Subject: TURMEL: Flaherty's Debt Virus Antidote is No Cure
Date: 26 Nov 1997 20:45:58

*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

 bank.JPG (22096 bytes)

     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

bankflah.JPG (22292 bytes)
 
*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
     The odds of survival are always set by the interest rate(i).
P/(P+I) survive, I/(P+I) do not.
 
INFLATION
     The equation for the minimum inflation (J) we must suffer is the
same as the equation for unemployment (U) because the fraction of the
people foreclosed on is the fraction of collateral confiscated.
 
     Though we are led to believe that inflation is caused by an
increase in the money chasing the goods (Shift A), actually, it is
caused by a decrease in the collateral backing up the money (Shift B)
due to foreclosures. Though both inflations shifts feel the same, the
graph shows inflation is not the inverse function of interest, it is
the direct function exposing the Big Lie that interest fights
inflation. (Fig. 4)

Fig. 4
    Dollars Assets

shifts.jpg (13704 bytes)

     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
 
bank.JPG (22096 bytes)
 
     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

bankflah.JPG (22292 bytes)

*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.

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