Sticking my oar in in hopes of increasing lucidity...
on Mon, 7 May, Ed Weick <[EMAIL PROTECTED]> said:
>Ed G:
>> The thing to keep in mind is that there are two kinds of money. Both are
>> used equally as currency to facilitate trade, you their nature is very
>> different.
>>
>> There is Fiat money and Credit money.
>>
[...]
>>
>> Credit money is issued (created) by private banks by monetising a
>> marketable collateral value. (defrinitions of such collateral were once
>> regulated but are now mostly at the discretion of a bank)
>>
>> It is issued by contract, at interest and disappears when the contract is
>> satisfied. (the debt repaid)
[...]
>> Since it uses a part of itself to satisfy the interest, it, like a pyramid
>> scheme, cannot all be repaid. The system works because the new issue is
>> always a little greater than the amount needed to satisfy the previous
>> contracts. which is made possible by the increased value of production
>> (technology) by an increasing work force
>
>I'm afraid you've lost me here, Ed.
It's fairly straightforward: imagine a world starting its financial system
from scratch, with just one bank, and no fiat money. The first person
takes out the first bank loan, which is the first cash in circulation.
As soon as they walk out of the bank, the clock starts ticking. As
they have the only available cash, their loan is now impossible to
pay back after the first minute's interest charge, unless someone
else takes more money out of the bank that can be earned by the
first customer to cover that interest on his loan.
>> The downside is that any increased economic activity must always incurr
>> debt. That is, the new assets are always (bookkeeping) balanced by
>> liabilities. As a consequence, any net financial assets that people have
>> are balanced by the financial debts of others.
>
>Here too. What you may saying is that is that productive assets, and even
>our houses, are usually bought on credit, and liabilities therefore have to
>be amortized. Once you pay off your mortgage, is there still a liability of
>some kind on your house? I don't think so.
This follows from the first observation. If you take out a loan and just
hold on to the money, and then earn enough to cover the interest with
money from someone else's loan, then pay it back, you haven't participated
in any debt expansion except for the money that went to pay your interest.
But if you used your loan to purchase an asset, then you must acquire
all the principle plus interest from other sources, presumably in cash
from other loans taken out by those from whom you earn that money. But this
doesn't quite seem right to me, as unless you purchase your asset from
the bank, the money you've spent goes into circulation, and becomes part
of the pool from which your earnings come, which go to pay off the loan.
Thus your earnings required to pay your original loan don't necessarily
directly require someone else taking out a loan to pay you those earnings.
It looks to me like the increase in debt is equal only to the amount
of interest paid, plus, I guess, an amount equal to the amount of
cash hoarded, and thus unavailable for circulation.
The bottom line though, is that bank interest requires an economy
which is continually growing in order to cover that interest.
... Disclaimer: I am not an economist, nor do I play one on TV.
-Pete Vincent
