# Money and value



## littlebabyjesus (Jun 30, 2011)

I'm starting a new thread on this to give it a bit of a fresh start. It concerns the way money is created and how value is attached to it. 


Firstly, about money. Money has no value until it is spent. A measure of the wealth of a nation comes from adding up all the transactions that take place in any given time-period. 

So to work out the wealth of a nation, you have to add up the value of all the transactions taking place in any given period, but then you also need a measure of how much money is worth - and you do that by taking a basket of goods and services and seeing how much they cost in that given timeframe. 

And excluded from that have to be transactions that merely involve the borrowing of money. If I borrow £100 from the bank, that money has no value until I try to spend it. Indeed I do not find out what the value of the money is until I come to spend it. 


The creation of the symbol to which value is to be attached is the act of a third party to any transaction - a bank of some description. One capitalist may agree to hand over capital to another capitalist, but they need an agreed system of representation by which to do this. The capitalists themselves do not create  the symbol - what they do rather is attach value to the symbol by accepting it in return for real goods or services. They obtain the symbol to be handed over from the third party, which demands interest as the price for its service. 

But what is given back to the bank is merely the symbol once again, and only the banks can create the symbol - others can make value but they cannot print money. So even if there is growth, if a bank has put 100 groats into the system for value to be attached to it and demands 110 groats in return, that same bank or another bank somewhere else will have to lend that same person or another person somewhere else the extra 10 groats. If there has been growth to match the interest, the extra money, when it is spent, will represent that extra wealth and the purchasing value of one groat will remain the same. But if there is no growth, there are now 110 groats in the system to represent the same total value, so you have inflation. If the bank has put the initial 100 groats into the system on the basis that it values an asset of the borrower at that level, when it comes to reloan the 110 groats, it has to do that by valuing the same asset at 110. Again, inflation. 

The bank gains from this process through growth, because if there is growth, the real value of the assets against which the money is borrowed needs to go up. In return for a loan to cover the interest on the previous loan, the initial asset plus something else must be put up as security. If the debtor defaults on the debt, the bank takes possession of the assets. If it does this after, say, 100 years of steady growth, it has enabled itself to take possession of a far larger bunch of assets than those it initially created the money against. 



If anyone is bothered to, can they explain what is wrong with the above scenario. It is the basis for my contention that the action of lending money at interest is the fundamental driver of inflation.


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## Santino (Jun 30, 2011)

Fuck off Dw-


Oh.


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## Crispy (Jun 30, 2011)

Santino said:


> Fuck off Dw-
> 
> 
> Oh.


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## EastEnder (Jun 30, 2011)

littlebabyjesus said:


> The bank gains from this process through growth, because if there is growth, the real value of the assets against which the money is borrowed needs to go up. In return for a loan to cover the interest on the previous loan, the initial asset plus something else must be put up as security. If the debtor defaults on the debt, the bank takes possession of the assets. If it does this after, say, 100 years of steady growth, it has enabled itself to take possession of a far larger bunch of assets than those it initially created the money against.


Most lending is unsecured lending, there are no assets involved. There are more credit cards than mortgages, surely.


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## littlebabyjesus (Jun 30, 2011)

In the UK, most debt is owed in the form of mortgages - more than 2/3. 



> The statistics, recorded at the end of April 2011, also showed that the average UK household has outstanding debt totalling £15,618 excluding mortgages. The average amount of debt per household when mortgages are included in the calculations is a whopping £55,854.



link

That's only talking about personal debt, though. I may be wrong to think this, but wouldn't most business debt be secured debt? Not many banks are willing to fund business activities on a credit-card basis, are they?


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## Maurice Picarda (Jun 30, 2011)

On the bright side, that's a completely new theory of economics, and so if you are right, you will become famous.

The problem is that it's generally held that high interest rates reduce inflation by dampening demand, while a fall in interest boosts demand and so is inflationary. So you may find yourself founding no more than a minor school.


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## littlebabyjesus (Jun 30, 2011)

It seems to me that raising interest rates is a double-edged weapon, dampening demand short-term, but forcing people to put their prices up long-term in order to pay the extra interest on their loans. 

By my reasoning (and it might be wrong), assuming there is no default, in the long term, a loan made with zero interest is neutral inflation-wise since the same amount is repaid as loaned. With a stable level of borrowing, an equilibrium of sorts ought to be set up. But if there is any interest due, someone somewhere is going to have to borrow the extra money for that debt to be paid in full, setting up a spiral of ever-increasing debt. And if the amount of interest due is more than can be provided for by growth - which in reality it invariably is - that extra amount being put into the system will result in inflation. 

I may be wrong. I may be wrong about all this, tbf.


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## EastEnder (Jun 30, 2011)

littlebabyjesus said:


> In the UK, most debt is owed in the form of mortgages - more than 2/3.
> 
> 
> 
> ...


You are correct, I was assuming by quantity, not overall amount. What I should've said was more individual debts are unsecured, rather than the aggregate amount. Or at least I would assume.

As for business debt, I really don't know, but from what little I do, there's a hell of a lot of unsecured debt. Primarily because it's often based on things like projected cashflow - my last company went bust because the bank stopped lending during the financial crash. The lending was only month-to-month to cover cashflow requirements anyway, the company had existed that way for years, we got big projects sporadically and needed finance to pay the wages in the lean times. It worked fine until everything imploded and the bank that likes to say "Yes" decided to say "No", so I got made redundant.

Given that most companies in the UK are small businesses, like the one I worked for (and got made redundant from), I'm guessing this is not a unique situation.


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## yield (Jul 1, 2011)

You also need to allow for external versus internal inflation. As most big ticket items are priced in dollars the £/$ exchange rate has a large affect on price changes.


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## littlebabyjesus (Jul 1, 2011)

yield said:


> You also need to allow for external versus internal inflation. As most big ticket items are priced in dollars the £/$ exchange rate has a large affect on price changes.


 
Yes, you do. But that ought to work pretty much equally both ways, shouldn't it - the external pressure should sometimes be inflationary and sometimes deflationary. The current situation is like that - external pressure is causing inflation (and also the pound is weak - which is also an inflationary pressure). But at other times, the external pressure should work the other way - the influx of cheaper Chinese goods, for instance, is an example of a deflationary pressure (and not just for the cheapest goods - as a result of imports from Asia, musical instruments are much cheaper now than they were 30 years ago). Yet when it's all added up, we always have inflation, never deflation, so the internal pressures of any economic system that has any degree of autonomy must generally be inflationary.


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## bi0boy (Jul 1, 2011)

littlebabyjesus said:


> Yet when it's all added up, we always have inflation, never deflation, so the internal pressures of any economic system that has any degree of autonomy must always be inflationary.


 
Like Japan?


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## littlebabyjesus (Jul 1, 2011)

Well, Japan has had near-zero interest rates, near-zero growth and near-zero inflation in the last two decades or so. But part of my case is the fact that very low interest rates would in the long term be expected to produce very little inflation.


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## yield (Jul 1, 2011)

littlebabyjesus said:


> Yes, you do. But that ought to work pretty much equally both ways, shouldn't it - the external pressure should sometimes be inflationary and sometimes deflationary. The current situation is like that - external pressure is causing inflation (and also the pound is weak - which is also an inflationary pressure). But at other times, the external pressure should work the other way - the influx of cheaper Chinese goods, for instance, is an example of a deflationary pressure (and not just for the cheapest goods - as a result of imports from Asia, musical instruments are much cheaper now than they were 30 years ago). Yet when it's all added up, we always have inflation, never deflation, so the internal pressures of any economic system that has any degree of autonomy must generally be inflationary.


In theory yes, but it's "animal spirits" "market sentiment" territory.
As bioboy said deflation hit Japan and could've happened here and in USA. Quantitative Easing was an attempt to stop deflation as inflation is easier to deal with.


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## yield (Jul 1, 2011)

littlebabyjesus said:


> Well, Japan has had near-zero interest rates, near-zero growth and near-zero inflation in the last two decades or so. But part of my case is the fact that very low interest rates would in the long term be expected to produce very little inflation.


No Japan has had high growth at times.


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## littlebabyjesus (Jul 1, 2011)

It might still happen here. As I understand it, one of the reasons Japan keeps lurching into deflation is that its currency is so strong and remains strong despite the best efforts of the Japanese to weaken it. A strong currency is a deflationary pressure.


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## yield (Jul 1, 2011)

littlebabyjesus said:


> It might still happen here. As I understand it, one of the reasons Japan keeps lurching into deflation is that its currency is so strong and remains strong despite the best efforts of the Japanese to weaken it. A strong currency is a deflationary pressure.


USA and UK are following a policy of competitive currency depreciation to erode their external debts and to make their exports more competitive.

Edit: low interest rates would in the long term be expected to produce very little inflation if the country was a net exporter so the currency was appreciating.


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## littlebabyjesus (Jul 1, 2011)

yield said:


> USA and UK are following a policy of competitive currency depreciation to erode their external debts and to make their exports more competitive.


 Yes, I know. We'll see if it works. If _everyone_ is trying to devalue their currencies at the same time, it might not! Germany appears dead set on keeping the euro down in value for its exports to thrive.


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## yield (Jul 1, 2011)

littlebabyjesus said:


> Yes, I know. We'll see if it works. If _everyone_ is trying to devalue their currencies at the same time, it might not! Germany appears dead set on keeping the euro down in value for its exports to thrive.


It's relative. Everyone cannot do. Brazil is unable to stop the Real appreciating against the Dollar.


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## Paulie Tandoori (Jul 1, 2011)

its a symbolic token to represent a sharing of effort

except it isn't just that, but in a nut shell, that's my take on it.

lend us a fiver you cunt anyway


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## yield (Jul 1, 2011)

Paulie Tandoori said:


> its a symbolic token to represent a sharing of effort
> 
> except it isn't just that, but in a nut shell, that's my take on it.
> 
> lend us a fiver you cunt anyway


*gives symbolic fiver*


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## littlebabyjesus (Jul 1, 2011)

Here's a fiver, but only on condition that you don't spend it.


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## Paulie Tandoori (Jul 1, 2011)

nice one fellah.

still don't trust that lbj fellah, starting threads like its fecking live aid or thread aid or something.

needs to pick his game up imo.


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## kabbes (Jul 1, 2011)

I don't think I agree with almost any of your OP, starting from its first real paragraph.

Money is abstracted labour and goods.  The value was created when the labour was expended and the goods created.  This value continues to exist whilst the abstraction is being stored.

I'm not sure there is any point continuing through the logic chain when the first principle appears dodgy.


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## littlebabyjesus (Jul 1, 2011)

kabbes said:


> Money is abstracted labour and goods.


 
I don't know what that means. Money is a symbol to which value is attached by people who use it to represent the value of labour and goods. 

How is 'money is abstracted labour and goods' different from that?


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## kabbes (Jul 1, 2011)

Not necessarily any different, with caveats about talking at cross-purposes.

So if it is representing the value of labour and goods, it doesn't cease to represent that value because it isn't being used right this second.

Or, if it does, you could make all your arguments substituting any other tangible asset, such as grain, for "money"


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## littlebabyjesus (Jul 1, 2011)

By only talking about the value of money when it is spent, you are gaining a measure of the amount of goods and services that have been passed from one person to another as a particular amount of money has changed hands. If I borrow £100 from a bank, what value does that money have? It has been created literally out of thin air - the push of a button on a computer. It has no value attached to it yet - and if it turns out that at the very second I was borrowing that £100, everyone else was doing the same thing and the money supply had taken a sudden spike, I might find when I come to spend it that it buys fewer goods and services than I thought it would.

You measure how rich someone is by measuring how much money passes through them, not how much money they have. Money only really makes sense to me in that way - as a measure of 'value per unit of time'. We earn £x per week. So it's not really fair to call someone who owns a house worth £1 million pounds a millionaire because they aren't selling the house, and they might not sell it for another decade or another century. Again, the house's value can only be measured when it is sold and if it is only sold after 20 years, that really represents a rate of income of £50,000 per year over that period, plus perhaps an amount representing rent you'd have to pay if you didn't own it - not a millionaire's income at all. By contrast, someone who earns £1m per year and spends it all may rarely have much money in the bank, but is genuinely very rich when you measure all the goods and services they have bought.


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## Blagsta (Jul 1, 2011)

It's a store of past labour value.


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## littlebabyjesus (Jul 1, 2011)

It is something that we accept in return for labour and so we measure how much our labour is worth at the time of that transaction by a calculation of what we think we will in turn be able to exchange for the money. But the actual value of the work done exists for the other person - in their roof being fixed, or whatever. If anything money is 'anti-value' - it's a uom (you owe me, where the 'you' is 'the world') for value.


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## newme (Jul 1, 2011)

was this written stoned in an economics class


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## littlebabyjesus (Jul 1, 2011)

No. It is a serious attempt at understanding how value is attached to money, which isn't a straightforward question, I would suggest.


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## Blagsta (Jul 1, 2011)

littlebabyjesus said:


> It is something that we accept in return for labour and so we measure how much our labour is worth at the time of that transaction by a calculation of what we think we will in turn be able to exchange for the money. But the actual value of the work done exists for the other person - in their roof being fixed, or whatever. If anything money is 'anti-value' - it's a uom (you owe me, where the 'you' is 'the world') for value.


 
use value and exchange value


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## ItWillNeverWork (Jul 1, 2011)

Even if new money is created to pay off the loans, the amount of physical value has increased therefore cancelling out any inflationary pressures. It's not the creation of money per se that causes inflation, it is the amount of money relative to the amount of real value.


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## phildwyer (Jul 2, 2011)

newme said:


> was this written stoned in an economics class



Whenever this subject is raised here, twerps like this will raise their twerpish heads and basically make any sensible discussion impossible.

However I would suggest that if we want to understand the nature of money, we need to return to Aristotle.  Marx's analysis of money is Aristotelian, and the biggest mistake people make is to try to read the former without having assimilated the teaching of the latter.


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## littlebabyjesus (Jul 2, 2011)

I'm expecting to get battered by one or two of the Marxist scholars on here, but I do think this is something that it is very difficult to think about. No wonder there is so little consensus among economists. There isn't even proper consensus about what money is. As to questions such as 'what produces inflation' and 'does raising interest rates produce inflation or reduce it', again there is no consensus. 

I'm still think the key to the whole thing has to be in understanding how money enters the system in the first place, which is something a lot of people seem to neglect, working from a position where the money is already somewhat magically there.


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## phildwyer (Jul 2, 2011)

littlebabyjesus said:


> I'm expecting to get battered by one or two of the Marxist scholars on here, but I do think this is something that it is very difficult to think about. No wonder there is so little consensus among economists. There isn't even proper consensus about what money is.



It's a sign.

But then you knew I was going to say that.


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## littlebabyjesus (Jul 2, 2011)

Well, aside from the supernatural devil bit, I largely agree with you about the nature of money. It is a sign, yes, a worthless sign until someone attaches value to it. 

What I'm really interested in is the way money increases in volume. 'Reproduces itself' as you would say. There is nothing magical about the process - and I still think the fact that it is created with interest owing is the root cause of its necessary reproduction.

In terms of the question of inflation, on another thread it was suggested that the rate of circulation speeding up might be a cause. I don't see how this can be the case. The rate of circulation of money will only speed up if the amount of transactions increases, and its speeding up should keep exact pace with growth. I don't see any inflationary pressure there at all.


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## phildwyer (Jul 2, 2011)

littlebabyjesus said:


> There is nothing magical about the process



This of course is where we disagree.

Certainly it was regarded as, and referred to as, "magical" until the eighteenth century.


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## littlebabyjesus (Jul 2, 2011)

phildwyer said:


> This of course is where we disagree..


 
It is indeed.


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## phildwyer (Jul 2, 2011)

littlebabyjesus said:


> It is indeed.



Let's not go there again.  I'll observe this thread silently for the most part.


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## TruXta (Jul 2, 2011)

phildwyer said:


> This of course is where we disagree.
> 
> Certainly it was regarded as, and referred to as, "magical" until the eighteenth century.


 
lbj, it seems that you think money has been essentially the same concept and practice throughout history. I'm not so sure it has tbh. Money have uses other than financial transactions - as ritual objects for example. In this sense coins, notes and other forms of tender aren't just signs, they're also objects thought to have inherent qualities and powers, even sentience according to some. Money as fetish, in the classical and not the Marxist sense.

In such a context the value that money has isn't attached to it by people, it is an essential aspect of the nature of money. Note that this isn't my viewpoint. I'm not an essentialist in the normal sense of the word.


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## DotCommunist (Jul 2, 2011)

money as symbol is not money as referent.


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## TruXta (Jul 2, 2011)

Is that to phil, Dots?


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## DotCommunist (Jul 2, 2011)

mm. The idea of seperation between symbol/referent is one I encountered through reading on language but I think it applies to currency and the idea of currency. In another way, phil isn't wrong about the 'magic' nature of money, if we want to take 'magic' to mean consensual delusion. A fiver is a fiver not through intrinsic value but because etc


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## TruXta (Jul 2, 2011)

Money's a social construct. Nothing magical about it. That said, as posted above, some cultures and people see money as something magical or supernatural, in addition to its regular ontological status.


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## littlebabyjesus (Jul 2, 2011)

TruXta said:


> In such a context the value that money has isn't attached to it by people, it is an essential aspect of the nature of money. Note that this isn't my viewpoint. I'm not an essentialist in the normal sense of the word.


 
At the moment, I'm only really talking about money as it now exists in capitalist societies, where it enters the system through loans made at interest. 

Its origins are different in that it used to be important what the coins were made from - their value came from the qualities of the actual object, or as is the case with the Aztecs, for instance, the coffee bean was used for exchange and its value again came from the fact that coffee beans have value. Even more recently with the gold standard, value was theoretically given by the amount of gold the promisory note promised.

Now, any pretence that the value of money comes from something inherent to the metal or the note has gone. We've completed the journey of full abstraction - only a tiny amount of money nowadays ever exists as anything other than a number in a computer system: in the UK less than 3 % of all money exists as cash.


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## ItWillNeverWork (Jul 2, 2011)

littlebabyjesus said:


> What I'm really interested in is the way money increases in volume. 'Reproduces itself' as you would say. There is nothing magical about the process - and I still think the fact that it is created with interest owing is the root cause of its necessary reproduction.



Don't the Post-Keynesian's have a theory of endogenous money that delves into this? BTW, have you had a look at post #32 regarding inflation?


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## littlebabyjesus (Jul 2, 2011)

ItWillNeverWork said:


> Even if new money is created to pay off the loans, the amount of physical value has increased therefore cancelling out any inflationary pressures. It's not the creation of money per se that causes inflation, it is the amount of money relative to the amount of real value.


 
My contention is, essentially, that the rate of inflation equals the amount of interest paid minus growth. The interest is due whether or not there is any growth, and the rate of interest charged is invariably higher than the rate of growth. My point is that the money supply has to keep growing - ie the amount of debt has to keep growing - in order to pay the interest due on loans, whether or not there is growth.


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## littlebabyjesus (Jul 2, 2011)

ItWillNeverWork said:


> Don't the Post-Keynesian's have a theory of endogenous money that delves into this?


 
I'd be very interested in any links anyone can provide to any of this. I'm familiar with some but far from all theories about it.


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## Brainaddict (Jul 2, 2011)

My brain isn't up to this at the moment but I'm interested in it. I'll come back to the thread but in the meantime can someone explain to me the process by which governments put money into the system when they decide to do 'quantative easing'. I've been wondering about it for a while.


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## ymu (Jul 2, 2011)

littlebabyjesus said:


> It might still happen here. As I understand it, one of the reasons Japan keeps lurching into deflation is that its currency is so strong and remains strong despite the best efforts of the Japanese to weaken it. A strong currency is a deflationary pressure.


 
The reason is Japan tried austerity in the 1990s and still hasn't recovered. Same story for every other country that tried austerity with high unemployment and low interest rates. It's like deciding to walk up the down escalator instead of walking a bit further to the up.

The links in this are worth chasing:



> Austerity Games, Here And There
> 
> Early last year, many people on both sides of the Atlantic seized on the idea that less is more — that cutting spending would actually help, not hinder, recovery. There was a paper by Alesina and Ardagna that seemed to provide evidence to that effect, and nothing succeeds like telling people what they want to hear.
> 
> ...


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## littlebabyjesus (Jul 2, 2011)

Brainaddict said:


> My brain isn't up to this at the moment but I'm interested in it. I'll come back to the thread but in the meantime can someone explain to me the process by which governments put money into the system when they decide to do 'quantative easing'. I've been wondering about it for a while.


 
They buy government gilts. So, say, Barclays Bank owns some UK gilts - the Bank of England just creates money by a click of a button and uses that money to buy the government gilts from Barclays Bank. It does this in the hope that the bank will then use that money as the basis for lending. So now we have a situation where a percentage of UK government gilts are owned by the Bank of England. 

During the recent recession, so few loans were being made that the amount being loaned out was less than the amount being paid back on existing loans, which has the net effect of reducing the money supply. Part of this reduction was accounted for by the contraction of the economy, but too much reduction of the money supply and you end up with deflation. Deflation cripples an economy because it removes the incentive to invest - you can make money just by metaphorically sticking your money under the mattress.

It's Keynsian economics, basically, but there are other, imo far better, ways of achieving the same thing. The credit crunch was the perfect opportunity to solve Britain's housing crisis. As builders and architects were being laid off, the government could have stepped in and simply printed the money to pay them to build social housing. Short-term the recession would prevent this from causing inflation. Long-term, the rents paid by tenants would have prevented it from causing inflation - the money from the rents could have simply been destroyed again. So we'd have had more houses, a stronger and more just economy, and all that with no downside.


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## TruXta (Jul 2, 2011)

littlebabyjesus said:


> At the moment, I'm only really talking about money as it now exists in capitalist societies, where it enters the system through loans made at interest.
> 
> Its origins are different in that it used to be important what the coins were made from - their value came from the qualities of the actual object, or as is the case with the Aztecs, for instance, the coffee bean was used for exchange and its value again came from the fact that coffee beans have value. Even more recently with the gold standard, value was theoretically given by the amount of gold the promisory note promised.
> 
> Now, any pretence that the value of money comes from something inherent to the metal or the note has gone. We've completed the journey of full abstraction - only a tiny amount of money nowadays ever exists as anything other than a number in a computer system: in the UK less than 3 % of all money exists as cash.


 
Fair enough that you don't want to go into history (although these practices continue to these day in different cultures around the world - China for example).

About your last sentence - I don't know that the value of money as distinct from its materiality is new, credit certainly isn't, and that is the same practice and idea of divorcing form from substance. Check out David Graeber, he's got some good stuff on money and credit. This is a short piece - annoying format tho. http://www.canopycanopycanopy.com/10/to_have_is_to_owe


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## ItWillNeverWork (Jul 2, 2011)

littlebabyjesus said:


> My contention is, essentially, that the rate of inflation equals the amount of interest paid minus growth. The interest is due whether or not there is any growth, and the rate of interest charged is invariably higher than the rate of growth. My point is that the money supply has to keep growing - ie the amount of debt has to keep growing - in order to pay the interest due on loans, whether or not there is growth.



Ok, I see where you're coming from now. I guess I was working under the assumption that the money borrowed for capital investment would successfully result in the production of new goods. I.e. if an economy has £100 and 100 widgets, each would be worth £1. If a loan was made of £10 of newly created money, and this was used to produce capital that led to the production of 10 more widgets, then the two would equal out and no price changes would occur. Which is essentially what you are saying.

In this sense though, money creation could also be deflationary if 20 widgets were produced with the £10 created. In other words there would be £110 in circulation, but 120 widgets - a price of 92p or there abouts.


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## ItWillNeverWork (Jul 2, 2011)

Unless you are using the definition of 'inflation' to mean 'increase in the money supply' rather than 'a general rise in prices'.


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## DotCommunist (Jul 2, 2011)

TruXta said:


> Money's a social construct. Nothing magical about it. That said, as posted above, some cultures and people see money as something magical or supernatural, in addition to i*ts regular ontological status*.


one which is subject to whims of market and forces outside of it's real value. It's not hard to see why phil engages with the 'it is basically voodoo' line of reasoning because despite all attempts to anchor currency to the real of what it represents, we still have currency subject to whims as arbitrary as its own claim to value. Might as well be flaxscrip if the 'I promise to pay the bearer' isn't backed by belief and ultimately government. I know there is a risk of dissapearing up my own hash pipe on that line of thought. Flaxscrip.


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## littlebabyjesus (Jul 2, 2011)

ItWillNeverWork said:


> In this sense though, money creation could also be deflationary if 20 widgets were produced with the £10 created. In other words there would be £110 in circulation, but 120 widgets - a price of 92p or there abouts.


 
It could, but in practice, the rate of interest is invariably substantially higher than the rate of growth.


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## littlebabyjesus (Jul 2, 2011)

ItWillNeverWork said:


> Unless you are using the definition of 'inflation' to mean 'increase in the money supply' rather than 'a general rise in prices'.


 
No. I'm using it to mean a general rise in prices. But that rise in prices is caused by an increase in the money supply!


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## littlebabyjesus (Jul 2, 2011)

littlebabyjesus said:


> It's Keynsian economics, basically, but there are other, imo far better, ways of achieving the same thing. The credit crunch was the perfect opportunity to solve Britain's housing crisis. As builders and architects were being laid off, the government could have stepped in and simply printed the money to pay them to build social housing. Short-term the recession would prevent this from causing inflation. Long-term, the rents paid by tenants would have prevented it from causing inflation - the money from the rents could have simply been destroyed again. So we'd have had more houses, a stronger and more just economy, and all that with no downside.


 
This kind of thing is an example of how we can become controlled by the logic of money rather than using the money for our own needs. It is this aspect of money - where we end up serving it rather than it serving us - that I have sympathy with dwyer for. 

Where a crisis is purely financial, it isn't necessarily a crisis at all. Looked at properly, it is a fantastic opportunity to do good and take control of the economy away from the rich. The credit crunch was potentially a very good thing for ordinary people. It wasn't of course, in large part because of the way QE was done, but it could have been. It was a missed opportunity.


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## ItWillNeverWork (Jul 2, 2011)

littlebabyjesus said:


> It could, but in practice, the rate of interest is invariably substantially higher than the rate of growth.


 
Have you got any links to data showing that this is the case?


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## ItWillNeverWork (Jul 2, 2011)

Also, are we talking about base rates set by the BoE, or interest rates actually charged by lenders?


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## ymu (Jul 2, 2011)

littlebabyjesus said:


> I'd be very interested in any links anyone can provide to any of this. I'm familiar with some but far from all theories about it.


 
Minsky. This is a useful way in.


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## ItWillNeverWork (Jul 2, 2011)

ymu said:


> Minsky. This is a useful way in.


 
The lectures on Behavioural Finance that are uploaded to that site are awesome. Really made me re-think my understanding of economics.


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## littlebabyjesus (Jul 2, 2011)

ItWillNeverWork said:


> Have you got any links to data showing that this is the case?


 
I need to do more than that, and I am planning on doing it when I work out how to - I need to find a way to take a long-ish period, say 50 years, in a particular economy and calculate how much interest was paid on loans over that period, how much growth there was and how much inflation. If I'm right (and this wouldn't in itself prove I was right, but it is a prediction of my theory), then inflation should equal interest paid minus growth. If it doesn't show this to a reasonable accuracy, then I am wrong. 

But to take post-war UK as the example, growth has been 2-3 percent per year for most of the post-war period. In that time, the bank base rate has until very very recently never dipped below about 4 percent, and of course most loans are taken out at a higher rate than the bank of england base rate. Even now, you can't take out a secured loan for less than about 3 percent even with massive equity, and growth is around zero at the moment - and most loans are made at much more than that.


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## littlebabyjesus (Jul 2, 2011)

ItWillNeverWork said:


> Also, are we talking about base rates set by the BoE, or interest rates actually charged by lenders?


 
No. It has to be rates actually charged by lenders. It's the actual activity that matters here rather than theoretical rates. You'd have to subtract defaults, but then defaults are an integral part of the game - they are the means by which the banks take possession of real things.


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## ymu (Jul 2, 2011)

Inflation fills in the gap, doesn't it? Interest rates have to cover inflation + risk + admin costs (+ profit) or the bank goes under. If growth is lower than inflation, fortunes trickle away. Which is why Osborne is on seriously borrowed time. His base are getting twitchy.


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## littlebabyjesus (Jul 2, 2011)

ymu said:


> Inflation fills in the gap, doesn't it?


 
Yes. I'm in danger of falling into circular logic here and proving a truism. I'd still like to do it. The difficult bit is demonstrating that interest rates are the driver of inflation.


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## ItWillNeverWork (Jul 2, 2011)

littlebabyjesus said:


> Yes. I'm in danger of falling into circular logic here and proving a truism. I'd still like to do it. The difficult bit is demonstrating that interest rates are the driver of inflation.


 
I don't think it is circular logic, more that this demonstrates the circularity of _causation_ within the economy. There are many interconnected variables impacting on each other simultaneously. Both positive and negative feedbacks exist, some cancelling each other out and others acting as self-reinforcing loops.

So it may well be that interest rates drive inflation, but just as real is the idea that inflation rates determine interest rates. Similarly, a raising of interest rates lowers the volume of people demanding loans and so creates a tendency for growth to decline which in turn decreases inflationary pressures.

Put simply, the economy cannot be viewed linearly with x -> y as a direct cause. It has to be analysed holistically and dynamically.


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## littlebabyjesus (Jul 2, 2011)

Yes. Very true. That's a good way of thinking about it. I may in fact be trying to oversimplify here. Certainly if inflation is running at 10 percent, banks are going to want to charge at least 11 percent for any loan. Charging interest sets up an expectation that the money supply will grow - but that expectation will then feed back into the process of setting interest rates - yes, I can see that.


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## love detective (Jul 2, 2011)

> my contention [is] that the action of lending money at interest is the fundamental driver of inflation





> The difficult bit is demonstrating that interest rates are the driver of inflation





> Charging interest sets up an expectation that the money supply will grow



where do you get this idea that money is actually created to pay interest (and that this 'extra' money is the 'fundamental' driver of inflation)? this crude mis-analysis is at the root of a lot of your misunderstanding about some very basic things

I'll have one last go at trying to show you where you are wrong - using the most simple of terms and examples to demonstrate it:-

Pretend I get paid £105 a week and I normally spend all of it consuming things. If i borrow £100 from you, and promise to pay you back £105 tomorrow when I get paid - a loan situation develops between us in the intervening period

Normally when I get paid i'd spent £105 on consumption, but when I get your loan I spend £100 on consumption and when I get paid my £105 I have to hand it all over to you. So at this point instead of £105 chasing goods in the economy, only £100 is (a potential deflationary, not inflationary, situation) - however that additional £5 that i'd normally spend on consumption goes to you and represents your gain on the loan, you now spend this and in total we're back to the £105 chasing goods in the economy.

The loan and the interest have been repaid in full - no money has been created while doing so (as i've paid you back from my wages which I would have been getting anyway), no trace of either the loan or interest is left - they have both been obliterated, no increase in the amount of money chasing goods has come about and no inflation has occurred. The only thing that has changed, at all the different points of the loan transaction, is the distribution of existing goods/money between you and I - at the total level nothing has changed

Can you try and explain to me why you see the need for additional money to come into the system in the above example?


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## ItWillNeverWork (Jul 2, 2011)

Expanding on this view of the economy as a system in which feedbacks exist, one of the problems with neoclassical economics is that it only analyses negative feedbacks - i.e. tendencies that cancel each other out and so lead a system to 'equilibrium'. The problem with this is that it is based on naive 19th century concepts found in physics. 

Nowadays it is understood that even physical systems do not always reach a static equilibrium. For  example, watch how chemical reaction oscillates back and forth between different colours. There is no reason to think that capitalism does not operate in the same sort of way with oscillations being a natural consequence of it's internal dynamics.

Anyway, that was a bit of a digression. You got me all excited.


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## littlebabyjesus (Jul 2, 2011)

love detective said:


> Can you try and explain to me why you see the need for additional money to come into the system in the above example?


 
How did that existing money enter the system? That example starts from the position where there is money already in the system.

I agree with you that your example is zero-sum, but my example involves a third party - a bank of some kind - providing the money, the symbolic entity to which value is attached. Without that third party, how can there be any money in the system at all?


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## ItWillNeverWork (Jul 2, 2011)

love detective said:


> where do you get this idea that money is actually created to pay interest (and that this 'extra' money is the 'fundamental' driver of inflation)? this crude mis-analysis is at the root of a lot of your misunderstanding about some very basic things
> 
> I'll have one last go at trying to show you where you are wrong - using the most simple of terms and examples to demonstrate it:-
> 
> ...


 
Although this does assume that saving has to take place before a loan can be made - i.e one persons loan is another persons deferred consumption. ymu mentioned Minsky earlier, and he had quite a different take on this idea.


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## love detective (Jul 2, 2011)

> How did that existing money enter the system? That example starts from the position where there is money already in the system.



but your contention is that lending money at interest causes inflation - if the money was lent at 0% according to you it wouldn't cause inflation - but the question as to where it comes from remains - so for the purposes of looking into your hypothesis it is irrelevant


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## littlebabyjesus (Jul 2, 2011)

ItWillNeverWork said:


> Nowadays it is understood that even physical systems do not always reach a static equilibrium. For  example, watch how chemical reaction oscillates back and forth between different colours. There is no reason to think that capitalism does not operate in the same sort of way with oscillations being a natural consequence of it's internal dynamics.


 
Yes, very good. And not a digression, I don't think - this kind of systems analysis is crucial to understanding complex processes. But in the particular case of inflation/deflation, there isn't an oscillation really - there's pretty much always inflation.


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## love detective (Jul 2, 2011)

I hope you get the significance of my point above - i.e. your claim is that only lending at interest causes a increase in the money supply which in turn causes inflation - this implies that lending money not at interest (i.e. for free) doesn't cause an increase in money supply/inflation - so the investigation into how the original £105 came about can have no relevance to your hypotheses, because according to you, if money is not lent at interest then we don't have the fundamental driver of inflation that you claim it is - so you can't use 'where did the original money come from' to justify your case here (or if you do, then you need to adjust your hypothesis to one which says lending in general causes inflation, but that then blows your plan about proving you are right via reference to interest rates & interest payments)


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## ymu (Jul 2, 2011)

Isn't the issue what happens when the money being lent doesn't itself exist, ie leverage?


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## love detective (Jul 2, 2011)

littlebabyjesus said:


> How did that existing money enter the system? That example starts from the position where there is money already in the system.
> 
> I agree with you that your example is zero-sum, but my example involves a third party - a bank of some kind - providing the money, the symbolic entity to which value is attached. Without that third party, how can there be any money in the system at all?


 
(i wish you'd stop editing in things after i reply as it makes it look like i'm ignoring points)

commercial banks don't introduce money to the system, they circulate existing money (i.e by lending it to people - just like you lent £105 to me) that has been created by the central bank


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## love detective (Jul 2, 2011)

ymu said:


> Isn't the issue what happens when the money being lent doesn't itself exist, ie leverage?


 
of course, but LBJ's theory is purely that lending at interest causes an increase in the money supply and therefore inflation (it's all bollocks anyway)


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## ItWillNeverWork (Jul 2, 2011)

littlebabyjesus said:


> Yes, very good. And not a digression, I don't think - this kind of systems analysis is crucial to understanding complex processes. But in the particular case of inflation/deflation, there isn't an oscillation really - there's pretty much always inflation.


 
In the 20th Century this was the case for sure (other than the great depression). This is quite an interesting graph though. It shows how in the 19th Century there was just as much deflation as there was inflation, with the severity of the price changes decreasing as the century went on. 

I've no idea what to make of this data but it sure is interesting. I'd like to understand what effects Keynesian policy had on altering the behaviour of the economy after the 1930's.


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## littlebabyjesus (Jul 2, 2011)

love detective said:


> but your contention is that lending money at interest causes inflation - if the money was lent at 0% according to you it wouldn't cause inflation - but the question as to where it comes from remains - so for the purposes of looking into your hypothesis it is irrelevant


 
Ok, I accept that loans within the system such as you describe don't create inflation. But there is a need to get money into the system in the first place. As itwillneverwork says, your model there assumes that all loans are made through deferred consumption. But in reality is that really what banks do? And in reality, how could money ever enter a system in the first place if that were true? 

There is another way in which money can be thought of - the deferred consumption (someone's deposit in the bank, perhaps) may give confidence to the borrower and lender, but the loan is made on the valuation of an asset of the borrower's, or even just on the trust of a firm handshake. You don't actually need the deposit to back that up - the bank can just as easily just create the money out of nothing and give it to the borrower with the asset as collateral - as long as the loan is repaid, the fact there was nothing to back up the bank's loan is irrelevant.

And in order for any money to be in the system at all, this kind of process must have happened, or at least, you have to consider the system as if this were the process that started it off. If you don't do that, you may be ignoring a fundamental aspect of the system.


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## ymu (Jul 2, 2011)

love detective said:


> of course, but LBJ's theory is purely that lending at interest causes an increase in the money supply and therefore inflation (it's all bollocks anyway)


 
But it does, if the money never existed in the first place, doesn't it?

I have no idea what he's going on about, but if a banker makes up an imaginary £90 to add to the tenner he's got, and charges a fiver on the £100 loan, inflation was caused by spending £90 that never existed. The fact that it quickly vanishes in a puff of smoke when profit has been made off it doesn't mean it didn't have an impact.

And this is where I get lost ...


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## ItWillNeverWork (Jul 2, 2011)

love detective said:


> commercial banks don't introduce money to the system, they circulate existing money (i.e by lending it to people - just like you lent £105 to me) that has been created by the central bank


 
At the risk of repeating myself, I'd point you to Minksy and the theory of endogenous money. I'm not saying that his theories are correct - for sure, they are not part of the mainstream. However, it is still the case that the mainstream understanding of how money is created is not accepted by everyone. Just something to think about


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## littlebabyjesus (Jul 2, 2011)

ItWillNeverWork said:


> In the 20th Century this was the case for sure (other than the great depression). This is quite an interesting graph though. It shows how in the 19th Century there was just as much deflation as there was inflation, with the severity of the price changes decreasing as the century went on.
> 
> I've no idea what to make of this data but it sure is interesting. I'd like to understand what effects Keynesian policy had on altering the behaviour of the economy after the 1930's.


 
Some changes I can think of that might be relevant include the abandoning of the gold standard (which had been fiction for a while anyway) and the beginning of fractional reserve banking as the mechanism for putting money into the economy.


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## littlebabyjesus (Jul 2, 2011)

ItWillNeverWork said:


> At the risk of repeating myself, I'd point you to Minksy and the theory of endogenous money. t


 
I'm going to have a read of that. I may leave this thread alone for a while while I do.


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## love detective (Jul 2, 2011)

littlebabyjesus said:


> Ok, I accept that loans within the system such as you describe don't create inflation. But there is a need to get money into the system in the first place. As itwillneverwork says, your model there assumes that all loans are made through deferred consumption. But in reality is that really what banks do? And in reality, how could money ever enter a system in the first place if that were true?
> 
> There is another way in which money can be thought of - the deferred consumption (someone's deposit in the bank, perhaps) may give confidence to the borrower and lender, but the loan is made on the valuation of an asset of the borrower's, or even just on the trust of a firm handshake. You don't actually need the deposit to back that up - the bank can just as easily just create the money out of nothing and give it to the borrower with the asset as collateral - as long as the loan is repaid, the fact there was nothing to back up the bank's loan is irrelevant.
> 
> And in order for any money to be in the system at all, this kind of process must have happened, or at least, you have to consider the system as if this were the process that started it off. If you don't do that, you may be ignoring a fundamental aspect of the system.



i've already explained to you numerous times how money enters the system and how commercial banks then circulate that money via fractional reserve lending - i.e. £10 of central bank money could be lent & borrowed countless times creating say £100 of loans & deposits

now each time that £10 is circulated by the commercial banks (through lending and recycling back through the system to more lending)- no new money is created, the only thing that happens is that the velocity increases

so the example i gave you, which you now accept doesn't create inflation, is the same thing that happens each time a bank lends through fractional reserve lending i.e. there is no third party that you keep going back to - no additional money comes into the system, it just circulates more (and earlier on you ruled out the possibility of increasing circulation from causing inflation - something i actually disagree with btw)

commercial banks can't create money, they can only circulate existing money

i'm more than happy to discuss how money enters into the system, but i specifically ignored it in the example i gave you because based on the way you had set out your hypothesis it wasn't relevant - because your core claim is that lending money _at interest_ is the fundamental driver of inflation. this implies that lending money at 0% interest does not cause inflation - so the issue to discuss from the point of your theory is not how the money got there, but once it's there - why if it's lent at interest does it cause inflation, but lent at 0% it doesn't. i.e. the issue of the money getting there in the first place you actually dispense with in your hypothesis because what you say is the fundamental driver of inflation is whether it's lent at interest or not - not how it got there

i know i keep saying this, and you will ignore it, but if I were you I would take a few steps back and try and work on your foundations before trying to build anything on them - it will pay dividends in the long run


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## love detective (Jul 2, 2011)

> your model there assumes that all loans are made through deferred consumption.



it doesn't, my example of the £100 borrowed from you was blind to where the money come from (for reasons i've already stated, i.e. your hypothesis rendered that fact irrelevant)

my actual model is what happens in reality (i tend to find that helps) which is that loans are made through commercial banks circulating existing central bank money - i.e. fractional reserve lending (which is nothing more than money circulating), something that has pretty much been around since the credit system & money itself, it's nothing new


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## love detective (Jul 2, 2011)

ItWillNeverWork said:


> At the risk of repeating myself, I'd point you to Minksy and the theory of endogenous money. I'm not saying that his theories are correct - for sure, they are not part of the mainstream. However, it is still the case that the mainstream understanding of how money is created is not accepted by everyone. Just something to think about


 
this is pretty much what i'm saying - i.e. banks circulate money within the system to the extent that demand dictates (although it still needs a base of central bank money to happen, but the independent variable is demand for loans, not central bank money - LBJ's theory on the other hand seems to place the importance of central bank money ('a third party') as the key driver here)

people often go on about banks being able to create money out of thin air, which is obviously bollocks - they have the ability to circulate existing central bank money, but only if the demand for loans & deposits in the system is there - i.e. neither the central bank, or the commercial banks are the independent variable, but demand for loan capital is)

anyway - this is all irrelevant to the fundamental reason behind LBJ starting this thread which states that lending at interest (and not lending money at 0%) is the fundamental driver of increased money supply and inflation - i.e. as said a few times already, what lies at the heart of LBJ's theory is not how the money gets there, but whether it's lent at interest or not once it's there. If he wants to admit that his theory (which prompted the creation of this thread) has no legs, then the discussion may move onto something that might actually get us somewhere - until then however we're stuck in a loop of LBJ insisting he's right without ever having proven it (either logically or empirically)


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## littlebabyjesus (Jul 2, 2011)

I'm not insisting I'm right. It's kind of the opposite, in fact. I can see your point about commercial banks - as long as loans are made on the back of deposits, they are a way of shifting existing money around - any loan is matched by money 'resting' in a bank account somewhere. So whether or not there is an increasing money supply is simply a function of the balance between loans and loan repayments. And at least in modern times, there has always been a bias towards ever greater loans being taken out. 

Ok, I accept that. I've got that bit wrong at least.


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## love detective (Jul 2, 2011)

yep that's correct (although the money isn't resting, far from it in fact, it's speeding/circualting around the system and effectively being in mutliple different places at once) - and fractional reserve lending is purely a function of existing money circulating (i.e. shifting around as you say, and this shifting around/circulating/velocity is the key thing in all of this)

commercial banks can't just create money from nothing (grasping this is absolutely vital here) , and while central banks _can_ create money from nothing, if there's no demand for it (from commercial banks, and in turn their customers) the money created would have no affect - so we're left with demand within the system for loan capital which is the key driver for both existing money circulating and new central bank money being created  (which is why things like QE never have anything like the effect most people think it does - because it's money being created and pushed onto a system that doesn't really want it at that particular time)


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## love detective (Jul 2, 2011)

> Ok, I accept that. I've got that bit wrong at least.



Do you still have the same level of confidence you initially had about how lending money at interest is the fundamental reason for inflation?

Bearing in mind that the question of the introduction of money into the system can have no bearing on your hypothesis - because if that money was lent at zero interest it would not, per your hypothesis, cause any inflation


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## ymu (Jul 2, 2011)

Does anyone know enough about Minsky/post-Keynesianism to do a thread on it? Debt is the thing that neo-classical economics doesn't include in its models, and it matters, but I'm nowhere near getting a grip on it.


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## littlebabyjesus (Jul 2, 2011)

Ok, I get that too. You may be finally breaking through here, ld. That makes sense.


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## littlebabyjesus (Jul 2, 2011)

love detective said:


> Do you still have the same level of confidence you initially had about how lending money at interest is the fundamental reason for inflation?


 
 

no

I never had that much confidence, tbf. I was genuine when I asked what was wrong with that picture.


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## love detective (Jul 2, 2011)

> Ok, I get that too. You may be finally breaking through here, ld. That makes sense.



good - time for a break then (it may be a problem in the way i've articulated it, but i've been 'saying' the same thing in pretty much every discussion/thread we have had on this)


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## TruXta (Jul 2, 2011)

DotCommunist said:


> one which is subject to whims of market and forces outside of it's real value. It's not hard to see why phil engages with the 'it is basically voodoo' line of reasoning because despite all attempts to anchor currency to the real of what it represents, we still have currency subject to whims as arbitrary as its own claim to value. Might as well be flaxscrip if the 'I promise to pay the bearer' isn't backed by belief and ultimately government. I know there is a risk of dissapearing up my own hash pipe on that line of thought. Flaxscrip.


 
Fiat, consensus, call it whatever you like, it's still nothing mysterious, unless you think human values as such are voodoo.


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## littlebabyjesus (Jul 2, 2011)

ymu said:


> Does anyone know enough about Minsky/post-Keynesianism to do a thread on it? Debt is the thing that neo-classical economics doesn't include in its models, and it matters, but I'm nowhere near getting a grip on it.


 
It does matter. And I think it is a fucking difficult thing to think about properly. I find quantum mechanics easier than a lot of this stuff. Relativity? Piece of piss! Love detective has in fact - finally, I'm sure he would say  - cleared some things up for me. But I'm going to leave it alone for now, I think.


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## ItWillNeverWork (Jul 2, 2011)

ymu said:


> Does anyone know enough about Minsky/post-Keynesianism to do a thread on it? Debt is the thing that neo-classical economics doesn't include in its models, and it matters, but I'm nowhere near getting a grip on it.


 
I'm relatively new to the post-Keynesian stuff but would definitely be interested in a thread on that topic. Maybe one revolving around a choice of reading - kind of like a reading group?


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## love detective (Jul 2, 2011)

> It does matter. And I think it is a fucking difficult thing to think about properly. I find quantum mechanics easier than a lot of this stuff. Relativity? Piece of piss! Love detective has in fact - finally, I'm sure he would say  - cleared some things up for me. But I'm going to leave it alone for now, I think.



sometimes you need to take a good few steps backwards, to establish firm foundations, before you can go forwards - i've mentioned a number of times in our various discussions that your logical reasoning about a lot of things in relation to this is generally pretty sound, but the starting premises of a lot of it left a lot to be desired - which in turn results in you coming up with some fairly daft conclusions (at times you do come across as some kind of metaphysical austrian economist - as you place too much emphasis on your abstracted reasoning/logic alone - without ever venturing into the real world to test/validate your hypothesis) -  it's worth taking the time to get the foundations right if you're serious about understanding this stuff properly - it may be a bit of a bind to step backwards to do this, but it's worth it in the long run

and, imo, one of the best ways of establishing a solid foundation from which to build from is to read all three volumes of capital! it gives a superb framework in which to think about all this stuff within


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## littlebabyjesus (Jul 3, 2011)

TruXta said:


> About your last sentence - I don't know that the value of money as distinct from its materiality is new, credit certainly isn't, and that is the same practice and idea of divorcing form from substance. Check out David Graeber, he's got some good stuff on money and credit. This is a short piece - annoying format tho. http://www.canopycanopycanopy.com/10/to_have_is_to_owe



That is good stuff. Ta. Very thought-provoking. I very much like his line that 'Money is a promise. And it is a promise we keep to those we value and break to those we do not.'


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## littlebabyjesus (Jul 3, 2011)

Ok, I can't leave this alone it seems. Another question for someone to answer (sorry if this sounds stupid): 

Since commercial banks can only lend money on the basis of their deposits, how exactly did the credit crunch happen? 

If the rules say you can only lend 80% the value of your deposits, say, that means that however much you've loaned out, you ought in theory to be able to cover it with your deposits (assuming there isn't a run where every depositor wants their money back). The loans were made on the basis of gross overvaluations of assets, but that only matters if the debtor defaults. 

Was the crunch caused by mass defaults on assets worth far less than the loan value? Or was the money the banks were lending out in reality not backed by deposits but rather really and truly 'created out of thin air'?


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## phildwyer (Jul 3, 2011)

TruXta said:


> Money's a social construct. Nothing magical about it. That said, as posted above, some cultures and people see money as something magical or supernatural, in addition to its regular ontological status.



_All_ cultures see _usury_ as magical when it is first introduced, including Western culture in the C16th and C17th.  

And they are right to do so.  Usury, which is the essence of capitalism, is the bestowal of life on what is lifeless.


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## newbie (Jul 3, 2011)

if a commercial bank can lend $100 (and get paid back $105)  while only holding assets below $10 how is it not creating money?

www.bankofengland.co.uk/publications/fsr/2009/fsrfull0906.pdf


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## kabbes (Jul 3, 2011)

> Was the crunch caused by mass defaults on assets worth far less than the loan value? Or was the money the banks were lending out in reality not backed by deposits but rather really and truly 'created out of thin air'?



In short, the former.  In long, neither, exactly.

Subprime mortgages were bundled together and the collection of them sold on as a single asset (like a single corporate bond that is actually a whole load of small loans, but you "don't need to know that" ).  This process is called securitisation.

Some startlingly poor understanding of statistics led some morons to declare that these bundles were ultra-safe because diversification would mean that they wouldn't all go at once.  This was mistake/intentional fraud 1.  As a single securitised asset they were rated as AAA, as if they were loan paper issued by Berkshire Hathaway or General Motors (if GM are still AAA).

Companies have assets backing their liabilities.  Financial institutions in particular have to have assets backing their liabilities.  AAA loans are good for this because they are supposed to be cast-iron, offering a tiny fraction above government bonds for a tiny risk.  So these AAA securitised loans were bought -- NOT as speculation but for the exact opposite reason, for stability.

When the market went south, the error was revealed -- loads of defaults happened at once and the securitised loans failed.  This wasn't in itself a problem.  Junk bonds fail all the time.  The problem was the mismatch on the expectation of risk and, crucially, the complete surprise that low-risk was failing.  This made big companies shaky and that had a snowball effect -- THEIR loan paper couldn't be trusted either and companies with those bonds were also in trouble.

The upshot of all that uncertainty was that credit spreads widened.  That means buyers demanded higher yields for the same bonds, I.e. They wanted to pay lower prices.

This meant that the value of bonds was falling all over the place, so companies' assets fell and their apparent security was now in question.  In turn, that made banks more reluctant to lend money to them.

So a double whammy happened -- banks' own assets were falling in value and also they couldn't trust the security of other companies.  They couldn't afford to lend (that solvency %) and they didn't want to lend.  Hence credit crunch.


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## love detective (Jul 3, 2011)

> Was the crunch caused by mass defaults on assets worth far less than the loan value? Or was the money the banks were lending out in reality not backed by deposits but rather really and truly 'created out of thin air'?



I don't know how many times I can say it, or how many different ways I can say it, but commercial banks cannot create money out of thin air

I know it might seem like an attractive rhetorical critique in the era of the soundbite, but it's a baseless & inaccurate. Your far better to understand how the wider system works as there's plenty in it to critique that's just as biting and hard hitting, and is actually true, as opposed to this 'out of thin air' stuff.

Think about it for a minute, if banks could create money out of thin air - why would there be a banking crisis at all? The first big tangible collapse in the UK as a result of the crisis was Northern Rock going under. The direct cause of this was not because of bad debts, but because they were unable to fund their ongoing operations in the money markets , i.e. they weren't able to borrow enough money from the markets to continue (compounded by a run on the bank with its customers withdrawing money from it). If commercial banks could just create money out of 'thin air' why didn't they just do this to survive? Why did it matter that both individual customers were taking their deposits away from it and the domestic & international money markets were refusing to lend to it? Why did it have to rely on things external to it if it could just create money out of thin air? The answer is of course that they can't do that. As previously said, the banks are not the independent driver/variable in all of this

If you want to borrow money from a bank, the bank can provide that money in three ways:-

i) it can use existing money coming into it from repaid loans, interest on existing loans, or customer deposits to fund the loan

ii) it can sell existing assets to convert them into cash to fund the loan (this general manner also covers new central bank base money coming into the system, as that's the way it enters the system) - but it must sell them at a level that doesn't cause it undue losses 

iii) it can borrow from the domestic or international money markets, and then lend that money on 

There's no 4th option where they can create money out of thin air - all three things above depend on someone else, somewhere else, doing something, that then allows a bank to lend

Kabbes has covered the point about the crisis - but in short, it's because value generation didn't match up with (fictitious) capital circulation and because of that, the latter had to be destroyed to reestablish value relations. lending in itself doesn't tell you much about the system, what's important is whether the money that starts circulating as a result of that loan ultimately takes part in value production somewhere else - if it does then things can hobble on, if not then crisis will intervene.

This is why I thought your initial hypothesis in the OP was daft & pointless - you were looking at the wrong driver (interest rates) to explain the wrong thing (inflation). You need to go deeper and actually think about, and understand, money and value - before looking at the effects of those things and their relationship with each other


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## love detective (Jul 3, 2011)

phildwyer said:


> _All_ cultures see _usury_ as magical when it is first introduced, including Western culture in the C16th and C17th.



Historically lots of things have been seen as magical or supernatural - doesn't mean they were or are



> Usury, which is the essence of capitalism



I've kicked your arse on this point many times on MATB - but once more:-

the essence of capitalism is the accumulation of capital through the appropriation of surplus value (via exploitation of labour) in the sphere of production and it's subsequent realisation in the sphere of circulation

capital, and capitalism, can exist (hypothetically) without lending, it can't exist without surplus value appropriation. lending may help speed up & deepen the process of surplus value appropriation but it's not a proxy or a substitute for it. If it was impossible to extract surplus labour, then no amount of lending would enable capital to valorize itself, and capital along with capitalism itself would be no more. lending at interest is not the essence of capitalism

your thoughts on this are infantile posturing to be honest


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## love detective (Jul 3, 2011)

newbie said:


> if a commercial bank can lend $100 (and get paid back $105)  while only holding assets below $10 how is it not creating money?
> 
> www.bankofengland.co.uk/publications/fsr/2009/fsrfull0906.pdf


 
because money is not created, it is just circulated - look up fractional reserve lending on wikipedia to get a basic handle on it

If i buy something from you for £10, you can then buy something from someone else for £10 and that chain could continue for ages - £10 has effected the purchase & sale of say £100 of sales & purchases - i doubt anyone sees this process a creating money.

fractional reserve lending is pretty much the same principal as this, except that it's not direct purchases & sales between two parties, but instead they are mediated by the banking system lending & borrowing the money - which in turn creates a build up of assets & liabilities within the system - all on the back of a small amount of central bank money - if one person then repays the £10 loan, that can allow the whole chain to also be repaid without any problem


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## kabbes (Jul 3, 2011)

I'll add that many features of the economy have chaotic features, such as amplifying feedback.  As such, attempting to isolate any couple of variables and think you can explore their relationship in isolation is always going to lead you to paradox and confusion.

It's a mistake that politicians are very fond of making.


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## love detective (Jul 3, 2011)

> attempting to isolate any couple of variables and think you can explore their relationship in isolation is always going to lead you to paradox and confusion



Less so if those attempts are made within a structured approach to doing so where you have a proper framework of understanding to work within - and you then work through the whole permuations of variables, continually holding some constant to see the impact on others, then moving on and doing likewise with the rest, then build all that up into some kind of properly constructed model (i.e. a bit like marx tried to do - although overall didn't really get there). Not saying it's possible to do, but the more it is done within this kind of framework, the more useful the results will be

hence my continued pointing out of the lack of a foundational basis/framework in which lbj thinks about these things


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## kabbes (Jul 3, 2011)

Yes, like all models of complex structures, you can do it but it's crucial to fully understand the limitations of your approach.


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## littlebabyjesus (Jul 3, 2011)

love detective said:


> I don't know how many times I can say it, or how many different ways I can say it, but commercial banks cannot create money out of thin air


 
They can if they are being fraudulent, which is why I asked that - if they lend on the basis of deposits that in reality don't exist. There are a great many people who should know better who think this is what happened - the link TruXta gave for instance, talks about it. But in reality, it appears that it is actually something else - the overvaluation of assets and misjudgement of risk.


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## love detective (Jul 3, 2011)

you can't lend what you haven't already got yourself - i went over the three main areas of where a bank can get money to lend (fraudulent is just a legal concept, it's not relevant here)

if something doesn't exist you can't lend it, simple as that - if it does exist (whether or not it actually will lead to an underlying production of value or not) you can circulate it further

you are conflating the existence or future production of value with the existence/circulation of money


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## love detective (Jul 3, 2011)

if anyone is interested on debate around dwyer's assertion that usury is the essence of capitalism - there was a reasonably short discussion about it here on MATB (dwyer is poortom there and i am oisleep)

it pretty much starts from top of page 2 (although it doesn't reallty get going until the end of page 2) and goes on to page 4


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## littlebabyjesus (Jul 3, 2011)

love detective said:


> you can't lend what you haven't already got yourself


 
Really? 

How can that be true? What is there to stop a bank from loaning more money than it has on deposit? I know that would be against the rules - hence fraudulent - but what is to stop them running false books and trying to get away with it?


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## love detective (Jul 3, 2011)

it's nothing to do with it being against the rules, it's physically & logically impossible it's nothing to do with legality - lending by commercial banks is the circulation of money within the system, if it isn't circulating you can't in turn take part in that circulation - this is why everytthing went tits up when money stopped circulating in the system at the end of 2008

if i want to borrow money from a bank to buy a house say, the bank has to find that money and lend it to me so i can buy the house - it's can't make it up out of thin air - if it could make it up out of thin air then you have to ask yourself why was there a bank crisis in the first place if banks can just make money out of thin air. if they could just make money out of thin air they wouldn't have to rely upon anyway else (money markets, customers, govt bail outs) they would just make money out of thin air and they would be fine - but they can't, so they don't and they aren't


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## ATOMIC SUPLEX (Jul 3, 2011)

Santino said:


> Fuck off Dw-
> 
> 
> Oh.


 
Tee hee.


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## love detective (Jul 3, 2011)

anyway - i've been dragged far too much into spending time on here on this the last few days - i've made my case as clear as I can and i'll leave you all to it now

my days of spending all day every day on message boards trying to convince people i'm right are thankfully over


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## phildwyer (Jul 3, 2011)

love detective said:


> Historically lots of things have been seen as magical or supernatural - doesn't mean they were or are



If anything is magical, usury is.  I suppose you could argue that nothing is magical.  But that is not a very useful position when discussing cultures which agree on the existence of magic.  



love detective said:


> the essence of capitalism is the accumulation of capital through the appropriation of surplus value (via exploitation of labour) in the sphere of production and it's subsequent realisation in the sphere of circulation
> 
> capital, and capitalism, can exist (hypothetically) without lending, it can't exist without surplus value appropriation. lending may help speed up & deepen the process of surplus value appropriation but it's not a proxy or a substitute for it. If it was impossible to extract surplus labour, then no amount of lending would enable capital to valorize itself, and capital along with capitalism itself would be no more. lending at interest is not the essence of capitalism



The essence of capitalism has changed over the last thirty years, as the "economy" has become de-materialized and financialized.  Capitalism in its twenty-first century form could not exist without lending.  Today's economy is based around financial practices that would universally have been regarded as usury in the past.



love detective said:


> your thoughts on this are infantile posturing to be honest



You know that isn't true, and I know that you know it.  So why say it?


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## littlebabyjesus (Jul 3, 2011)

phildwyer said:


> Capitalism in its twenty-first century form could not exist without lending.



I think ld's own analysis would contend that this bit is true - without demand for loans, money doesn't do anything. Money only properly exists in a sense when it is handed over - taking ld's point about QE: if you create money for which there is no demand, it just sits there doing nothing and not affecting the economy at all. And the size of the money supply is dictated by the balance between borrowing and paying back loans - paying back loans taking money out of circulation, borrowing putting money into circulation. It's central to the whole process of money production, and given that money represents debt, it's hard to imagine it any other way.


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## phildwyer (Jul 3, 2011)

love detective said:


> anyway - i've been dragged far too much into spending time on here on this the last few days - i've made my case as clear as I can and i'll leave you all to it now



Mmmm... a tactic very familiar from our discussions over the road.


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## love detective (Jul 3, 2011)

littlebabyjesus said:


> I think ld's own analysis would contend that this bit is true - without demand for loans, money doesn't do anything. Money only properly exists in a sense when it is handed over - taking ld's point about QE: if you create money for which there is no demand, it just sits there doing nothing and not affecting the economy at all. And the size of the money supply is dictated by the balance between borrowing and paying back loans - paying back loans taking money out of circulation, borrowing putting money into circulation. It's central to the whole process of money production, and given that money represents debt, it's hard to imagine it any other way.



i have weak will power but this is definitely my last post on the matter

If you look at what I said, I said:-

_capital, and capitalism, can exist *(hypothetically)* without lending, it can't exist without surplus value appropriation_

If you want to understand what capitalism is, you have to understand what capital is - and it is unpaid/appropriated labour. That is the foundational basis of capitalism. Lending of money , particularly in 21st century, may well be necessary but it's not sufficient. lending money doesn't directly lead to unpaid labour being appropriated in and off itself, and turned into capital. it may do, but it may not - this is my reason for saying that lending of money is not the essence of capitalism. Capital can exist (logically and practically - although in practice it would be a very different scale) without the lending of money, it can't exist (logically or practically) without the appropriation of value. 

There are lots of things where something is necessary for something else to happen, but it doesn't make it the essence of that thing - if you want to get to the core of what capitalism is, you need to go right to the core of what it is and build up from there. The financialisation of capital in the last 30 years may well give an impression that capitalism is now changed in essence and it is just about the sphere of circulation and the circulation of value rather than the sphere of production and the production of value - but the financial crisis has shown that this was nothing more than that, an impression, the system moved too far away from the thing that anchors it, i.e. value production - and crisis then did what crisis does - it irrationaly rationalised and irrational system. no amount of money circulating can magic value out of thin air, it has to be produced for capital to sustain itself - it can perhaps hobble on for a while without that happening, but it's own contradictions will eventually put a block on that 




			
				dwyer said:
			
		

> Mmmm... a tactic very familiar from our discussions over the road.



The whole point of LBJ starting this thread was to get feedback on a hypothesis he thought was true - within a number of posts from me, he got what he was looking for, i.e. an understanding of where and how his theory was incorrect and he graciously admitted and accepted his initial assertion had no legs - so i'm hardly running away - the objective of the thread has been achieved


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## kabbes (Jul 3, 2011)

LBJ, you asked what caused the credit crunch and I gave you a fair old post in response.  Did it answer your question?  Do you now understand how the credit crunch happened?


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## littlebabyjesus (Jul 3, 2011)

Ok, I'm not going to talk about creating money out of nothing now. Banks can't do this as the person taking the money would have no reason to believe it was worth something.

I think the anthropologist in TruXta's post is onto something (although he falls into the trap of thinking that banks made money out of nothing in the credit crunch) when he says that money is simply a promise. So it always needs to be a promise of something - a promise to do something, or as in the case of deferred consumption, not to do something. 

I do now accept that my OP is wrong. But I think the root cause of it going wrong was that I was conceptualising money wrongly - trying to see how value was attached to the symbol - which is the wrong way of looking at it. And in fact money isn't really a symbol in that sense. It's just an iou. Nothing more mystical than that.

Something else that anthropologist said rings very true too. Once you simply view money as the writing down of a promise, you can then reintegrate it into human relations. It ceases to appear to have some kind of autonomous existence, which is what dwyer considers it to have, and is what I was struggling with. The whole idea that there is some separate field of scientific study called 'economics' is a nonsense.


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## littlebabyjesus (Jul 3, 2011)

kabbes said:


> LBJ, you asked what caused the credit crunch and I gave you a fair old post in response.  Did it answer your question?  Do you now understand how the credit crunch happened?


 
Yes. Ungracious of me not to acknowledge it. I did read and appreciate that post. Thanks. 

There is a HELL OF A LOT of misinformation and misunderstanding kicking around about this - and not just from me.


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## love detective (Jul 3, 2011)

i have no willpower 



> The whole idea that there is some separate field of scientific study called 'economics' is a nonsense



bingo!

that's why we need a return to Political Economy - and what political economy is, is best articulated on the back cover of Rubin's History of Economic thought

_Political economy deals with human working activity, not from the standpoint of its technical methods and instruments of labor, but from the standpoint of its social form. It deals with production relations which are established among people in the process of production.

In terms of this definition, political economy is not the study of prices or of scarce resources; it is a study of social relations, a study of culture. Political economy asks why the productive forces of society develop within a particular social form, why the machine process unfolds within the context of business enterprise, why industrialization takes the form of capitalist development. Political economy asks how the working activity of people is regulated in a specific, historical form of economy._

There was a bit of discussion about this on this thread here (i.e. the idea that economics is the key - or that marx's capital was an economics text)


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## phildwyer (Jul 3, 2011)

love detective said:


> There was a bit of discussion about this on this thread here (i.e. the idea that economics is the key - or that marx's capital was an economics text)



It wasn't political economy either, as you well know.

Political economy is just as much bullshit as economics.

In reality, "economic" behavior is inseparable from other kinds of behavior.


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## TruXta (Jul 3, 2011)

phildwyer said:


> _All_ cultures see _usury_ as magical when it is first introduced, including Western culture in the C16th and C17th.
> 
> And they are right to do so.  Usury, which is the essence of capitalism, is the bestowal of life on what is lifeless.


 
You lost us all at the first two words, phil.


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## littlebabyjesus (Jul 3, 2011)

I think dwyer kind of has a point here, though, or at least, his point of view illustrates a point. 

Time and again, behaviour that has a practical reason becomes elevated to a symbolic, 'magical' status in order to explain and to pass that behaviour on. 

A good example would be religious prohibitions on certain kinds of foods. At some point in the past it was noticed in certain parts of the world, for instance, that eating certain kinds of seafood was often followed by illness. Not knowing why the one caused the other - not having any idea really about how diseases are passed on - the best explanation that can be found is that 'god doesn't want us to eat these things and is punishing us for eating them by making us ill'. 

I see similar processes with money - where people don't properly understand the nature of economic exchanges, but they see bad things happening when debts aren't repaid: and so the money itself is somehow granted an autonomous existence to explain it. It's not so different from attributing the reason water flows downhill to a river-demon. It is elevated to godly status to be someone who repays debts, even if you really and truly ought to be fucking the debts off when they are unjust. 

It's very characteristic of modern humans that we're able to generate systems such as modern economies whose dynamics we don't understand. Just because we made something, that doesn't mean we understand how it works - particularly when it is something that has arisen out of the mass behaviour of millions or billions of individuals.


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## phildwyer (Jul 3, 2011)

My basic point is that the belief that signs can do things is magical.

And that usury is the belief that signs can do things.

And that our society is based on usury.

So that our society is based on magic.

And that the alleged disappearance of magic from our society is in reality its complete triumph.


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## TruXta (Jul 3, 2011)

lbj, I think it's characteristic of all humans ever to generate systems that are unpredictable. It's no different from the weather really, we can have a good guess at the very short and the pretty long scales, but everything in between is forever opaque. Economic relations are no different from other social dynamics in that regard.


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## littlebabyjesus (Jul 3, 2011)

phildwyer said:


> And that the alleged disappearance of magic from our society is in reality its complete triumph.


 
lol

It's a good line. It's total nonsense, but it's a good line. Now I'm the first to admit that I struggle with this stuff, but at least I'm trying to understand it. You, on the other hand, seem to just give up and call it 'magic'. We'd still be living in a world where river-demons make water flow downhill if everyone thought like that.


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## TruXta (Jul 3, 2011)

phildwyer said:


> My basic point is that the belief that signs can do things is magical.
> 
> And that usury is the belief that signs can do things.
> 
> ...


 
Well, your basic point is bullshit. The fact that humans can use indexicals without attributing magical properties to that basic element of speech renders your "point" dismissed at the first test. 

_It_.

There, is that magic?


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## littlebabyjesus (Jul 3, 2011)

TruXta said:


> lbj, I think it's characteristic of all humans ever to generate systems that are unpredictable. .


 
The bigger the society, the more complex the system can become, though. If you live in a very small hunter-gatherer society, you've got a much better chance of understanding your group's dynamics than if you live in a society of millions of individuals.

But you are right, and there's no reason why we ought to understand group behaviour, really. An ant doesn't need to understand its nest's needs in order to carry out its functions for the good of the nest - mechanisms (pheremones in the case of ants in a nest) are in place to guide it. In that sense, magical thinking performs a perfectly understandable and valid function. It's just that we are in fact able to think beyond it.


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## TruXta (Jul 3, 2011)

littlebabyjesus said:


> The bigger the society, the more complex the system can become, though. If you live in a very small hunter-gatherer society, you've got a much better chance of understanding your group's dynamics than if you live in a society of millions of individuals.


 
For sure (h/t Rafa Nadal) there will exist aggregate phenomena that are only emergent at a certain level of complexity, but from a purely structural viewpoint the combinatorics suggest that with even small increases in group membership the number of possible variations skyrocket. This is where the point about multiple non-linear processes comes back to bite our asses. We have many in themselves simple processes acting on a finite number of actors, with feedbacks and feed-forwards all over the shop, together acting to produce chaotic systems.


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## love detective (Jul 3, 2011)

phildwyer said:


> It wasn't political economy either, as you well know.
> 
> Political economy is just as much bullshit as economics.
> 
> In reality, "economic" behavior is inseparable from other kinds of behavior.


 
i doubt we'll ever see eye to eye on anything to be honest

There's two books, both by Ben Fine & Dimitris Milonakis that cover this move from Political Economy to 'Economics' very well (although they are a bit dry at times to be fair). They sum up everything that's wrong with 'economics' as a subject in modern times. They are pretty pricey but I got both of them second hand for £9 each from Amazon - well worth it

These are:-

From Political Economy to Economics: Method, the Social and the Historical in the Evolution of Economic Theory

_Economics has become a monolithic science, variously described as formalistic and autistic with neoclassical orthodoxy reigning supreme. So argue Dimitris Milonakis and Ben Fine in this new major work of critical recollection. The authors show how economics was once rich, diverse, multidimensional and pluralistic, and unravel the processes that lead to orthodoxy’s current predicament. The book details how political economy became economics through the desocialisation and the dehistoricisation of the dismal science, accompanied by the separation of economics from the other social sciences, especially economic history and sociology. It is argued that recent attempts from within economics to address the social and the historical have failed to acknowledge long standing debates amongst economists, historians and other social scientists. This has resulted in an impoverished historical and social content within mainstream economics.

The book ranges over the shifting role of the historical and the social in economic theory, the shifting boundaries between the economic and the non-economic, all within a methodological context. Schools of thought and individuals, that have been neglected or marginalised, are treated in full, including classical political economy and Marx, the German and British historical schools, American institutionalism, Weber and Schumpeter and their programme of Socialökonomik, and the Austrian school. At the same time, developments within the mainstream tradition from marginalism through Marshall and Keynes to general equilibrium theory are also scrutinised, and the clashes between the various camps from the famous Methodenstreit to the fierce debates of the 1930s and beyond brought to the fore.

The prime rationale underpinning this account drawn from the past is to put the case for political economy back on the agenda. This is done by treating economics as a social science once again, rather than as a positive science, as has been the inclination since the time of Jevons and Walras. It involves transcending the boundaries of the social sciences, but in a particular way that is in exactly the opposite direction now being taken by "economics imperialism". Drawing on the rich traditions of the past, the reintroduction and full incorporation of the social and the historical into the main corpus of political economy will be possible in the future._

From Economics Imperialism to Freakonomics

_Is or has economics ever been the imperial social science? Could or should it ever be so? These are the central concerns of this book. It involves a critical reflection on the process of how economics became the way it is, in terms of a narrow and intolerant orthodoxy, that has, nonetheless, increasingly directed its attention to appropriating the subject matter of other social sciences through the process termed "economics imperialism". In other words, the book addresses the shifting boundaries between economics and the other social sciences as seen from the confines of the dismal science, with some reflection on the responses to the economic imperialists by other disciplines.

Economics imperialism reaches its most extreme version in the form of "freakonomics", the economic theory of everything on the basis of the most shallow principles.

By way of contrast and as a guiding critical thread, a thorough review is offered of the appropriate principles underpinning political economy and its relationship to social science, and how these have been and continue to be deployed. The case is made for political economy with an interdisciplinary character, able to bridge the gap between economics and other social sciences, and draw upon and interrogate the nature of contemporary capitalism._


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## ymu (Jul 3, 2011)

Those look more like a critique of the predominant practitioners of economics at the moment, not a critique of the discipline itself, which obviously cannot and should not be disconnected from politics. I'm not sure it describes economics as a discipline so much as its hijacking by a dominant school and some highly inadequate policing by the academy.

We're really quite fussy about good science in my field (medicine), but it's rare that anyone bothers to assess quality outside stuff published in the big 4 journals because their authors don't get it right most of the time, so it's not necessary to show that less high profile research is also often badly flawed.

The other parallel between the two fields is that there are often very powerful vested interests pushing the wrong answers in medicine too. The relative powerlessness of independent scientists/economists if the loudest voices decide to promote recklessly poor evidence and arguments, is not the same thing as the entire discipline having morphed into something irrelevant.

But I may well be anticipating much of the argument in those books, I realise.


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## love detective (Jul 3, 2011)

it's a critique of the 'discipline' in its current form - i can't see how you can get anything other than that from the blurb


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## littlebabyjesus (Jul 3, 2011)

love detective said:


> Pretend I get paid £105 a week and I normally spend all of it consuming things. If i borrow £100 from you, and promise to pay you back £105 tomorrow when I get paid - a loan situation develops between us in the intervening period
> 
> Normally when I get paid i'd spent £105 on consumption, but when I get your loan I spend £100 on consumption and when I get paid my £105 I have to hand it all over to you. So at this point instead of £105 chasing goods in the economy, only £100 is (a potential deflationary, not inflationary, situation) - however that additional £5 that i'd normally spend on consumption goes to you and represents your gain on the loan, you now spend this and in total we're back to the £105 chasing goods in the economy.
> 
> ...



I still haven't completely let go of this one. While I accept all the things I had wrong about fractional reserve lending - and fully accept now that it does not involve creating money out of nothing in any sense - there is something missing from this picture, which is the question 'where does the employer's £105 come from?'. 

Now if all new money enters the system as a debt with interest due, which it does in our current system, that £105 that you are paid was itself originally created (not out of nothing - don't worry, you've convinced me of that one)  for someone by a loan with interest due. Basically, whatever scenario you imagine, you cannot talk about money already in the system without going back to its origins. Every sum of money mentioned has to be accounted for. 

Your example is zero-sum only once the employer's £105 is already there, but the system as a totality cannot be. Every loan has interest due, so for any given set of total loans, the total amount owed by the borrowers exceeds the total amount loaned. It still seems to me that only a spiral of ever-increasing loans can service this situation.


I think the best way to look at this is to imagine a snapshot of the entire money supply at any given moment. All the money circulating has been created as a debt with interest due. So the amount owing on all the money out there at any given moment is greater than the amount of money out there. The only way to pay it is for more loans to be taken out.


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## love detective (Jul 4, 2011)

> Basically, whatever scenario you imagine, you cannot talk about money already in the system without going back to its origins





> Now if all new money enters the system as a debt with interest due, which it does in our current system,



Except in our current system it doesn't - and this is where your reasoning is once again let down by faulty premises.

I did actually go over how money enters the system in this post here

The relevant part is here:-

_the mechanics of the way the [central] bank manages the money supply and money creation (something that I've noted you seemed to have a poor understanding off previosuly). This process is called open market operations - and again perhaps somewhat counter intuitevely, the mechanics of the process is exactly the same as quantative easing, the only difference is the reason for doing it - i.e. it's done on a much smaller basis and it's purpose is to manage short term interest rates via the supply of base money in the economy.

So if the central bank decides it wants to inject more money into the economy - there are two steps that happens, firstly it creates money by a touch of a key stroke (the modern equivalent of the printing press) - it then uses that created money to purchase or repo from the commerical banks securities or other financial instruments. *This is how the money enters the economy, i.e. not through the central bank lending to commerical banks, but by the central bank purchasing (or repoing) assets from commericial banks with money that it's created*_

So when money originally enters the system, it is debt free. This is how it works now, and this is also how it worked when metals were used as the currency (i.e. gold producers produced money in their production process, there was no debt attached to it on creation, only once it began to circulate as debt). 

So when that new money starts to circulate within the system, it leaves in its trace a multiple of loans & deposits, all bearing interest. However at any point (just like my simple example above), the total amount of debt + interest due from borrowers is exactly the same as the total amount of debt + interest due to lenders. It can't be any other way. The system is the system, and if you add it all together it always comes to zero. You don't have a position where the system as a whole, owes something to something outside it. 

I've noticed you've continually used this 'money created as debt' thing as the premise behind a whole load of your assertions in relation to this topic - which always leads to you coming to incorrect conclusions on things. For example, this is why I was saying to you that it's completely illogical/wrong/contradictory to accept that the flows on derivatives are a zero sum game, but deny that the flows on loans & deposits are also a zero sum game. Even if the borrower defaults, it's still a zero sum game as on a default the debt (or the defaulted portion) is written off by both the lender and the borrower, leaving a net zero at the total level

This is why I constantly keep coming back to the point that things that happen in the sphere of circulation, never amount to anything other than moving existing money & value around the system - yes it can result in a different distribution of that total money & value as banks capture a bigger share through their activities (both by capturing a share of the value produced by other capitals through commercial lending, and also capturing a share of wages earned by labour through personal lending), but it doesn't effect anything at the total level - it never creates something which is not negated by something else somewhere in the system.


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## love detective (Jul 4, 2011)

I could have maybe simplified/stripped down the point about central bank money creation there - and just said that at the point money is created by the central bank (which is out of thin air) - that is the point the money enters the system, and there is no debt attached to it at that point, it's debt free (just like the gold that starts circulating once the gold producer as produced it)

So even if the central bank then lent that money to commercial banks (although it doesn't, as noted it buys securities from them with it) - this is still just a loan & deposit between two parties within the system, with everything canceling out between those two parties


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## ItWillNeverWork (Jul 4, 2011)

I think the point here is that lbj is not convinced that the mainstream story of how money is created (i.e. via central bank & money multiplier) is true. Other theories exist, hence my mentioning of the post-keyenesians. http://en.wikipedia.org/wiki/Money_creation#Alternative_theories



> The key distinction from mainstream economic theories of money creation is that circuitism hold that money is created endogenously by the banking sector, rather than exogenously by the government through central bank lending: that is, the economy creates money itself (endogenously), rather than money being provided by some outside agent (exogenously). Circuitism also models banks and other firms separately, rather than combining them into a representative agent as in mainstream neoclassical models.
> These theoretical differences lead to a number of different consequences and policy prescriptions; circuitism rejects, inter alia, the money multiplier as a causal agent, arguing that money is created by banks lending, which only then pulls in reserves from the central bank, rather than by re-lending money pushed in by the central bank. It also emphatically rejects the neutrality of money, believing instead that the money supply and its growth or decline are critical to the functioning of the economy





> In circuitism, as in other theories of credit money, credit money is created by a loan being extended. Crucially, this loan need not (in principle) be backed by any central bank money: the money is created from the promise (credit) embodied in the loan, not from the lending or relending of central bank money: credit is prior to reserves.


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## ItWillNeverWork (Jul 5, 2011)

Thought the following might be useful:

The real interest rate;







The lending interest rate;






The inflation rate;


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## love detective (Jul 5, 2011)

i could go on for pages about my thoughts on this (i.e. the endogenous stuff) - but i think i try to say far too much in any individual post and then get frustruated when others don't pick up on the points being  made - it's a difficult thing to write about though without rattling on for ever about it as there's a lot of things to introduce & interlink for any given point


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## littlebabyjesus (Jul 5, 2011)

This idea that money is created through demand for loans makes a lot of sense to me. After all, banks exist to make loans - they only take deposits (which in reality are themselves loans) to enable them to make loans. So, the bank wants to make loans so has to attract deposits, by advertising that they will pay interest, etc. 

If the system is functioning with high demand for loans, there is never any need for outside intervention to create new money - the money supply grows to fulfill the increasing demand for loans. Then whenever demand in the private sector for loans dips, the govt steps in and itself borrows from the banks in the form of gilts. Either way, the aim is to keep the money supply growing by keeping the demand for loans at a rate that is higher than the rate of repayments. It seems to me that a money supply could in theory grow from a tiny sum of a few quid to billions and trillions in this fashion. 

I don't have much time today for this, but I still think my basic premise - that we have a system where money enters the system through the creation of debts with interest owing, and that this system demands inflation in order to function - has legs.


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## love detective (Jul 5, 2011)

> This idea that money is created through demand for loans makes a lot of sense to me. After all, banks exist to make loans - they only take deposits (which in reality are themselves loans) to enable them to make loans. So, the bank wants to make loans so has to attract deposits, by advertising that they will pay interest, etc.
> 
> If the system is functioning with high demand for loans, there is never any need for outside intervention to create new money - the money supply grows to fulfill the increasing demand for loans. <snip>.  It seems to me that a money supply could in theory grow from a tiny sum of a few quid to billions and trillions in this fashion.



Everything you've said here is bog standard fractional reserve lending - all of which is accomodated within the mainstream theories of money creation. Also throughout all our arguments I've never suggested that the above is not the case - i.e. just a few posts up I said 

_when that new money starts to circulate within the system, it leaves in its trace a multiple of loans & deposits, all bearing interest_. 

And

_fractional reserve lending is pretty much the same principal as this, except that it's not direct purchases & sales between two parties, but instead they are mediated by the banking system lending & borrowing the money - which in turn creates a build up of assets & liabilities within the system - all on the back of a small amount of central bank money - if one person then repays the £10 loan, that can allow the whole chain to also be repaid without any problem_

So there's no real argument here - and the 'debate' about whether central bank money is needed for the money supply to expand through increased velocity/circualtion (exogenous) or not (endogenous) is irrelevant to the basic theory of money supply growing through increased circulation

The main point I've been making in relation to this is that it's not the commercial banks (or central banks) that are the independent variable/actor here, i.e. neither the central or commercial banks can make money circulate if there is no demand for it within the wider economy. And of course the money supply can grow hugely on the base of a relatively smaller amount, this is also a point I've made consistently throughout our arguments. 



> Then whenever demand in the private sector for loans dips, the govt steps in and itself borrows from the banks in the form of gilts.



This, however is massively confused, your mixing up fiscal & monetary mechanisms - and also the fact that commercial banks own a small proportion of govt debt (pension funds & insurance companies have a far bigger share)



> Either way, the aim is to keep the money supply growing by keeping the demand for loans at a rate that is higher than the rate of repayments.



I'd argue the reverse here - the objective is not to keep the money supply growing by creating demand for loans (through fiscal measures) - the objective is to create demand in the economy, which in turn brings with it the necessity for the money supply to grow to accomdate it. 



> I don't have much time today for this, but I still think my basic premise - that we have a system where money enters the system through the creation of debts with interest owing, and that this system demands inflation in order to function - has legs.



I don't.

I disagree on both logical and empirical grounds

*1. Logical:* Your whole argument seems to be based on the tail wagging the dog. Despite naming this thread money & value - your whole focus has been on money alone, with value being either non-existent or a mere afterthought in the analysis. Value creation (or non-creation/destruction) is a better starting point for looking at things like this.

In your assertion you state that the simple act of a loan with interest being created, in and off itself, is the fundamental reason for inflation in the ecomomy. You don’t put any analysis on what happens in the wider economy following the creation of that loan - and because of that your analysis is incomplete & flawed. If someone takes out a loan and (in value terms) the loan & interest is paid back out of created value (either from wages for workers or surplus value for capital) along with a bit of profit left over for the borrower - then how can this result in inflation. The marginal amount of value production here is higher than the amount of interest due on the loan. And when the loan is repaid (which effectively decreases the money supply in your terms as there is less loans/deposits) we have a situation where there is less 'money' in the system but more value (as the profit is higher than the interest paid)  - so if anything this points to deflation not inflation.

Clearly not everything runs as smoothly as this all the time, but you don't even look at what happens in relation to value creation - you base everything on the fact that a loan has been created and your theory is blind to the real substance of what then happens next. In your theory whether the money from the loan is wasted, eaten, transplanted to mars, used to produce real value or whatever, is not even considered - you simply assert that more loans = more inflation

You also have failed to account for how inflation that is caused by the things I raised in this post would magically disappear if loans with interest didn't exist.


*2. Empirical:* Your theory essentially says the more loans & deposits (or money, or things circulating like money) in the system, the higher inflation will be. But if we look at the period from say mid 1990's to 2007 (in say the US and UK). This was a time where a huge amount of money/loans/deposits/ficticious capital were circulating around at incredible speeds (save for the blip of the dotcom crash). This was a result of loose monetary policy, huge (ficticious) banking profits, massive confidence, huge amounts of loan capital flowing in from surpluses in China etc.Now according to your theory we should have been seeing pretty high inflation then, but in fact the reverse was true and inflation was pretty low over that period (the fact that interest rates were fairly low during this period shouldn't detrat from your theory, as the theory is based on volumes of interest bearing loans/depoists circulating - so while perhaps the interest rates were relatively low on them, the fact that the circulation/velocity/mulitplication of them was very high is what's important for your theory)

From 2007 onwards however all that activity ground to a halt, loads of the stuff that was circualting was destroyed because it was ficticious, loans were paid down or defaulted on, so the whole build up through previous circulation came crashing down - now according to your theory we should be seeing a lot less inflation than before, however we are in fact seeing much more. 

So when your theory says there should be high inflation we see low inflation and when it says we should see low inflation we see high inflation. It doesn't appear to be a particular useful theory for explaining real world phenomena 

So, so far,  I can't see any support for your theory, either on logical/rational or empirical grounds


While I'm here I can't resist a comment on the exogenous & endogenous (and possibly the erogenous) argument - as there are some interesting things coming out of looking at this. One one hand in terms of end result I can argue that there is in essence not much difference between the two (edogenous effectively says that loans create deposits whereas exogenous says deposits enable loans - same end situation though, lots of deposits & lots of loans, each dependent on the other, and all cancelling out to leave a zero sum game) 

However on the other hand (and in addition to various technical reasons for disliking the theory) I have knee jerk ideological reaction to the core/thrust of the endogenous/circuitism theory as I see it as providing ideological succour to the idea of a purified neo-liberal view of the world where the state & central bank are not required - i.e. the view that markets, money, capitalism can function naturely, without the state crutch, and are effectively a natural thing. 

Endogenous/circuitism theory & models eschew the need for state/central bank activity in the economy and instead posit that that commercial banks can lend (without the need for any central bank money to exist) purely because of their social role (i.e. people put trust in it because of what it is). However commercial banks don't just appear from heaven, supernaturally endowed with a social role, they only have it because the state/central banks stand squarely & solidly behind it. So the basic premise of endogenous/circuitism implicitly relies upon something that it explicitly rejects (yet very obviously & tangibly exists) 

It seems to be a theory which, along with the likes of the austrian economists, leads to the conclusion that the real world can't possibly exist in theory - and what use is such are such theories


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## deke t lefel (Jul 17, 2011)

littlebabyjesus said:


> I'm starting a new thread on this to give it a bit of a fresh start. It concerns the way money is created and how value is attached to it.
> 
> 
> Firstly, about money. Money has no value until it is spent. A measure of the wealth of a nation comes from adding up all the transactions that take place in any given time-period.
> ...



value is created by work, money represents value in order to allow the holder the convenient facility to exchange for other products

money can have value in its own right, for instance, there have been times when coins have been melted down because the metal is worth more, however, increasingly, money has become more virtual and the vast majority is now floating in the electronic aether

growth figures are adjusted for inflation so that growth is measured in real terms rather than getting a false impression of growth due to inflation

to what extent are financial services and the lending of money excluded from growth figures?



littlebabyjesus said:


> The creation of the symbol to which value is to be attached is the act of a third party to any transaction - a bank of some description. One capitalist may agree to hand over capital to another capitalist, but they need an agreed system of representation by which to do this. The capitalists themselves do not create  the symbol - what they do rather is attach value to the symbol by accepting it in return for real goods or services. They obtain the symbol to be handed over from the third party, which demands interest as the price for its service.
> 
> But what is given back to the bank is merely the symbol once again, and only the banks can create the symbol - others can make value but they cannot print money. So even if there is growth, if a bank has put 100 groats into the system for value to be attached to it and demands 110 groats in return, that same bank or another bank somewhere else will have to lend that same person or another person somewhere else the extra 10 groats. If there has been growth to match the interest, the extra money, when it is spent, will represent that extra wealth and the purchasing value of one groat will remain the same. But if there is no growth, there are now 110 groats in the system to represent the same total value, so you have inflation. If the bank has put the initial 100 groats into the system on the basis that it values an asset of the borrower at that level, when it comes to reloan the 110 groats, it has to do that by valuing the same asset at 110. Again, inflation.
> 
> ...


the symbol is faith or trust......originally precious metals were used as money because the holder had faith that the metal could be exchanged for products, then paper/electronic money was introduced and the holder had trust in a guarantee by the issuer

inflation, interest and growth are all functions of time....time consists of the past, the future and that elusive firmament of the present, so it is only reasonable to assume that the future can influence the present as well as the past

overall global inflation can only be achieved if the money supply exceeds growth..... and money can only enter the system through a trading window - if that window is in the future (not _futures_ specifically) then additional money can be created for use in the present from the future


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## love detective (Sep 24, 2011)

LBJ, I'm guessing with nearly three months passing with no reply to the points made in my last post this discussion has stopped

But the reason for bumping the thread was not to pick a fight but to post a link to a paper published this month by the Research on Money & Finance network called Neoclassical Inflation: No theory there - which critiques the neo-classical theory of inflation.

A lot of the arguments you were making on this thread (and others) about the driver for inflation are similar to the neo-classical view and a lot of my rebuttals of your arguments are contained within this paper. So you may be interested in having a read at it. It's not a great paper however, is a bit narrow and misses a lot of other relevant things out, but I thought it quite neatly reflected the argument we were having a few months ago where I crticised you for placing all focus/attention on money supply alone (and in isolation) as a driver of inflation (i.e. the tail wagging the dog criticism)




			
				Abstract said:
			
		

> The theoretical generalization that the price level is determined by the quantity of money is commonly employed as a teaching device, in abstract modeling, and as a guide to policy. It represents a profound misunderstanding of inflation.
> 
> In specific, the famous parable, more money then more inflation, is logically wrong.
> 
> Far from the strength of neoclassical economics, its theory of inflation encapsulates and epitomizes its most fatal analytical errors and contradictions. Prominent among these errors and contradictions are the failure to provide a convincing explanation for the existence of money, and the closely related inability to provide a definition of money that makes its supply analytically determinate. These basic problems require the creation of an imaginary economy, the analysis of which results in arbitrary conclusions that cannot be generalized beyond neoclassical Cloud-Cuckoo Land





> The apparently simple statement, increases in the money supply generate equal proportional increases in prices, is the essence, the sine qua non of neoclassical inflation theory. The conditions under which this statement is logically true are so restrictive that by any rational judgment the statement is false. These are listed below along with the reason for each.
> 
> 1. the economy produces one commodity so there are no differential price
> changes;
> ...


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## littlebabyjesus (Sep 25, 2011)

Yeah, ta for that. I struggled through it. It brought out the editor in me because it needs a thorough copy edit!

But yes, it makes some interesting points. Certainly, I have already conceded - if you had misunderstood - that the relationship between the size of the money supply and inflation is not what I had thought it was: ie not a simple relationship at all, and increasing the size of the money supply does not necessarily lead to inflation.

Interesting to see that I had unwittingly fallen in with Friedman!


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## Jazzz (Sep 29, 2011)

You haven't understood it yet LD



love detective said:


> Everything you've said here is bog standard fractional reserve lending - all of which is accomodated within the mainstream theories of money creation. Also throughout all our arguments I've never suggested that the above is not the case - i.e. just a few posts up I said
> 
> _when that new money starts to circulate within the system, *it leaves in its trace a multiple of loans & deposits, all bearing interest*_.
> 
> ...


That 'multiple of loans and deposits' or 'liabilities' IS_ new money_. When we make bank transfers, or write cheques, we are simply shuffling the debt around. That is what the money IS! As such fractional reserve lending does indeed create money out of thin air and for every £1 the Bank of England creates the high street banks can loan out £10, thus getting 60% interest not 6%.

Your example is not incorrect, however it is carefully contrived to disguise the fact that something really fairly extraordinary is going on.


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## love detective (Sep 29, 2011)

no desire to enter into a discussion about this with someone like you, but answer me one thing:-

if banks can create money out of thin air - why do they need bailed out, why is there a credit crunch, why do they have to rely on central banks to fund them - why don't they just create that money they so desperately need out of this thin air you talk off?

money circulates (and sometimes it doesn't), get over it


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## Jazzz (Sep 29, 2011)

love detective said:


> no desire to enter into a discussion about this with someone like you, but answer me one thing:-
> 
> if banks can create money out of thin air - why do they need bailed out, why is there a credit crunch, why do they have to rely on central banks to fund them - why don't they just create that money they so desperately need out of this thin air you talk off?
> 
> money circulates (and sometimes it doesn't), get over it


You don't understand money mate. Not at all.

It is precisely because banks are creating money (lines of credit) pretty much out of thin air that the system is unstable, and they are always vulnerable to "the run on the bank". At any time for a high st bank, if a significant fraction of depositors withdraw all the money in their accounts it would bring down the bank. That is because they are continually lending out far more than they have the cash reserves for (precisely what "fractional reserve" banking means), and if confidence drops the whole scam - and it is a scam - can go tits up. If they were just lending out hard cash from the central bank in they way you or I would, there couldn't possibly be a 'run'.

Why is there a credit crunch? Well simply put that is what happens when the banks (as a whole) stifle the amount of loans made and hence new credit appearing. When that happens, that is how banks steal everyone's property, as we cannot pay back our loans. Perhaps some banks may do badly and even fail, however, overall it is a terrific land grab for them.



> “The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled. With something so important, a deeper mystery seems only decent.” John Kenneth Galbraith (1908- ), former professor of economics at Harvard, writing in ‘Money: Whence it came, where it went’ (1975)


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## love detective (Sep 29, 2011)

so you admit they don't create money out of thin air then - as if they could it wouldn't depend on other things, actors, activities happening to allow that circulation to happen - but as you yourself point out this process of circulation does depend on these things, ergo it's not created out of thin air - instead money circulates if the conditions for that circulation allow it and money creation is therefore not the independent variable in all this, but the dependent variable - it's not a conspiracy or magic, it's just money, circulating - not saying it's a good thing it does so in this way, but your conspiracy like take on things conceals a proper understanding of what actually happens

I take the time & effort to understand things like this properly Jazz - and therefore able to critique in properly - you just jump on hysterical bandwagons which never poke beyond the surface and contribute fuck all to a proper understanding of the thing you're meant to be against


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## littlebabyjesus (Sep 29, 2011)

Jazzz said:


> That is because they are continually lending out far more than they have the cash reserves for (precisely what "fractional reserve" banking means), .



Um, don't they lend out only a fraction of the reserves? The run is caused when depositors come for their money and some of it has been lent out. The money is recorded as existing in two places at the same time, certainly - in the depositor's statement and the borrower's pocket. You could characterise this as lending creating money while paying back the debts destroys it. But you could also characterise it as depositors lending the money to the borrowers - after all, what is 'saving', if not 'delaying your promise of a share of consumption in order that another can consume today'. If money is being lent out faster than it is being paid back, you have an increase in the money supply, and if the reverse is true, you have a decrease in the money supply.

Where ld and I disagree, I think, is the role of interest due in all this. Because of interest due, the total amount of money owed is more than the total amount of money in existence, which necessitates an ever-increasing spiral of debt to avoid default.

There's a reason why banks call deposits 'liabilities' and loans they've made 'assets'. When you deposit money at a bank, what you're really doing is lending that money to them.


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## love detective (Sep 29, 2011)

not really time to get back into all this at the moment - but if you maintain that lending is creating money (which i don't disagree with) then logically you can never have more money owed than money in existence because interest is purely another temporary loan between two parties (owed by the borrower to the lender) so going on the premise that lending creates money, so does the interest on it - an asset that a lender has in the form of interest for example can be monetised and circulated as money, used for collateral etc..

Anyway, my main disagreement with you is not necessarily about interest itself - (although interest in this case is a symptom of the deeper criticism I have of your analysis) - my disagreement with you is that you start (and finish) your analysis purely with money in isolation - it's the tail wagging the dog - you need to incorporate it into a wider framework of value to get any sense out of all this - you can't derive conclusions purely looking at money alone, detached from the value relations of the system it is but a manifestation from


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## littlebabyjesus (Sep 29, 2011)

Ok, bearing in mind that I have accepted a lot of what you've said and that you have corrected some errors on my part - I freely acknowledge that - to concentrate just on one narrow issue:

If all money comes into existence as the creation of a debt bearing interest, then the total amount of money owed equals the total amount of money loaned out plus the interest due, which is the total amount of money in existence plus the interest due on all loans. The interest due doesn't create money. Rather the reverse - taking the sum of the total system it creates a debt that is not represented anywhere in the system by any money. The lender may use this as an asset with which to do things, but surely the one thing a lender cannot do is change the asset into something other than 'money owed'. They can sell it, perhaps with the interest due included in the price, but that's just transferring the asset from creditor to another. It doesn't change the nature of the asset.

Basically, what I'm saying is that if you sum the whole system, accounting for all the money in it, you necessarily have more money owed than exists.


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## deke t lefel (Sep 29, 2011)

love detective said:


> you can't derive conclusions purely looking at money alone, detached from the value relations of the system it is but a manifestation from


that's a little like..... you can't derive conclusions purely looking at the mind alone, detached from the body relations of the system it is but a manifestation from


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## love detective (Sep 29, 2011)

littlebabyjesus said:


> Basically, what I'm saying is that if you sum the whole system, accounting for all the money in it, you necessarily have more money owed than exists.



if you sum the whole system you get zero


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## love detective (Sep 29, 2011)

littlebabyjesus said:


> taking the sum of the total system it creates a debt that is not represented anywhere in the system by any money



you could equally say the same about all the loans & deposits in the system - they are not actually represented in the system by money - they just represent the trace that money leaves when it circulates in this way - if the same tenner is lent and borrowed 10 times between different parties, there is a 100 pounds of loans and a 100 pounds of deposits in the system - all created by the fact that the tenner has circulated many times between different parties and left debtors/creditors in its path - likewise with the related interest

anyway - i apologise in advance but i can't get into this at the moment - lot on


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## camouflage (Sep 29, 2011)

love detective said:


> you could equally say the same about all the loans & deposits in the system - they are not actually represented in the system by money - they just represent the trace that money leaves when it circulates in this way - if the same tenner is lent and borrowed 10 times between different parties, there is a 100 pounds of loans and a 100 pounds of deposits in the system - all created by the fact that the tenner has circulated many times between different parties and left debtors/creditors in its path - likewise with the related interest



The velocity of money.


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## Jazzz (Sep 30, 2011)

littlebabyjesus said:


> Um, don't they lend out only a fraction of the reserves?


No, the amount they hold in cash (bills, or central bank deposits) is only a fraction of the amount they lend out. In the UK it is an average of 3.1% source



> The run is caused when depositors come for their money and some of it has been lent out.


Of course, you mean 'to exchange for cash', the money is the 'ledger entry' saying they have £1000 on deposit. People can and do trade these numbers on a screen without exchanging for cash. That is how the banks are able to get away with having only a fraction of cash for the amount they lend out.
At any one time the cash just isn't there - as above, if just 5% of people with an account in credit come to withdraw it all (not paying back their loan accounts), the banks go down.



> You could characterise this as lending creating money while paying back the debts destroys it.


Certainly.



> But you could also characterise it as depositors lending the money to the borrowers - after all, what is 'saving', if not 'delaying your promise of a share of consumption in order that another can consume today'.


I don't think so. If you wanted to save your family silver, and gave it to me to look after, I think you'd be pretty miffed if I lent it out to someone else! And if I lent it out to ten other people simultaneously and demanded they gave me back more silver than I lent them, you'd think I was up to something pretty devilish!



> Where ld and I disagree, I think, is the role of interest due in all this. Because of interest due, the total amount of money owed is more than the total amount of money in existence, which necessitates an ever-increasing spiral of debt to avoid default.


Well yes, as things are, the only way the interest can be paid back is from new loans being taken out (fresh money supply), hence spiralling debt, and bankruptcies on whatever level whenever the banks choose to stifle new loans.

So the banks get earn fortunes simply because we are effectively renting our means of exchange from them, and if they choose to turn off the loan taps, they get to take all our stuff!


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## littlebabyjesus (Sep 30, 2011)

Jazzz said:


> No, the amount they hold in cash (bills, or central bank deposits) is only a fraction of the amount they lend out. In the UK it is an average of 3.1% source
> 
> Of course, you mean 'to exchange for cash', the money is the 'ledger entry' saying they have £1000 on deposit. People can and do trade these numbers on a screen without exchanging for cash. That is how the banks are able to get away with having only a fraction of cash for the amount they lend out.
> At any one time the cash just isn't there - as above, if just 5% of people with an account in credit come to withdraw it all (not paying back their loan accounts), the banks go down.



The amount they lend out is a fraction of the amount deposited - less than 100 percent. Of course the money they lend out eventually finds its way back into the bank as the person paid for their work deposits it again, and the process is repeated, but that's the nature of money - as ld says, a tenner can be lent out and deposited loads of times leaving traces of its circulation.

That's where the comparison with the family silver breaks down - money is a means of exchange rather than a thing to be exchanged in itself. It facilitates exchanges. As ld says, it _circulates_. The circulation is the money effectively. When you deposit money at a bank, you are effectively lending the bank the money. They offer you a rate of interest in return for permission from you to use the money. And there is only one way to use money - that's to put it back into circulation.

Where the problem comes is the question of interest. I can't agree with ld that the sum of the total system is zero. If money is created through loans bearing interest, where does the interest come from? If the money lender expects to be paid for their services with money, we have a problem. That can only happen if we go from money lender to money lender borrowing ever increasing amounts. Individual transactions may sum to zero, but only if the extra money to pay the interest can enter the transaction from elsewhere.


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## love detective (Sep 30, 2011)

so LBJ, I have to ask, with both Friedman and Jazz on your side - are you feeling comfortable!

the one thing you all have in common (Friedman, Jazz and yourself) is that you all look at money in isolation - as though it's an independent variable, rather than a dependent one - so to properly understand money & the credit system you have to look deeper into what it is a manifestation/crystalisation of - build a few foundations first and a proper framework to then analysis money & credit within that - anything else is rudderless, leads to a weak and unfounded analysis and lends itself perfectly to the hysteria that conspiracy types come out with


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## Johnny Canuck3 (Sep 30, 2011)

littlebabyjesus said:


> . If I borrow £100 from the bank, that money has no value until I try to spend it. .



Huh?


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## Johnny Canuck3 (Sep 30, 2011)

Does it have any value when someone steals it off you?


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## dilute micro (Oct 1, 2011)

6 pages and this thread is still on topic


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## Johnny Canuck3 (Oct 1, 2011)

littlebabyjesus said:


> Where the problem comes is the question of interest. I can't agree with ld that the sum of the total system is zero. If money is created through loans bearing interest, where does the interest come from? If the money lender expects to be paid for their services with money, we have a problem. That can only happen if we go from money lender to money lender borrowing ever increasing amounts. Individual transactions may sum to zero, but only if the extra money to pay the interest can enter the transaction from elsewhere.



But all of the money doesn't exist solely inside the banking system. You pay the interest on your loan not by borrowing it from another bank - it usually comes from earnings the borrower makes elsewhere.

Interest makes some sense in the capitalist model, which is predicated on continuous growth.


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## littlebabyjesus (Oct 1, 2011)

Johnny Canuck3 said:


> But all of the money doesn't exist solely inside the banking system. You pay the interest on your loan not by borrowing it from another bank - it usually comes from earnings the borrower makes elsewhere.



All money is issued as a debt with interest due, though. So you may not pay the interest on your loan by borrowing the money, but whoever you work for and pays you does. That's my point - summing the total system, there is nowhere for the extra money to come from other than bigger loans.

And all money _originates_ in the banking system. That was my point earlier about the money lender and their role. Backatcha bandit posted this Gessel story on another thread. What Gessel says makes a lot of sense to me. Where is he mistaken?


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## love detective (Oct 1, 2011)

littlebabyjesus said:


> So you may not pay the interest on your loan by borrowing the money, but whoever you work for and pays you does.



and as i previously demonstrated in an example on this thread (or on another one) - all this results in is a transfer of existing value (represented by money) from one place to another

if i get paid 105 a week and a few days before payday i borrow 100 from you and promise to pay you back 105 - instead of me spending my 105 on consumption like i would have done had i not borrowed from you, i only spend 100 on consumption (the original loan from you) and the remaining 5 gets transferred to you as payment of interest due - which you can then spend on consumption (or repay the interest that you have incurred getting the money in the first place).

so in summary if the loan had not taken place 105 would have circulated and spent on consumption

while if the loan does take place, once it's been repaid, 105 has circulated and been spent on consumption - just by different parties, at the total level the effect is still the same

And where the 105 to pay my wages comes from is fairly irrelevant for the purposes of this example as you are claiming if i borrowed from you the impact would be different at the total level to if i hadn't borrowed from you - but as we can see in both cases the impact is the same - so the question of where the 105 came from to pay my wages is relevant for both examples (me borrowing from you and me not borrowing from you) so can be discounted from both to then examine what impact borrowing with interest from you has and what impact not borrowing from you has

so all that is happening here is that existing things are being shifted around between parties - the total societal level of things have not changed, only their distribution - interest results in one party capturing a bigger share of existing value from another - it effects the distribution of what is generated in the underlying economy

And once again, a proper analysis of money and the impact of its circulation has to go back to what is going on underneath - in terms of value production itself - i continually point this out and you continually ignore it


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## littlebabyjesus (Oct 1, 2011)

love detective said:


> And where the 105 to pay my wages comes from is fairly irrelevant



This is the sticking point, I think. That 105 has in turn come from a loan with interest due. Your boss, or whoever down the line, has borrowed the money to pay you, reckoning on getting extra value from your labour with which to pay the interest and leave them with profit. Those paying for the services provided by the company you work for have again borrowed that money with interest due, or at least someone has. At each stage, where you introduce money into the system, that money has to be accounted for. And every sum of money can be traced back to the loan that created it and that has interest due on it.

Your example only sums to zero because you've introduced £105 into the system - the amount of the loan plus the interest. It sums to zero because you've designed it to do so, and the amount you need to introduce into the system to sum it to zero is necessarily greater than the amount loaned out. That money itself - the 105 you've introduced - has been created through a loan. That's the whole point when I mean that the total system requires an ever-increasing spiral of debt to service the interest.


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## love detective (Oct 1, 2011)

your initial premise was that any time a loan is created it needs an increasing spiral of debt be created due to the interest - i've given an example above that has shown this as patently not true (and i could keep going back in the chain to show that it's not true in relation to any borrowing my boss did to pay me, and so on - each time showing it just affects distribution) - your argument has to hold true in any example of a loan situation between two parties for it to have relevance, yet it doesn't so it hasn't

Also with regards to this:-



> Your example only sums to zero because you've introduced £105 into the system - the amount of the loan plus the interest. It sums to zero because you've designed it to do so



this is another example of your tail wagging the dog/back to front thinking - i haven't backwards engineered anything, i haven't designed the amount of money into the system to match the loan, what i've done is reflect what happens in real life, i.e. you can only borrow what is floating around and circulating anyway - so the driver is not the loan itself, but what is available to be loaned. I haven't introduced a specific amount into the system to make my sums work, i've taken an arbitrary amount that exists in the system and showed what happens if that amount is loaned out (albeit an isolated example that abstracts away velocity & circulation elsewhere, but that doesn't detract from the logic that is demonstrated by it)

the system always sums to zero because it has to - it's impossible for it no to - for every borrower there is a lender, for every party owing interest there is a party it is owed to - add it all up and you get zero - every transaction is always been two parties and is equal & opposite in value - you can't have a borrower without a lender or vice versa and you can't have someone owing interest without someone else on the other side who is due that interest - for the system not to sum to zero you would have to have a borrower without a lender (who did they borrow from then?), or someone owing interest to someone who doesn't exist (how does that work?)

i'm also a bit confused as to the end point of your assertion - what's the impact/point of it - initially way back you had used this to assert that the whole thing creates (and required) inflation to sustain itself - however at various times in the discussion you'e admitted your error in relation to this (and various other area) - is it still this that is your main point, i.e. is it, as you said earlier that




			
				LBJ said:
			
		

> _I still think my basic premise - that we have a system where money enters the system through the creation of debts with interest owing, and that this system demands inflation in order to function - has legs_



If you still think this is the case (and it's something based on either logical or empirical grounds) can you have a go at responding to my post in response to this that you didn't address previously when this was being discussed a few months ago

This was:-

I disagree on both logical and empirical grounds

*1. Logical:* Your whole argument seems to be based on the tail wagging the dog. Despite naming this thread money & value - your whole focus has been on money alone, with value being either non-existent or a mere afterthought in the analysis. Value creation (or non-creation/destruction) is a better starting point for looking at things like this.

In your assertion you state that the simple act of a loan with interest being created, in and off itself, is the fundamental reason for inflation in the ecomomy. You don’t put any analysis on what happens in the wider economy following the creation of that loan - and because of that your analysis is incomplete & flawed. If someone takes out a loan and (in value terms) the loan & interest is paid back out of created value (either from wages for workers or surplus value for capital) along with a bit of profit left over for the borrower - then how can this result in inflation. The marginal amount of value production here is higher than the amount of interest due on the loan. And when the loan is repaid (which effectively decreases the money supply in your terms as there is less loans/deposits) we have a situation where there is less 'money' in the system but more value (as the profit is higher than the interest paid) - so if anything this points to deflation not inflation.

Clearly not everything runs as smoothly as this all the time, but you don't even look at what happens in relation to value creation - you base everything on the fact that a loan has been created and your theory is blind to the real substance of what then happens next. In your theory whether the money from the loan is wasted, eaten, transplanted to mars, used to produce real value or whatever, is not even considered - you simply assert that more loans = more inflation

You also have failed to account for how inflation that is caused by the things I raised in this post would magically disappear if loans with interest didn't exist.

*2. Empirical:* Your theory essentially says the more loans & deposits (or money, or things circulating like money) in the system, the higher inflation will be. But if we look at the period from say mid 1990's to 2007 (in say the US and UK). This was a time where a huge amount of money/loans/deposits/ficticious capital were circulating around at incredible speeds (save for the blip of the dotcom crash). This was a result of loose monetary policy, huge (ficticious) banking profits, massive confidence, huge amounts of loan capital flowing in from surpluses in China etc.Now according to your theory we should have been seeing pretty high inflation then, but in fact the reverse was true and inflation was pretty low over that period (the fact that interest rates were fairly low during this period shouldn't detrat from your theory, as the theory is based on volumes of interest bearing loans/depoists circulating - so while perhaps the interest rates were relatively low on them, the fact that the circulation/velocity/mulitplication of them was very high is what's important for your theory)

From 2007 onwards however all that activity ground to a halt, loads of the stuff that was circualting was destroyed because it was ficticious, loans were paid down or defaulted on, so the whole build up through previous circulation came crashing down - now according to your theory we should be seeing a lot less inflation than before, however we are in fact seeing much more. 

So when your theory says there should be high inflation we see low inflation and when it says we should see low inflation we see high inflation. It doesn't appear to be a particular useful theory for explaining real world phenomena 

So, so far, I can't see any support for your theory, either on logical/rational or empirical grounds


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## littlebabyjesus (Oct 1, 2011)

Alright, setting this to one side, because I'm sure you agree that we're going in circles now, what do you think of Gessel's idea of free money?

While capitalism sees people 'saving' and accruing interest through others taking out loans, Gessel's idea of money is one that is more directly attached to the value it represents. In his system - which would need updating, but I see no reason why it can't be updated to be electronic - people are paid with notes that are worth a certain amount. However, every month, to keep the money valid, they must pay for a stamp to be put on it. They cannot save the money or give it to banks. All they can do is use it to buy something - circulate it. And the longer they hang onto it, the less it is worth, so there is incentive enough to use it - to get someone else doing something.

In many ways, this turns capitalism on its head. It would have to be combined with other measures to work - a socially funded pension, free education, etc. And he also proposed the taking of all land into public ownership so that it could only be rented, not owned.

This might all sound utopian, but Gessel viewed capitalism as a system that served to make people act against their own self-interests. And I have to agree with this. The whole idea of 'saving' money is wrongheaded. Surely this is treating money as if it were a commodity itself, abstracting the value of capital - alienating it if you like - in such a way that banks can operate just on money. A money lender can demand interest because there are no adverse consequences to them personally to their holding onto the money they are lending out, despite the fact that the value of the last transaction facilitated by the money will surely go down over time.

Effectively, Gessel built inflation into his model - depreciating money over time - but in a different way, so that it is only inactive money that depreciates. In our current model, all money depreciates together. And this is where I do have to insist again on the role of interest. Banks charge interest for the relatively simple task of providing us with our means of exchange. In the process, they hoover up most of the proceeds of growth, while most people get further and further into debt to them.


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## deke t lefel (Oct 1, 2011)

free money, relative debt......


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## love detective (Oct 1, 2011)

littlebabyjesus said:


> Alright, setting this to one side, because I'm sure you agree that we're going in circles now



Hold on, just because i ask you to back up your assertions by challenging it with some carefully though through empirical & logical criticism - the whole discussion now has to be conveniently 'set aside'?

i've asked you these points a number of times on this thread and others, you've failed to address them, yet you still assert your original claim without any attempts to address the calm & reasoned criticism i've made of them (despite starting a thread specifically calling for people to point out where you may be going wrong in your thought process on this)

and to characterise the discussion as going round in circles is absurd - it hasn't rotated once, it's never got to a stage where you've addressed my valid criticism of your assertions

At times it feels like trying to use empirical & rational arguments to convince a religious person that god doesn't exist - i.e. it's pointless because their belief in the deity is based on faith alone, not reason or empiricism so no amount of arguments using them can make them budge - this is what this discussion feels like

You've continually asserted something, i've asked you to address numerous criticism from me as to why I think you are wrong, but you've continually refused to even attempt to address these points while at the same time re-asserting that you're right - you may not see the arrogance in that but I do

I've spent an inordinate amount of time putting time & effort into detailed responses to some of the bizarre & poorly thought through things you come out with in relation to money, finance, credit and value yet time after time this is ignored as you fall back on your faith in some poorly thought through idea that lacks any kind of foundational structure or framework to give it half a chance of having any legs.

This is the last time i will say it - you will never get anywhere in understanding all this by taking your starting point of analysis as money itself - it might seem like a convenient short cut to understand it, but it's not. Anyway, i've got better things to do than waster my time on this - if you ever want a serious discussion about these things then fair enough - until that point comes i'll leave you to subtley inhabit a ground the likes of Friedman and Jazz inhabit somewhat more explicitly

As for Gessel, a poor man's adam smith for the monetarist/neo-classical generation


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## littlebabyjesus (Oct 1, 2011)

I feel kind of the same way, though. This bit:



> the system always sums to zero because it has to - it's impossible for it no to - for every borrower there is a lender, for every party owing interest there is a party it is owed to - add it all up and you get zero - every transaction is always been two parties and is equal & opposite in value - you can't have a borrower without a lender or vice versa and you can't have someone owing interest without someone else on the other side who is due that interest - for the system not to sum to zero you would have to have a borrower without a lender (who did they borrow from then?), or someone owing interest to someone who doesn't exist (how does that work?)


misses my point. If you're owed interest, that does not mean that the money to pay that interest exists. You don't put money into the system just by writing down how much interest you're owed. The lender has no money until the borrower pays it back. For every borrower there is a lender, and in every case, the borrower owes more to the lender than the lender lent out to the borrower.

Ok, I might see what you're saying. Are you saying that in effect, if I owe the bank 2k, then bank has 2k? But to be owed 2k by me is not the same thing as to be owed 2k by the Bank of England. And that debt can't be used in the same way. Exchanging a debt owed by someone like me for banknotes showing a debt owed by the Bank of England would involve a huge markdown.


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## love detective (Oct 1, 2011)

you haven't even attempted to address any of the fundamental points i've made in the last couple of pages (or on all the other threads when these topics have come up) - had you done so some of the points that you think you have you may see in a different light - that's the reason for raising most of them, but you can't/won't address them - i mean you couldn't even clarify what your overriding point was when asked above - you're just drifting about clutching onto disparate things

but until you do constructively engage with my criticisms of your 'theory', as i said, i can't be arsed going round the houses with your anchor-less surface level analysis anymore - it provides zero interest for me to do so (and it's actually boring as shit as well) - so sorry, but that's it from me, good luck learning about this stuff with the approach you take to it


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## littlebabyjesus (Oct 1, 2011)

Have you seen my point, though?

I borrow 100, am paid 105, pay back 105... sum zero, but 105 has come in.

Boss borrowed 105 to pay me, is paid 120 by customer, pays back 110, consumes 10.

Customer was paid 120

Boss of customer borrowed 120 to pay customer, is paid by client 140, pays back 130, consumes 10

Etc.

The figure goes up and up, and everything is accounted for, summing to zero, except the last term introduced to pay the last person in the list's loan. It isn't a trivial matter that this last term is never accounted for.


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## love detective (Oct 1, 2011)

take it up with Jazz - perhaps his approach will suit you better

no need to even think about value, i mean it's not like money is its representative or anything


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## littlebabyjesus (Oct 1, 2011)

Trying that with no external consumption, just transferring the money, once with interest, once without:

Without interest:

I borrow 100, am paid 100, pay back 100

Boss borrowed 100 to pay me, is paid 100 by customer, pays back 100

Customer was paid 100

Boss of customer borrowed 100, is paid by client 100, pays back 100

Client is me! that's what I borrowed the 100 for.

Sum: zero

With interest:

I borrow 100, am paid 105, pay back 105

boss borrowed 105, is paid 110, pays back 110

client borrowed 110, is paid 115, pays back 115

Money to pay client: 100 + 5 + 5 + 5

Sum: zero also

So, yes sum zero once all the transactions have been completed. But transactions don't come all at once. There is a time order. Why did the boss borrow money to pay me? Because he knew his client wouldn't be paying in time. And so on, so the boss borrows after me, the client borrows after the boss. But the money to give to the client to sum the zero is coming mostly from me. Why would I borrow to pay the client then not pay them? There is a logical absurdity to the whole scenario whereby I am borrowing money to pay a client who doesn't need paying until after I'm paid. So with that initial 100 I must have had to pay the client for last month's debt. I pay them another 100, and the three money lenders each pay them 5 each. Except that the three money lenders haven't got their 5 each yet. So where does the client get the extra 15 if I'm still just paying 100? By charging me more than 100, for starters, putting prices up, but also by borrowing the 15. Let us say they borrow the 15. So then the second round is:

Client gets 100 from me, borrows 15, pays back 115,

I borrow 100, am paid 105, pay back 105

Boss borrows 105, is paid 110, pays back 110,

Client borrows 110, is paid 115, pays 115, but still owes that 15, which is now 16.

So this process goes on, and the client slips into owing more and more to the lenders and in the end puts prices up to compensate - inflation.

_Somebody_ has to be a month behind in this scenario.

Of course in reality those who are a month behind and bear the brunt of this are the workers. They are paid at the end of the month, but most things have to be paid for at the beginning of the month. No wonder so many people live on their overdraft, paying it back up to zero each month. Ideal scenario for a bank, in fact. They don't have to find anyone else to lend to to make their money - they make it out of the current account holder. They extend the overdraft to allow for the expanding debt until one day, they arrange a loan to pay it all off with, reckoning that the loan will make the worker economise so that they pay down the debt for a bit (they might even have a friendly adviser who can help you to budget), and then whole process starts again. And all of that interest you pay is effectively theft. It all stems from the fact that you are paid in arrears but must pay for things upfront. You are the sucker in the system, basically.

As a side note to this, one of the effects of the credit crunch has been a doubling of interest on overdrafts. This is effectively a significant pay cut to many people. I asked my bank why they had done it, and even the woman at the branch thought it was rough. The justification is simply this: good luck getting the money from elsewhere - we've got you by the curlies. While rich people with big deposits are paying 3 percent or less on their mortgages, others with no capital are paying ever more extortionate rates on overdrafts, credit cards, etc. A direct, naked transfer of wealth from the poor to the rich.


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## Johnny Canuck3 (Oct 1, 2011)

littlebabyjesus said:


> All money is issued as a debt with interest due, though. So you may not pay the interest on your loan by borrowing the money, but whoever you work for and pays you does. That's my point - summing the total system, there is nowhere for the extra money to come from other than bigger loans.



As I mentioned, capitalism is predicated on growth. The population grows, the economy grows. Income is larger than the interest paid on loans.


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## littlebabyjesus (Oct 2, 2011)

Johnny Canuck3 said:


> As I mentioned, capitalism is predicated on growth. The population grows, the economy grows. Income is larger than the interest paid on loans.


Normally interest rates are higher than growth rates. So the interest charged swallows up the growth, basically. Hence nearly all the proceeds of growth over the last few decades have gone to the richest few percent. The rest of us see virtually none of it.

Balls to growth, basically. It does most of us no good at all.


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## Johnny Canuck3 (Oct 2, 2011)

littlebabyjesus said:


> Normally interest rates are higher than growth rates. .



Which measurement of the growth rate: GNP; GDP; average family income, etc etc?

Which interest rate: prime lending rate?


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## love detective (Oct 2, 2011)

littlebabyjesus said:


> Trying that with.......



Again no attempts to address my points - I haven't read any of the above post as until you address (or even acknowledge the existence of) the valid critique I made of your 'theory' I have no interest going into other detail with you - your arrogance thinks it's acceptable to ignore considered responses to your points while demanding others engage with what particular thing you happen to decide that you want to discuss (conveniently a thing which deflects from you having to address the more substantive points) - so sorry, like you i'm going to ignore any efforts you make into this

I raised my original rebuttals of it nearly three months ago now, so if you feel like you can defend your theory against them then go ahead - otherwise your points are irrelevant to me

Even within your own system of logic you trip yourself up:-

- You claim new money needs to come into the system to service debt

- You claim new money enters the system as debt

- inherent within the concept of debt is a party on each side, each owing/lending the same amount, with the net coming to zero

- ergo, if new money needs to enter the system to service interest, that money comes in as debt, and like all other debt sums to zero - the position is zero both before any new money enters the system and after

Now I don't even agree with all of your premises - but you should be able to hold the logic correct within the framework of your premises but you don't

what you're arguing above is the logical equivalent of saying not all bachelors are unmarried men - you're trying to break what is an analytic a priori

Likewise empirically your theory predicts high inflation in periods where empirically inflation was low and likewise predicts low inflation in periods where empirically inflation has been high - so despite your theory having no rational or empirical basis to exist - you cling on to it, through what looks like faith alone

More fundamentally you don't understand the system you are trying to analysis money within - all that crap about Gessell shows that - you think you can just tinker with money (whose workings is a manifestation/crystalisation of the underlying social relations of capitalism) and make a great new system - this is nonsense


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## articul8 (Oct 2, 2011)

ouch


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## Johnny Canuck3 (Oct 2, 2011)

love detective said:


> what you're arguing above is the logical equivalent of saying not all bachelors are unmarried men - you're trying to break what is an analytic a priori



This analogy isn't clear to me.


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## Jazzz (Oct 3, 2011)

love detective said:


> Even within your own system of logic you trip yourself up:-
> 
> - You claim new money needs to come into the system to service debt
> 
> ...



So the sum of money in the whole world is zero? This is just flippancy. Of course LBJ is not talking about money as being a total which comes to zero. He is talking about the credit side of the equation - the circulation.

It's really not much good if the interest only exists on the side of the bank's accounting ledgers: the point is that it needs to be there as credits in circulation for the people to pay back their loans with.

From a conference recently: http://www.positivemoney.org.uk/2011/10/breath-fresh-air-conference-banking/



> The two main speakers at the free public session were Lord Adair Turner (both Financial Services Authority and Committee on Climate Change chairman) and Prof Richard Werner (of the University of Southampton’s school of management). I’ll give you my summary and impressions of what each of them said.
> 
> First *Prof. Richard Werner*, who was a breath of fresh air. It’s heartening for “cranks” everywhere to see an Oxbridge educated economics professor stand up at a conference in a suit and tie and state that:
> 
> *“It is basically an accounting trick … Banks create money. They don’t lend it ... When a bank gives out what is called a loan, it basically pretends that you have deposited the money… it has to invent the liability … This is how the money supply is created.”*​


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## deke t lefel (Oct 4, 2011)

can't anybody create debt/money by writing an IOU and then guaranteeing it, or is money only defined as legal tender backed by the government?

it seems like the government's proposed credit easing will mean that corporation bonds will now be backed by the tax payer (which is the prime source of value)


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## Jazzz (Oct 4, 2011)

deke t lefel said:


> can't anybody create debt/money by writing an IOU and then guaranteeing it, or is money only defined as legal tender backed by the government?



I didn't want to fry everyone's brain too much... but this is in fact precisely what is happening. I have been saying the banks create it out of thin air - but in fact this is not quite true. In fact, *we* create it out of thin air by signing a loan agreement which is.... a 'promise to pay' (promissory note!). That is what the cash is! (look at the ten pound note in your pocket and the promise on it). The banks/loan companies then take our created cash, then change it up for us into a credit that we can use.

"_What they [banks] do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts. Loans (assets) and deposits (liabilities) both rise by [the amount of the "loan"]._"
*Modern Money Mechanics, Federal Reserve Bank of Chicago*

The loan agreement is a swap! _There is no loan_.


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## butchersapron (Oct 4, 2011)

Donkey crackers


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## Jazzz (Oct 4, 2011)

butchersapron said:


> Donkey crackers


I suggest you try going into the Bank of England, present one of their promissory notes and demand that the chief cashier honours it for you, and see what happens.


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## butchersapron (Oct 4, 2011)

I stand by my post.


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## Jazzz (Oct 4, 2011)

butchersapron said:


> I stand by my post.


You weary me.


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## butchersapron (Oct 4, 2011)

I may do, but you are a donkey running around with a cracker tied to its tail. You have no idea.


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## Jazzz (Oct 4, 2011)

butchersapron said:


> I may do, but you are a donkey running around with a cracker tied to its tail. You have no idea.


Kindly produce something that isn't mindless abuse or piss off, there's a good chap.


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## butchersapron (Oct 4, 2011)

That wasn't mindless abuse. It was mindful abuse. Actually, it wasn't abuse at all. You've just tied money to nothing. There's literally nothing in your fantasy. Do you want to talk about the invention of money? Ok, shall we do that?


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## Jazzz (Oct 4, 2011)

butchersapron said:


> That wasn't mindless abuse. It was mindful abuse. Actually, it wasn't abuse at all. You've just tied money to nothing. There's literally nothing in your fantasy.


The whole thing is indeed the most extraordinary illusion.



> Do you want to talk about the invention of money? Ok, shall we do that?


go ahead


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## butchersapron (Oct 4, 2011)

Jazzz said:


> The whole thing is indeed the most extraordinary illusion.
> 
> go ahead



That you were unable to tie it value in any way whatsoever. And you were unable to do so because you don't appreciate that value is tied to production. To something concrete.  This whole thread is a fairy story.

Ok, tell me how money was invented.  You have a theory. let's hear it.
You must have a start point right?


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## Jazzz (Oct 4, 2011)

butchersapron said:


> That you were unable to tie it value in any way whatsoever. And you were unable to do so because you don't appreciate that value is tied to production. To something concrete. This whole thread is a fairy story.
> 
> Ok, tell me how money was invented. You have a theory. let's hear it.
> You must have a start point right?


I think you would fully realise if you were alive in Germany 1923, or China 1948, or Poland 1989, that money may not be tied to anything. It's you who wishes to talk about the invention of money.


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## butchersapron (Oct 4, 2011)

I think if you were alive *today* you should realise that it's tied directly to production of value. But you don't because you're donkey crackers. You don't tie value to money yet you criticise banks for not tying money to value. The examples you give are of value forcing itself on money.


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## love detective (Oct 5, 2011)

jazz and lbj,
in a tree,
k.i.s.s,
i.n.g,
first came money,
in their analysis,
which then ensured their total paralysis


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## Random (Oct 5, 2011)

Jazzz said:


> I didn't want to fry everyone's brain too much...


 Jazz - the holder of dangerous truths. Wielding the flaming sword of knowledge, but beware- it burns all the way to the pommel.


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## Jazzz (Oct 5, 2011)

love detective said:


> jazz and lbj,
> in a tree,
> k.i.s.s,
> i.n.g,
> ...


A curious post because it seems to be you who was left unable to reply.


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## love detective (Oct 5, 2011)

your right, i was left unable to reply, but not for the reasons you think


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## Jazzz (Oct 5, 2011)

love detective said:


> your right, i was left unable to reply, but not for the reasons you think


seriously I would advise you to just forget all the rubbish about economics that is in your brain, start again with this video


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## Random (Oct 5, 2011)

Jazzz said:


> seriously I would advise you to just forget all the rubbish about economics that is in your brain, start again with this video


 Jazzz! Holder of the truth! Patiently explaining powerful knowledge to the sheeple.


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## love detective (Oct 5, 2011)

Jazzz said:


> seriously I would advise you to just forget all the rubbish about economics that is in your brain, start again with this video




at least you make me laugh


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## petee (Oct 5, 2011)

love detective said:


> jazz and lbj,
> in a tree,
> k.i.s.s,
> i.n.g,
> ...



crikey, l.d.


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## Will2403 (Oct 6, 2011)

can someone please summarize all this money as debt, fractional reserve, central banking jazz for me in simple sentences. except for jazz and lbj and dwyer.

someone who's not insane.

it sort of seems like sense, but all you wise sages think it's not. so what's right and what's wrong.

TIA!


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## Random (Oct 6, 2011)

Will, I'm not as knowledgabe about money and value as LD, but I'd say one important flaw in this idea of 'banks creating money' is that money is only a _reflection_ of really existing value. It can be a bad, distorted reflection, it is, in practice, often created by private banks, but the function of money is basically to allow value to be easily traded by capital owners.

To say that it's all a trick set up by the banks gives them too much credit (lol), when they're really only one of the branches that just provides a serviceamong others, to help capital keep rolling on. Saying that banks are _controlling_ this also seems to leads us easily into traditional banking conspiracy theories, which overlap with antisemitic anti-banking conspiracies.


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## love detective (Oct 6, 2011)

lbj and dwyer are by no stretch of the imagination insane


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## deke t lefel (Oct 6, 2011)

Jazzz said:


> I didn't want to fry everyone's brain too much... but this is in fact precisely what is happening. I have been saying the banks create it out of thin air - but in fact this is not quite true. In fact, *we* create it out of thin air by signing a loan agreement which is.... a 'promise to pay' (promissory note!). That is what the cash is! (look at the ten pound note in your pocket and the promise on it). The banks/loan companies then take our created cash, then change it up for us into a credit that we can use.
> 
> "_What they [banks] do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts. Loans (assets) and deposits (liabilities) both rise by [the amount of the "loan"]._"
> *Modern Money Mechanics, Federal Reserve Bank of Chicago*
> ...


money is derived from work and value, the three now go round and round in a spiral


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## Falcon (Oct 8, 2011)

Butchersapron is correct.

The locus of "value" is in the matter/energy system. This is a physical system.

The locus of "money" is in the financial system. This is an abstract system.

Being different systems, and different categories of system, they are governed by different rules. The matter/energy system is constrained by physical reality. Specifically, it cannot expand indefinitely. The financial system is constrained only by rules as abstract as the system. Specifically, it is free to expand indefinitely.

I have two pigs. They represent "value". My pigs can die. Although my two pigs can multiply, they can only do so within the limits imposed by the conversion of the flow of sunlight on the forest floor into truffles. When my supply of pigs exceeds my supply of truffles, my supply of pigs cannot increase.

I owe you two pigs. Your claim of "minus two pigs" - the impact of your claim on my inventory of pigs - is "money".

Your claim of "minus 2 pigs" cannot die.

"Minus two pigs" has an abstract meaning i.e. as money. It has no physical meaning i.e. as value - if I have only 1 pig, I cannot fulfil my promise by owning "minus 1 pig".

Your "money" of "minus 2 pigs" can (and, because of usury, does) become "minus four pigs", "minus eight pigs", "minus sixteen pigs" through the abstract process of compound interest. There is no upper bound.

My source of value can only relate to pigs which currently exist. Your supply of money can relate to pigs which do not yet exist, or cannot ever exist with this supply of truffles.

I could figure out how to feed my pigs on, e.g. oil and, providing more calories than truffles, my supply of pigs might expand very much faster than previously. On that basis, I might agree to owe you "minus 20 pigs" next year, corresponding to when you hoped to retire, in return for you desisting in that tiresome practice of withdrawing your labour all the time in protest at having fewer pigs than me.

The bankers, observing that the supply of pigs has been increasing recently, might offer to print "minus 2 pig" vouchers for the government - for a modest fee of "minus 2 pig" vouchers, of course - to help the government with an increase in demand of "minus 2 pig" vouchers required by pensioners salivating at the prospect of all that bacon - to be repaid by those future pigs that will surely be born now we've cracked the business of perpetual pig food. The government might decide that would also be a jolly good way to pay for the "minus 2 pig" vouchers demanded by the road builders, too, and order some more. This would Please the bankers.

The sum of all "money" therefore does not correspond to the sum of all "value", even in a world of zero interest. "Money" in interest systems expands in a way that has no correspondence with physical expansion. "Money" does not die in the way that physical value does. "Money" may be issued in the expectation of future pigs which, in reality, never materialise.

With all these mechanisms for producing more "minus pig" vouchers than there are pigs, any correspondence between abstract "minus pig" vouchers and the number of actual pigs eventually and inevitably breaks down, and the vouchers become more valuable as toilet paper.

It is the divergence between the physically constrained "value" system and the unconstrained "money" system which is the root of the instability in the global financial system.

There is a brief period of time when the matter/energy system *is* capable of sustaining a few octaves of compound growth. During this period, it appears that it is the *financial* system which is driving the *matter/energy* system (especially amongst those infected by the hubris and mythology of neoclassical economics, man's triumph over nature mediated by technology, etc.). This illusion is so strong that the matter/energy system disappears completely. Thus analysis reduces to the behaviour of the abstract system e.g. the impact of "interest rates" (an abstract property of the financial system) on "inflation" (an abstract property of the financial system). Cures are devised having the same relationship to the matter/energy system as sticking plasters have to cancer of the bowel.

P.S. Schumpeter attempted to write a book on money. Schumpeter famously declared at the end of the attempt that he never managed to understand money. Schumpeter, being a neoclassical economist, formally denied the interrelationship between money and matter/energy. It is not possible to form an understanding of money without an understanding of the matter/energy system from which it derives.

P.P.S. Credit creation/quantitative easing/etc. - printing "minus pig" vouchers - stands in approximate relation to wealth creation as masturbation does to sexual congress - creating an evanescent sensation of pleasure, with nothing of lasting substance. Many are unaware that this is the source of the frequent confusion between the terms "banker" and "wanker".


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## deke t lefel (Oct 15, 2011)

wonderful, although not too sure about this bit



Falcon said:


> The locus of "value" is in the matter/energy system. This is a physical system.
> 
> The locus of "money" is in the financial system. This is an abstract system.



money relies on the energy supply to the printing presses and computers and is still part of the physical system

if E=Mc^2 it may be of interest to note that money seems to become more detached from the physical system as the vast majority of it moves around at a velocity (literally) very close to the speed of light


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## Backatcha Bandit (Oct 15, 2011)

Rats, moths and rust, Deke.


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## love detective (Oct 15, 2011)

the quote that is attributed to Marx in that (pretty woeful) article is not something that Marx said (at least not to my knowledge)

when I first read it, I thought maybe it was just some odd translation, but re-reading it it became pretty clear that this doesn't sounds like the kind of language Marx would use, nor the type of thing that Marx would say (in terms of substance). I can't even work out what it's meant to be saying. weird.


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## Backatcha Bandit (Oct 16, 2011)

The translation (Pye, 1929) is certainly not perfect.

In Gesell's original, the bit at the end where he has Crusoe saying _"Then the cause of interest is to be sought in money? And Marx was mistaken?"_, it's _Crusoe_ that then continues:



> Even where he says:_ "The circuit M-C-M, buying in order to sell dearer, is seen most clearly in genuine merchants’ capital. But the movement takes place entirely within the sphere of circulation. Since, however, it is impossible, by circulation alone, to account for the conversion of money into capital, for the formation of surplus-value, it would appear, that merchants’ capital is an impossibility, so long as equivalents are exchanged; that, therefore, it can only have its origin in the two-fold advantage gained, over both the selling and the buying producers, by the merchant who parasitically shoves himself in between them. ** If the transformation of merchants’ money into capital is to be explained otherwise than by the producers being simply cheated, a long series of intermediate steps would be necessary_ (Marx, Capital, 6th Edition, Volume I, p. 127)"???



Friday/The Stranger then replies:



> Of course Marx was mistaken, and as he was mistaken about money, the nervous system of economic life, he was mistaken about everything. He and his disciples excluded money from the scope of their enquiry


The 'shining metal disks' jibe and the 'Gold and Silver' quote (probably from _'A Contribution to the Critique of Political Economy'_) Pye tacked on instead of the above quote from Marx_._

It's a shame, really, as the piece loses a touch of it's original humour - the joke being that it's Crusoe who keeps quoting Marx; e.g. the pause between the previous long-winded (Capital I.VI) quote and Friday's dead-pan question: _"How long have you been on this island?" _

**Gesell himself snips Marx's Benjamin Franklin quote:_ “war is robbery, commerce is generally cheating.”_ - (which is itself a misquote).

I trust that clears up any niggling questions you had regarding the Marx quotes, leaving you clear to consider the _actual idea_ that Gesell is trying to get across. 

As Falcon put it so well:



Falcon said:


> The locus of "value" is in the matter/energy system. This is a physical system.
> 
> The locus of "money" is in the financial system. This is an abstract system.



The 'value' is real, tangible and subject to _rats, moths and rust_.

The 'Money' is ethereal, abstract, a sign that exists within the realm of ideas, of _information_, therefore beyond the temporal and spacial.

Hence; 'Money' today representing multiple claims to a single 'asset' in the form of future industrial production _that will never take place.  _No bacon_?  DAMN YOU, FALCON! 
_


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## love detective (Oct 16, 2011)

poor translations aside - the assertion that:-



> He [Marx] and his disciples excluded money from the scope of their enquiry



is absurd

the fact that Marx largely incorporated & embedded his analysis of money into his wider framework of value (which by the way may be 'real' and objective, but it's not tangible - you can't blow up a social relation) and didn't treat it as a separate detached topic, seems to make people who have not read him able to come out with absurdities like this. Anyone who has struggled through the three volumes of capital will be very much aware as to the embedded & natural incorporation of money (and credit, interest, banking system, etc.) into the scope of Marx's enquiry



> It's a shame, really, as the piece loses a touch of it's original humour



it was quite funny to be fair, even reading it from the original article you linked to (even if it's wrong, it can still be funny)



> leaving you clear to consider the actual idea that Gesell is trying to get across



even taking the other (real) marx quote that you mentioned above, his analysis (and therefore his criticism of marx) is all over the place - mixing up theories of money, labour power, interest, use-values, exchange values, merchants capital and surplus value and using them all interchangeably without really getting the grasp of any of them.For example, he introduces a topic and then uses a quote from Marx about a completely different topic to then say Marx was wrong about another completely different thing, it's absurd and lazy hackery.

I believe i criticised Gessel earlier for thinking that a little bit of tinkering with something (money) which is a manifestation of the deeper issue (capitalist social relations) would solve all the worlds problems, and he's doing it again in the article that you linked to, tinkering with (interest) as though that would solve the contradictions of the deeper issue (value production & related social relations)

I can see the appeal of Gessel to those who think they can just wrench money apart from the system that it is a manifestation of - and then base all analysis & 'solutions' at that surface level layer - this thread is pretty much full of that kind of thing happening ('quick wins' in terms of analysis and solutions), and i've argued until i'm blue in the face as to the short sightedness of that approach, so not really much more to add on that


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## Backatcha Bandit (Oct 16, 2011)

love detective said:


> ..a little bit of tinkering...
> 
> ..tinkering with (interest)...
> 
> ..surface level layer...



What could be more fundamental that examining the fundamental nature of 'money'?

It's his perceived absence (in Marx) of consideration of that 'fundamental' level which forms the basis of Gesell's criticism.

I think the problem here is that this sits outside of the 'framework' within which you're working.


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## love detective (Oct 16, 2011)

do you agree with gesell that marx excluded money from the scope of his enquiry?

anyone who is familiar with marx's analysis/work in this area couldn't possibly entertain the charges that gessel lays out here - marx derives money (both logically and historically) from the most fundamental of bases

this conversation is absurd


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## Blagsta (Oct 16, 2011)

Backatcha Bandit said:


> *What could be more fundamental that examining the fundamental nature of 'money'?*
> 
> It's his perceived absence (in Marx) of consideration of that 'fundamental' level which forms the basis of Gesell's criticism.
> 
> I think the problem here is that this sits outside of the 'framework' within which you're working.



Yes, this is what Marx does.


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## frogwoman (Oct 16, 2011)

Apparently the only real money is gold and the rest is fraudulent.


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## Backatcha Bandit (Oct 16, 2011)

@ LD: I'm wondering if it's possible to get you to utilise a different framework from which to view the question (I'm assuming, of course, that you can accept the possibility that there even _is_ an alternative framework to the one you are currently working with - we can argue later about which might be more more relevant / appropriate).

Perhaps somebody else can suggest a better one, but in the interests of keeping it accessible, I invite you to take a look at Donella Meadows work on 'leverage points' - points of intervention within a complex system.

Whereabouts on that scale would you place Gesell's idea regarding bringing 'money' back within the temporal realm?


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## love detective (Oct 16, 2011)

if you'd read my last few posts you would see my particular criticism here is Gessel's fundamental misunderstanding of Marx's framework/project - so you're asking me to use a different framework to the one he was trying to critique/understand and then to base my evaulation as to whether he has any kind of handle on that framework on a completely different framework - yeah that might work

the point here is not even saying that Marx is correct (or the only framework to use), but pointing out that the criticisms made by Gessel about Marx portray a complete and utter confusion of Marx's work in the first place


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## Backatcha Bandit (Oct 16, 2011)

frogwoman said:


> Apparently the only real money is gold and the rest is fraudulent.


'Money' differs from 'Gold' in that 'Gold' is obviously in the physical - and as such is subject to physical effects, such as being heavy, getting stolen, requiring energy and effort to store, etc.

The 'money', extratemporal, information, idea, suffers none of this.


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## frogwoman (Oct 16, 2011)

yeah, I don't actually believe that, lol.


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## TruXta (Oct 16, 2011)

Calling money, or capital for that matter, extra-temporal, a mere abstraction, well, that's me disagreeing already there. Just like value, money is material. Even if it's "just" information it is instantiated, stored, manipulated and perceived in terms of concrete social behaviours that are reproduced daily by billions of people all over the globe.


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## Backatcha Bandit (Oct 16, 2011)

love detective said:


> you're asking me to use a different framework to the one he was trying to critique/understand and then to base my evaulation as to whether he has any kind of handle on that framework on a completely different framework



Yes, it was a daft assumption to make on my part. 

If you can't face the fact that an alternative framework exists, you're not going to have much fun trying to examine things using a different one.

I'm not particularly interested in your opinion of Gesell's opinion of Marx's opinion.  I was hoping for your opinion on Gesell's idea regarding what he saw as a fundamental flaw in 'money'.


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## Backatcha Bandit (Oct 16, 2011)

frogwoman said:


> yeah, I don't actually believe that, lol.



I know, jus' sayin'.

 Are you channelling Max Keiser?


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## Backatcha Bandit (Oct 16, 2011)

TruXta said:


> Calling money, or capital for that matter, extra-temporal, a mere abstraction, well, that's me disagreeing already there. Just like value, money is material. Even if it's "just" information it is instantiated, stored, manipulated and perceived in terms of concrete social behaviours that are reproduced daily by billions of people all over the globe.



No one's suggesting that the magic doesn't _work_, TruXta.


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## love detective (Oct 16, 2011)

Backatcha Bandit said:


> Yes, it was a daft assumption to make on my part.
> 
> If you can't face the fact that an alternative framework exists, you're not going to have much fun trying to examine things using a different one.
> 
> I'm not particularly interested in your opinion of Gesell's opinion of Marx's opinion. I was hoping for your opinion on Gesell's idea regarding what he saw as a fundamental flaw in 'money'.



Re your first two sentences - do you ever read anyone else's posts here other than your own?

Re the third & fourth - the former sentence is part & parcel of making any kind of assessment on the question posed in the later. Approaching the question from the point of view of a 'flaw in money' is the kind of surface level, superficial, non foundational/fundamental, vulgar analysis I was referring to earlier

The 'flaw' is not with money in and off itself, the 'flaw' is with the underlying social relations that give rise to the crystalisation of our current monetary system. Money is a manifestation of a particular essence, so any analysis which concentrates on 'flaws' at the level of that manifestation (at the expense of analysis of the essence) only will never get anywhere useful in telling us how our society works


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## Falcon (Oct 16, 2011)

frogwoman said:


> Apparently the only real money is gold and the rest is fraudulent.


You'd think so. But you end up constraining your economy on the basis of how much gold there is, rather than how much economy there is. And you end up with the value of your economy going up and down depending on how much people fancy gold, rather than the other way round.

Renewable energy generating capacity - now _that's_ a tasty physical asset for backing currency ...


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## Backatcha Bandit (Oct 16, 2011)

love detective said:


> The 'flaw' is not with money in and off itself, the 'flaw' is with the underlying social relations that give rise to the crystalisation of our current monetary system. Money is a manifestation of a particular essence...



Nope. 

It's the qualitative, metaphysical difference between the 'money' and the 'stuff' that enables such social relations to exist. Makes them _inevitable._

Regardless of politics or intent, extratemporal 'money' provides a powerful systemic driver towards unequal distribution.

Gesell says that '_The cause of interest lies in money_' because _even_ with 0% interest (NO interest), the extratemporal nature of it has the same effect as having interest: That is, you can hoard (or artificially withhold from circulation) 'money' and _benefit from the act of doing so._

As soon as you have 'interest', whether explicit or invisibly contained within the fundamental nature of the medium of exchange, the _system _can do nothing other than concentrate wealth.

Failure to recognise this key point is what leads to 'surface level, superficial, non foundational/fundamental, vulgar analysis', in my opinion.

Keynes puts it like this:



> [Gesell] points out that the rate of interest is a purely monetary phenomenon and that the peculiarity of money, from which flows the significance of the money rate of interest, lies in the fact that its ownership as a means of storing wealth involves the holder in negligible carrying charges, and that forms of wealth, such as stocks of commodities which do involve carrying charges, in fact yield a return because of the standard set by money.



I'm sure there's no need to remind you of _his_ opinions regarding Gesell and Marx.


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## love detective (Oct 17, 2011)

Backatcha Bandit said:


> As soon as you have 'interest', whether explicit or invisibly contained within the fundamental nature of the medium of exchange, the _system _can do nothing other than concentrate wealth.



concentration of wealth (or more correctly value) is not fundamentally due to the existence of 'interest' or some flaw in the monetary system alone, which if fixed (as gessell seems to think) would herald a different and more progressive mode of organising society.

Interest is but one of the forms that surplus value takes when it comes to its distribution _after production & appropriation of that surplus value_ - the existence or otherwise of interest says nothing about the fundamental ability of capital to extract value from labour in the first place - and the existence of this, not interest, means that the system can do nothing other than concentrate wealth (more correctly value)

and you harp on at me for being wedded to a one framework approach


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## Backatcha Bandit (Oct 17, 2011)

love detective said:


> Interest is but one of the forms that surplus value takes when it comes to its distribution _after production & appropriation of that surplus value_ - the existence or otherwise of interest says nothing about the fundamental ability of capital to extract value from labour in the first place - and the existence of this, not interest, means that the system can do nothing other than concentrate wealth (more correctly value)



It says something about the fundamental ability of capital to _exist_.

Absent the extratemporal nature of the medium of exchange, accumulation to the point where it can exploit is simply not possible.

At the moment value is abstracted into 'money', it is removed from the temporal plane. Gesell suggests a method for 'tying it down' to reality.

I'm not convinced that you even understand the problem with extratemporal currency, or that you even recognise it as such.

You appear to be as aware of the metaphysical nature of 'money' as a fish might be of the nature of the water in which is swims.


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## love detective (Oct 17, 2011)

Backatcha Bandit said:


> It says something about the fundamental ability of capital to exist.



It does no such thing actually

The fundamental ability of capital to exist is its ability to extract surplus value from labour. Without this there would be no capital as we know it, regardless as to whether money is lent at interest or not. You'll note that although capitalism has only existed for a few hundred years, lending at interest has been around for thousands of years prior to capital & capitalism's existence. So to say the existence of interest says something about the fundamental ability of capital to exist, not only portrays a logical confusion of the matter you're trying to understand but also a historical & empirical confusion as to the way its actually developed

The surface level forms that surplus value takes (i.e. profit, interest or rent) when it comes to its actual distribution amongst different types of capital is important but it's not the fundamental basis of surplus value's (and hence capital's) existence in the first place. In fact this distinction is something that Marx considered one of the most important things in _Capital_ (the book):-




			
				letter to Engels from Marx in 1867 said:
			
		

> The best points in my book are: 1) the two-fold character of labor, according to whether it is expressed in use-value or exchange value. (All understanding of the facts depend upon this.) It is emphasized immediately in the first chapter; *2) the treatment of surplus value independently of its particular forms as profit, interest, ground rent, etc*



The rest of your post doesn't warrant a response


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## Random (Oct 17, 2011)

Backatcha Bandit said:


> Absent the extratemporal nature of the medium of exchange, accumulation to the point where it can exploit is simply not possible.


 Are you saying that capitalism using barter would not be exploitative?


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## love detective (Oct 18, 2011)

these 'money first' people don't seem to grasp that our current monetary system is largely an effect, not the cause, of the underlying exploitative social relations of capitalism

you could have all the money in the world, but if you can't go out and buy labour with that money, it's not going to make you a capitalist, no matter how much you have of it. In other words, capital as we know it would not exist. If wage-labour doesn't exist, surplus value doesn't exist, if surplus value doesn't exist, capital doesn't exist. this is the fundamental ability of capital to exist, to grow, to valorise itself.

this 'money first' approach is similar to the idea that you could negate/abolish the catholic church by formally getting rid of the pope but changing nothing else - it mixes up essence & appearance, substance & form

Marx (sorry BB) actually makes the point somewhere in Volume 2, that although money is an obvious requirement for value to circulate and pass its way through the circuits of capital, that the most ideal situation from a point of view of the production of value (i.e. exploitation of labour) is the case where a capitalists's commodity product is sold not for money, but for the productive capital inputs that are required to re-start the production process. As this minimises the amount of time value spends in the sphere circulation (i.e. the money capital and commodity capital forms) and maximises the amount of time value spends in the productive sphere (i.e. in the production of value, through exploitation of labour)

fairly straightforward logic really in that although capital clearly needs to fully traverse the circuit from money to productive capital to commodity capital and then back to money again, value itself is only produced within the production stage, so the ideal situation is for the time that value is spent in the money and commodity form's should be minimised, hence efficiencies in transport/communication/circulation etc.. are key to an efficient traverse of the circuit and to allow value to 'work harder' and spend less time in the forms that does not allow it to directly valorise itself

So taken to logical conclusion an ideal type capitalism (from a maximisation of exploitation perspective) would skip the stages of commodity capital being turned into money and that money then being turned back into productive capital and instead the commodities coming out of the production phase would be converted immediately back into the productive capital inputs of means of production and labour - he wasn't suggesting that this would ever be possible practically but from an ideal perspective this would be the most efficient (if an efficient way of doing it could ever be found).


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## deke t lefel (Oct 18, 2011)

Backatcha Bandit said:


> 'Money' differs from 'Gold' in that 'Gold' is obviously in the physical - and as such is subject to physical effects, such as being heavy, getting stolen, requiring energy and effort to store, etc.
> 
> The 'money', extratemporal, information, idea, suffers none of this.


however, money is not just a pure idea, most money is stored on computers which are in the physical and require energy to run

it could be argued that all tools are just ideas, as without the knowledge of how to use them, they have no use


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## deke t lefel (Oct 18, 2011)

Falcon said:


> You'd think so. But you end up constraining your economy on the basis of how much gold there is, rather than how much economy there is. And you end up with the value of your economy going up and down depending on how much people fancy gold, rather than the other way round.
> 
> Renewable energy generating capacity - now _that's_ a tasty physical asset for backing currency ...


or constraining the amount of war that can be waged.... Nixon Shock and all that


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## deke t lefel (Oct 18, 2011)

love detective said:


> these 'money first' people don't seem to grasp that our current monetary system is largely an effect, not the cause, of the underlying exploitative social relations of capitalism
> 
> you could have all the money in the world, but if you can't go out and buy labour with that money, it's not going to make you a capitalist, no matter how much you have of it. In other words, capital as we know it would not exist. If wage-labour doesn't exist, surplus value doesn't exist, if surplus value doesn't exist, capital doesn't exist. this is the fundamental ability of capital to exist, to grow, to valorise itself.
> 
> ...


very well explained, thanks


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## littlebabyjesus (Oct 18, 2011)

deke t lefel said:


> however, money is not just a pure idea, most money is stored on computers which are in the physical and require energy to run
> 
> it could be argued that all tools are just ideas, as without the knowledge of how to use them, they have no use


Are you really convinced by your own argument there?


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## TruXta (Oct 18, 2011)

littlebabyjesus said:


> Are you really convinced by your own argument there?



Total self-contradiction going on there.


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## littlebabyjesus (Oct 18, 2011)

TruXta said:


> Total self-contradiction going on there.


It is possible to put forward an argument that you yourself are not really convinced by. This seems like that kind of instance.


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## TruXta (Oct 18, 2011)

littlebabyjesus said:


> It is possible to put forward an argument that you yourself are not really convinced by. This seems like that kind of instance.



True, and that argument can be contradictory in terms. He's saying money isn't an abstraction, then he kinda says it is. I dunno what he's trying to say really.


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## deke t lefel (Oct 18, 2011)

littlebabyjesus said:


> Are you really convinced by your own argument there?


money is not a pure abstract idea, it is derived from the physical and remains in the physical realm

tools are physical although require an idea of how to use them, so why can't money be part physical and part idea, why does money have to be one or the other?


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## love detective (Oct 19, 2011)

Agree with what you say about tools/labour - this for example:-




			
				Marx said:
			
		

> We pre-suppose labour in a form that stamps it as exclusively human. A spider conducts operations that resemble those of a weaver, and a bee puts to shame many an architect in the construction of her cells. But what distinguishes the worst architect from the best of bees is this, that the architect raises his structure in imagination before he erects it in reality. At the end of every labour-process, we get a result that already existed in the imagination of the labourer at its commencement. He not only effects a change of form in the material on which he works, but he also realises a purpose of his own that gives the law to his modus operandi, and to which he must subordinate his will......
> 
> ...Labour is, in the first place, a process in which both man and Nature participate, and in which man of his own accord starts, regulates, and controls the material re-actions between himself and Nature. He opposes himself to Nature as one of her own forces, setting in motion arms and legs, head and hands, the natural forces of his body, in order to appropriate Nature’s productions in a form adapted to his own wants. By thus acting on the external world and changing it, he at the same time changes his own nature. He develops his slumbering powers and compels them to act in obedience to his sway



touches on the same thing

and while it's clear that money is not 100% pure idea/abstract and requires some (minimal) physical underpinning in terms of its production (either printing press or digital press) and distribution/circulation (the technical/physical infrastructure of the monetary & credit systems) - i don't think you can stretch this far enough for it to have much relevance or meaning.

However I think you touch upon the more important aspect for this in your post, in terms of looking at what money is derived from, what causes it, what is it an effect of etc. All these things are things which the 'money first' analysis never does, because the level of its analysis is not at the level required to actually understand both the logical & historical derivation of money (under capitalism) in the first place. So they are left trying to analyse the world by looking at a symptom alone, in isolation, and trying to understand the world by looking at the level at which the symptom appears at. Vulgar political economy is what Marx called such an approach


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## deke t lefel (Oct 19, 2011)

the vast physical infrastructure that supports money production and circulation has been built up over many years and is largely taken for granted

a tool is an instrument commonly used to amplify labour..... in a similar way, money is used as an instrument to leverage capital in order to expropriate additional surplus value from the worker


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## love detective (Oct 19, 2011)

yeah to be fair, and increasingly so, the vast amounts of fixed capital that allows capital itself to be so mobile, nimble and roaming does tend to be ignored when people go on about trendy topics like global capital mobility etc.. (so not just the physical infrastructure that money relies upon/is supported by, but the wider physical & digital infrastructures that allow capital to move, road, rail, airports, shipping and communication networks etc. - there's a huge amount of fixed capital that has to exist to allow value to move around efficiently (and generally the only bodies that can implement, oversee and maintain such structures are the state which flies in the face of the trendy theories about state's being irrelevant etc.)

not sure how any of this moves on the discussion though...


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## littlebabyjesus (Oct 19, 2011)

love detective said:


> these 'money first' people don't seem to grasp that our current monetary system is largely an effect, not the cause, of the underlying exploitative social relations of capitalism
> 
> you could have all the money in the world, but if you can't go out and buy labour with that money, it's not going to make you a capitalist, no matter how much you have of it. In other words, capital as we know it would not exist. If wage-labour doesn't exist, surplus value doesn't exist, if surplus value doesn't exist, capital doesn't exist. this is the fundamental ability of capital to exist, to grow, to valorise itself.
> 
> ...



What kind of value does this take, though? Are you not confusing actual value - a pig - with a representation of a claim on value - you owe me a pig? Value doesn't spend time in the money form. That seems like a serious mistake to me.

It appears to me that you, and perhaps Marx, have been seduced by the symbols money has taken. When money was backed by gold or whatever, the 'real value' of the gold was in fact formally irrelevant. Truth is that nobody actually needed the gold - its value was at a purely symbolic level, so societies could safely afford to lock it away in vaults. Gold was nonetheless prized, so it was the perfect thing to use to create confidence in an abstracted currency - I own/am owed gold, and I can pass that promise on to you in return for something of real value to me (and you). But a currency doesn't actually have to be backed by anything at all, and effectively they aren't now. They are simply backed by the idea that the promises written on the notes would be honoured if you ever were to ask (although the nature of what you'd be given if you were to ask the Bank of England for 'ten pounds please' is somewhat obscure). It's an effective confidence trick, in other words, to allow a currency to exist that people will respect enough to exchange it for real value in the confidence that they will themselves be able to pass the currency on for real value in the future.

I'm not trying to give a 'money first' view, as you have been claiming. But money doesn't - cannot - 'hold' value in the way you seem to say that it does. I really do think that is to misunderstand what money is and the purpose it serves.


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## love detective (Oct 20, 2011)

you just dip in and out of this discussion - refusing to respond to points that have been put to you time after time - and then, after a suitable period of time, pop up again with nonsense like the above

as i've said before, i've no interest in putting any effort into responding to any of your points, as history shows that as soon as I do and logically challenge the crap you come out with and challenge you to defend/answer it, you, you slope off into extended periods of silence and then reappear after enough time & space has been put between now and your previous arguments being demolished - so that kind of debate is not worth the effort on my part, sorry

For the record, though you're seriously mixed up in everything you talk about above - value does not take the form of something like a pig for a start (you're mixing up use-values and value/exchange value), and to say that value doesn't spend time in the money form (or the commodity or productive capital forms) portrays a fundamental understanding of even the most basic of political economy

But don't let any of that let you think that you're so clever that you can write off or critique Marx without even having read (or understood) any of him. And to even seriously suggest that Marx (or indeed me) was seduced by the fetishism around money is totally absurd, this alone shows your total and utter fundamental ignorance of Marx's political economy - complete strawman from you on that from what i can see (ditto your 'point' that value doesn't spend time in the money form during the circuit of capital). Whether that's deliberate so you can try and salvage some point in the eyes of others on this thread, or whether it's due to your ignorance & utter misunderstanding of the topic who knows, i'm inclined towards thinking the later though as from what i've seen I doubt you have enough grasp of the topic matter to even attempt to do the former.


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## TruXta (Oct 20, 2011)

Out of interest, LD, what other theories of value other than Marxian ones are out there? The neoclassical framework does without any value except prices, which are fairly uninteresting in this context, but I'm struggling to think what other fundamentally different ideas are out there.


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## love detective (Oct 20, 2011)

That's the thing there isn't really any of value (pun intended!)

post Marx (or even pre post-marx) - pretty much the whole idea of a labour theory of value had to be ditched as it got far too close to the bone in getting to the roots of what capitalism was about (ironic though that those who also had a variation on a labour theory of value like Adam Smith & David Ricardo are still revered, although purged of their most important & relevant analysis) - that then gave the way to things like the marginal revolution & marginal utility theories (through people like jevons, menger, marshall and bohm-bawerk) - thoroughly individualist & micro level theories that tell us nothing about how society at the total level operates

This movement pretty much heralded the collapse of Political Economy as it was and the descent into narrow economics which was achieved by purging Political Economy of all social, historical, sociological and political content ending up with what we see as mainstream economics today - something much more accommodating to the type of society we live in

As Marx commented on this development: -




			
				Marx said:
			
		

> In France and in England the bourgeoisie had conquered political power. Thenceforth, the class struggle, practically as well as theoretically, took on more and more outspoken and threatening forms. It sounded the knell of scientific bourgeois economy. It was thenceforth no longer a question, whether this theorem or that was true, but whether it was useful to capital or harmful, expedient or inexpedient, politically dangerous or not. In place of disinterested inquirers, there were hired prize fighters; in place of genuine scientific research, the bad conscience and the evil intent of apologetic



I posted this previously on this thread that that's why we need a return to Political Economy - and what political economy is, to me, is best articulated on the back cover of Rubin's History of Economic Thought



> Political economy deals with human working activity, not from the standpoint of its technical methods and instruments of labor, but from the standpoint of its social form. It deals with production relations which are established among people in the process of production.
> 
> In terms of this definition, political economy is not the study of prices or of scarce resources; it is a study of social relations, a study of culture. Political economy asks why the productive forces of society develop within a particular social form, why the machine process unfolds within the context of business enterprise, why industrialization takes the form of capitalist development. Political economy asks how the working activity of people is regulated in a specific, historical form of economy.



A good (if a bit turgid) book that charts the development of this transition from Political Economy to Economics was written by Dimitris Milonakis & Ben Fine called _Political Economy to Economics: Method, the social and the historical in the evolution of economic theory_


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## JimW (Oct 20, 2011)

Didn't they come up with marginalism as your bourgeois response to the labour theory of value?


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## love detective (Oct 20, 2011)

isn't that what i said above!


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## JimW (Oct 20, 2011)

I know, I didn't preview, so didn't see yours!


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## JimW (Oct 20, 2011)

You also have the advantage of knowing what it means, which is more than I do.


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## TruXta (Oct 20, 2011)

Sounds like what used to be called political economy has been partly taken over by what is now referred to as economic sociology, the latter of which I quite like.


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## love detective (Oct 20, 2011)

the problem though is that walls are built up & reinforced between things like economics, history, politics, economic history, sociology etc. - each thing separated into its own narrow sphere, whereas to properly understand society you need these barriers smashed and the transcending of the boundries of the social sciences in analysis, treating economics as a social science rather than a hard science, and reintroducing the social, historical and political content back into an integrated approach to try and understand what's going on around us. Academia seems to be doing its upmost to prevent this from happening.

I would say that most of us who have not been through the university system and who are not academics in any sense of the word can see these things happening much more than those who are closer to it (and to a large extent recuperated by, and dependent on, it)


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## butchersapron (Oct 20, 2011)

There's a very useful basic introduction to the idea that marginalism (and all sorts of other developments) were a material response to LToV and the challenges marx presented in general in the first two chapters of A survey of global political economy - Kees van der Pijl which you can read here


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## TruXta (Oct 20, 2011)

love detective said:


> the problem though is that walls are built up & reinforced between things like economics, history, politics, economic history, sociology etc. - each thing separated into its own narrow sphere, whereas to properly understand society you need these barriers smashed and the transcending of the boundries of the social sciences in analysis, treating economics as a social science rather than a hard science, and reintroducing the social, historical and political content back into an integrated approach to try and understand what's going on around us. Academia seems to be doing its upmost to prevent this from happening.
> 
> I would say that most of us who have not been through the university system and who are not academics in any sense of the word can see these things happening much more than those who are closer to it (and to a large extent recuperated by, and dependent on, it)



Sure, I agree with that, except I wouldn't like to see economics as any kind of master discipline even if it did become thoroughly socialised again (and it has become much less orthodox/neo-classical in the last generation IME).


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## TruXta (Oct 20, 2011)

butchersapron said:


> There's a very useful basic introduction to the idea that marginalism (and all sorts of other developments) were a material response to LToV and the challenges marx presented in general in the first two chapters of A survey of global political economy - Kees van der Pijl which you can read here



Cheers, will have a look.


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## love detective (Oct 20, 2011)

TruXta said:


> Sure, I agree with that, except I wouldn't like to see economics as any kind of master discipline even if it did become thoroughly socialised again (and it has become much less orthodox/neo-classical in the last generation IME).



yeah i didn't mean to suggest that this was the aim (in fact I don't think i did) - it's the imperialism of economics (in relation to everything else) that is part of the problem


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## TruXta (Oct 20, 2011)

love detective said:


> yeah i didn't mean to suggest that this was the aim (in fact I don't think i did) - it's the imperialism of economics (in relation to everything else) that is part of the problem



Sorry, didn't mean to imply you said as much, only that it was a possible implication of what you wrote.


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## littlebabyjesus (Oct 20, 2011)

love detective said:


> you just dip in and out of this discussion - refusing to respond to points that have been put to you time after time - and then, after a suitable period of time, pop up again with nonsense like the above
> 
> as i've said before, i've no interest in putting any effort into responding to any of your points, as history shows that as soon as I do and logically challenge the crap you come out with and challenge you to defend/answer it, you, you slope off into extended periods of silence and then reappear after enough time & space has been put between now and your previous arguments being demolished - so that kind of debate is not worth the effort on my part, sorry
> 
> ...



I've held off from responding on this thread for a while precisely because of this kind of response from you. You're an arrogant fuck, you know that, calling anyone who questions you ignorant.

Btw, I'm not critiquing Marx. I'm critiquing *you*. Big difference.


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## love detective (Oct 20, 2011)

you've held off responding (on this and countless other threads) because you're unable to respond to the points i've put to you and are unable to counter my rebuttals of your previous points/arguments - something you consistently do here - so grow a set of balls and don't hide behind lame shite like above.

And if you being unable to respond to my rebuttal of your shite makes me arrogant then you've got some weird kind of displacement thing going on around your own failings there. I don't call anyone who questions me ignorant, I do call them ignorant if after spending an inordinate amount of time going into the reasons why I disagree with their fuckwitted theories, they continue to ignore all rational, logical and empirical arguments I make against them and refuse to engage with the points raised, and continue to just assert, like some kind of religious faith, that they are right (or like we have seen on this thread, either run away or try to shift the topic onto something else to shield them from having to confront your own ignorance).

You are right, because it comes from you, so it must be right - and you call me arrogant.

and what else can you call someone who is ignorant of the topic they are trying to make out they have some profound insight into, but ignorant?

I know you like to think of yourself as an all round clever-cloggist, but face it, like the rest of us we're ignorant about a lot of things - the difference between you and most in that regard though is you can't actually admit that - but instead of actually taking the time to research and find out about a particular topic (and understand about what has went previous to it in terms of conceptual frameworks and ways of understanding things), you think you can just 'think' your way to being an expert in it - i.e. because if comes from you, it must be right

You have no idea who you are critiquing because you have no idea about the topic - it's been seen on this thread that your positions on this puts you in a weird kind of camp that is some kind of fuckwitted synthesis between Jazz and Friedman. Pretty much everything i've argued here is standard marxian approaches to understanding money & value - yet you maintain that in dismissing them (or failing to even understand them) this is not a critique of marx. There's no end to your ignorance really.

I think you just have a chip on your shoulder because you with all your expensive private schooling and university education still gets trashed into the ground by someone who left school at 16 and had no formal education since.


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## Random (Oct 20, 2011)

littlebabyjesus said:


> I've held off from responding on this thread for a while precisely because of this kind of response from you. You're an arrogant fuck, you know that, calling anyone who questions you ignorant.


 In your post that LD responded to, you said that he had made a serious mistake, but while doing so you showed that you had no idea of the concepts that you were trying to use. No wonder he gets a bit short-termpered.


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## love detective (Oct 20, 2011)

yet i'm the arrogant one


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## TruXta (Oct 20, 2011)

love detective said:


> yet i'm the arrogant one



Not even a little bit?


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## Random (Oct 20, 2011)

TruXta said:


> Not even a little bit?


He just Scottish = descended from Norwegians who liked to fight more than they liked to fish.


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## love detective (Oct 20, 2011)

TruXta said:


> Not even a little bit?




everything's relative


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## JimW (Oct 20, 2011)

butchersapron said:


> There's a very useful basic introduction to the idea that marginalism (and all sorts of other developments) were a material response to LToV and the challenges marx presented in general in the first two chapters of A survey of global political economy - Kees van der Pijl which you can read here


Cheers, just downloaded all of that to add to the pile of stuff I don't know when I'll get round to reading.


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## deke t lefel (Oct 20, 2011)

littlebabyjesus said:


> But a currency doesn't actually have to be backed by anything at all, and effectively they aren't now.



as a minimum, a currency has to be backed by the workforce of the issuer


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