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I've done a lot of research on this topic, and have found that in the most part most people think the system is fine, and that there are a rising few that are considered "conspiracy" theorists that think the system is rigged.
Anyhow, the multiplier effect on the money supply is fine with me, basically it "stimulates" and lets the money supply grow faster than it should to be able to ramp up AND ramp down as credit is created and destroyed. The fact that there is a "reserve" constricts the money supply from expanding indefinitely.
The interest on loans raises another question. How does interest get paid unless new loans are created? And if they aren't created... doesn't that mean the system collapses? So, in a sense, once borrowers can't borrow any more (or vise versa, banks can't lend anymore), the system collapses (both borrowers default, and banks become insolvent)? Please explain this for those that think the system is fine. So, if the Fed stops lending to the banks (ie, we hit the "reserve"), and borrowers stop borrowing, do people holding the last loans have no choice but to default, as no more money is entering the system?
From my understanding of interest, essentially it is a put on future production. As the economy "grows" credit expansion, the borrower is able to earn money from the loans made by new borrowers to pay off the interest. So, in a sense Fed Funds rates to banks follow national productivity or "guesses" what national productivity should be in the future (guess on future GDP growth) to provide liquidity (credit) to new borrowers to fund previous Interest. Are these assumptions true? Or how do borrowers pay off interest on loans?
Another thing that is puzzling to me is the tiering or laddering of interest rates. If the Federal Funds rate is a precursor or "guess" on future productivity growth (GDP), then how are individuals suppose to make enough money to cover a population with declining productivity (as the population ages, lower birthrates, outsourcing of production, doesn't production capability fall?). Therefore, future funds rate is going to fall, while the previous Interest payments are based on past growth rate projections PLUS the additional overhead (margins) that banks put on top of the Fed Funds rate.
So, my point is, is to ask how do borrowers pay off interest, future productivity, when production is shrinking, AND banks charge a higher rate than future production (GDP) growth?
Any help on these concepts, or even my misconception is greatly appreciated.
I've done a lot of research on this topic, and have found that in the most part most people think the system is fine, and that there are a rising few that are considered "conspiracy" theorists that think the system is rigged.
Hi chuck22b,
I have been spending more time outdoors lately so I have had less time to chat. It may be considered related to conspiracy but there is nothing secrete about it other than its complexity. It is certainly rigged from the stand point that relatively few control the money supply. It is fundamentally a speculative system.
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Anyhow, the multiplier effect on the money supply is fine with me, basically it "stimulates" and lets the money supply grow faster than it should to be able to ramp up AND ramp down as credit is created and destroyed. The fact that there is a "reserve" constricts the money supply from expanding indefinitely.
We certainly need the right about of money. The most effective is a slowly depreciating currency. We don't want too much or too little. It is not a store of value, nor should we treat it as such. Saving is contextual. With 100% employment and shortages, saving money in a fully reserve or money token system is effective. I allow another to use the money tokens to consume while I deny myself. That is a market driven system and I believe how most people actually think the system works. Oops, it doesn't. The money supply does need to grow in any case.
When there is a surplus, saving currency does squat. Saving apples to rot in a cellar is not saving. However a slightly depreciating currency should bring such capitals at a reasonable par.
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The interest on loans raises another question. How does interest get paid unless new loans are created? And if they aren't created... doesn't that mean the system collapses?
Yes all money is credit. It is created from banks. Banks do not warehouse money as most people think they do. They create money and we rent it. The society as a whole rents its entire money supply. The system demands continually growing debt or defaults.
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So, in a sense, once borrowers can't borrow any more (or vise versa, banks can't lend anymore), the system collapses (both borrowers default, and banks become insolvent)? Please explain this for those that think the system is fine. So, if the Fed stops lending to the banks (ie, we hit the "reserve"), and borrowers stop borrowing, do people holding the last loans have no choice but to default, as no more money is entering the system?
This is the other part of the problem. If we recall that I said in a full reserve system, loans would be created as surplus is gathered from the population. As this surplus gathers, it indicates spare capacity that is market driven. What our system does is assess. No one cares at all how much money is being saved. They will create money based upon the speculated value of an asset. Banks will create money based upon this speculation. Reserves don't really matter since the new loan will almost certainly return as a reserve. Sure there is a 10% loss in the reserve but then the value of the house was just bumped up to absorb it. Its a speculative system. Feed back from the population is thwarted and ignored. Once deflation takes hold, banks will not lend money.
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From my understanding of interest, essentially it is a put on future production. As the economy "grows" credit expansion, the borrower is able to earn money from the loans made by new borrowers to pay off the interest. So, in a sense Fed Funds rates to banks follow national productivity or "guesses" what national productivity should be in the future (guess on future GDP growth) to provide liquidity (credit) to new borrowers to fund previous Interest. Are these assumptions true? Or how do borrowers pay off interest on loans?
Those are the usual models. It tends to work in circulating capitals as it did historically in discounted bills of exchange. It was usually short term loans for merchants who had the goods and just need to ship or otherwise liquidate it. Banks never historically loaned money for fixed capital which was left for the bond markets or personal capital like housing which can only grow in value by scarcity or inflation. FRB is a disaster in the other two types of capital. Ask a finance major to apply that model to personal capital like a house or credit cards. Be sure their beverage has a good deal of lubricity since I have seen their minds completely seize up.
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Another thing that is puzzling to me is the tiering or laddering of interest rates. If the Federal Funds rate is a precursor or "guess" on future productivity growth (GDP), then how are individuals suppose to make enough money to cover a population with declining productivity (as the population ages, lower birthrates, outsourcing of production, doesn't production capability fall?). Therefore, future funds rate is going to fall, while the previous Interest payments are based on past growth rate projections PLUS the additional overhead (margins) that banks put on top of the Fed Funds rate.
Ah, so you noticed the other nature of this. Grow or die. The only ones who can be meek are the bankers who inherent the earth.
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So, my point is, is to ask how do borrowers pay off interest, future productivity, when production is shrinking, AND banks charge a higher rate than future production (GDP) growth?
Any help on these concepts, or even my misconception is greatly appreciated.
-chuck22b
We need to increase debt at a clip of at least 3-4% a year. The only way to do this perpetually is to pay the inflation tax and hope everything inflates at about the same rate. Unfortunately in this system most money is created by securitized debt and that inflates to be disproportionate to everything else, then bust.
So the flaws in this system can be summed up to be too speculative with centralized decision making, artificial scarcity, instability and lack of proportion. All of this results in an unstable and unreliable value system which is what money was designed to solve. It also tends to make insiders rich. The latter point is why we tolerate the other aspects.
Thanks gwynedd1,
For your explanation, and taking some time out to chat. Another thing that came into mind is... could this system be continued indefinitely without making everybody into indentured servants or debt slaves?
If the only repercussion is that the last loan holders default, then couldn't this system spur growth, let those who default take the losses, and then restart up again. I mean, we don't have debtor prisons, and those that default can eventually get loans again and the assets that have been ramped up get depreciated for those that Can buy them.
So, in theory, the credit system acts as a stimulus for growth, allows busts and defaults (write-offs), and then the system grows again and those that default can be participants again.
So, in a sense, it's a pro-growth system because the "debt" is occasionally written off at mostly the expense of the borrowers (but the borrowers over time can borrow again). The only draw back I see is that the banking institutions get larger and more powerful with each cycle because they can't fail - or else the system can't ramp up again. But, in the most part, things can inflate indefinitely?
Ideally, in a balanced system, savings rate should be close to zero or zero. Meaning all capital is geared towards production and capital is fully deployed rather than horded. A higher savings rates means an expectation of "reduced" future production.
On the other hand, if future production is falling or negative... then a larger swath of people would default? and more people would be bankrupt? as loan interest continues to be due? and the Fed Funds rate or growth of the money supply is zero but no one is borrowing. Is economic growth infinite? as per the system? Or is it finite?
Thanks gwynedd1,
For your explanation, and taking some time out to chat. Another thing that came into mind is... could this system be continued indefinitely without making everybody into indentured servants or debt slaves?
If the only repercussion is that the last loan holders default, then couldn't this system spur growth, let those who default take the losses, and then restart up again. I mean, we don't have debtor prisons, and those that default can eventually get loans again and the assets that have been ramped up get depreciated for those that Can buy them.
So, in theory, the credit system acts as a stimulus for growth, allows busts and defaults (write-offs), and then the system grows again and those that default can be participants again.
So, in a sense, it's a pro-growth system because the "debt" is occasionally written off at mostly the expense of the borrowers (but the borrowers over time can borrow again). The only draw back I see is that the banking institutions get larger and more powerful with each cycle because they can't fail - or else the system can't ramp up again. But, in the most part, things can inflate indefinitely?
Ideally, in a balanced system, savings rate should be close to zero or zero. Meaning all capital is geared towards production and capital is fully deployed rather than horded. A higher savings rates means an expectation of "reduced" future production.
On the other hand, if future production is falling or negative... then a larger swath of people would default? and more people would be bankrupt? as loan interest continues to be due? and the Fed Funds rate or growth of the money supply is zero but no one is borrowing. Is economic growth infinite? as per the system? Or is it finite?
-chuck22b
Hi chuck22b,
I still see the system as exaggerating the so called business cycle. Housing goes up in price so its a good investment which then creates more loans for it which makes it go up in price. Its a feed back loop and a ponzi scheme. That is bad enough. Unfortunately the system you described is easily circumvented. If ,for example, banks received capital from bankruptcy and reallocated we would at least keep the capital moving and keep banks interested in the capital they are funding. Now fund they what ever since they will be backed by government. The idea is to put funds on paper to create any assets they can and then get the treasury for it. The is what rewards is due Goldman Sachs and JP Morgan. This is why the finance industry has been growing. They get the money.
The financial industry owns most of our government thus we are rapidly approaching the phase of barbarian raiders making permanent residence. They are now in the hit and run phase. I suspect at some point this merger will result in some immunity much like when the Vikings were finally neutralized by other resident Vikings or Cossacks neutralizing Tartars. A financially militant faction will build a hedge around its newly acquired fertile land. Thus when a barbarian takes your house the next wave of barbarians will need to take the house from the now resident barbarian. This is why the so call conspiracy view is correct and inevitable. Finance will be and is becoming the government. The problem is that transition will mean burning villages, raping the women, culling the men folk, enslaving the resident population that come with transition from privateer to governor.
Lets hope they do not remain the elitist, eugenic, Cabalistic, Frankists that they so far have seemed to be.
Actually it is not just the fractional reserve system but beyond that, the entire monetary system. Check out www.thevenusproject.com and Jacques Freso's idea for an idea whose time has come. Before that watch Zeitgeist and the Zeitgeist Addendum movies so you'll have the background and history. Zeitgeist - The Movie.
Actually it is not just the fractional reserve system but beyond that, the entire monetary system. Check out www.thevenusproject.com and Jacques Freso's idea for an idea whose time has come. Before that watch Zeitgeist and the Zeitgeist Addendum movies so you'll have the background and history. Zeitgeist - The Movie.
Hi emilybh,
Thanks for the link, and a glimpse of a possible future. I was up late and watched both of the films and read up on the project.
Part I:
I agree with most everything they said about the monetary system, consumption cycles, profit motives, and manipulated scarcity and potentially planned obsolencence (although, I'm not positive about this one). It really puts a finger on all of the things I felt was inherently wrong with the system into an organized, coherent way.
The gist of the Resource Based Economy is that it believes that everything is plentiful and that humans can harness the earth's near infinite resources indefinitely (by inventorying the earth), eliminating the competition of resources, scarcity and the need for money.
There is a major factor that isn't accounted for - Time and Aging. As long as people have a finite amount of time (die) and age (reducing their productive "potential"), there will be competition for resources or the allocation thereof. Furthermore, all of these technological advances are going to take time to make and distribute and therefore although technology has limitless potential, the application of said technology is a limited, scarce resource at any given time. Therefore there is scarcity even in a Resource Based Economy.
Lastly, it assumes that humans once "symbiotic" and enlightened would unaminously agree to live together, work together, for the benefit of human kind not trying to one up one another because they can have everything - material that is. Think about it this way, the most powerful people in the world, essentially have everything one would ever need to consume, entertain, and live lavishly (material goods). They are in no need for additional money... but, they continuously thrive for more Power.
Money isn't at the heart of this or the lack of resources/scarcity, but the ability to control, or manipulate someone else. In a symbiotic world you can't control someone else, that would defeat the assymetry and interdependence. Would the system just eliminate such tendencies? (drugs? everybody's on marijuana and are passive?).
Part II:
Alright, now that I've talked about the Resource Based Economy, I would like to get back to Now. I think the first step towards any Real economic/social change is to get rid of the Fractional Reserve System and debt-based currency. We need first start with basing our economic growth on our productive growth with some mind that productive productin is rewarded vs. whatever is the most latest comsumptive affinity. By having the money supply interest free, resources would be better allocated because it requires actual thought and innovation to increase production vs. an arbitrary increase in the money supply through debt and more debt. This would result in products and technology that actually are better produced, are sustainable, and are more geared for duration. After all, if you had to "work" for and save/layaway for that TV, you would demand a durable product that lasts and the company that provides said good would profit.
Secondly, there is no reason why companies can't thrive to produce sustainable products even with a profit motive. A company that can create the "source" of infinite energy at a low cost can make a profit until they sell all the widgets to all the world and Competition would drive prices so low at some point that it's virtually free (Product Maturity in marketing terms). This is the second part that would happen with a debt-free/interest free currency and the conversion of said technology into a low cost to free utility as demand is placated (drops) and competition and technology makes the utility/product a surplus or without scarcity.
Competition is at its' heart. Some people like to compete, some don't... in a debt-free monetary system those that want to compete can compete, and those that don't, don't. People don't play games to necessarily make money. They play games for the competition and achievement of one upping someone else. Make innovation and productivity a friendly game (debt-free), not an inslavement game (debt based money).
Eventually, basic utlities, food, shelter and everything becomes free as they become utilities, automated, and in abundence. Cost of living is close to nil or nil, and people produce and innovate each new neccissity/product until near everything becomes "free". Thus, allowing those that want to be the innovators to have first dibs and make money and get the "latest" innovation and compete, and also allowing those that have aged/lost productivity or don't care about producing live essentially free as the essentials have been surplused to the point they are free. People aren't working to pay off debt, but rather working and making money to thrive and make the next greatest innovation and have first access to said innovation.
Basically, I'm proposing the transition from our current system to the Resource based system allowing for debt-free money to control the "scarcity" of the flow of new products/innovations into products/innovations that are abundent and automated. The management and rollout of "temporary" scarcity.
A certain group loves to complain about fractional reverse systems, but they never give an alternative that has a better set of pros/cons.
There is no such thing as a stable money system, they are all built on faith and sentiment. Each different system has its own pros and cons and each has a different set of benefactors.
Also, chuck you are pretending as if changing the money system is going to remarkably change the economy. Its not. Money systems are like the oil in your car, its necessary for it to run, but there are a lot of different brands and types you can use and your car will run just the same.
A certain group loves to complain about fractional reverse systems, but they never give an alternative that has a better set of pros/cons.
There is no such thing as a stable money system, they are all built on faith and sentiment. Each different system has its own pros and cons and each has a different set of benefactors.
Also, chuck you are pretending as if changing the money system is going to remarkably change the economy. Its not. Money systems are like the oil in your car, its necessary for it to run, but there are a lot of different brands and types you can use and your car will run just the same.
From what I've been seeing and finding there are many who have alternate proposals and most of them have to do with eliminating debt-based currency. As debt requires constant consumption cycles to grow the money supply until it collapses when no one else can absorb new debt. An interest-free system had worked in the past. Most noteably the coloneal script monies that were debt free.
Anyhow, the point of this thread is to question whether or not the Monetary System, and the Fractionl Reserve System is "really" the root of the problem (so, im also countering those who think it is the problem). So far, from what I can tell, the current system leans towards the growth side, but requires persistent "debt" to grow with each credit cycle growing faster than the Real economy (ie the speculation that gwynedd1 was talking about). Thus, we will continue to have bubbles, excesses of capital that may be improperly allocated, and even the possibility of RE bubbles that you seem to believe we'll never have again.
I also question the so called Zeitgeist movement. Although it sounds really nice and all, uniformity, conformity, and surplus for all may be too idealistic anytime soon. That is why I proposed a somewhat hybrid system to get technology moving through competition and non-debt based monies.
Anyhow, who knows. Eventually like you seem to agree from previous posts about robots and AI, we'll all be replaced with robots. At that point? Wouldn't you say the money system is pretty much outdated? when everything is at surplus? and labor isn't necessary?
Changing the monetary system isn't like changing the oil, it's more like replacing the fuel type from oil (scarcity driven, debt driven), to something that focuses on actual progressive, sustainable growth (electricity, alt-energy, innovation driven).
Actually, the groups/people who I have heard criticizing the system usually do.
Yes, and obviously when they provide alternatives I don't not believe they provide better pros/cons. Its not like people are purposing novel solutions, just money systems that have been used many times in the past.
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and are passive?). 
