"Money As Debt" - must see animated "film"
gaute
You probably all know most of what this film tries to explain, but I
think it is damn good anyway.
Very nice to show friends and family, as an introduction to your
strange monetary interests :)
Actually I'm surprised no one has posted it already. Perhaps no one
here is member of the "econ-lets" list?
Anyway here it is: http://video.google.com/videoplay?docid=-9050474362583451279
Regards
Gaute Amundsen
Ryan Fugger
half is terribly misguided, in that its base assumption is that it is
impossible to pay back the interest on bank loans due to a shortage of
money. That is patently false, as the interest portion of each loan
payment is not destroyed, but remains in circulation in the lender's
account. There is always sufficient money in circulation to meet all
the loan payments, and in fact the amount required for interest in any
payment period is only a tiny portion of the money supply.
Ryan
Gaute Amundsen
> I really like the first 20 minutes of this film, but I think the 2nd
> half is terribly misguided,
Films like these allways get more, what's the word, tenous, as they get past
the basics. ( Did you se "zeitgeist"? - great propaganda, but hardly
defendable by logic :)
What I missed in this film was the evolutionary perspective. That we have the
system we have because it has won the war or the revolution for it's nation.
> in that its base assumption is that it is
> impossible to pay back the interest on bank loans due to a shortage o
> money.
I don't think its says that of bank loans in general..
Only that the total debt is allways larger than the moneysuply.
> That is patently false, as the interest portion of each loan
> payment is not destroyed, but remains in circulation in the lender's
> account.
I'm not sure I get this.
The interest does not get destroyed provided it is payed,
but it wil not get payed unless the moneysuply grows after the loan was
issued. If all and every loan was repayed today, are you saying that all the
money that was ever payed in interest would remain in existence?
(disregarding all the money that existed before we got a debt based
moneysystem)
> There is always sufficient money in circulation to meet all
> the loan payments, and in fact the amount required for interest in any
> payment period is only a tiny portion of the money supply.
>
In any one period, yes, but all togeter?
There are some broad simplifacations and abstractions hidden here for sure...
The challenge is picking the right ones I guess :)
Someone once said that armageddon is the day when the length of all loops of
cause and effect collapse to zero, and no consequence can be postponed, the
day of instant reckoning so to to speak :) I allways found that kind of
poetic.
Gaute
Ryan Fugger
> > in that its base assumption is that it is
> > impossible to pay back the interest on bank loans due to a shortage o
> > money.
> I don't think its says that of bank loans in general..
> Only that the total debt is allways larger than the moneysuply.
Well, that's true, but only larger by a very tiny amount -- the
interest accrued during over the latest loan period, usually a month.
>
> > That is patently false, as the interest portion of each loan
> > payment is not destroyed, but remains in circulation in the lender's
> > account.
>
> I'm not sure I get this.
> The interest does not get destroyed provided it is payed,
> but it wil not get payed unless the moneysuply grows after the loan was
> issued.
No. Take an example of a village with one bank where I take out the
only loan, so the principal on my loan is the entire village's money
supply. I use a large portion of the loan to pay a carpenter to build
me a house. The carpenter uses the money to buy food from the farmer.
I labour on the farm to earn the money to pay off my loan. See, I'm
really just earning back the same money that was lent out. No need to
increase the money supply at all. Money doesn't just disappear when
you spend it -- it circulates, and you can earn it back.
> If all and every loan was repayed today, are you saying that all the
> money that was ever payed in interest would remain in existence?
> (disregarding all the money that existed before we got a debt based
> moneysystem)
No, if the loans are to be all repaid (something that never happens
because having a certain amount of money in circulation facilitates
business), then all the interest paid previously would have to
recirculate back to the borrowers to be ultimately paid to the lenders
as principal payments.
>
> > There is always sufficient money in circulation to meet all
> > the loan payments, and in fact the amount required for interest in any
> > payment period is only a tiny portion of the money supply.
> >
> In any one period, yes, but all togeter?
Very few borrowers pay off bank loans in one lump sum. Furthermore,
it will never occur that all bank loans come due at once. There is
always the time for one borrower to earn another's interest payments
to put towards their own payments.
That doesn't mean that the central bank doesn't use interest rates to
control the economy for the benefit of the few. Whenever a few people
are granted positions of privilege in a system, there will always be
reasons to suspect that they are abusing that privilege. I'm just
saying that I wish people wouldn't keep repeating the myth that loans
can never be repaid because there isn't enough money to cover the
interest -- it's simply not true.
Ryan
Gaute Amundsen
> On 6/18/07, Gaute Amundsen <ga...@div.org> wrote:
> > > in that its base assumption is that it is
> > > impossible to pay back the interest on bank loans due to a shortage o
> > > money.
> >
> > I don't think its says that of bank loans in general..
> > Only that the total debt is allways larger than the moneysuply.
>
> Well, that's true, but only larger by a very tiny amount -- the
> interest accrued during over the latest loan period, usually a month.
Exactly. For the sake of this argument, I can't se that it matters how tiny
the amount is.
> > > That is patently false, as the interest portion of each loan
> > > payment is not destroyed, but remains in circulation in the lender's
> > > account.
> >
> > I'm not sure I get this.
> > The interest does not get destroyed provided it is payed,
> > but it wil not get payed unless the moneysuply grows after the loan was
> > issued.
>
> No. Take an example of a village with one bank where I take out the
> only loan, so the principal on my loan is the entire village's money
> supply. I use a large portion of the loan to pay a carpenter to build
> me a house. The carpenter uses the money to buy food from the farmer.
> I labour on the farm to earn the money to pay off my loan. See, I'm
> really just earning back the same money that was lent out. No need to
> increase the money supply at all. Money doesn't just disappear when
> you spend it -- it circulates, and you can earn it back.
Sitll don't se what your getting at. Of course the money circulates, and you
can earn it back. I did not percieve anyone claiming anything else.
But please, since you spell out such a nice example, where in this
hypotethical village would you get the money to pay your interest?
(you where waithing for that, right? :-)
> > If all and every loan was repayed today, are you saying that all the
> > money that was ever payed in interest would remain in existence?
> > (disregarding all the money that existed before we got a debt based
> > moneysystem)
>
> No, if the loans are to be all repaid (something that never happens
> because having a certain amount of money in circulation facilitates
> business),
You don't say! ;)
> then all the interest paid previously would have to
> recirculate back to the borrowers to be ultimately paid to the lenders
> as principal payments.
The whole ballet would have to be run in reverse, yes?
And in principle we would be left with zero money..?
> > > There is always sufficient money in circulation to meet all
> > > the loan payments, and in fact the amount required for interest in any
> > > payment period is only a tiny portion of the money supply.
> >
> > In any one period, yes, but all togeter?
>
> Very few borrowers pay off bank loans in one lump sum. Furthermore,
> it will never occur that all bank loans come due at once. There is
> always the time for one borrower to earn another's interest payments
> to put towards their own payments.
Ah! Don't come dragging reality into this now ;)
The crucial thing is that time delay...
> That doesn't mean that the central bank doesn't use interest rates to
> control the economy for the benefit of the few. Whenever a few people
> are granted positions of privilege in a system, there will always be
> reasons to suspect that they are abusing that privilege. I'm just
> saying that I wish people wouldn't keep repeating the myth that loans
> can never be repaid because there isn't enough money to cover the
> interest -- it's simply not true.
Possibly there are a lot of people that naively interpret this whole argument
as some sort of personal fear that they wil not be able to pay back their
loans. If this is the perception that you are trying to shoot down, then I
understand perfectly :) To be honest that interpretation had not occured to
me perviosly, but I suspect that you must be somewhat more active in this
whole field than me, so you probably hear a lot of strangeness.
To me the main point is that because of the whole mecanism of compound
interest, it forces the system to grow, or someone to loose their collateral.
Never mind any shenenigans the central bank might add to that.
So: ALL loans could never be repaid NOW, because there isn't enough money to
cover the interest. That extra money has to be introduced into circulation
during the loans lifetime. (that's an abstraction of a continuous process of
course) Governments tend to be very anxious to make sure this happens because
lotts of foreclosures make lotts of citizens very angry and desperate.
The main problem is that our natural resources, capacity for work, and not the
least, capacity for consumption, can not indefinitely keep pace whith the
exponential growth this creates. And also that the faster this growth goes,
the harder it is to maintain just the right growth, and destabilizing
imballances inevitably occur.
But I ramble :)
Gaute
Ryan Fugger
> To me the main point is that because of the whole mecanism of compound
> interest, it forces the system to grow, or someone to loose their collateral.
> Never mind any shenenigans the central bank might add to that.
No, in no way is the system mathematically forced to grow. That is a
gross misunderstanding of the system. I will explain in more detail
below with examples.
>
> So: ALL loans could never be repaid NOW, because there isn't enough money to
> cover the interest. That extra money has to be introduced into circulation
> during the loans lifetime. (that's an abstraction of a continuous process of
> course)
You're right. All loans can't be repaid NOW because there is a very
small amount missing -- only about 99% of loans could theoretically be
repaid immediately with existing money in circulation. Actually, if
average interest on bank loans is 6%, and the average payment period
is one month, then the average amount of interest outstanding would
actually only be 0.25% of the total principal outstanding (which
equals money in circulation), since the interest is 0.5% per month,
and loans would be on average halfway through their payment period.
So it's probably more like 99.75% of loans could be paid off
immediately with only the money in circulation.
A lack of money in circulation certainly isn't what is preventing 99%
of people paying off their loan immediately -- it's the reality of
having to earn that money that prevents immediate settlement. In
other words, the money is in circulation, it just takes time for it to
actually circulate.
However, you're wrong to say that extra money needs to be introduced
in order for all loans to be paid off as scheduled over the course of
time. That would only be true if the final payment on all loans came
due on or around the same day. In that case, the extra amount
theoretically required would be equal to the interest on the final
payment, the only payment where the amount of the payment is greater
than the amount of money in circulation.
We can accurately model multiple loans ending on the same day by
looking at a single loan, which we will assume is the only loan in
existence for the sake of argument. Let's do a real compound interest
example. Please go to:
http://mortgage-x.com/calculators/amortization.htm
Enter the following values:
Loan amount: $100,000
Interest rate: 5%
Term: 10 years
Select "Yes, complete amortization table", and click "Calculate". You
get an amortization table with a complete schedule of each payment
with principal and interest amounts. Notice that the monthly payment
is $1060.66. The borrower must earn that amount each month out of the
pool of money in circulation, which is equal to the outstanding
principal balance of the loan (since for the sake of argument we
presume this is the only loan in existence).
After each monthly payment, we can clearly see that the loan balance
is well above $1060.66, until the second last payment has been made,
at which point the amount of money in circulation is only $1056.25 --
$4.40 is missing. That's 0.0044% of the total original loan that is
mathematically impossible to pay. Hardly enough for anyone to go
bankrupt or have their property seized. No, after having paid off
$99,995.60 of a $100,000 loan (which is mathematically possible in
every case), the borrower would certainly qualify for a loan of $4.40
to pay off the rest.
So now try putting a loan of $4.40 into the amortization calculator --
the interest on the final payment is $0.00! (The amount is so small
that it rounds to nothing.) So there we have one single loan, paid
off, only needing to resort to another loan of $4.40. One can hardly
call this "growth" in the money supply, given that this second loan
takes the money supply from zero to $4.40, when a few months earlier,
the money supply was in the tens of thousands of dollars!
But it gets better. If we presume that there is always two or more
loans in existence, each with different end dates, then there will
always be enough to cover the final payment for every loan as it comes
due. This is not a requirement for growth of the system, only a lower
bound on the number of loans required for the system to theoretically
function without requiring any more loans to be made in order to cover
the interest on existing loans: 2! Once there are two, we don't need
any more.
I don't know how much clearer I can make it.
Ryan
Gaute Amundsen
> On 6/19/07, Gaute Amundsen <ga...@div.org> wrote:
> > To me the main point is that because of the whole mecanism of compound
> > interest, it forces the system to grow, or someone to loose their
> > collateral. Never mind any shenenigans the central bank might add to
> > that.
>
> No, in no way is the system mathematically forced to grow. That is a
> gross misunderstanding of the system. I will explain in more detail
> below with examples.
A rather persistent one then, I must say, in many circles, rather close to a
common agreement actually.
It would ber very good if you can clear that up.
<snip>
>
> We can accurately model multiple loans ending on the same day by
> looking at a single loan, which we will assume is the only loan in
> existence for the sake of argument. Let's do a real compound interest
> example. Please go to:
>
> http://mortgage-x.com/calculators/amortization.htm
>
> Enter the following values:
>
> Loan amount: $100,000
> Interest rate: 5%
> Term: 10 years
>
> Select "Yes, complete amortization table", and click "Calculate". You
> get an amortization table with a complete schedule of each payment
> with principal and interest amounts. Notice that the monthly payment
> is $1060.66. The borrower must earn that amount each month out of the
> pool of money in circulation, which is equal to the outstanding
> principal balance of the loan (since for the sake of argument we
> presume this is the only loan in existence).
>
> After each monthly payment, we can clearly see that the loan balance
> is well above $1060.66,
Arn't you mixing up "loan balance" here and "outstanding principal balance"
above?
> until the second last payment has been made,
> at which point the amount of money in circulation is only $1056.25 --
> $4.40 is missing. That's 0.0044% of the total original loan that is
> mathematically impossible to pay. Hardly enough for anyone to go
> bankrupt or have their property seized. No, after having paid off
> $99,995.60 of a $100,000 loan (which is mathematically possible in
> every case), the borrower would certainly qualify for a loan of $4.40
> to pay off the rest.
Sorry for being obstinate, but I really dont get it.
When I take 1060.66 * 12 * 10 I get 127 279
Is that not the total amount you wil have to pay?
Please speak simply now, where does those 27 278 come from in this "single
loan universe".
To me it looks like you would have paid down the 100 000 (outstanding
principal balance) after just 7.8 years, and thereafter you would til have to
pay 25.7 * 1060 to make up the "loan balance" in a universe where the total
amount is now zero.
You keep insisting on counting this all out by the month, while I prefer to
look at the loan as a whole. Perhaps that's where the difference hides
> You're right. All loans can't be repaid NOW because there is a very
> small amount missing -- only about 99% of loans could theoretically be
> repaid immediately with existing money in circulation. Actually, if
> average interest on bank loans is 6%, and the average payment period
> is one month, then the average amount of interest outstanding would
> actually only be 0.25% of the total principal outstanding (which
> equals money in circulation), since the interest is 0.5% per month,
> and loans would be on average halfway through their payment period.
> So it's probably more like 99.75% of loans could be paid off
> immediately with only the money in circulation.
If you look at the middle of your 100 000 loand at payment 60, you have 56 204
outstanding. If the original 100 000 is all the money there is in the world
and you have paid back 60*1060 = 63639 of them allready,
then there is only 36360 left. That leaves you 19843 short....
That looks more like 20% to me...
I don't think I can make it much clearer either..
Perhaps there is another angle you could try?
How about we leave out compund interest, and periodisation, and take just one
loan of 100 000, on which you would have to pay 27,2% interest, never mind
how long you had it?
Gaute
Ryan Fugger
> On Tuesday 19 June 2007 19:03, Ryan Fugger wrote:
> > No, in no way is the system mathematically forced to grow. That is a
> > gross misunderstanding of the system. I will explain in more detail
> > below with examples.
>
> A rather persistent one then, I must say, in many circles, rather close to a
> common agreement actually.
> It would ber very good if you can clear that up.
I know, that's why I'm putting in the effort :)
>
> <snip>
> >
> > We can accurately model multiple loans ending on the same day by
> > looking at a single loan, which we will assume is the only loan in
> > existence for the sake of argument. Let's do a real compound interest
> > example. Please go to:
> >
> > http://mortgage-x.com/calculators/amortization.htm
> >
> > Enter the following values:
> >
> > Loan amount: $100,000
> > Interest rate: 5%
> > Term: 10 years
> >
> > Select "Yes, complete amortization table", and click "Calculate". You
> > get an amortization table with a complete schedule of each payment
> > with principal and interest amounts. Notice that the monthly payment
> > is $1060.66. The borrower must earn that amount each month out of the
> > pool of money in circulation, which is equal to the outstanding
> > principal balance of the loan (since for the sake of argument we
> > presume this is the only loan in existence).
> >
> > After each monthly payment, we can clearly see that the loan balance
> > is well above $1060.66,
>
> Arn't you mixing up "loan balance" here and "outstanding principal balance"
> above?
In the amortization table, "loan balance" means "outstanding principal
balance". It's not a complicated chart.
>
> > until the second last payment has been made,
> > at which point the amount of money in circulation is only $1056.25 --
> > $4.40 is missing. That's 0.0044% of the total original loan that is
> > mathematically impossible to pay. Hardly enough for anyone to go
> > bankrupt or have their property seized. No, after having paid off
> > $99,995.60 of a $100,000 loan (which is mathematically possible in
> > every case), the borrower would certainly qualify for a loan of $4.40
> > to pay off the rest.
>
> Sorry for being obstinate, but I really dont get it.
>
> When I take 1060.66 * 12 * 10 I get 127 279
> Is that not the total amount you wil have to pay?
Yes, that's the amount that gets paid off, without recourse to any
other money in circulation, except the $4.40 at the end. Look at the
chart.
>
> Please speak simply now, where does those 27 278 come from in this "single
> loan universe".
Money can go around in circles several times before the debt that
created it is extinguished. Imagine there is $100 total in
circulation, and I have $20 of it. I might use the $20 to buy food
from you, you might give it to your landlord as rent, and I might earn
it back cutting his lawn. This cycle can repeat 20 times, so I have
paid you $400. Where did this $400 come from if there is only $100 in
circulation? It came from the same money going around in circles.
The same principle applies to the interest on loan payments. Suppose
I make a loan payment of $1000, of which $800 goes to principal, and
$200 to interest. The $800 principal portion is taken out of
circulation, since the debt behind it is extinguished. The $200
interest is profit for the lender, and remains in circulation in their
account -- they can spend it. Eventually that $200 circulates to me
or some other borrower and is used as part of another loan payment.
Get it? It's not complicated.
>
> To me it looks like you would have paid down the 100 000 (outstanding
> principal balance) after just 7.8 years, and thereafter you would til have to
> pay 25.7 * 1060 to make up the "loan balance" in a universe where the total
> amount is now zero.
No, you're ignoring the difference between the principal and interest
portions of the loan payments. The principal portion goes out of
circulation, but the interest portion remains in circulation. I've
been saying precisely this for about 4 emails now, and I don't think
I'll bother to do so much longer. Go back and read my prior emails.
Maybe they'll make sense to you now.
> Perhaps there is another angle you could try?
> How about we leave out compund interest, and periodisation, and take just one
> loan of 100 000, on which you would have to pay 27,2% interest, never mind
> how long you had it?
OK, the real world works mainly on compound interest and periodic
payments, but I can explain without them.
Suppose I take out a $1000 loan at 5% interest, and have to pay it off
in a lump sum at the end of the year. I owe $1050, but only $1000
exists, so clearly another loan is needed somewhere in the system for
me to be able to fulfill my obligation. OK, so the system requires
another loan. Let's say that halfway through the first year someone
else takes out a similar loan -- $1000 @ 5%, lump sum payment after a
year.
So when it comes time to pay my $1050 to the banker, there is $2000 in
circulation, and it's perfectly possible for me to pay off my loan.
When I do, the $1000 principal is taken out of circulation, and $50
goes into the banker's account, leaving $1000 still in circulation.
At all times, the amount of money in circulation is equal to the
principal on outstanding loans.
Now the second borrower is faced with the same problem as I was: $1050
to be paid, but only $1000 in circulation. Oh dear, another loan is
required. So someone takes out a third $1000 loan. Now there is
again $2000 in circulation, enough to pay off the second loan. In
turn, a 4th loan will be required to pay off the 3rd, and a 5th to pay
off the 4th, etc. Never does the money supply need to grow larger
than $2000 for all loans to get paid off as they come due. As long as
there are two loans in existence with different due dates, there is no
pressure for the money supply to grow to cover the interest on
existing loans.
But suppose we actually want to get completely out of debt. Well, in
that case we needn't take out a full $1000 loan to cover the $50
shortfall -- we can just take out a $50 loan, and give it to the
banker as interest, leaving only $50 in circulation. Now, it will
take me 1/20th as long to earn $50 as it takes me to earn $1000, so I
can pay off a $50 loan 20 times sooner than I can pay off a $1000
loan, and so the (simple) interest due is 20 times less -- 5% / 20 =
0.25%. (Remember, interest is charged per year, and if I can pay off
sooner, I am charged less interest.) 0.25% of $50 is $0.125, so I owe
$50.125, which rounds to $50.13.
Now I need another $0.13 loan because only $50 is in circulation, but
I can earn and pay that back almost instantly, so much less than one
penny of interest accrues, and we're completely out of debt, less than
a month after we started trying. (2-3 weeks to earn the $50, plus
maybe a day for the $0.13.)
The fact that we actually keep the money lenders in business by
continually taking out new loans is a different story. There can be
many arguments made about how they string us along with easy credit
and use interest rates to manipulate the markets to their advantage,
etc. But we should never say that there is no money to cover the
interest they charge.
Ryan
Daniel Reeves
analysis but don't think Gaute is trying to be difficult at all. This
is one of those things that is genuinely confusing until it finally
fall into place in your head and then it all seems so simple that it
can be downright frustrating that so much confusion persists.
It doesn't help that a lot of people with a lot of ideological reasons
for maligning interest actively invite misunderstanding with things
like the last half of that google video.
A thought experiment that has helped me is to pretend there is no
money and just look at movement of wealth. Remember the distinction:
wealth is the actual stuff we want, money is just a way to transfer
it. So the question "how can I repay a loan with interest; where does
the extra money come from?" becomes "how can someone give back more
wealth than they were loaned; where does the extra wealth come from?".
Well that's easy to answer. The same place all wealth comes from:
people make it. They build things, do work, cough up valuable
property.
Say you have a beautiful painting (= wealth) that I want and I have
nothing to offer you for it except the promise to return it to you
later. That's a big favor I'm asking you. To keep things fair, I
might offer you a small thing of my own in return (say, doing your
dishes). So there you have it, I borrowed the painting and paid it
back, plus interest (doing your dishes). Everyone's happy.
It really is, fundamentally, as simple as that.
And, by the way, there's nothing magical or mathematically insidious
about compound interest either. In fact, the concept is already
implicit in this "extra favor" conception of interest. Say our
agreement is that while I have possession of your painting I'll do
your dishes once a week. That's the agreement but now I ask you the
favor of letting me off the hook this week and in exchange I'll carve
you a wooden duck (or something). Work that out with numbers and you
have compound interest. Note that interest only compounds if you
shirk the payments. Compound interest is just simple interest applied
recursively to the missed payments which can be treated as additional
loans.
--
http://ai.eecs.umich.edu/people/dreeves - - search://"Daniel Reeves"
Gaute Amundsen
> Thanks Ryan and Gaute for hashing this out.
Thanks for participating :)
Thinking straight about theese kind of matters certanly takes some effort.
I had to put it off to the weekend this time...
> A thought experiment that has helped me is to pretend there is no
> money and just look at movement of wealth. Remember the distinction:
> wealth is the actual stuff we want, money is just a way to transfer
> it. So the question "how can I repay a loan with interest; where does
> the extra money come from?" becomes "how can someone give back more
> wealth than they were loaned; where does the extra wealth come from?".
> Well that's easy to answer. The same place all wealth comes from:
> people make it. They build things, do work, cough up valuable
> property.
Hehe, yeah, the problem certainly dissappears when viewed that way.
(only to be replaced by the problem of most of the wealth ending up in fewer
and fewer hands, but that's another story)
But the way you tell it here it looks like you presume that money and wealth
is the same thing, or at least behave in a significantly similar way.
If that was the case however, I could create money simply by the effort of my
labor, which of course I can't. Nothing stops me from issuing IOU's as the
members of this list is probaby more aware of than most people, but the
entrenched institutions and habits of our current money stops that from being
verey usefull.
> Say you have a beautiful painting (= wealth) that I want and I have
> nothing to offer you for it except the promise to return it to you
> later. That's a big favor I'm asking you. To keep things fair, I
> might offer you a small thing of my own in return (say, doing your
> dishes). So there you have it, I borrowed the painting and paid it
> back, plus interest (doing your dishes). Everyone's happy.
>
> It really is, fundamentally, as simple as that.
With certain moral glassses on this is of course the simplest and most obvious
thing in the world. A favor is anonther worth, and the lending of capital is
just another kind of favor.
But wealth is not the same as the symbolical tokens a society has agreed to
use to exchange for wealth. And most definitely not, when the right to create
those tokens is not equally distributed.
That's one of the tricky bits about it, is it not, that money was once wealth
of any kind, gold, tobacco, and what not, but has step by step morphed into
an abstract information system based on nothing more that widespread
agreement and old habit.
Bernard Lieater, I think, offered the definition of money as an information
system a society uses to keep track of who has made themselves deserving of
what. By that definition one could hardly say that it has been very
successfull.
Personally I find that an evolutionary perspective on the history of money can
be very illuminating. The way I read it, a lot of differnt monetary regimes
has been tried out, failed and succeeded on the historical stage. The ones
that have succeeded are the ones that have been able to finance the war or
the revolution of their nations.
In that contrext it should be no surpise that a system that can concentrate
wealth and spur growth has succeeded. To expect such a system to be fair to
individuals, or sustainable in the long run would be rather naive. To the
contrary one would expect such a system exploit it's low level constituents
as thoroughly at it is possible to get away with, and to discount everything
but the immediate future heavily.
I digress, I guess , but this is part of the background of why I find it hard
to believe that our current system does not have a build in growth
imperative. If it had not, it would have been outcompeted by one that had,
generations ago.
Gaute
Gaute Amundsen
> On 6/20/07, Gaute Amundsen <ga...@div.org> wrote:
> > On Tuesday 19 June 2007 19:03, Ryan Fugger wrote:
> > > No, in no way is the system mathematically forced to grow. That is a
> > > gross misunderstanding of the system. I will explain in more detail
> > > below with examples.
> >
> > A rather persistent one then, I must say, in many circles, rather close
> > to a common agreement actually.
> > It would ber very good if you can clear that up.
>
> I know, that's why I'm putting in the effort :)
>
get...
<snip>
>
> > Please speak simply now, where does those 27 278 come from in this
> > "single loan universe".
>
> Money can go around in circles several times before the debt that
> created it is extinguished.
<snip>
I'm well aware of that. That's one of the reasons why I find "demurrage"
systems, like the classic Wörgl example so interesting.
> The same principle applies to the interest on loan payments. Suppose
> I make a loan payment of $1000, of which $800 goes to principal, and
> $200 to interest. The $800 principal portion is taken out of
> circulation, since the debt behind it is extinguished. The $200
> interest is profit for the lender, and remains in circulation in their
> account -- they can spend it. Eventually that $200 circulates to me
> or some other borrower and is used as part of another loan payment.
> Get it? It's not complicated.
I have been getting that part for a while now, but then we are way out of the
"one loan universe" we agreed for arguments sake.
> > To me it looks like you would have paid down the 100 000 (outstanding
> > principal balance) after just 7.8 years, and thereafter you would til
> > have to pay 25.7 * 1060 to make up the "loan balance" in a universe where
> > the total amount is now zero.
>
> No, you're ignoring the difference between the principal and interest
> portions of the loan payments.
That's odd now, wouldn't you say, in that I just thought that you where doing
the same ;-)
> The principal portion goes out of
> circulation, but the interest portion remains in circulation. I've
> been saying precisely this for about 4 emails now, and I don't think
> I'll bother to do so much longer. Go back and read my prior emails.
> Maybe they'll make sense to you now.
I have heard you saying it repeatedly, yes, but repeating it does not make it
make any more sense. If you are going to be able to counter the "pupular
myth" you are going to have to explain by a counterexample of at least
comparable simplicity.
> > Perhaps there is another angle you could try?
> > How about we leave out compund interest, and periodisation, and take just
> > one loan of 100 000, on which you would have to pay 27,2% interest, never
> > mind how long you had it?
>
> OK, the real world works mainly on compound interest and periodic
> payments, but I can explain without them.
>
> Suppose I take out a $1000 loan at 5% interest, and have to pay it off
> in a lump sum at the end of the year. I owe $1050, but only $1000
> exists, so clearly another loan is needed somewhere in the system for
> me to be able to fulfill my obligation. OK, so the system requires
> another loan. Let's say that halfway through the first year someone
> else takes out a similar loan -- $1000 @ 5%, lump sum payment after a
> year.
Now we're getting somwhere.
> So when it comes time to pay my $1050 to the banker, there is $2000 in
> circulation, and it's perfectly possible for me to pay off my loan.
> When I do, the $1000 principal is taken out of circulation, and $50
> goes into the banker's account, leaving $1000 still in circulation.
Leaving $1000 in circulation strictly speaking, but only $950 of those
available unless the banker can be made to spend his $50.
> At all times, the amount of money in circulation is equal to the
> principal on outstanding loans.
>
> Now the second borrower is faced with the same problem as I was: $1050
> to be paid, but only $1000 in circulation. Oh dear, another loan is
> required. So someone takes out a third $1000 loan. Now there is
> again $2000 in circulation, enough to pay off the second loan. In
> turn, a 4th loan will be required to pay off the 3rd, and a 5th to pay
> off the 4th, etc. Never does the money supply need to grow larger
> than $2000 for all loans to get paid off as they come due. As long as
> there are two loans in existence with different due dates, there is no
> pressure for the money supply to grow to cover the interest on
> existing loans.
Hm.. a "two loan universe", this is an interesting example.
I might be starting to see what you're getting at.
Now if the banker should decide to hold on to those $50 instead of spending
them into circulation again, in effect keeping them out of the moneysupply,
then the available money supply would shrink as the bankers account grow, and
the need for ever expanding loans to keep the $2000 in existence would be
back.
Perhaps we could try a "one loan universe" after all, but with $50 allready
independently existing in the bankers account.
Then all one would have to do is to offer the banker some real wealth to
entice those $50 out of him.
In that case I must concede that the moneysupply would not necessarily have to
grow. One would only have to keep giving the banker real wealth, and those
$50 would keep going round and around.
Perhaps what you are saying is in one way a restating of the same problem.
That if we want to avoid having to ever increase loans, we must somehow give
the bank enough real wealth to make it spend all it's earnings back in
circulation, thus gaining an ever increasing bank instead....
Or to put it another way, one could say that what you are trying to point out
is the hidden assumption in the example of the "one loan universe" that the
bank would never spend the interest it recieves, and that it has never done
so before.
In that case the "one loan world" example is just a special case of the more
general model, where the bank chooses not to spend anything back into
circulation.
> But suppose we actually want to get completely out of debt. Well, in
> that case we needn't take out a full $1000 loan to cover the $50
<snip>
Recursion is the bread and butter of us programmers :-)
I'ts quite fun, I'll agree.
> The fact that we actually keep the money lenders in business by
> continually taking out new loans is a different story. There can be
> many arguments made about how they string us along with easy credit
> and use interest rates to manipulate the markets to their advantage,
> etc. But we should never say that there is no money to cover the
> interest they charge.
I think I understand what you are trying to say now, but I must say again,
that just repeating the assertion that the common perception is wrong, is not
very useful. The usual example is so simple an seemingly selfcontained, that
it needs a very clear refutation.
Perhaps the "one loan universe with $50 in the bank" example could be a start
on something like that.
I will also maintain that the classic example, even if not a precise enough
model of the real world, is correct "in spirit". In the larger picture it
matters little if the growth happens in the moneysupply, or in the real
wealth belongings of the bank.
gaute
Daniel Reeves
world than about the theory.
As for more and more wealth ending up in the hands of the wealthy,
here is what I consider a highly lucid take on that:
http://www.paulgraham.com/gap.html
One minor point, Gaute:
> But the way you tell it here it looks like you presume that money and wealth
> is the same thing, or at least behave in a significantly similar way.
>
> If that was the case however, I could create money simply by the effort of my
> labor, which of course I can't.
I don't know about "create money" (I think I know what you mean by
that but this is the sort of thing it's all too easy to get hung up on
and very confused by, speaking for myself) but you can convert your
labor into other forms of wealth and money facilitates that. Namely,
you do work for someone who pays you and you take that money and use
it to buy, say, food.
This stuff (including interest) makes sense in theory. How it might
go awry in practice is a highly worthy topic of discussion but when
the loudest proponents of reform betray a deep misunderstanding of the
theory it's hard to take them seriously.
I'm still learning about all this myself but so far I think the
biggest targets for reform are inflation and the central bank.
Ryan Fugger
> On Wednesday 20 June 2007 22:17, Daniel Reeves wrote:
> > A thought experiment that has helped me is to pretend there is no
> > money and just look at movement of wealth. Remember the distinction:
> > wealth is the actual stuff we want, money is just a way to transfer
> > it. So the question "how can I repay a loan with interest; where does
> > the extra money come from?" becomes "how can someone give back more
> > wealth than they were loaned; where does the extra wealth come from?".
> > Well that's easy to answer. The same place all wealth comes from:
> > people make it. They build things, do work, cough up valuable
> > property.
>
> Hehe, yeah, the problem certainly dissappears when viewed that way.
> (only to be replaced by the problem of most of the wealth ending up in fewer
> and fewer hands, but that's another story)
Well, in a competitive market for lenders, the interest rate should
approach the cost of actually providing the loan. Banks have expenses
you know, and default risk is also a cost of being a lender. I know
that banks in Canada make most of their money from service fees, not
from loan interest.
Historically, bank profits aren't much different from profits in any
other sector of the economy.
> But the way you tell it here it looks like you presume that money and wealth
> is the same thing, or at least behave in a significantly similar way.
>
> If that was the case however, I could create money simply by the effort of my
> labor, which of course I can't. Nothing stops me from issuing IOU's as the
> members of this list is probaby more aware of than most people, but the
> entrenched institutions and habits of our current money stops that from being
> verey usefull.
No, what stops your IOU from being useful is that it isn't widely
accepted, because you aren't widely known and trusted. That banks
exist doesn't change this. What banks have done is two things: (1)
become widely known and trusted, so their IOUs have value to a wide
range of people, and can therefore be traded for personal IOUs at a
profit, and (2) build a trust network between themselves so their IOUs
can be routed amongst each other to settle payments globally. Unless
your economy consists of a small village, your IOU still needs some
kind of system to become useful as money, whether it's the banking
system, or Ripple.
Ryan
matabele
Have a look at this article : http://www.cyberclass.net/turmel/bankmath.htm
LETS Engineering Mathematics, by John C. Turmel, B. Eng.
Clearly explains how the shortage of money arises.
regards William Jackson
matabele
Ryan Fugger
>
> Hi
>
> Have a look at this article : http://www.cyberclass.net/turmel/bankmath.htm
>
> LETS Engineering Mathematics, by John C. Turmel, B. Eng.
>
> Clearly explains how the shortage of money arises.
Hi William. Yes, I'd read that article some years ago, but I re-read
it to see if it could shed any light on the present issue.
The pertinent bit seems to be this:
-----------
INTEREST-USURY MARKETING METHOD:
In the Interest Game, all borrow 10 but have to inflate their
prices to recuperate the 11 they owe the bank.
Step 1): I had all 10 guests at the table pledge their watch as
collateral for a $10 Beandollar loan. At 10% interest, they each owed
me 11 Beandollars at the end of the loan period.
Step 2) I had all 10 guests spend their $10 Beandollars into the
market bowl in exchange for a product token.
Step 3): Once all 10 guests now had a product token for sale, I
used fair chance to determine who would successfully market their
product. Starting first with pairs of players with similar product
tokens for sale, I flipped a coin to determine which the economy chose
to buy from. Then winner delivered the product token to the market
bowl and collected $11 Beandollars. After the first round, half the
players had successfully marketed their product and half had not yet
sold. Finally, taking diverse pairs, I continued tossing the coin to
decide who the economy chose to purchase from, the winner delivering
goods and taking price out of the market.
Step 4) Since everyone put in 10 and the winners all took out 11,
eventually, the market bowl ran out of Beandollars with one guest
still having products unsold. I foreclosed and seized the loser's
product token and watch.
Step 5) I explained to the winners how their $100 Beandollars had
inflated because there were now only 9 watches.
--------------------
Well sure, if we set up a theoretical system where all the debts come
due as a lump sum plus interest at the same time, then of course
there's not enough money to pay off all the debts. If the debts come
due at different times, like in reality, then the interest has time to
recirculate and there is no such shortage. Turmel's fig. 2 shows how
interest coming gets paid out as bank expenses. I've already given
detailed examples, so I won't do it again. Look back in the thread if
you need to. (Of course, some people can't pay their debts, but not
because the money doesn't exist for them, but because whoever holds it
isn't buying what they're selling.)
Further, what happens to the 10th watch in his example when the banker
forecloses on it? Does he eat it? In reality, the banker is
generally legally required to sell foreclosed property and use the
proceeds to satisfy the debt, with the remainder going back to the
borrower. So there are still really 10 watches, and his whole example
shows nothing.
Explaining inflation turns out to be really, really easy: It is
stated central bank policy.
http://en.wikipedia.org/wiki/Inflation_targeting
When the institution in control of the money supply says that to
expect inflation, we don't need any further explanation when that is
what we actually get. The interesting question is whether that is
sound monetary policy, and whether or not it's a good idea to give any
small group of people that much power.
Ryan
>
>
> regards William Jackson
>
>
>
> >
>
Daniel Reeves
who's fundamentally doing what for whom (the "there is no money"
trick). We have 10 entrepreneurs with watches, who need materials
(product tokens) from suppliers to make products, some of which
consumers actually want and will cough up their own valuable assets to
get. To get materials the entrepreneurs could trade their watches and
the whole economy would chug along.
But of course they don't want to give up their watches, they want to
borrow the materials from the suppliers and repay the loan later with
the stuff they get from the consumers (so they hope). The
entrepreneurs understand that's a lot to ask and are happy to pay 10%
extra in exchange for delaying the payment. Still, that's more faith
than the suppliers have (and rightly so).
Here's where the banker steps in, offering to vouch for the
entrepreneur (after examining that watch) and guaranteeing the payment
+ 10%. If the suppliers trust the banker then everyone is happy. The
entrepreneurs who succeed are pay up with what they get from their
customers, the consumers. The ones who fail still have to pay for the
supplies plus 10% and they do that by giving back the supplies plus
coughing up their watches. Like Ryan says, if the watches are worth
more than the 10% they should and do get back the difference.
As described so far the bank is just contributing a path of trust and
making no profit. But instead of just vouching for the entrepreneur
the bank might actually pay the supplier up front, in which case the
entrepreneur should pay that 10% to the bank. If the bank is so
trusted that simple IOUs from the bank (Turmel's beandollars) are as
valuable as real wealth in the suppliers' eyes then more power to it.
In any case, the bank's only profit is the 10% from the entrepreneurs
which they are happy to pay and the suppliers are happy to not receive
(since they get immediate payment from the bank).
In conclusion, Turmel's example of a broken/unfair money system in
fact makes exactly the right things happen in the economy (again with
the one modification that Ryan pointed out -- that the bank shouldn't
get paid extra simply because it foreclosed (and of course in reality
banks only recover at most what they are owed when they foreclose)).