Pete:
>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.
OK, I think I see what you're getting at. But let's imagine another world,
one in which the banking system has existed for a long time, and population,
production, and the standard of living are more or less stable. There are
various forms of income in this world: many people earn it by putting
forward labour effort (wages); others by assembling enterprises (profits);
others by allowing people to use assets which they own (rents); and still
others by lending out surplus income (interest). A more or less constant
amount of money circulating through society in order to allow people to make
such exchanges should be able to provide for all of these needs. I really
don't see a pyramid scheme in any of this.
>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.
IMHO, to repeat, I see interest is as a cost to the borrower and income to
the lender. No new money or credit needs to be created. In lending part of
my income, I forego its use. I use that part of my income for investment,
not consumption, and someone pays me for having done so, thereby incurring a
cost. If he happens to gain from having borrowed my money, someone else
down the line will have incurred costs, or will have been milked, and so on.
In theory, all of these transfers should balance out and not require any
monetary expansion. In fact, however, economies expand and contract, which
means that the supply of money expands and contracts as well.
But it is true that, historically, economies have come close to being
pyramid schemes. During the great crash of 1929, many investors pumped
borrowed money into an inflating and ultimately unsustainable stock market.
The South Sea Bubble of the early part of the 18th Century was another
example, as was the Dutch Tulip Craze. And pyramid schemes have been a
source of political turmoil in Albania recently.
> ... Disclaimer: I am not an economist, nor do I play one on TV.
Here I can't disclaim. I worked as one for many years, but I'm probably
terribly out of date now, so take anything I say with a grain of salt.
Ed W
