*Article #78805 (79187 is last):
*From: eflahert@garnet1.acns.fsu.edu (Edward
Flaherty)
*Newsgroups: sci.econ
*Subject: Antidote to the "Debt Virus"
*Date: Tue Oct 14 15:58:26 1997
*DEBT VIRUS HYPOTHESIS:
* The central
thesis of Debt Virus is that there exists in the
*economy an insufficient quantity of money
to repay both the
*principal and the interest on all the
currently outstanding debt.
*The problem is when banks lend money,
only the principal is created
*and never the interest. Thus, the money
supply can never be
*sufficient for total debt retirement.
JCT: Connecting
debt to the price structure, say 10 businesses in
the village all borrow Principal = $1
million at 10% for a year and
spend the million that year producing
their goods for sale. At the end
of the year, assuming zero profit, what
is the minimum price for their
goods? Principal + Interest or the debt
cannot be paid.
So prices on
the store shelves=P+I and money in circulation=P.
* Fortunately
for us, Jaikaran's model contains two gaping holes
*which collapse his entire thesis.
* Banks are no
different in the real world. Commercial banks
*and savings and loans have expenses to
pay just like any other
*firm. They must pay their employees,
purchase office supplies, and
*meet the other expenditures which are
a part of doing business.
*When they do this banks spend money back
into the economy without
*any debt being created to burden the
non-bank public -- debt-free
*money as it were. The revenues banks
collect from interest on
*loans and other services do not disappear
into an economic void.
*Instead, those revenues are used to meet
the bank's operating
*expenses, to purchase assets to generate
future income, or are paid
*to the shareholders as dividends.
JCT: "Spend money
back" implies funds they were first taken into
the reservoir. So revenues from interest
in the reservoir are used to
meet the bank's expenses, to purchase
assets or are paid as dividends
which come out of the reservoir. That
fits in with my plumbing model
of the banking system in my Engineering
Analysis:
Fig. 3
FRACTIONAL RESERVE BANK
Fig. 3 is the
interior plumbing of a chartered bank which shows
that the revenues banks collect through
the Interest(in) pipe from
loans and other services are used to meet
the bank's operating
expenses, to purchase assets to generate
future income, or are paid
to the shareholders as dividends through
the Bank Expenses pipe. And
it is true that these funds go back to
the economy free of debt though
I call it splashing in the pool.
Then he states:
*In the real world banks must pay their
employees, pay interest
*to their depositors, meet their other
expenses, and purchase
*equipment. When the banking system does
this, it spends into
*existence new "debt-free" money (debt-free
in the sense that no one
*outside the banking system is required
to obtain a new loan). In
*other words, the system creates
a new demand deposit out of nothing,
*adding to the money
supply without the creation of any additional
*bank credit (loans plus bank-held bonds)
being necessary.
JCT: This says
that the Bank Expenses tube is connected to a tap
which is adding the the money supply.
Fig 3b
FRACTIONAL RESERVE BANK
*Summarizing the first counterpoint, the
banking system creates new
*"debt-free" money in the form of new
deposits whenever it pays its
*expenses or purchases fixed assets. These
deposits do not represent
*loan principal or interest which the
non-bank public must eventually
*repay. Contrary to the Debt Virus thesis,
new bank credit is not the
*only source of new money.
JCT: The banking
system does not create new "debt-free" money in
the form of new deposits whenever it pays
its expenses or purchases
fixed assets. It uses debt-free revenues,
old deposits, whenever it
pays its expenses.
* The other major
flaw in the Debt Virus hypothesis is that it
*ignores the role of the central bank
in the money-creating process.
*The Federal Reserve creates a measure
of debt-free money when it
*buys government bonds from the public.
The Fed buys the bonds on
*the open market and pays for them by
creating new checkbook money.
*The new money is therefore created without
any additional debt
*appearing in the economy.
JCT: Say there's
a billion in the US citizen hands and they buy
the government's billion dollar bond.
When the Fed buys that bond from
citizens, they inject a new billion and
take the bond. The government
still has their billion, the people now
have their billion and the
government now owes the FED instead of
the people.
Same process
if the government lets the citizens keep their
billion and simply borrows the new billion
from the FED. The
government would get their billion, the
people would keep their
billion and the government would owe the
FED the billion.
Yet, buying government
paper is the same process as buying a
borrower's paper during a loan. Either
way, the borrower has a deposit
put in his account in exchange for signature
on the loan document
whether called a mortgage or a bond.
So the point
of the Debt Virus still applies to the FED's
purchases of government bonds. If the
Debt Virus infects interest-
bearing loans, does it similarly infect
interest-bearing bonds? Yes.
*Jaikaran's central thesis that new money
is created only through new
*bank lending is thus countered by the
facts that banks create
*debt-free money when they pay their operating
expenses, purchase
*assets, and disburse dividends, and that
the Fed creates debt-free
*money in the process of buying government
bonds.
JCT: They don't
create debt-free money, they spend revenues debt-
free which makes a big difference.
So that's all
there is to his objections to the Debt Virus. It's
interesting though. Old Socreds use the
debt virus to argue that the
price of debt is always higher than the
money we got and suggest ways
of injecting new money to balance the
equation and Ed counters that
debt free money is already being issued
to balance the equation.
Having with his
own words disproved the two sources of funds he
alleged were coming out of the pumphouse,
we are back to the original
Debt Virus theory which stands unchallenged.
And even if bank's
expenses were coming from the tap, nowhere
does he say if enough money
is being issued to balance the equation.
He does point out that there
is enough money residing in the US to
pay off the debt but the debt
virus deals with world debt and the fact
that more rich people choose
to save their dollars in the States than
Biafra has no bearing on the
automatic shortage created everywhere.
How about the global figures?
That's it for his antidote
to the debt virus.
To counter the
need to inject such new money to solve the debt
virus, Flaherty now says that it's already
being done, that the banker
is injecting money from the pump without
adding it to the loans due.
Even if true, are the bankers spending
enough from the pump to cure
the balance or are some of the symptoms
predicted by the debt virus
hypothesis not proven out. If they are
injecting half enough, are we
seeing half the effects predicted by the
debt virus hypothesis?
But he forgets
that the money paid in interest and expenses and
all these things have first been taken
in in interest and service
charges in the first place.
So he tries to
say that the problems raised by the imbalance are
already solved by the bankers in the Social
Credit suggested way of
adding new money from the pump to the
economy to balance the debt. The
fact Ed's splashing in the pool, injecting
money "back" in that has
been previously taken out, validates the
debt virus hypothesis. The
fact Ed sought a solution in the pump
house indicates that that's
where the fundamental problem and misunderstanding
is.
* The idea is
also objectionable for other less direct reasons.
*Jaikaran's main warning is that if we
wished to repay all the debt,
*we would be unable to do so because of
the shortage of money. But
*why would we wish to retire all the outstanding
debt in the
*economy?
*most debt in the U.S. economy is in the
form of bonds, not bank
loans.
*This is important for his thesis because
unlike the lending process,
*the issuing of new bonds and the retiring
of old ones does not affect
*the money supply. Therefore, a
given money supply can repay a total
*bond debt many times its size, in fact,
a debt infinitely greater
*than the money supply.
JCT: Find A who
owes B who owes C who owes A and splashing a $50
bill around in the pool can settle many
bonds. But not bonds bought by
banks in the creationary process whose
payment results in the
destruction process.
* The f
He proposes having
*the federal government print currency
to finance its entire budget,
*thereby eliminated its need to tax or
to borrow.
JCT: Using LETS,
government would still need to tax but not to
borrow. This "not to tax" stuff is the
old Social Credit theory which
certainly would have eliminated the need
to borrow. Not having to
service government debt would certainly
reduce its need to tax but
paying for public utilities, services
and projects may still need to
be financed by taxation. Which is how
a government LETS would work.
Government would spend all the Green necessary
for the upkeep of the
realm and tax that amount out of circulation
pursuant to standard LETS
accounting rules.
*This would create an infusion of debt-free
money which would make
*it possible for the economy to repay
all its debts.
JCT: This would
certainly soak up all of the government money in
an acceptable way for the first few years.
People would be earning
good salaries and paying down their interest-bearing
debts. But
redemption would eventually be necessary
and should be done by
taxation. I still argue giving each person
their own interest-free
Green account and simply letting everyone
convert their interest-
bearing debt to interest-free debt by
writing checks to their
creditors is the quickest and easiest
way. Governments can do it too.
*Since he argues that inflation is really
caused by interest on debt,
*this would have the added benefit of
generating price stability.
*Unemployment, crime, marital difficulties,
and war are each merely
*symptoms of our debt-money system and
can be cured by something so
*simple as a switch to a debt-free money
supply.
JCT: Yes. Deliverance
from a debt-growth-free money system is
financial utopia but it's simply good
financial engineering.
I hate the use
of the words "debt-free" by the old Social
Crediters. They say that the problem is
debt money. Money created as a
debt.
A debt-based
currency is just as good as a wealth-based currency.
A casino check can be a wealth-based currency,
a warehouse receipt for
collateral in the cage or it can be a
debt-based currency, tokens
issued for a player's IOU debt.
Assume that most
of Sears' 60 million account holders owe $1000
on average. Should Sears offer members
to option to transfer between
each others accounts using LETS checks,
transactions made with that
debt-money are as valid as transactions
made with federal currency
accounts.
So whether the
currency is a wealth-based currency or a debt-
based currency is irrelevant and switching
between the two is not the
solution. It's the interest on the debt
that is the real culprit of
what they call the "debt-money" system.
Replacing the words "debt-
money" for "usury-money" would leaves
me no arguments with the debt
virus hypothesis.
As I've explained
in my Social Credit Posts, Douglas Social
Credit is very similar to Turmel Social
Credit.
Douglas Social
Credit [A/(A+B)] argues that money issued into
circulation is A and the prices are inflated
to A+B where B includes
not only the Interest but also other expenses
which I have found to be
non-consequential such as rent, taxes,
overhead.
Turmel Social
Credit [P/(P+I)] argues that everyone borrows the
money principal P into circulation and
everyone must inflate their
prices to pay their debt of P+I with interest
being the only true
cause of the shortage of money to buy
the goods.
Douglas
Social Credit chooses to solve the imbalance between
purchasing power A and prices A+B by adding
to the numerator by
government spending money "debt-free"
on operations, public works,
compensated business discounts and dividends
right to the citizens.
This is the only time the use of the term
"debt-free" applies because
government would be spending it without
needing to tax it back.
Turmel LETS Social
Credit chooses to solve the imbalance between
the P and prices P+I by eliminating the
I from the denominator and
eliminating the imbalance in the first
place. In a LETS, the
government could not just print and spend
to balance the debt because
prices will have been already stabilized
to the debts. Government will
simply have to be another financial participant
borrowing all the
Green funds necessary for the upkeep of
the realm and taxing it back
pursuant to sound casino accounting principles.
Douglas The Engineer
accepted as inevitable a Money-Prices
imbalance and came up with a slew of currency
injection devices to
compensate for it while Turmel The Engineer
does not accept the
imbalance as inevitable. Sure, we could
go to the old Social Credit
way but it needs software to treat government
differently while the
new social credit way uses the same software
for all accounts.
*In short, Jaikaran promises the reader
*an economic paradise if only the government
would end taxation,
*cease borrowing, and instead print money
to pay its bills.
JCT: And Turmel
promises the reader an economic paradise if only
the government would cease borrowing and
match the taxation to the
money it had printed to pay its bills.
INFLATION SHIFT A:
* Any economist
in the world would recognize this idea as a plan
*for economic chaos. One of the best demonstrated
theories in this
*social science is that an excessive growth
of the money supply
*always causes inflation.
JCT: It might
be recognized this way by anyone who believes that
inflation is Shift A but not by anyone
who believes that inflation is
Shift B.
HOW "MORT-GAGE" INTEREST CREATES A DEATH-GAMBLE
The word "mort-gage"
is derived from the French word "mort"
meaning "death" and "gage" meaning "gamble".
Bankers create the money
supply when they make loans. Producers
are forced to gamble by
borrowing newly created Principal(P) to
pay for production costs and
then inflating their prices to recuperate
the Principal and
Interest(P+I) in sales. Because total
goods priced at (P+I) can never
be sold when consumers only have P dollars
available, a minimum amount
of goods must remain unsold and a minimum
number of producers must
fail and suffer foreclosure. The economist
Keynes likened the mort-
gage death-gamble to the game of musical
chairs. Just as there are
insufficient chairs for all to survive
the musical chairs death-
gamble, so too, there is insufficient
money for all to repay (P+I) and
survive the mort-gage death-gamble.
P < principle, I < Interest, i <
Interest Rate, t < Time
| PERCENT | ALGEBRA | EXP. FUNC | |
| Production costs (principal) | 100 | P | 1 |
| Production prices (Debt) | 100+1 | P+l | exp(it) |
| Purchasable Value | 100 | P | 1 |
| or ratio of money to prices | ----- | ----- | ----- |
| or survivors | 100+i | P+l | exp(it) |
| Unpurchasable value | i | l | 1 |
| or forced unemploymen | U= ----- | ----- | 1 - ----- |
| or non-survivors | 100+1 | P+l | exp(it) |
| For U=0, let | i=0 | l=0 | i=0 or t=0 |
Fig. 4
Dollars Assets
Most people who
have not studied economics, if asked whether
interest fights or causes inflation, are
quick to agree that a
merchant must pass on increased interest
costs in his prices and
therefore it is evident that increased
interest costs will result in
increased prices.
*The federal government's expenditures
totalled $1,560.1 billion in
*fiscal year 1996. If it were to print
and spend all the money for
*similar budgets rather than raise it
through taxes, then the M1
*money supply would more than double in
a year. The annual inflation
*rate would hit 100 percent within two
years.
JCT: Not true.
First of all, he assumes the money supply just
doubles in one year without a corresponding
increase in value to back
it up. Yet, he notes in the Sovereignty
Proposal:
*2. Spend the New Money on Capital Projects
*Sovereignty specifically proposes that
about $360 billion of
*this new money be printed and spent by
the Treasury on
*various capital projects by the federal
government, or loaned
*interest-free to local governments for
their own projects or
*debt retirement. This would improve the
production capacity of the
*economy, reduce the Treasury's annual
interest costs, reduce the debt
*burden of state and local governments,
and most importantly help to
*relieve the money shortage.
JCT: Yes on all
counts. Key point. Loaned interest-free. They
must pay it back. And the funds the municipalities
receive are spent
in the creation of new capital projects
so that injection of funds
into the US economy would have a zero
component of inflation. It would
actually reduce inflation.
In the most recent large-scale example
of government use of a LETS local currency,
large injections of local
currency caused overall federal inflation
to drop substantially.
Again, let me repeat this very important
point.
It is true that
while suffering inflationary Shift A, an increase
in the money supply would increase inflation,
but while suffering
inflationary Shift B, an increase in the
money supply will reduce
inflation!
The most recent
large-scale use of a LETS 1/s local currencies
was by 6 Argentinian provinces. In Tom
Greco's book of LETS resources:
New Money for Healthy Communities ISBN
0-9625208-2-9" page 73, is an
article that showed that small denomination
government bonds were
being tried and had shown startling results:
Thursday November 28, 1985,
The Charlotte Observer,
CASH-STARVED ARGENTINE PROVINCES TURNING
OUT THEIR OWN MONEY
By Andres Oppenheimer, Knight-Ridder News.
MIAMI -- Two
remote Argentine provinces, short of cash to pay
public employees, have come up with an
easy solution.
They're printing
up their own money, to the chagrin of the
national and international banking authorities.
"We are paying
all our public employees with provincial bonds,"
Roberto Romero, governor of the northern
Argentina province of Salta,
said in a telephone interview. He said
Salta started printing its own
IOUs because it wasn't getting sufficient
federal currency fast
enough.
"People can change
these bonds for money at any bank," Romero
said. "They can use them to shop at supermarkets
and to buy cars or
any other products."
The Argentine
government is not smiling, and world bankers are
worried that other cash-starved states
will copy Salta's financial
extravaganza and jeopardize Latin efforts
to curb inflation and pay
huge foreign debts.
The International
Monetary Fund (IMF), the world's main financial
inspector for debt-ridden countries, was
concerned enough to bring up
the issue in recent talks with the Argentine
government, said sources
in Argentina and Washington. The IMF does
not comment on negotiations
with individual countries.
After Salta started
quietly issuing its own IOUs in September
last year, the nearby province of La Rioja
started printing its own
bonds too. Four other Argentine provinces
have either begun adopting
similar programs or are preparing to do
so.
In all cases,
the bonds are good only within the province where
they're issued.
But the government
of President Raul Alfonsin says the provincial
bonds are expanding the country's money
supply and are undermining
efforts to remove Argentina from the list
of world inflation leaders.
Earlier this year, Argentina had a 1,000%
annual inflation rate.
Alfonsin made
headlines worldwide in June when he launched an
austerity program built around a commitment
to stop his government
from printing money. Since then, inflation
has dropped to 3% a month,
a record low in recent history.
The bonds printed
in Salta come in denominations of 10, 100, and
1,000 australes, the same as ordinary
Argentine currency bills. They
pay no interest and can be either exchanged
for Argentine currency or
used to buy goods.
Romero, of the
opposition Peronist Party, and officials of other
provinces claim their bonds are not really
new currencies because they
are no good outside their provinces.
JCT: Note once
again that not only did inflation not go up with
the injection of more local currency but,
contrary to orthodox
economic laws, inflation went down from
1,000% a year to about 36% a
year. This should be repeated as local
currencies break sacred
economic laws.
"The Argentinian
Provincial Government LETS 1/s local bond
currencies being added to circulation
made inflation of the federal
currency go down. To understand how reducing
foreclosures with more
money makes inflation go down, you have
to grasp the difference
between inflationary Shift A and Shift
B detailed in my LETS
Engineering Mathematics Analysis.
In conclusion,
Flaherty assumes that the whole extra 100% money
will come into circulation unbacked. Yet,
how would the money get into
circulation if no one earned it? As long
as every dollar the
government spends is issued in exchange
for goods and services value,
that currency is backed up by that value
received and there can't be
inflation. Think of those government spendings
as tax-credit receipts
for value. Like a good casino cashier,
chips can't be issued until
delivery of work. There can be no inflation
and no one knows how great
a production we might achieve upon which
to base even more money
issued into circulation without any inflation.
* Of course, Jaikaran
is not an economist; he is a plastic
*surgeon. Nor is he much of an historian.
Somehow he expects his
*plan would not be hyper-inflationary,
even though it was tried once
*before in American history.
JCT: It was tried
many times before in American history. And
there is a great difference between adding
chips to circulation in
exchange for equivalent value at the cage
and just dumping enough to
double the chip supply onto the casino
floor. And I just can't imagine
how that could be done and I've never
had any economist explain how
their theoretical "assume the money supply
doubles" is actually
effected. How can there be such a large
injection of currency without
some work being done?
*The Continental Congress, which organized
the principal army which
*fought the American Revolutionary War,
did not have any taxing or
*borrowing authority of its own and thus
had to rely on the meager
*contributions given to it by the newly
independent States. But from
*1775 to 1780 it also printed $250 million
in debt-free currency and
*spent it directly into existence.
This increase was well out of
*proportion to any growth in output and
hence caused some of the
*worst inflation in U.S. history. Jaikaran
is well aware of this
*inflationary episode because he discusses
it in Debt Virus.
JCT: There's
a difference between issuing chips in exchange for
roads, buildings, services and issuing
currency in exchange for bombs
that will blow up. What is not mentioned
is the sabotage of the
American Continental currency by British
counterfeiting but with all
payments going against the principal of
the national debt, I am sure
America could have finally honored even
$250 million over the next 50
or 100 years. And what is not mentioned
is the successful use of
interest-free currency by individual pre-revolution
States which
Benjamin Franklin credited for their prosperity
and the banning of
colonial scrip and imposed use of interest-bearing
gold which Ben
credited with causing the American Revolution
over the beggars in the
streets, not the tax on tea.
*But he does not address why his plan
would somehow not be
*inflationary even though it is identical
to the Continental Congress
*fiasco.
JCT: I do address
why government spending in exchange for value
is not inflationary. A LETS government
would not just spend money into
circulation to compensate for the imbalance
in prices but would
prevent the imbalance at the source. If
every token issued is backed
up one-for-one with collateral value,
there can be no inflation.
*Grassroots organizations cite it as inspiration
for various reform
*efforts. The Coalition to Reform Money
is a thorough believer in the
*debt-money myth and proposes what it
calls the "Monetary Reform Act"
*with provisions very similar to those
of Jaikaran's plan.
*The Coalition proposes the "Monetary
Reform Act" which would have the
*U.S. Treasury print currency and spend
it to meet all federal
*expenditures. Eventually, this would
eliminate the need for any
*federal taxation. Sovereignty recommends
only a one-time policy of
*additional federal spending financed
by newly printed Treasury money.
JCT: If they
won't install LETS, then government issuing "debt-
free" money is the next best thing. What's
saddest is that Sovereignty
has a database of over 3,000 municipalities
who have signed their
petition for interest-free funds and they
haven't thought of using a
LETS to do it themselves.
* There is no
danger of the Debt Virus thesis becoming an
*accepted idea in Congress, and certainly
not among economists, but
*this has not limited its adverse effects.
JCT: Sad truth
about a valid thesis.
*It has clearly lead many people to an
erroneous interpretation of the
*workings of the financial system and
has caused them to direct their
*political activist energies toward an
imaginary problem.
JCT: And now
that we've seen that the Debt Virus thesis has not
been successfully challenged by a claim
of Bank Expenses paid with new
deposits out of the tap, we can only be
glad that it has led many
people to a correct interpretation of
the workings of the financial
system and has caused them to direct their
energies toward the real
problem, if with an old-fashioned sub-optimal
solution. But a solution
that even my grandfather, that great Socred
Adelard Turmel, accepted
as valid.
Adelard's Axiom
#1: Money has no babies.
Adelard's Axiom
#2: Interest is theft
*into political awareness who might otherwise
be inert. But instead of
*directing their efforts toward real social,
economic, and political
*problems, they tilt windmills. What a
waste.
JCT: No, they
tilt at sound engineering design. What good news.
*URL to open: http://garnet.acns.fsu.edu/~eflahert/virus1.html
*Part One: The Debt Virus Hypothesis
*(last updated July 14, 1996)
*The Debt Virus Hypothesis:
*The imbalance between the debt level
and the size of the money supply
*is the source of financial instability.
The instability manifests
*itself in three ways:
*1. Rising Prices
*Because interest is another type of expense
in the production
*process for a firm, the ever-increasing
level of debt and its
*corresponding interest obligation increases
the cost of
*production which forces retail prices
higher. This forms a
*growing wedge between resource prices
and retail prices and
*is the reason the price level rises continuously
over time.
JCT: This is
the wedge of imbalance between money and prices
which I also identify with the mortgage
contract promising 11 for 10.
*2. A Slow Growth Economy
*The financial system generates interest
rates that are much
*higher than they would be under what
the Coalition calls a
*"wealth-based" monetary system.
JCT: Like many
old Social Crediters, they think we'll still
choose to allow a little 1/(s+i) in Earth's
future banking software.
They have not seen the simplicity of the
1/s system. The fact they
still permit positive feedback is testament
to their failure to fully
appreciate the repercussions of usury.
*this causes the unemployment rate to
be much higher than it could
*be and the growth rate of the economy
much slower than it would be.
JCT: LETS has
a zero "involuntary unemployment" rate.
*3. Bankruptcies
*IV: Solutions and Proposals
*The solution to the economy's catch-22
is a fundamental change in the
*order of the financial system. The Coalition
To Reform Money believes
*we must switch our money supply from
a debt-based currency to a
*wealth-based currency. "Wealth-based"
money is money that is spent
*into existence rather than borrowed into
existence.
JCT: I accept
that this was King Henry I's Tally solution. But
I've explained how there's nothing wrong
with a debt-based currency
though I have no objection to calling
money spent in exchange for
value a "wealth-based" money. The point
is the solution is not to
switch from debt- to wealth-base but to
eliminate the interest
feedback on either.
*In the nineteenth century, the Coalition
reminds us, the Treasury,
*under various free-coinage acts, would
mint for free gold and silver
*coins for anyone who brought them sufficient
amounts of the metals.
*This money was produced from the wealth
of the population rather
*than being created by having someone
take a loan.
JCT: Hoping to
count the wealth of the population in terms of
even more bullion produced certainly makes
the point that more money
is needed in the numerator to balance
the debt of the denominator.
*1. Create New Debt-Free Money
*Rather than have new money borrowed into
existence through
*the current Fed-Treasury arrangement,
money should be spent
*directly into existence by permitting
the Treasury either to
*print and to spend its own currency,
or to instruct the
*Federal Reserve to give the Treasury
free of charge the
*appropriate credit in its checking account
at the Fed. The
*new currency would eventually replace
Federal Reserve Notes
*which are our present currency. For a
historical example,
*Sovereignty cites United States Notes
which were printed and
*spent by the Treasury itself at various
points in U.S.
*history. Current law restricts the volume
of U.S. Notes to
*$300 million or less (31 US Code [3]''5115,
5119). The
*Treasury estimates that most of existing
U.S. Notes are in
*the hands of collectors.
JCT: Appropriate
credit means appropriate loans. Restricting it
to $300 million when it could be the whole
supply is their problem.
*Switching to this form of money would
end the periodic waves
*of bankruptcies, stem the rising tide
of debt, and reduce the
*gap between resource prices and retail
prices because
*interest costs would be substantially
lower.
JCT: Those are
the results that I would predict whether ShiftB is
fought by Socreds adding money to balance
their debts or by LETSers
eliminating the imbalance between Greendollars
and debts in the first
place.
*2. Spend the New Money on Capital Projects
*3. Eliminate Fractional Reserve Banking
*To prevent banks from creating additional
debt-money,
*Sovereignty proposes that all banks be
required to maintain
*100 percent reserves against deposits,
that is, an end to
*fractional reserve banking.
JCT: Unnecessary.
LETS is a zero fractional reserve system. So
may banks be. Reserves are immaterial.
Deposits of old money have
nothing to do with future issuance of
currency in a LETS, only
production offered to the cashier at the
cage. I have no problem with
banks running LETS and earning service
charges for their valuable
convenience. It's only the interest they
once used to charge that made
them offensive to me.
*This would leave the government as the
sole supplier of money for the
*economy. This idea is not unique to Sovereignty.
JCT: I don't
disagree that government as the sole supplier could
be done right but since it scares many
people who would rather have a
local currency under their own control,
I suggest a government account
be no different from a citizen's account.
The plus of central
government not doing it all themselves
when each municipality can do
much for themselves is that many municipalities
will simply
controlling finances themselves and that
can be accommodated. Yet,
it's just as easy to allow the banks to
also run LETS creating
Greendollars as easily as they create
federal dollars to satisfy
demand.
*Economist Irving Fisher advocated 100
percent reserve banking as
*early as 1910, and some monetary economists
today also advocate this,
*although for different reasons.
JCT: Missing
the whole point that reserves, whether 100% or 0%
are not the problem. The positive feedback
of interest is.
*The Coalition, Sovereignty, and the authors
of the books earlier
*mentioned claim a variety of benefits
that would follow the adoption
*of their proposals: a sharp reduction
in the level of debt in the
*economy, lower taxes, full employment,
a faster growing economy,
*price stability, and a reduction in welfare
expenditures. In other
*words it would bring economic utopia.
JCT: That is
also the Guarantee of the John The LETS Engineer.
*The desire of these groups to improve
the performance of the U.S.
*economy is certainly admirable. However,
their proposals are based on
*what they call a mathematical certainty:
that the financial system is
*substantially short of money. Far from
being a certainty, this idea
*is a serious fallacy. In the essay that
follows, I provide a detailed
*criticism of the Debt Virus hypothesis.
JCT: Well, Ed's
solution to the imbalance happened to be exactly
what the Socreds had been demanding, a
new injection from the tap to
balance the growth in debt due to interest.
Yet, now we know that Ed's
solution is not taking place and that
we face the same problems Ed has
failed to address.
Unfortunately,
many old Social Crediters get angry when they hear
that they're not going to get a chance
to balance the equation in the
numerator with their dividends, compensated
discounts and government
spending if John The Engineer balances
the equation in the denominator
first.
*Exposing the Debt Virus Fallacy.
*Part Two: A Critical Examination
*(last updated July 18, 1997)
*Counterpoint #1:
*The System is Not Short of Money
Considered above.
*Banks are not the only means to borrow
money. When a firm or a
*government issues a bond, it is essentially
trading its IOU for the
*public's demand deposit; no new money
is created, unlike when a bank
*extends credit. When the principal and
interest of a bond are repaid,
*no money is destroyed, unlike when a
bank loan is repaid.
JCT: The Debt
Virus still applies to an island of industries who
all sell 10% bonds and when the time to
pay the principal and the
interest, they find that they only have
the original principal they
were lent and can't pay the extra 10%
to get their bonds back.
*When money is used in a transaction to
retire one bond issue, the
*money is immediately available for other
transactions since it still
*exists within the economy.
JCT: And the
money is still immediately available for other loan
transactions even though it only exists
within the bank's potential
tap allowance.
*Therefore, a given supply of money can
be used to
*repay any balance of outstanding bonds
without having an effect on
the
*level of the money supply.
JCT: I don't
see how a given supply of principal can be used to
repay a balance of principal plus interest
loan on outstanding bonds.
*The exception to this is bonds held by
the banking system. A bond
*held by a bank is functionally the same
as a loan in terms of its
*effects on the money supply. When a bank
purchases a bond, money is
*created; and when a bank sells a bond,
money is destroyed.
JCT: Sure. Just
like a casino cashier allowed to accept bonds as
collateral for chips at the cage. When
our bank "purchases" a bond,
new chips are exchanged. When our bank
"sells" a bond, chips are
returned to the chip cage.
*The exceptions are when banks trade bonds
with each other or with the
*Federal Reserve. If the former is the
case, then there is no change
*in the money supply at all. If the banks
buy bonds from the Fed, then
*the monetary base decreases. If they
sell bonds to the Fed, then the
*monetary base increases.
JCT: The FED
cage issues chips if banks sell bonds and takes back
chips if the banks buy bonds back. Just
like all FED operations.
*Commercial banks are permitted by law
to hold only federal,
*state, or local government bonds; they
may not own any corporate
*bonds for their own accounts. Therefore,
if we wish to examine the
*economy's ability to pay off its outstanding
debts, then the correct
*measure of debt should include bank loans
plus bonds held by the
*banking system that is, total bank credit.
The repayment of these
*types of debt destroys money. All other
bonds must be excluded from
*the debt measure. The correct measure
of debt is presented below,
*along with the current level of the money
supply.
JCT: I think
I've shown that the Debt Virus can infect trade
using new or old money.
*Table 4 shows that if all bank loans
suddenly came due, and if all
*government bonds held by banks were retired,
then there is more than
*enough money in the U.S. economy to repay
the principal and interest
*due on both the loans and the bonds.
JCT: On the possibility
that much money has chosen to reside on
American soil, is there more than enough
money in the world economy to
repay the principal and the interest due
on both loans and bonds?
*This observation is also contrary to
the Debt Virus hypothesis.
*Including corporate and government bond
issues as part of the debt
*measure is erroneous because repaying
those loans does not cause the
*money supply to decrease. The same deposits
could be used any number
*of times to extinguish all bond liabilities
while leaving the money
*supply unaffected.
JCT: Must be
not. If the FED creates new money to buy government
bonds, it destroys new money when it sells
them. So if the government
takes out loans creating new money, it
repays loans destroying money
and causing the money supply to decrease.
The FED as well as the banks
do have connections to the sink.
*Counterpoint #4:
*Federal Reserve Earnings Go To the Treasury
*The Debt Virus explanation for how Federal
Reserve Notes enter the
*economy is correct, but it neglects two
very important points. First,
*like a commercial bank, the Federal Reserve
system has expenses which
*are met by spending the interest income
it collects from the
*Treasury.
JCT: Repeating
that bank expenses are met out of the reservoir
and do not come from the tap.
*Second, nearly all of its remaining earnings
above its operating
*costs are paid to the Treasury. It then
spends this money as part of
*its general revenues.
JCT: Positive
then negative feedback to prove it doesn't matter.
So why have the middleman at all?
*In 1994 the Federal Reserve paid more
to the Treasury than the
*Treasury paid to the Fed in interest.
This is typical for all years.
*In effect, the Treasury securities held
by the Fed are interest-free
*loans to the federal government.
JCT: So in effect,
if they're interest-free loans to the
government, then why not just give interest-free
loans to the
government? Why the two motions of taking
and giving back.
*Federal Reserve Notes therefore do
*not carry a net interest obligation.
The Treasury can then use this
*money to spend on Congressionally appropriated
items free of any net
*cost. This is exactly what the Coalition
and Sovereignty groups want,
*except that they would have the Treasury
print and spend the money
*directly rather than through indirect
process via the Fed (more on
*this later).
JCT: Except that
is a big difference. They don't want a cut of
the already existing interest revenues,
they want new deposits. They
don't want the interest splashing from
government to Fed back to
government in the pool, they want new
funds from the pumphouse.
*Counterpoint #5:
*Interest Does Not Cause Higher Prices
*It is difficult to discern the relationship
between interest costs
*and retail prices among the various Debt
Virus advocates. On some
*occasions they assert that interest causes
higher prices.
JCT: I do. Prices
= Debt = P+I minimum.
*In other cases, they claim interest causes
higher inflation.
JCT: In my case,
Inflation J is a direct function of interest
rate i. J(i).
*These are two very different conjectures.
Let me first examine the
*supposed link between interest and the
price level.
*In the Debt Virus model, interest is
a cost of production and is
*therefore passed along to the consumer
in the form of higher price
*This is wrong for several reasons. First,
in the short-run interest
*expense is a fixed cost of production
in that it does not vary with
*the level of output.
JCT: It is still
a component of the price.
*Even if a change in interest rates makes
a substantial difference in
*price in the long-run, prices for some
goods will be affected more
*than others. This is not price inflation;
it is a change in the
*relative prices of goods.
JCT: Yes, when
interest rates make a substantial difference in
prices in the long-run, regardless that
prices for some goods will
differ from others, this is price inflation,
a change in the relative
prices of goods, all due to interest.
*Inflation is a continuous rise in the
average level of all
*prices in the economy, not just a group
of prices.
JCT: And interest
is a component of every business's budget.
Raise interest and the only way pay the
banker is to raise your
prices.
*Only an increase in the supply of money
relative to the amount of
*goods for sale can cause sustained price
inflation.
JCT: An admission
that he has never even contemplated the
possibility of ShiftB inflation. It must
be ShiftA, too much money.
*The hypothesized link between interest
and the price level can be
*tested empirically. If interest costs
form a wedge between resource
*prices and retail prices, then higher
interest rates ought to make
*the wedge bigger and increase retail
prices. That is, an increase in
*interest rates ought to increase the
price level. Conversely, a
*decrease in interest rates should lower
the price level -- as the
*wedge gets smaller competition between
firms will bid prices down.
JCT: Yes, prices
(Principal+Interest) are a direct function of
the interest rate. No, they won't be bidding
the prices down when
their interest costs are reduced, they
will be decreasing them
pursuant to the savings in their bank
statement. When interest is
zero, all costs are spent for earthly
goods and services with no
component of the price in phantom debt
service and no inflation is
possible.
*The Coalition and Sovereignty groups
also postulate a strong positive
*correlation between interest rates and
inflation. On this economists
*can agree. However, there are two problems.
First, a link between
*interest rates and inflation does not
logically fall out of the Debt
*Virus hypothesis.
JCT: It does
out of mine. Over 1 cycle, minimum expected
inflation is I/(P+I), a direct function
of the interest rate. J(i).
*In their model, an increase in interest
rates will push up costs and
*retail prices. This is a one-time increase
in the price level.
*Inflation is the rate of change in the
price level over time.
JCT: Ed wants
to say inflation is a rate of change, I want to say
inflation is an instantaneous change right
after the bank informs you
you have to come up with more to survive.
*To quote Makinen and Woodward, "Sovereignty
adherents are off by
*one derivative" (Makinen, 1994).
JCT: Or Makinen
and Woodward are off by one derivative.
*For the Debt Virus hypothesis to be correct,
a single increase in
*interest rates would have to cause a
continual and proportional
*increase in the price level, and there
is nothing in the hypothesis
*which permits such an effect.
JCT: The increase
in interest rate expense does cause a continual
and proportional increase in the price
level.
*Second, their arrow of causality points
the wrong direction: interest
*rates do not cause inflation; inflation
causes interest rates.
JCT: He's saying
that interest I is a function of the inflation
rate j. I(j) One of certainly has their
arrow of causality pointed in
the wrong direction. Interest rates do
cause inflation, J(i), and
inflation does not cause interest rates.
Bank governors do.
*Economists agree there is a strong link
between interest rates and
*inflation, but that it is inflation that
causes interest rates.
JCT: Inflation
is something they measure. Interest is something
they set. Interest is not a direct function
of the inflation rate Just
because bank governors choose to set interest
to follow inflation
doesn't make interest a natural function
of inflation.
*Financial markets and creditors build
their expectations about future
*inflation into the current interest rate
they charge to protect the
*purchasing power of the principal they
lend.
JCT: That's right.
Bank governors build the rate with their false
expectations. It's not a naturally occurring
statistic.
*Moreover, the idea that changes in inflation
cause changes in
*interest rates is supported by
strong empirical evidence.
JCT: He's noticed
that every time inflation went up, the FED
chairman raised the rate and sees it as
empirical evidence of interest
being a natural direct function of the
inflation rate.
*Counterpoint #6:
*Contradictions in Sovereignty Arguments
*Second, in a promotional video a Sovereignty
advocate, Mr. Edward
*Mrkvicka, states that Treasury money,
"if phased in correctly, is not
*inflationary any more than any added
dollar to the money supply is
*inflationary." This appears to be an
admission that their proposal
*has inflationary consequences which again
contradicts the basic Debt
*Virus hypothesis that Treasury money
would be less inflationary than
*Federal Reserve Notes.
JCT: I take it
as an admission that over-issuance had ShiftA
inflationary consequence, not that "correctly-phased-in"
issuance
would too.
*Fundamentally, all Sovereignty proponents
want is a faster money
*supply growth rate than what the Fed
considers to be adequate.
JCT: Evidently,
this is not all.
*Evaluating the Coalition and Sovereignty
Proposals
*1. Issue New Debt-Free Money
*Even the U.S. Notes which Sovereignty
uses as a historical example
*of their recommendation are classified
as part of the non-interest
*bearing portion of the national debt
(31 US Code [10]'5119). It is
*true that additional money of this type
would increase the
*national debt without increasing interest
payments for the federal
*government, but this is already the current
situation with new
*issues of Federal Reserve Notes.
JCT: So why not
make it the same thing for the credit received?
*The key difference between the current
arrangement and the one
*advocated by Sovereignty and the Coalition
is that issues of
*currency are now controlled by a mostly
non-political body, the
*Board of Governors of the Federal Reserve
system, whereas under
*their scenario it would be controlled
by purely political bodies,
*Congress and/or the executive branch.
JCT: A agree
100%. Decisions on a nation's monetary policies
should be made by elected officials, not
profit-oriented businessmen.
*Several economists have examined the
relationship between central
*bank political independence and inflation.
(See for example Wyss and
*Blondia (1988) and Grier (1987) ). For
the major industrialized
*countries the studies have found that
economies with a central bank
*tied relatively closely to the political
process, such as in Great
*Britain and Italy, had higher average
annual inflation rates
*during the 1955-1990 period than those
economies with more
*independent central banks, such as Germany
and the United States.
*I do not think this is a coincidence.
And inflation
is something generated by governors who set the
interest rates. They have the power to
control those results.
*Second, such large regular increases
in the money supply would be
*very inflationary.
JCT: As pointed
out, not if backed up by production.
*Few ideas in economics have been demonstrated
so well by governments
*throughout history: when the money supply
rises faster than the
*growth of real output of goods, inflation
must be the result.
JCT: Finally,
he admits a link he's never mentioned before
between money and output of goods. The
whole point of Sovereignty's
proposal is to spend it all on the output
of new goods to match the
new currency issued into circulation in
payment of those new goods.
*The U.S. is no exception to this rule
(See
*Friedman and Schwartz, A Monetary History
of the United States,
*for a thorough treatment). The higher
rates of inflation would
*then increase, not decrease, interest
rates via the Fisher Effect.
JCT: I guess
Fisher's another who didn't notice that interest
rates are not measured as a function of
the inflation rate, they are
set as a function of the inflation rate.
A big difference.
*Their proposal is essentially expansionary
fiscal policy combined
*with monetary accommodation by the Federal
Reserve, that is,
*combined with expansionary monetary policy.
If the Fed were to
*commit to purchasing an amount of securities
equal to the amount
*of additional federal spending, then
the effect would be identical
*to the Treasury printing the $360 billion
needed and spending into
*the economy.
JCT: Except that
under the Sovereignty proposal, the tax to be
levied necessary to redeem the loans would
be for $360 billion and not
for double or triple with interest over
the next decades. Sure the
injection of money would be the same but
the replacement of that money
would be radically different with radically
different repercussions.
*Such arrangements between the Treasury
and the
*Federal Reserve have taken place several
times in the past, always
*with inflationary consequences. How inflationary
this proposal
*would actually become would depend on
whether the spending took
*place in a recession, when there is plenty
of slack in the economy
*and it can handle increased production
without much inflation, or
*whether it was done near full employment.
If the latter is the
*case, then there would be no appreciable
increase in real output
*with the entire effect of the plan being
inflationary. This would
*hold true whether the $360 billion were
literally printed by the
*Treasury, or whether the Fed provided
monetary accommodation. This
*increased inflation would boost interest
rates in accordance with
*the Fisher Effect, and this would actually
increase the Treasury's
*interest burden, not decrease it.
JCT: If the government
couldn't hire anybody with their $360
billion because everyone was already employed,
how does the $360
billion get into circulation to effect
inflation? Mail everyone some?
*3. Eliminate Fractional Reserve Banking
*Their ability to create checkbook money
via the deposit expansion
*process would be eliminated.
JCT: I
don't care about their deposit creation, only their
interest charges on those deposits.
*The need for credit is extensive in a
capitalist economy. No
*government can prevent two parties from
agreeing to an exchange of
*credit. Nor can government prevent the
private sector from accepting
*paper representations of such transactions
as money. This is what
*the deposit expansion process does: it
creates a new IOU, a checking
*account credit, which the private sector
chooses voluntarily to
*use as a means of exchange.
JCT: Exactly
what LETS does. Multi-parties agree to an exchange
of credit accepting paper representations
of such transactions as
Greendollars. This is what the LETS deposit
expansion does: it creates
a new IOU, a LETS checking account credit,
which the private sector
chooses voluntarily to use as a medium
of exchange.
*Other Problems
*In many instances he injects his own
subjective values into
*his analysis, such as when he describes
profits as immoral and
*interest as usury. A scientist must be
an objective, dispassionate
*observer of his subject. Personal values
have no place in scientific
*analysis.
JCT: I consider
interest the mechanism of debt slavery the
planet's inhabitants find themselves chained
in. I consider profits
quite moral and interest on money, not
cows, as usury when it inflicts
a death-gamble upon its participants.
As an objective,
passionate observer on my subject, this banking
systems engineer is appalled by the death
and destruction caused by
this errant financial software and my
passion for its upgrading to
LETS does not detract from the integrity
of the engineering analysis
upon which those emotions are based. It's
not for nothing that the
mort-gage "death-gamble" is so roundly
condemned by most of the
world's better religions.
*Self-contradictions and non sequiturs
abound.
JCT: Seems the
self-contradictions and non sequiturs are
abounding in Ed's analysis, I've seen
little other than the allowance
for a little interest positive feedback
that I find objectionable.
*Conclusion
*The Debt Virus hypothesis is wrong. Its
error is due to its failure
*to recognize how banks interact in the
economy.
JCT: It's veracity
is due to recognizing how the economy
interacts with the bank's pump and reservoir.
*The error was here shown with a detailed
T-account analysis of this
*interaction and was demonstrated with
two simple empirical tests of
*the predictions and implications of the
hypothesis. The first test
*examined the prediction that deposits
can grow only as much as new
*bank credit plus new currency emissions.
Data for six recent months
*showed that the deposits in the banking
system grew considerably more
*than what can be accounted for by additional
bank credit and new
*currency -- an unmistakable contradiction
of the Debt Virus
*hypothesis. The second trial examined
the prediction that the price
*level and interest rates are positively
correlated. To test this
*claim, I collected price level and interest
rate data from 1970 to
*1995 and calculated a simple correlation
coefficient. The statistical
*and graphical results demonstrated that
no such correlation exists.
*The Debt Virus hypothesis failed this
test as well. Combined with
*flaws in logic, a fundamental misunderstanding
of how the financial
*system actually works, and several contradictions
in its body of
*thought, the Debt Virus hypothesis must
be rejected. Consequently,
*the recommendations of Jaikaran, the
Coalition to Reform Money, and
*Sovereignty are based on fallacious arguments
and should also be
*rejected.
So, Ed is wrong
when he says that:
1) the imbalance raised by the Debt Virus
thesis is compensated for by
new deposits created to pay for Bank Expenses,
etc.
2) interest does not cause higher prices.
3) interest does not cause inflation.
4) inflation causes interest when interest
is set by humans.
5) government spending is unbacked and
would cause inflation.
6) more money causes inflation ShiftA
when it fights ShiftB.
7) the FED's giving Treasury back the
interest makes it interest-free.
8) monetary matters should best be left
to private bankers.
9) calling interest on money usury is
too subjective.
10) Debt Virus solution won't work when
it easily could.
I decided I was
going to try to settle the contradictory piping
and posted a message to Ed:
TURMEL: Flaherty's Contradiction
Article #393 (394 is last):
From: eflahert@garnet1.acns.fsu.edu (Edward
Flaherty)
Newsgroups: alt.fan.john-turmel,can.politics,ncf.ca.lets,own.eco.lets,sci.econ,sci.engr,alt.conspiracy
Subject: TURMEL: Flaherty's Contradiction?
Date: Mon Nov 09 23:56:33 1997
Ed:
In your Debt
Virus text, you say:
* Banks are no
different in the real world. Commercial banks
*and savings and loans have expenses to
pay just like any other
*firm. They must pay their employees,
purchase office supplies, and
*meet the other expenditures which are
a part of doing business.
*When they do this banks spend money back
into the economy without
*any debt being created to burden the
non-bank public -- debt-free
*money as it were. The revenues
banks collect from interest on
*loans and other services do not disappear
into an economic void.
*Instead, those revenues are used to meet
the bank's operating
*expenses, to purchase assets to generate
future income, or are paid
*to the shareholders as dividends.
JCT: You may
note that this fits in with my plumbing model of the
banking system:
Fig. 3
FRACTIONAL RESERVE BANK
Fig. 3 is the
interior plumbing of a chartered bank which shows
that the revenues banks collect through
the Interest(in) pipe from
loans and other services are used to meet
the bank's operating
expenses, to purchase assets to generate
future income, or are paid
to the shareholders as dividends through
the Bank Expenses pipe. And
it is true that these funds go back to
the economy free of debt though
I call it splashing in the pool.
*In Dr. Jaikaran's model, the only interaction
a bank has with the
*economy is to extend a loan and to collect
on it.
JCT: More precisely,
the plumbing shows that the only interaction
a bank has with the economy through the
tap of new money in the
pumphouse is to extend a loan and collect
the principal payments on
it. Yet:
*In the real world banks must pay their
employees, pay interest
*to their depositors, meet their other
expenses, and purchase
*equipment. When the banking system does
this, it spends into existence
*new "debt-free" money (debt-free in the
sense that no one outside the
*banking system is required to obtain
a new loan). In other words, the
*system creates a new demand deposit out
of nothing, adding to the
*money supply without the creation of
any additional bank credit (loans
*plus bank-held bonds) being necessary.
JCT: This says
that the Bank Expenses tube is connected to a tap.
Fig 3b
FRACTIONAL RESERVE BANK
*Summarizing the first counterpoint, the
banking system creates new
*"debt-free" money in the form of new
deposits whenever it pays its
*expenses or purchases fixed assets. These
deposits do not represent
*loan principal or interest which the
non-bank public must eventually
*repay. Contrary to the Debt Virus thesis,
new bank credit is not the
*only source of new money.
JCT: Your contention
that the Bank Expenses pipe is
connected to the tap is contradicted by
your statements that it's
connected to the reservoir of bank revenues.
I believe that only the
Loans(out) pipe is connected to tap of
new money and Bank Expenses are
as you yourself say: "banks spend money
back into the economy.." The
money spent back into the economy is the
money first taken out before
being put back.
*Counterpoint #4:
*Federal Reserve Earnings Go To the Treasury
*The Debt Virus explanation for how Federal
Reserve Notes enter the
*economy is correct, but it neglects two
very important points. First,
*like a commercial bank, the Federal Reserve
system has expenses which
*are met by spending the interest income
it collects from the Treasury.
JCT: Same contradiction.
The FED can't be paying for expenses
with already-existing revenues from the
reservoir and with newly-
created money in the pumphouse at the
same time.
So, Ed, before
I continue parsing your words for my Nov 12
presentation at Rensselaer Polytechnical
Institute, I'd like you to
indicate what the Bank Expenses Out pipe
is connected to, the
reservoir of revenues as in Fig 3 or the
tap of new money as in Fig
3b?
--
*Article #394 (394 is last):
*From: eflahert@garnet1.acns.fsu.edu (Edward
Flaherty)
*Newsgroups: can.politics,ncf.ca.lets,own.eco.lets,
*alt.fan.john-turmel,sci.econ,sci.engr,alt.conspiracy
*Subject: Re: TURMEL: Flaherty's Contradiction?
*Date: Mon Nov 10 11:56:33 1997
*bc726@FreeNet.Carleton.CA (John Turmel)
writes:
** JCT: Your contention
that the Bank Expenses pipe is
**connected to the tap is contradicted
by your statements that it's
**connected to the reservoir of bank revenues.
I believe that only the
**Loans(out) pipe is connected to tap
of new money and Bank Expenses
**are as you yourself say: "banks spend
money back into the economy.."
**The money spent back into the economy
is the money first taken out
**before being put back.
*It's not really a contradiction, depending
on how you view the
*mechanics of money-creation. Consider
the following examples.
*A loan customer pays interest to the
bank by writing a check and
*sending it to the bank for payment.
The bank's balance sheet will
*change like this:
*Assets
Liabilities & Capital
*------------------------------------------------
*
| - deposits
*
| + capital
*So technically, by paying interest money
is destroyed.
JCT: No. Deposits
in the customer's reservoir account go down and
and deposits in the bank's reservoir capital
account go up. Money is
not destroyed down the drain by the payment
of interest.
*However, the bank can now create new
deposits, perhaps for expenses,
*dividend payment, buying assets, or another
loan. If the
*bank pays its employees who then deposit
the funds back into
*the bank, the balance sheet will change
thusly:
*
*Assets
Liabilities & Capital
*------------------------------------------------
*
| + deposits
*
| - capital
*So here, new money is created without
additional loans being created.
JCT: No. Money
goes from the bank's capital reservoir account to
the customer's deposit account. It's a
switch of deposits, splashing
in the pool.
*If we think of both transactions as one,
which is what I imply
*in the first paragraph you quoted, then
money is not really
*destroyed in this first step since it
will need to be created
*(or re-created as they case may be) to
fund expenses and what-not.
*If we detail the transactions separately,
then money is destroyed
*and then re-created.
JCT: Again, he's
suggesting that the pipes look like Fig 3c with
interest into the bank going to the drain
rather than the reservoir.
*So it's not really a contradiction, just
a lack of detail or
*clarity on my part.
JCT: Whether
the Interest(in) and Interest(out) pipes are
connected to the reservoir or to the Drain
and Tap is of consequence.
If the pipes go through the reservoir,
the money supply does not
change. If through the drain and then
the tap, the money supply dips
and then rises.
*I guess that depends on how detailed
you want the money-creation
*mechanics to be. If highly detailed,
then both.
JCT: The plumbing
diagrams are as highly detailed as possible and
they show two alternatives - three with
the recent claim that
Interest(in) goes to the drain. It can't
be both. Either the Bank
Expenses come from the reservoir or they
come from the tap.
*If less detailed, then Fig 3 would more
accurately represent my story.
JCT: Fig. 3 accurately
represents my story but only seems to half
represent yours. Since it really is Fig.
3, then no new money is
created in the payment of bank expenses
and the imbalance raised in
the Debt Virus Thesis has not been addressed.
*Edward Flaherty
*School of Business & Economics
*University of Charleston
JCT:
John C. Turmel, B. Eng.
Banking Systems Engineer.
Carleton University.