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Debt Based Monetary System Question

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For someone who has been on this forum as long as I have, my understanding of the monetary system is pretty poor. As a result, I've buried this thread down in the Economics forum in the hope that I can get some sensible and non abusive feedback to an idea that I have been formulating over the past couple of days. So I'd really appreciate any constructive feedback to what I'm posting, even though it may be obvious / wrong / plain stupid to other posters.

Right, that out of the way, discuss...
[i]
The problem with a debt based monetary system is that we have an ever growing supply of money which is all chasing a return. The return can only be gained in a debt based system by lending that money out, whether you are a bank lending mortgages, or a saver depositing cash in a building society. So I start with £10. I lend it out, and I get £11 back, so I now have 10% more money chasing a return, which means I have to find someone to borrow my £11. That figure grows with every turn of the cycle. [1]

The problem with this is that there is a finite supply of people who are good prospects to lend to. Once every "good" borrower has taken on as much debt as they can manage, I need to find some other way of generating returns [2]. So one way to do this is to relax my lending criteria, and accept slightly "less good" prospects. But that obviously brings the risk of defaults, which is not something I want to get involved in.

So the solution is to lend into a specific asset class, thereby driving up the price of that asset class, and this will help to minimise defaults. As long as I throw enough credit at it, that asset class will keep on inflating. So even if some of my borrowers struggle to pay the debt, they (or I, if I take possession of it) can sell that asset for more than they owe me, and I have still made a return.

And this works up to the point where I have saturated even the poorest borrowers. At that point, enough of them are underwater that the resulting fire sales start to hit the value of the asset class, and then I'm in real trouble. [3]

That's enough for now - some questions in footnotes:

[1] "That figure grows with every turn of the cycle". The increase in the money supply since WW2 has been exponential, and I often see this linked to the dropping of the gold standard. How would staying on the gold standard prevent this exponential growth?

[2] "I need to find some other way of generating returns". In a normal (ie non credit bubble) cycle, I've run out of good borrowers to lend to, and I'm not prepared to relax my lending criteria. What happens to the money supply while I wait for the good borrowers to deleverage to the point that they are prepared to take on more debt? Does it stop growing? Contract?

[3] "And then I'm in real trouble". In a normal cycle, I guess we'd expect massive destruction of (my) wealth - and I get just what was coming to me because I lent to bad prospects. We haven't seen this yet (or is it still to come?), but will we?[/i]

Thanks for any comments on this, and apologies for a bit of a scatterbrained post. But I really want to develop this in idiot speak that I can understand. I guess some points that I'm thinking at this early stage are:

1. The financial crisis is not the fault of all the bad borrowers who never had a hope in hell of paying the money back, or of the bankers lending recklessly - it's the fault of the system (all of us) and our perceived "right" to see a return on our cash.
2. Whether it happens this time around, next time, or the time after that, the existing monetary system is doomed. As long as the monetary base keeps growing, there is no option but to lend to default risks.
3. I'm beginning to see the housing bubble as a sort of double ended ponzi scheme - the borrowers at one end and the "investors" at the other. Each end was only sustainable while you had enough people either borrowing the money, or investing enough (in MBS etc) to ensure that the level of credit meant that the asset class kept rising.
4. How does this affect my position - I'm deliberately not revealing that because this isn't a post about how I should structure my investments. I want to expand my ideas and understanding first.

Right, time to get a scotch - do your worst Edited by Fully Detached

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Looks like a lot of effort you put in there, so I'll at least honour you with a response for what it's worth.

Seems to be your understanding is fairly good, but I would say that you are only looking at lending from an unproductive speculative lending view point, such as the ponzi housing bubble. If this sort of lending is followed then the results you describe are inevitable.

IMO, good lenders would lend to sound businesses that should invest the money, thereby increase productivity and generate wealth and real returns, which would then be used to pay back the principal and interest. This sort of lending is sustainable, until a bad loan is made, but it is in the banks interest not to make too many bad loans and stay solvent.

The current problem we have is that housing is not a productive asset, that does not rule out mortgage lending per se, because as long as your borrower has a decent deposit and proof of a sound income it is worth the risk of the loan to make a return.

However, the growth in mortgage lending witnessed in the 00's was a purely speculative bubble and that is where the problem lies, because the lenders should have gone broke when the bubble burst, but that would have sunk the entire financial system and taken depositers cash with them. Unfortunately the tax payer funded bailout is unpayable too, so we now have a bubble in gilts/bonds (because the taxpayet hasn't paid yet - it's on the government borrowing tab at the moment) that will ultimately burst and when it does, interest rates will rocket, which will destroy the housing market and the banks anyway, not to mention seriously depress the economies involved and have severe consequences for their currencies, especially if governments attempt to print their way out of trouble.

There is no free lunch.

Of course this is a gift for any one with savings. Gordon saved the banks and gave savers the opportunity to remove their money and buy gold and silver bullion with it, good bloke in my books. Gold and silver are priced artificially lower than their true value thanks to the actions of western governments and international banks, giving a great buying opportunity, even though prices have more than tripled in the last decade. When this blows gold and silver will increase in value substantially, perhaps more than 5-fold from here.

Thank you evil banks, thank you reckless borrowers, thank you idiotic governments, you efforts have been much appreciated. :D

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[quote name='Fully Detached' timestamp='1297799013' post='2895710']


That's enough for now - some questions in footnotes:

[1] "That figure grows with every turn of the cycle". The increase in the money supply since WW2 has been exponential, and I often see this linked to the dropping of the gold standard. How would staying on the gold standard prevent this exponential growth?[/quote]

The system would crash and vanish faster if the gold standard was adhered to. No chance of them adhering to it, of course.
[quote]
[2] "I need to find some other way of generating returns". In a normal (ie non credit bubble) cycle, I've run out of good borrowers to lend to, and I'm not prepared to relax my lending criteria. What happens to the money supply while I wait for the good borrowers to deleverage to the point that they are prepared to take on more debt? Does it stop growing? Contract?[/quote]

The idea that good or bad borrowers has anything to do with anyone but the banks is a bit simplistic, maybe a bit innocent even. The banks decide the flow of money, if they want your industry to go bankrupt, it will do. The money supply can't stop growing without total system failure, radical system change or, of course lots and lots of fraud (when it has stopped growing but perceptions can be molded to make people think it's still expanding.).
[quote]
[3] "And then I'm in real trouble". In a normal cycle, I guess we'd expect massive destruction of (my) wealth - and I get just what was coming to me because I lent to bad prospects. We haven't seen this yet (or is it still to come?), but will we?[/i][/quote]

I'm not too sure there are "normal" cycles, I don't think cycles occur with anything but the current regime.
[quote]
Thanks for any comments on this, and apologies for a bit of a scatterbrained post. But I really want to develop this in idiot speak that I can understand. I guess some points that I'm thinking at this early stage are:

1. The financial crisis is not the fault of all the bad borrowers who never had a hope in hell of paying the money back, or of the bankers lending recklessly - it's the fault of the system (all of us) and our perceived "right" to see a return on our cash.[/quote]

Bad philosphy, which is derived from (mass) broken psychology. There is a reason that debt has been the most successful mechanism. What might be an interesting though exercise to try out is to ask this question -

What would happen to the banking system if the populstion had the self esteem to not blame themselves for failing at an impossible task?
[quote]
2. Whether it happens this time around, next time, or the time after that, the existing monetary system is doomed. As long as the monetary base keeps growing, there is no option but to lend to default risks.[/quote]

But as the money si free, it doesn't matter to the runners of the system. Only keeping it or something very much like it matters. All the people who are naturally inclined to fraud don't care what lies they tell - they'll fib about jesus, allah or there being a mountain of gold in the vault as long as theres a payout from the gullible.
[quote]
3. I'm beginning to see the housing bubble as a sort of double ended ponzi scheme - the borrowers at one end and the "investors" at the other. Each end was only sustainable while you had enough people either borrowing the money, or investing enough (in MBS etc) to ensure that the level of credit meant that the asset class kept rising.
4. How does this affect my position - I'm deliberately not revealing that because this isn't a post about how I should structure my investments. I want to expand my ideas and understanding first.

Right, time to get a scotch - do your worst
[/quote]
It is double ended but not I think in the way you mean it - it's people giving away their personal power at one end and others gratefully accepting it at the other. Every single borrower has the power to go "pffbt it's just worthless bloody paper" but they don't. [i]Why[/i] they don't is a fascinating area of study.

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Thanks for the replies - I will spend some time digesting them before responding. To be honest I wasn't quite expecting a response from Injin, but I'll give it my best shot in the spirit of my new found open mindedness :P

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[quote name='Fully Detached' timestamp='1297799013' post='2895710']
For someone who has been on this forum as long as I have, my understanding of the monetary system is pretty poor. As a result, I've buried this thread down in the Economics forum in the hope that I can get some sensible and non abusive feedback to an idea that I have been formulating over the past couple of days. So I'd really appreciate any constructive feedback to what I'm posting, even though it may be obvious / wrong / plain stupid to other posters.

Right, that out of the way, discuss...
[/quote]

Basically, almost exactly right. Well done.

What you are close to realizing is that there is no viable money except debt. Anything else is just a placeholder.

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[quote name='scepticus' timestamp='1298062448' post='2900112']
Basically, almost exactly right. Well done.

What you are close to realizing is that there is no viable money except debt. Anything else is just a placeholder.
[/quote]
No, actually, money can't be debt.

It can only be something which [i]cancels[/i] debts.

Money has to be [i]payment.[/i]

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[quote name='scepticus' timestamp='1298062483' post='2900113']
Oh, and welcome back to injin.

How's tricks?
[/quote]
Thank you.

I'm amazing, thank you very much, I took some good advice (long delayed) and while initially painful....:)

How are you?

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[quote name='scepticus' timestamp='1298062448' post='2900112']

What you are close to realizing is that there is no viable money except debt. Anything else is just a placeholder.

[/quote]

Scepticus,

Do you really mean debt or what you mean is a claim on real produciton?

Consider the following hypothetical monetary system:

1) 100% reserve -- no Fractional Reserves allowed.

2) Deflation is handled by creating more 100% reserve money and giving social credit up to the point where very low inflation is observed. Note, I am not saying 100% of purchasing power is given to the public via social credit. Only enough to achieve very low inflation and no deflation.

3) If inflation is observed social credit is reduced or discontinued. If inflation is still an issue taxation is introduced to destroy purchasing power.

4) In such a system there would be no debt. But money holders would still have claim a on future production of society via enforcement of legal tender laws and taxation.

Is such a system viable in your opinion?

Mansoor H. Khan

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[quote name='mansoor_h_khan' timestamp='1298172594' post='2901282']
Scepticus,

Do you really mean debt or what you mean is a claim on real produciton?

Consider the following hypothetical monetary system:

1) 100% reserve -- no Fractional Reserves allowed.

2) Deflation is handled by creating more 100% reserve money and giving social credit up to the point where very low inflation is observed. Note, I am not saying 100% of purchasing power is given to the public via social credit. Only enough to achieve very low inflation and no deflation.

3) If inflation is observed social credit is reduced or discontinued. If inflation is still an issue taxation is introduced to destroy purchasing power.

4) In such a system there would be no debt. But money holders would still have claim a on future production of society via enforcement of legal tender laws and taxation.

Is such a system viable in your opinion?

Mansoor H. Khan
[/quote]
:)

There is no such tghing as society, and taxes are not debt, nor money but extortion.

Also, taxation in such a system increases the value of money, so you can't destroy purchasing power that way.

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[quote name='Injin' timestamp='1298201532' post='2901512']
:)

"There is no such tghing as society"

Also, taxation in such a system increases the value of money, so you can't destroy purchasing power that way.
[/quote]

Hmmm.. I don't know where to start with this comment?

Please elaborate...Are you libertarian?

All organizations are man made to better manage the affairs of our lives like marriage, like businesses, like local government, like state government, like federal government and in the future (I believe and desire!) a world government.

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[quote name='Injin' timestamp='1298070629' post='2900237']
Thank you.

I'm amazing, thank you very much, I took some good advice (long delayed) and while initially painful....:)

How are you?
[/quote]

excellent thank you. You do seem a bit different to what I remember...

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[quote name='mansoor_h_khan' timestamp='1298172594' post='2901282']
Scepticus,

Do you really mean debt or what you mean is a claim on real produciton?
[/quote]

yeah, that.

[quote]
Consider the following hypothetical monetary system:

1) 100% reserve -- no Fractional Reserves allowed.

2) Deflation is handled by creating more 100% reserve money and giving social credit up to the point where very low inflation is observed. Note, I am not saying 100% of purchasing power is given to the public via social credit. Only enough to achieve very low inflation and no deflation.

3) If inflation is observed social credit is reduced or discontinued. If inflation is still an issue taxation is introduced to destroy purchasing power.

4) In such a system there would be no debt. But money holders would still have claim a on future production of society via enforcement of legal tender laws and taxation.

Is such a system viable in your opinion?

Mansoor H. Khan
[/quote]

No, because people never know when they are going to get taxed. Besides, you can't ban fractional reserves.in the real world.

In the case above, the fact that people may get taxed at any instant mean that they are effectively permanently in debt to the state, they just don't know by how much.

A pretty horrific situation!

Here's they key point mansoor - inflation cannot be "controlled" like you are intimating, either in our current monetary system, or your hypothetical one above or indeed in any conceivable system.

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[quote name='mansoor_h_khan' timestamp='1298206868' post='2901613']
Hmmm.. I don't know where to start with this comment?

Please elaborate...Are you libertarian?

All organizations are man made to better manage the affairs of our lives like marriage, like businesses, like local government, like state government, like federal government and in the future (I believe and desire!) a world government.
[/quote]
I'm a lover of facts. They lead to anarchy.

None of those things you outline actually exist, nor can they.

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[quote name='scepticus' timestamp='1298207647' post='2901625']
excellent thank you. You do seem a bit different to what I remember...
[/quote]
I'm partly here to find how much, really.

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[quote name='scepticus' timestamp='1298207856' post='2901632']
yeah, that.



No, because people never know when they are going to get taxed. Besides, you can't ban fractional reserves.in the real world.

In the case above, the fact that people may get taxed at any instant mean that they are effectively permanently in debt to the state, they just don't know by how much.

A pretty horrific situation!

Here's they key point mansoor - inflation cannot be "controlled" like you are intimating, either in our current monetary system, or your hypothetical one above or indeed in any conceivable system.
[/quote]

Scepticus,

I strongly, strongly suspect that any fractional reserve system will eventually fail without government backed deposit insurance protection. Once you grant this protection eventually you end up with taxation (anyway) to give value to all the "badly" created private money.

Do you see what I mean?

Mansoor

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[quote name='mansoor_h_khan' timestamp='1298208443' post='2901647']
Scepticus,

I strongly, strongly suspect that any fractional reserve system will eventually fail without government backed deposit insurance protection. Once you grant this protection eventually you end up with taxation (anyway) to give value to all the "badly" created private money.

Do you see what I mean?

Mansoor
[/quote]
Not if there is no government, you don't.

Morons lose their shirts and that's that.

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[quote name='Injin' timestamp='1298208262' post='2901638']
I'm a lover of facts. They lead to anarchy.

None of those things you outline actually exist, nor can they.
[/quote]

What do you mean? Marriages to exists. Businesses don't exist. Governments don't exist.

Please elaborate. I know I am slow at grasping stuff sometimes.

Mansoor

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[quote name='mansoor_h_khan' timestamp='1298210151' post='2901677']
What do you mean? Marriages to exists. Businesses don't exist. Governments don't exist.

Please elaborate. I know I am slow at grasping stuff sometimes.

Mansoor
[/quote]
A marriage is just an agreement between two people, they exist, their behaviour exists but there is no thing "marriage" that exists outside of their behaviour, when they are not performing that behaviour.

Businesses are the same. It's just a label for people doing stuff.

However, sometimes we have a concept that isn't part of peoples behaviour, or is impossible and can't exist. Governent is one such concept. Clever individuals use the concept, but if you look closely you'll see the idea is quite, quite mad, not possible.

In my initial statement I should have singled marriage out as the odd one out as it prescribes a definite set of behaviours (unlike the others which are either vague or impossible.)

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[quote name='Injin' timestamp='1298208524' post='2901652']
Not if there is no government, you don't.

Morons lose their shirts and that's that.
[/quote]

There is another very practical way to look at it. If in any given system most end up being morons. The system itself is moronic. Then the system itself should be redesigned.

We can do better than just: "and that's that". Again, if most are behaving in such a way that the results are moronic then our basic assumptions are moronic and we need a change in way of thinking about ourselves and others.

Today's 6.5 billions humans alive (with Malthus turning in his grave) with more material production per capita than ever dreamed of I say we are doing pretty good materially at least.

Mansoor

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[quote name='mansoor_h_khan' timestamp='1298211132' post='2901695']
There is another very practical way to look at it. If in any given system most end up being morons. The system itself is moronic. Then the system itself should be redesigned.

We can do better than just: "and that's that". Again, if most are behaving in such a way that the results are moronic then our basic assumptions are moronic and we need a change in way of thinking about ourselves and others.

Today's 6.5 billions humans alive (with Malthus turning in his grave) with more material production per capita than ever dreamed of I say we are doing pretty good materially at least.

Mansoor
[/quote]
me, I believe in free markets.

I also know what they are, which is pretty rare.

Which is why I have to take issue with the idea that systems are "designed." Central planning hasn't been taken seriously as an idea for a long time due to it's consistent utter failures. Even the early russian marixists jacked it in as unworkable rather than starve absolutely everyone to death. I suspect this idea that stuff is done by some benevolent committee somewhere and we all obey for the greater good is for the birds.

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[quote name='Injin' timestamp='1298212138' post='2901697']
me, I believe in free markets.

I also know what they are, which is pretty rare.

Which is why I have to take issue with the idea that systems are "designed." Central planning hasn't been taken seriously as an idea for a long time due to it's consistent utter failures. Even the early russian marixists jacked it in as unworkable rather than starve absolutely everyone to death. I suspect this idea that stuff is done by some benevolent committee somewhere and we all obey for the greater good is for the birds.
[/quote]

Dude.... Why you have to only look at bad examples.... How about Germany? How about Japan?

Mansoor

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[quote name='scepticus' timestamp='1298207856' post='2901632']
yeah, that.

Here's they key point mansoor - inflation cannot be "controlled" like you are intimating, either in our current monetary system, or your hypothetical one above or indeed in any conceivable system.


[/quote]

Scepticus,

What is the point of inflation targeting by central banks?

Are you saying that open market operations should be done away with?

Mansoor

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[quote name='mansoor_h_khan' timestamp='1298213730' post='2901713']
Dude.... Why you have to only look at bad examples.... How about Germany? How about Japan?

Mansoor
[/quote]
Germany - huge slave population, evil system of extortion, crippling debt and violence to solve interpersonal problems.

Japan - you aren't seriously siggesting that the land of the hari kiri salaryman is one to be envied are you?

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[quote name='Injin' timestamp='1298214883' post='2901736']
Germany - huge slave population, evil system of extortion, crippling debt and violence to solve interpersonal problems.

Japan - you aren't seriously siggesting that the land of the hari kiri salaryman is one to be envied are you?
[/quote]

No. I grew up in Pakistan (to age of 13 before coming to America) and know firsthand the disaster anarchy leads to. Japan is way, way, way much better than what I saw in Pakistan.

But anyway. Let us focus on Germany. You say "evil system of extortion". Germany is a democracy. Is it not?

Germany is the best example I have seen of a society in the modern world which is highly disciplined and ordered yet quiet creative. Granted, Britain has been probably more creative in the past and I see mostly a rudderless Britain now.

What is needed is a cross between the Britain of 1700 to 1960 (very creative) to a Germany of today (highly disciplined and ordered and aware of connectedness of members of society).

Mansoor

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