Ed W responded to Pete
At 10:44 AM 08/05/2001 -0400, you wrote:
>
>Pete:
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>>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.
Ed Replied
>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.
To Ed W - when credit money is created at fluctuating interest and credit
money is constantly being created and cancelled, the analogy of "a more or
less constant money supply" is not apt. Additionally, your analogy does not
take into consideration a growing population with a growing amount of
hggoods available. When the effects of weather on the availability of
(agrarian) goods is considered, stability is one thing that economies do
not have.
Pete said
>>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.
To Ed W
>IMHO, to repeat, I see interest is as a cost to the borrower and income to
>the lender.
Agreed that money is valuable also as a "store of value" As such it can
legitimatley attact interest. It is when money is created (and lent into
existsnce by private corporations that are less and less regulated) that
has not been earned and stored is where the problem lies.
Ed W said:
>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.
The pyramid was but an analogy that pointed to part of the problem, not the
whole problem.
Increased populations and increasingly complex economies need an increased
money supply.
Secondly, the economy contracts as the money supply decreases( velocity of
money, facillitation of the market) . That money supply decreases when
less credit money is lent out than is created, by private banks.
Ed W said:
>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.
That is what is happening now. The borrowed money that investors pumped
into the stock market is precisely the same process that is happening now
with deregulation. Then it was margin buying of stocks that had decreasing
collateral value. Now it is bank lending (investor borrowing) on the basis
of decreasing collateral value in the 'dot coms' stocks.
>
>> ... 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
Ed, I have discussed this with many and you are probably better informed
than most economists.
One thing that economists fail to do is utilise the Tinbergen Principal.
Tinbergen was a physisist that turned to economics. He said that "in an
equasion that has more than one variable, the solution must havean equil
number of virables as the question." Since the "practice" of econiomics is
to reduce the number of variables, they inevitably argue against
themsselves, or at least their proposed solutions.
Kindest regards
Ed G
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