £495,000. Over the same time wages have gone up about tenfold, the effect on a wage-earner being no different from that of hyper-inflation: what he may need is no longer affordable.
The point of Kenneth Boulding’s critique for me is that the dog has a single-minded purpose, and even if equilibrium analysis can cope with that, it is totally inadequate, for there are six logically different types of purpose which need to be prioritised, synchronised and harmonised in an economic system. Making money out of (or by doing) nothing is not one of them. We need to enable Nature to replenish itself, everyone to consume what they need, the distribution system to supply everyone, the production system to generate what is needed, the factory system to enable that production, R & D to discover new options and eliminate problems, and transaction accounts to reveal problems which need to be dealt with before they have time to spread. Localisation and openness of monetary accounting is necessary for the latter, suggesting not just national and local currencies as well as global and international currencies, but in principle, credit authorised for a specific purpose to be written off where that purpose has been fulfilled.
Looking back at the point of the original discussion, I agree with the Minsky position: anyone with something to lend, not just bankers’ reputations, can authorise credit accounted for in monetary terms. In Merijn’s summary of the mainstream position, money is a unit of account (i.e. linguistic). However, it is not a means of payment: it is in Fregean logic a reference to or record of a real repayment which has been made, e.g. when a shopkeeper distributes goods obtained ultimately on credit for that purpose and banks the takings. Likewise it is not a store of value, only a reference to an authorised credit limit not yet taken up. The philosophical – not economic – issue here is whether the modern legal interpretation of “ownership” as conferring absolute, transferable and potentially unlimited rights is justifiable, given the older “stewardship” tradition and what Locke had intended: earned rights of secure possession limited by not depriving others of as much or better. In other words, is it better to acquire limited property on tick from society, or by theft/buying cumulatively with “nothing money” and defending our acquisitions by force?
The fallacy of velocity theory of money’s “circulation” is that it forgets that 97% of money is created as debt (not just interest charged on money, but also the promise to pay kind of debt) In REALITY velocity THEORY leaves a trail of debt (promises to pay) engendered by every purchase made….that far exceeds the PRICE that money has liquidated in any and every additional purchase it makes. Here is an explanation of the process I am speaking about:
A wage-earner A. uses a $10 bill of his income to buy two
pairs of shoes from a shoe merchant B., who immediately goes into the
adjoining store and spends the $10 to purchase some shirts from C.,
C in turn immediately goes across the street to grocer D. and buys
some provisions costing $10, grocer D. then takes the $10 bill across
to the local garage E., to buy some gasoline and oil.
The contention is that the $10 bill provided purchasing
power to the extent of $40 during the day by virtue of its “velocity of
circulation” in enabling $40 worth of goods to be purchased by consumers.
On the face of it this would appear to be the case, but on examination
it will be found to be a complete fallacy.
Because all money issued creates a debt of the corresponding
amount at its source of issue, for all practical purposes merchants
B., C., D., and E. can be assumed to be operating on credit loans
from their banks with some “savings” invested in their stock.
The proceeds of every sale they make can be divided into three
parts: (1) repayment of a bank loan before a new line of credit can
be obtained to replace stock, (2) payment of operating costs and
(3) net profit- i.e. personal income for services. Suppose that in
each case B.,C., D., and E. work on a 15% net profit. From each
purchase amounting to $10 they would be obliged to set aside – say,
$8.50 repayment of their bank loans for replacement of stock and overhead
costs, and only $1.50 as personal income. This is likewise true of C. and D. Therefore, by spending the $10 both of them created a liability against their future purchasing power.
When A. obtained the $10: in wages there was against it a
corresponding cost in the prices of goods coming on the market. This
liability must be kept in mind.
On buying the two pairs of shoes from B., A. surrendered his
right to $10 purchasing power and B. acquired the right to $1.50 of
this, the balance going for the repayment of his bank loan and cancellation
of the money as shown previously. (If he was operating on his
own capital it would make no difference, for the $8.50 would have to
go to the replacement of working capital with the same result.)
If B. does not repay his bank loan, but spends the whole $10,
he will have a liability of $8.50 outstanding which will constitute
a debt against future purchasing power. In other words he will have
to sell over $50 worth of goods without getting any portion of it for
his own use in order to make good the deficit.
Thus while it is true that in the example quoted ,the $10
bill resulted in $40 worth of goods reaching consumers, there was
created a trail of debts against their future purchasing power amounting
to $10 (the liability against the original issue of the money) plus
$8.50 (B.’s undischarged liability) plus $8.5O (C.’s undischarged
liability) plus $8.50 (D.’s undischarged liability)- making a total
of $35.50. Suppose E. now meets his obligations of $8.50, he retains
$1.50 as his net profit–:ie.,as purchasing power.
It will be evident that the effect is exactly the same as
if A. bought gasoline, etc., from E., and B. and C. and D had obtained
goods from each other “on time”, pledging their future purchasing
power.
The so-called “velocity of circulation” did not increase purchasing power at all.
The fallacy in the theory lies in the incorrect assumption that money “circulates”, whereas actually it is issued against production, and withdrawn as purchasing power as the goods are bought for consumption.
Rather as Frederick Soddy would say:
The $10 loan from the bank is really a counterfeit $10 which turns into $40 counterfeit (by velosity) and since it is NOT backed by the “goods and services” of the people of the nation that OWNS the represented “goods and services” it is in fact “credit expansion”.
A massive “credit expansion” can only lead to a collapse of the moneytary system.
It must be taken under control before it burst.
Ok, If this is correct, one must show why the first $10 is counterfeit.
There is in reallity two types of lending.
Type one is “true lending”.
When someone takes their money (be it gold or fancy colored paper) which represents a value of “goods and services” literally turns over that value to someone else and in doing so “gives up their right to redeem their money for the goods and services represented.
The lender surrenders their right to the borrower. ONLY ONE HAS THE RIGHT TO THE VALUE.
Type two is “fictictious lending”
When a bank (meaning a bank or a financial institution) has $10 intrusted to their care, something that they do not OWN, merely the guardian of, when they take that and issue
$10 into the account of a borrower ,they have created a counterfeit value of $10 worth of goods and services. NOW TWO PEOPLE HAVE THE RIGHT TO THE EXACT SAME VALUE.
This is not sustainabe, yet was made legal.
Can you see the problem, When banks made loans for $16 trillion using $1.6 trillion in reserves (Not only money not owned) its also money that isn’t even backed by $1.6 trillion of value of goods and services).
Someone must honor this issuance. Us Constitution-“payment of all debts”-“good faith and credit of the American people”
Read more: “The Role Of Money” Frederick Soddy.
“The Wealth of a Nation is in how it Redistributes its Wealth” justaluckyfool
As a follow up to the above post, considering that 1) cost accounting enforces a scarcity of INDIVIDUAL incomes in comparison to PRICES, and that 2) this enforcement is in effect AT ALL TIMES whenever money actually enters or re-enters commerce/the economy and that 3) in the normal operation of the economy as illustrated in my velocity THEORY expose above more debt (promises to pay) remain than prices liquidated…….what is the SYSTEMIC solution to the ENFORCED build up of promises to pay?
Well, currently it is to BORROW. Unfortunately even at 0% rates that isn’t actually a solution because even a 0% loan incurs a cost. Keep in mind that the situation described in the velocity expose and in the above paragraph occur IN THE NORMAL OPERATION OF THE ECONOMY. That means the system as it is….is a flawed, debt inducing ponzi scheme. Minsky was right, but was only looking at the end of the process. The entire process is ponzi, its just that central bank injections, government spending etc. momentarily obscure the ponzi nature of it all.
The ONLY way to resolve this flawed system is to increase individual income without increasing any additional cost. That means IN ORDER FOR THE SYSTEM TO ACTUALLY BE FREE there must be instituted a monetary policy of Grace, the free gift in the form of a citizen’s dividend. In addition there needs to be instituted a compensated (back to retailers) price discount mechanism to consumers to avoid any cost push or demand pull inflation for a prescribed period of time.
TO STEVE-“That means the system as it is….is a flawed, debt inducing ponzi scheme. Minsky was right, but was only looking at the end of the process. The entire process is ponzi, its just that central bank injections, government spending etc. momentarily obscure the ponzi nature of it all. The ONLY way to resolve this flawed system is to increase individual income without increasing any additional cost.”
THE ONLY WAY ????
What if :
A value (Wealth) for ALL the goods and services of America were to be set. (ex., $1,000 trillion-yes, the magic word , quadrillion).
Over a long period of time this “Virtual Wealth” would be allowed to change for surely America may increase thru intellegence and innovation its “goods and services”
What if :
The value, wealth of this nation uses fiat currency (colorful paper) as a system of recording
the distribution and circulation of the wealth of its nation.
The governing agency does not OWN all the goods and services because the rights to these goods and services remain with their lawful owners. Therefore, issuance must have a ways and means that will control that it must ultimately be “redeemable” by its one true owner. This calls for “true lending”.
The “flaw” is in that we are now in the process of “fictitious lending”
justalucky,
I’m not disputing the fact that the Banks have hijacked the economy with their pre-crisis lending to everyone and your dog’s uncle plus their derivative/repo/rehypothecated nightmare. That is the aberrant nonsense that comes about with the wedding of greed and (mistaken) creativity in finance, and that debt must be eliminated by a modern debt jubilee, a sane and humane unwinding of the derivative crap pile and then either severe regulation of such or outright banning.
However, what I am pointing at is the additional unacknowledged and uncorrected flaw going on in the normal operation of the system which insures price inflation and hence loss of purchasing power (the scarcity of income in comparison to prices that is enforced by cost accountings conventions). If we don’t recognize and correct that flaw then we are doomed to keep repeating “the business cycle.” Furthermore, the ONLY way to raise individual incomes without clicking in that scarcity enforced by cost accounting is to go outside of the normal flow of money from the Banks to businesses and then to individuals and DISTRIBUTE it DIRECTLY to the individual in the form of a dividend. Throw in the already problematic fact of Technological unemployment and innovation’s increasingly rapid elimination of the need for human input in production and the problems of relying on only pay for work become even more severe. A monetary policy of Grace, the free gift is the only answer to these problems.
An inward sense of Grace is the psychological experience which enables one to be free from any negative reactions to outward events or any negative independently self generated internal creations. It is a temporal universe monetary policy of Grace which will make the system mistakenly believed to be free….actually free. I think this is no coincidence. I think it is simply the wisdom of recognizing that if you are human, then you must have regard for humane rules, and the only way to thoroughgoingly do that IS TO ALIGN THE IDEAS, VALUES AND EXPERIENCES THAT YOU BASE YOUR SYSTEMS ON WITH POLICIES THAT ACTUALLY REFLECT THE SAME.
Condense human Wisdom down to the four ideas, values and experiences of Faith as in Confidence, Hope, Love and Grace. Make these the basis upon which you derive policy in ALL human systems and that alignment will make our systems function not only more humanely but actually correctly. This is my contention in my theory of Monetary, Economic, Spiritual Synthesis Theory (MESST) put forth here:
Steve, I can totally agree with what you are saying, but things don’t just happen. In your last paragraph, policy is “derived” not just from values but by logic and from understanding of what is possible. One has to have faith in something. The logic of derivation is retroductive rather than deductive: we need to experience grace in order to love, hope and eventually have confidence. Here I need to understand your two lists of four as two sides of a matrix: having the IDEA of confidence, valuing it, and learning to trust those whose grace you have received; likewise with hope, love and gratitude for being shown the “Why?” and “know-how” of grace, which enables us to be graceful in our turn.
Though it may not appear like it, in the third “Kenneth Boulding” paragraph of #48 I was trying to specify an economic structure which achieves your “Monetary, Economic and Spiritual Synthesis”. This is a four-level network of communication channels with energy and information input/outputs, through which money (information) flows to direct energy (spirit meaning wind) through the phases of cyclic sequences of biological and economic functions performed by specialists internally directed by their spirituality (personality). Imagine children, fathers, mothers and more reflective old folk fed by nature, linked by communication and currently controlled by the animal spirits of financial directors.
I wish to CHALLENGE:
*Steve:”The ONLY way to raise individual incomes without clicking in that scarcity enforced by cost accounting is to go outside of the normal flow of money from the Banks to businesses and then to individuals and DISTRIBUTE it DIRECTLY to the individual in the form of a dividend. ”
**Ans. Justaluckyfool. ” DIVIDEND, no, no, that is wrong, that is stealing, yes, pure and simple theft by the governing appropreating the “goods and services” of the nation and REDISTRIBUTING those goods and services as it choses. Why would we allow the gov. to counterfeit the currency when we discover that that is the illness while inequality is merely a symtom.
Rather than steal “all the goods and services”, use the means of distribution to BORROW with an attachment to insure return to it’s rightful owner.
*Steve: “Throw in the already problematic fact of Technological unemployment and innovation’s increasingly rapid elimination of the need for human input in production and the problems of relying on only pay for work become even more severe. A monetary policy of Grace, the free gift is the only answer to these problems. ”
**Ans. Justaluckyfool. “Since the beginning of recorded history, human innovation and intellegence has made it possible for all mankind to elevate their standard of living and to make progress
toward their pursuit of happiness.
BUT as Michael Hudson states that GRACE may have been put on hold by the develish Imps, INTEREST and COMPOUND INTEREST. That most powerful force in the universe being used against mankind instead of for the betterment of all mankind.
“The Wealth of a Nation is in how it Redistributes its Wealth”.
justalucky,
“DIVIDEND, no, no, that is wrong, that is stealing, yes, pure and simple theft by the governing appropreating the “goods and services” of the nation and REDISTRIBUTING those goods and services as it choses.”
That is not what I’m suggesting. A universal dividend 1) is not REDISTRIBUTION, but DISTRIBUTION. There is no theft from anyone to go to others. and 2) the government is not buying anything, the INDIVIDUAL receives his dividend and along with any pay for work purchases what he cares to.
“Rather than steal “all the goods and services”, use the means of distribution to BORROW with an attachment to insure return to it’s rightful owner.”
No stealing is committed as per above, and borrowing, even at 0% still incurs a cost to the individual and also clicks in the built in scarcity of individual incomes in comparison to prices ENFORCED by cost accounting’s conventions.
“BUT as Michael Hudson states that GRACE may have been put on hold by the develish Imps, INTEREST and COMPOUND INTEREST. That most powerful force in the universe being used against mankind instead of for the betterment of all mankind.”
We are definitely at the point of the necessity of a modern jubilee in order to reset the economy because debts are simply onerous, but interest is not the BASIC problem as I explained above because even 0% loans incur a cost to the individual whose income is already scarce compared to prices. I love Michael Hudson for his “fire in the belly” moral fiber, however, REDISTRIBUTIVE money systems are obsolete and will always be controlled by wealthy elites. Redistribution is dead! Long live DISTRIBUTIVE MONEY SYSTEMS!
Steve, I don’t know how compound interest can be used for the betterment of mankind. Maybe for the part of the mankind who is entitled to receive it, it is. For the part of mankind who owes it, it is enslaving.
I’m also for Distribution, rather than Redistribution. But in a different sense. Distribution of income happens mainly in the financial markets, and the losers are workers, consumers and SME. The winners are financial powers. Then we have the keynesian redistributive policies, to correct this wrong distribution, that is not only unfair, but unsustainable by the collapse of demand that just kills the market. Since redistribution is no longer possible thanks to globalization and the impossibility to tax companies who produce in third countries and pay taxes in tax heavens, then the only way out is to go to the origin of the problem: the wrong distribution of income.
Debt jubilee is OK maybe to solve a situation in a point of time. But it doesn’t change the inner engine that produces the distribution of income that causes the problem, and I would add that it is arbitrary too. An interest rate of 0% does change that. I’ll explain why.
A money system, like the one we have today, in which money is created as a debt with interest means that there is never enough money to pay the debts. This means there needs to be new money getting into the system all the time. This has two major consequences: the imperative of grow and a very special power scheme of the society I’d like to draw your attention to: if we always need more and more money to pay the debts, then the whole society depends of this inflow of new money. How can you make rules to limit the benefits of those you depend on? This parent-child relationship of the financial powers with society hinders the sheer possibility to regulate the financial and economic powers, to establish minimum wages, to tax capital holders, etc. Because if they don’t like the laws, they would go and settle their companies elsewhere, which is a perk they won in a previous battle against society.
Creation of money with a 0% interest rate means there is the same quantity of money that is owed, and we don’t need more.
This frees us from the imperative of growth. You would only need to grow if there are savings, which will be not so interesting if there is no reward for savings. We can grow if we want, by allocating more credit to the sectors of the economy that need it, but we wouldn’t be forced any more.
But more important, this frees us from the kidnap society is subject to by the financial powers, this makes possible to regulate the market, and distribute income more abundantly to workers and consumers, which is something you can’t do if you depend on financial powers to provide you with new credit to avoid recession all the time.
“..To to regulate the market, and distribute income more abundantly to workers and consumers, which is something you can’t do if you depend on financial powers to provide you with new credit to avoid recession all the time.”
**Correct, because they are “private for-profit ” corporations.
But you could redistribute the wealth of the nation IF the system of distribution, the initial issuance is done in such a manner as “true lending” with an attachment of a means to recover that currency as well as all the previous currency that had been introduced by way of “fictitious lending”.
E.G., If the Feds were to make $200 trillion available to the financial institutions
at 2% for 36 years so that they would be able to comply with 100% reserves, that would set in motion a recovery of $400 trillion for the true owners of “goods and services” of the nation.
One most note that giving the governing $11 trillion a year as revenue would collapse the currency (being unsustainable) without the currency being redistributed.
It would be extremely beneficial in that it would mean by ending federal income taxes, and FICA an increase in wages, profits, and a lower cost of production, all of which is , Great News!! Zero Income Taxes Solves Worldwide Crises” (Justaluckyfool)
Also, there would be a control to inflation since the currency that must be redistributed gets
spread out over an more sectors as it is used to fund SS, Medicare, Defence, etc.,
Without any increase in deficit spending. And of course it would reduce the debt.
“Yes, You can lower taxes, pay off the Debt, and at the same time increase spending” (justaluckyfool)
THE SOLUTION IS : TAKE AWAY “FICTITIOUS LENDING” FROM THE BANKS AND ALLOW “WE THE PEOPLE” TO REPLACE IT WITH “TRUE LENDING”.
All who read this,
Please challenge, improve, then post.
Please, read more. What I write contains no new thoughts of my own.
It is a compilation of what I have read on the net.
Articles by William K Black,
Michael Hudson,
The book, “The Role Of Money” by Frederick Soddy,
And others:***** “Believe nothing merely because you have been told it…But whatsoever, after due examination and analysis,you find to be kind, conducive to the good, the benefit,the welfare of all beings – that doctrine believe and cling to,and take it as your guide.”- Buddha[Gautama Siddharta] (563 – 483 BC), Hindu Prince, founder of Buddhism