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Links and fests

(1) According to some news the arctic sea is covered with ice, once again. Fortunately, this is the internet age – and you can check it. Aside – the fact that we have such real-time data is of course a-ma-zing.

(2) An underrated statistic from the European Central Bank: monthly data on the Eurozone balance of payments. The twelve month cumulated total of the current account data show (almost in real-time) that the surplus increased from 0,4% of Eurozone GDP in April 2012 to 1,8% of GDP in April 2013, quite a boost for such a large area. The more stunning statistic: despite this boost the volume of GDP declined with 1,1% in (almost) the same period (nominal GDP was flat). Which means that domestic demand plummeted. If the Eurozone had been less lucky, for instance because of a dip in China and the USA, GDP might have declined with 2 to 3% or even more. Those are the risks which the Troika is taking.

(3) Paul Krugman is tinkering with a model which explains monopoly rents on products with ‘zero’ or at least very low production costs (pharmaceutical products, computer programs like Excel). But he does not yet mention that (A) electronic fiat money is the ultimate zero production costs product while (B) the seigniorage interest profits made by the banks which produce it are to quite some extent based upon ‘land’related loans. Think of a loan for house purchase, financed by freshly produced money and a 4% interest rate. This income often is, to the extent that it’s used to buy already existing land with a high location value or leads to an inflationary increase of house prices, an often overlooked rent income.

(4) I spent some time on the island of Terschelling, at the Oerol festival (something in between Burning man and the Hay festival). ‘Oerol’ is the local dialect for the Dutch ‘Over al’, which is the proper way to state ‘All over’. About thousand performances take place on 63 stages spread ‘All over’ the rather large island as well in an unspecified number of pubs. Any serious festival organizer will however directly tell you that this won’t work. The logistics are forbidding. But it does work, already since 1982. What makes it work? This:

bca

And of course, one of the stages:

strand

  1. Hepion
    June 23, 2013 at 1:42 am

    Interest to the bank is like fee for it’s service of underwriting. Borrower could also buy house from a seller directly by promising to pay money later, if seller were willing to bear credit risk burden. Usually not so bank acts as a middle man checking borrowers creditworthiness and taking on the credit loss risk themself if things go bad.

  2. davetaylor1
    June 23, 2013 at 8:04 am

    One of your best blogs ever, Merijn. I loved the bikes! Malvern ain’t so flat, but I still try to use mine and my son loves his electric one. Also I live just 50 miles from Hay, on the boundary of Wales, and I’m ashamed to say I’ve not yet been to its Eisteddfod-like Festival. I’d always thought of the town in terms of its huge collection of second hand book shops. Evidently missed it this year but its on the calendar for next!

    Hepion’s reaction to the Krugman argument seems an exceptionally clear expression of a traditional understanding of banks. As I see it, however, the banks don’t don’t actually underwrite, they arrange under-writing; and if the interest is its fee for doing so, it ought to be a one-off, not in exchange for collateral, and not in total typically twice the sum under-written. Yes, they perform the important function of checking credit-worthiness, and ought to risk their reputation if they make and have to write off too many bad loans (though it seems the big ones don’t). It costs them virtually nothing to recreate IOU money lost, so it is not they who lose out, but unfortunate borrowers (like those who lose both their jobs and their collateral), and the community insofar as borrowers have spent rather than earned their keep. (As happened when unproductive stock market fraud and speculation led to Government bail outs). Even recalling such truths is painful enough, Hepion, so I am sorry: it may be shocking to be confronted by them.

    • Hepion
      June 23, 2013 at 9:36 am

      What you mean credit losses costs banks nothing? They pay the whole bill!

      Demand deposits banks create are not asset of the bank, as you seem to imply. Rather, they are an liability. Loan bank makes is recorded as an asset of the bank. After all, someones promise to pay money to the bank is worth something. If bank loses assets it’s money is gone! Deposit liabilities remain. Two different things.

      See Dan Kervik’s explanation: Do Banks Create Money from Thin Air?
      http://neweconomicperspectives.org/2013/06/do-banks-create-money-from-thin-air.html

      • merijnknibbe
        June 23, 2013 at 3:23 pm

        The point is – when I pay back my mortgage the money is gone too. This is not the case when I borrow from a penion fund (which can re-invest the money I pay back). But it is the case when I pay back to an MFI, a Monetary Financial Institution which are banks with ‘a licence to print’. The bank creates the money when I borrow, the money is destroyed again when I pay back and the interest is the money the bank earns. What an MFI-bank loses when a loan is written off is not the money – but the interest foregone.

    • Hepion
      June 23, 2013 at 8:33 pm

      Bank assets – bank liabilities = bank capital. Capital is in essence what bank owes to its shareholders. So if you detuct loan losses from bank assets, which they are, loans bank have made are bank assets and loans that do not get paid back are not anymore, it is clear that bank capital, or shareholders equity goes down. Owners of the bank pay for loans gone bad.

      Again this idea that banks can manufacture their own assets willy-nilly from thin air is debunked in that Dan Kervik’piece. They must obtain external assets to pay for the debt they own to other people/entitites, namely what is called M0 or high-powered money. And that does not come from the banks it comes from the government.

      • merijnknibbe
        June 23, 2013 at 9:48 pm

        Exactly. Banks can’t create their own assets. That’s why the money banks (together with the borrower!) create when they lend money disappears again when the loan is paid back. The asset is the promise of the borrower to pay interest and to pay back the loan, not the money created (which might be in a deposit at another bank).

      • Hepion
        June 24, 2013 at 11:51 am

        We use bank debt as a payment medium. It is something i would not even define as “money”, but simply as “debt”. I know there are many different definitions what money really is. I would define money as government issued M0, that is payment medium with wich monetary debts are promised to be settled in. But 3rd party debts are clearly financial assets, and financial assets are good for saving and making payments.

  3. davetaylor1
    June 23, 2013 at 11:54 pm

    At #3, Dan Kirvick’s opening assumption is “Clearly you are going to have to hand over something of positive value”. Actually, no. Clearly you are going to have to hand over something which other people TAKE AS HAVING positive value. When one carefully analyses what really happens in the banking system it turns out that the banker’s promise on the note in front of me “to pay the bearer on demand the sum of ten pounds” is of no real value if all I get in exchange for it is two £5 notes making a similar promise.

    In the system of Reserve Banking, even if a central bank starts with £1000 in gold as real collateral, it gives itself a receipt [share entitlement] for the gold, then borrows say £20,000 from gold it hasn’t got to start up 20 commercial banks on an IOU basis, each taking the risk that at this level of capitalisation, no-one will want as much as £1000 worth of real valuables before they are in a position to provide it. The initial capital and any loans or payments made thus amount to no more than IOU’s, which cost the banks virtually nothing to write. Hepion, “They pay the whole bill” in IOU’s! Demand deposits of IOU’s are not an asset of the bank because they have no real value; but nor is something you can recreate at will a liability. Loans of IOUs are similarly worthless, so (whether or not this is recognised by the parties concerned), the claim that in equity the borrower owes the bank collateral and interest until they are repaid is untrue, contracts made on this basis are invalid and the buying and selling of such claims to entitlement of other people’s assets is fraudulent. In truth, IOU’s don’t need to be repaid, merely returned so they can be written off and their use (payments for work as well as goods) accounted for.

    The amount of money in my demand deposit is thus, in effect, not credit but the amount of credit I am authorised to draw upon (equivalent to the credit limit on a credit card). This reduces as I spend it and increases again as I return IOU’s (my income) to the bank. Because even workers and shopkeepers are paid in IOU’s, the system is really working on the basis of trust rather than the storage of value. What the system currently fails to account for is the real debt: the debt of gratitude to the unknown “all” in the supply chain, which can only be repaid by keeping the system going, i.e. helping nature to sufficiently regenerate the goods and services supplied on credit. The issue is whether to trust profit-seeking banks and employers, or the trusting majority who (often inarticulately) understand the need to keep the system going and earn their keep reliably for years even when no-one is willing to employ them (e.g. as family carers or volunteers). Demands for unwaged students to pay fees for education has revealed the fact that the monetary baseline at the beginning of employment is not zero but considerably negative. Logically, the more credit (as against IOUs) one has received from society, the more one owes. Not to the banks, but to society. Which on the whole doesn’t mind how much you have if you need it, but resents unnecessary accumulation when it stops others getting what they need.

    • davetaylor1
      June 24, 2013 at 9:28 am

      Having slept on this, I’ve managed to get my head round a crucial step in the arguments for humility and the negative valuation of money which had evaded me. Not only do we start needing to gratefully repay our debts, but also, throughout life, it remains almost impossible to do more for other people than together they do for us. Newton’s “little men standing on great men’s shoulders” argument.

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