Injin And Scepticus...

[Timm]

not this time. I suspect injin and I are both right in the sense that you can have a cash economy, or a credit economy, but not a combination of both.

it's not stable, and its not compatible with democracy.

OK, thanks for replying. I'm going to have to go and think about that. In the meantime, can you explain why your (edited) post below appears to imply that you can pump reserves into the banks without risking a credit explosion?

So to conclude, all the wild hyperventilating about QE leading to hyperinflation is misinformed boll0cks, and the only inflationary impact of government spending is what it adds to the broad money supply.

That is to say (concentrate now)

THERE IS NO LINK BETWEEN BANK RESERVES AND BROAD MONEY.

The money multiplier is between bank capital, and broad money.

[Timm]

no

did you have to ask

no

(Not saying I agree or anyfink).

[Injin]

not this time. I suspect injin and I are both right in the sense that you can have a cash economy, or a credit economy, but not a combination of both.

it's not stable, and its not compatible with democracy.

And as only a cash economy works, that's what we will ultimately have.

First there is going to ba a massive economic collapse as humanity proves for the bajillionth time that you can't create value by force of arms and lies.

Edited December 16, 2009 by Injin

[leicestersq]

not this time. I suspect injin and I are both right in the sense that you can have a cash economy, or a credit economy, but not a combination of both.

it's not stable, and its not compatible with democracy.

Scepticus,

why cant you have both cash and credit? Lots have both.

I have cash in my pocket, and a balance to pay off at the end of the month on my credit card.

Credit is only an agreement to pay a debt in an acceptable form at a later date. I guess you could have a credit to mend your fence tomorrow in exchange for a bag of apples today, so you can have credit without cash, but you can certainly have credit and cash.

But I bet you couldnt have cash without credit. How would you do that? You might legislate against it, but that wont stop people borrowing money. Arent there really ancient tablets with strange writing on from the dawn of civilisation, and when decoded, dont they show credit agreements? Its like so natural to borrow and lend, that life without it is almost impossible.

Am I missing something?

[scepticus]

OK, thanks for replying. I'm going to have to go and think about that. In the meantime, can you explain why your (edited) post below appears to imply that you can pump reserves into the banks without risking a credit explosion?

Oh it certainly risks a credit expansion but it won't be the cause of one. the level of bank reserves sets the upper limit on the amount of credit that can be created, is all. Someone has to want to borrow the money first, and equally as important banks have to want to lend it. Banks won't lend if their capital is impaired because if they do they'll go bust.

A banks can have 2 trillion in reserves at the CB and still go bust.

The point at which those reserves become an issue is when people have paid down enough existing debt, growth opportunities are back (maknig lending low risk for banks), and the banks are well capitalised. This is why I think those reserves become an issue in say 10-15 years, but not now.

[Injin]

Oh it certainly risks a credit expansion but it won't be the cause of one. the level of bank reserves sets the upper limit on the amount of credit that can be created, is all. Someone has to want to borrow the money first, and equally as important banks have to want to lend it. Banks won't lend if their capital is impaired because if they do they'll go bust.

A banks can have 2 trillion in reserves at the CB and still go bust.

The point at which those reserves become an issue is when people have paid down enough existing debt, growth opportunities are back (maknig lending low risk for banks), and the banks are well capitalised. This is why I think those reserves become an issue in say 10-15 years, but not now.

Bank credit is when banks lie about having money and then claim repayments for somethignthat never happened.

It's the best game in town, if you can get away with it.

Unfortunately the population has a gorwing awareness of the scam and so it is now over.

For keeps. it's going the same way that religion has done. It'll still be there but with diminshing power over time.

[scepticus]

Scepticus,

why cant you have both cash and credit? Lots have both.

you can during benign periods in which growth is reasonably smooth so banking failure never becomes an issue. As soon as you are threatened with a long term secular decline in growth which threatens general bank failure (and embeds such expectatios in peoples minds) then people will just withdraw from the system into cash and destroy it. Peversely this also damages the value of the cash too.

But I bet you couldnt have cash without credit. How would you do that? You might legislate against it, but that wont stop people borrowing money. Arent there really ancient tablets with strange writing on from the dawn of civilisation, and when decoded, dont they show credit agreements? Its like so natural to borrow and lend, that life without it is almost impossible.

that is my view too. Yes, debt instruments are ancient. Assuming the technology for efficiently recording and processing debt claims exists then one can surmise people will use if money becomes too scarce.

A cash economy is possible though even in the presence of credit assuming the volume of cash far outweighs the volume of credit.

[Injin]

you can during benign periods in which growth is reasonably smooth so banking failure never becomes an issue. As soon as you are threatened with a long term secular decline in growth which threatens general bank failure (and embeds such expectatios in peoples minds) then people will just withdraw from the system into cash and destroy it. Peversely this also damages the value of the cash too.

that is my view too. Yes, debt instruments are ancient. Assuming the technology for efficiently recording and processing debt claims exists then one can surmise people will use if money becomes too scarce.

A cash economy is possible though even in the presence of credit assuming the volume of cash far outweighs the volume of credit.

Only a cash economy works and that only works to the degree which cash is accuratly tied to some resource or other.

[Timm]

Only a cash economy works and that only works to the degree which cash is accuratly tied to some resource or other.

Say we tie it to wood. Or we could tie it to the carbon in wood. Hell, let's just use wood today. Wood is wealth.

Scepti has coppiced some willow and produced wood chips. I am cold and wet.

How do you stop him lending me some willow to construct a shelter and woodchips to burn, in return for my promise to work at coppicing for the rest of my life and provide him with half of the crop?

[tomwatkins]

To all the Injin groupies on here-you lot must be far cleverer than me. Most of the time what he says is either way above my head or makes no sense at all (to me at any rate) which might mean the same thing. Most of what he says remind me of Bob Dylan's lyrics (which even he admits don't make sense sometimes either). Injin has no clothes sometimes. IMHO of course.

[Injin]

To all the Injin groupies on here-you lot must be far cleverer than me. Most of the time what he says is either way above my head or makes no sense at all (to me at any rate) which might mean the same thing. Most of what he says remind me of Bob Dylan's lyrics (which even he admits don't make sense sometimes either). Injin has no clothes sometimes. IMHO of course.

I'm really simple, if that helps.

If you are looking for complexity in what I write you'll be a long time looking, it ain't there.

[Injin]

Say we tie it to wood. Or we could tie it to the carbon in wood. Hell, let's just use wood today. Wood is wealth.

Scepti has coppiced some willow and produced wood chips. I am cold and wet.

How do you stop him lending me some willow to construct a shelter and woodchips to burn, in return for my promise to work at coppicing for the rest of my life and provide him with half of the crop?

I don't, but that's not what credit is. (At least not bank credit.)

Credit is when he says he's lent you some wood but doesn't actually have any and never does. If you perform a miracle and repay him by creating the whole shebang then he can repay his own debts. If you fail he's ******ed and so is whoever is relying on him.

In this case, the pensioners, the welfare state et al.

[Bloo Loo]

Oh it certainly risks a credit expansion but it won't be the cause of one. the level of bank reserves sets the upper limit on the amount of credit that can be created, is all. Someone has to want to borrow the money first, and equally as important banks have to want to lend it. Banks won't lend if their capital is impaired because if they do they'll go bust.

A banks can have 2 trillion in reserves at the CB and still go bust.

The point at which those reserves become an issue is when people have paid down enough existing debt, growth opportunities are back (maknig lending low risk for banks), and the banks are well capitalised. This is why I think those reserves become an issue in say 10-15 years, but not now.

banks could always cut their overhead, move to portakabins, pay depositors they owe and bow out quietly...thats according to their "We are Strong and Have Large Buildings to Prove it" blurb.

[scepticus]

banks could always cut their overhead, move to portakabins, pay depositors they owe and bow out quietly...thats according to their "We are Strong and Have Large Buildings to Prove it" blurb.

like it or not intermediaries are essential for a civilisation based on the division of labour.

however we certainly have too many intermediaries right now.

[getdoon_weebobby]

good point but no, last december 5.99 the fan heaters, £10 the static halogens

cadburys fingers £1.13

now buy 1 get 2 free in morrisons!!

MEGA DEFLATION!!

[Lepista]

cadburys fingers £1.13

now buy 1 get 2 free in morrisons!!

MEGA DEFLATION!!

How are the lemons doing?

[Bloo Loo]

like it or not intermediaries are essential for a civilisation based on the division of labour.

however we certainly have too many intermediaries right now.

I thought Cash was the intermediary...adding the convenience of banking helps with the er...convenience, but much else in their system is a total waste.

[Injin]

I thought Cash was the intermediary...adding the convenience of banking helps with the er...convenience, but much else in their system is a total waste.

Yep.

There is no reason that the intermediary has to be human.

[scepticus]

I thought Cash was the intermediary.

division of labour implies risk for the individuals being as they are less generalist.

therefore intermediaries must assume risk to prevent excessive risk accumulating to individual specialists which would disincentivise any further specialisation, which in turn would halt technological and civilisational progress.

cash does not assume risk. cash only irons out mismatches between parties who wish to transact.

therefore we are at a crossroads. we can ditch banking and financial intermediation and return to a cash based economy with a far lower tech level than where we are now, or we can find a way to make financial intermediation work in a socially useful and economically robust fashion and continue techynological progress, or at least maintain that which we have already achieved.

[lowrentyieldmakessense(honest!)]

To all the Injin groupies on here-you lot must be far cleverer than me. Most of the time what he says is either way above my head or makes no sense at all (to me at any rate) which might mean the same thing. Most of what he says remind me of Bob Dylan's lyrics (which even he admits don't make sense sometimes either). Injin has no clothes sometimes. IMHO of course.

who are the injin groupies

he just happens to be right more than most

i dont think its complicated though others make it far more complicated than it actually is

heres an example

FISCAL INSANITY VIRUS

Academic Wonkishness

Those with FIV are trapped in academic wonderland with no ability to see anything from a real world logical perspective. Instead they rely on formulas that imply free lunch theories and/or perpetual motion.

Here is a recent example of Krugman trapped in academic wonderland: European macro algebra (wonkish).

I’ve been on the warpath over Germany’s refusal to play a constructive role in European fiscal stimulus. But what does the math look like? Here’s a simple analysis — well, simple by economists’ standards — of the reason coordination is so important for the EU. ....

Consider the effects of an increase in government purchases dG. This will raise GDP directly, to the extent that it falls on domestic goods and services, and indirectly, as the rise in GDP induces a rise in consumer spending. We have:

dY = (1-m)dG + (1-m)(1-t)c dY

or dY/dG = (1-m)/[1 - (1-m)(1-t)c]

Since governments are worried about debt, it’s also important to ask how much the budget deficit is increased by an increase in government spending. It’s not one-for-one, because higher spending leads to higher GDP and hence higher tax revenue. We have

dD = dG - tdY

A crucial number is “bang for euro”: the ratio of the increase in GDP to the increase in the deficit. After a bit of grinding, it can be shown to be

dY/dD = (1-m)/[1 - (1-t)(1-m)c - t(1-m)]

It is impossible to argue against such wonkishness except with logic that an average 8th grader would understand.

Non-Wonkish Rebuttal

* The average 8th grader understands that one cannot continually spend more money than he has.

* The average homeowner who has been foreclosed on understands that buying more house than he could afford vs. wages earned was a very bad idea.

* The average economics professor afflicted with the K-Virus thinks that it is possible to spend one's way out of a fiscal crisis.

* The average economics professor afflicted with the M-Virus thinks that it is possible to inflate one's way out of a fiscal crisis by destroying the currency.

* The average congressional representative believes in the free lunch theory of spending many multiples of what is collected in taxes.

Why is it that the average 8th grader has a better grasp of economics and fiscal sanity than the average economist and the average member of Congress?

Scientists are now in a race against time, attempting to figure out why economists and Congressional representatives are more prone to FIV than eighth graders. Preliminary results indicate immunity at birth that wears off as one ages.

The Economic Free Lunch

The problem with academic "wonkishness" is that it is tantamount to belief in perpetual motion free lunch physics.

Greenspan employed the very policies espoused by academia and all it did was create a bigger bubble. Now that the bubble has popped, the K's and the M's argue with each other how best to blow a bigger bubble.

Those afflicted with the K-Virus fail to look ahead to what happens once government stops building bridges, roads and whatever else they propose. What happens (in the absence of still more stimulus) is economic activity returns to where it was before, only more money was squandered in the meantime because of government graft and because schools, roads, and bridges will be repaired that did not even need repairing.

Wonks fail to see that Keynesian spending to "prime the pump" is much like a heroin addict needing forever increasing amounts of dope to achieve the same high. The only solution for the heroin addict is to kick the habit. The only solution for governments to stop fiscal insanity.

[Bloo Loo]

division of labour implies risk for the individuals being as they are less generalist.

therefore intermediaries must assume risk to prevent excessive risk accumulating to individual specialists which would disincentivise any further specialisation, which in turn would halt technological and civilisational progress.

cash does not assume risk. cash only irons out mismatches between parties who wish to transact.

therefore we are at a crossroads. we can ditch banking and financial intermediation and return to a cash based economy with a far lower tech level than where we are now, or we can find a way to make financial intermediation work in a socially useful and economically robust fashion and continue techynological progress, or at least maintain that which we have already achieved.

why must intermediaries interfere with free lending by default. Im not following your case here.

[Injin]

division of labour implies risk for the individuals being as they are less generalist.

No it doesn't.

You start off with nothing. On your own you can produce x. If you team you can produce x + producivity bonuses.

X is your basis anything higher than that is a bonus. Your default income is x.

therefore intermediaries must assume risk to prevent excessive risk accumulating to individual specialists which would disincentivise any further specialisation, which in turn would halt technological and civilisational progress.

cash does not assume risk. cash only irons out mismatches between parties who wish to transact.

No, theres the risk that the person you offer cash to isn't interested.

therefore we are at a crossroads. we can ditch banking and financial intermediation and return to a cash based economy with a far lower tech level than where we are now, or we can find a way to make financial intermediation work in a socially useful and economically robust fashion and continue techynological progress, or at least maintain that which we have already achieved.

Cash created the tech level.

Banking is destroying it.

[scepticus]

why must intermediaries interfere with free lending by default. Im not following your case here.

you mean free lending of cash? in this case there is no requirement or room for an intermediary. The key function of a financial intermediary is to perform maturity transformation - i.e. turn long term risks into short term ones.

if there is no maturity transformation there can be no long term lending. free lending of cash can't transform maturities since the lender must give up all his money for the duration of the lending term.

Clearly many technological specilaisms are rather long term in nature and certainly developing new layers of specialisation and technology is a long term activity. The more such specialisms and the greater their rate of growth, the greater is the need for intermediaries who match third parties of differing risk profiles much in the same way cash matches third parties with otherwise incompatible exchange goods or services.

[Bloo Loo]

you mean free lending of cash? in this case there is no requirement or room for an intermediary. The key function of a financial intermediary is to perform maturity transformation - i.e. turn long term risks into short term ones.

if there is no maturity transformation there can be no long term lending. free lending of cash can't transform maturities since the lender must give up all his money for the duration of the lending term.

Clearly many technological specilaisms are rather long term in nature and certainly developing new layers of specialisation and technology is a long term activity. The more such specialisms and the greater their rate of growth, the greater is the need for intermediaries who match third parties of differing risk profiles much in the same way cash matches third parties with otherwise incompatible exchange goods or services.

bit esoteric for me. I lend john a few bob, he pays it back..maybe with a tickle on the side.

If I dont have enough, John has to see several people with cash, and tickles them all.

Maybe John will be successful in his venture..maybe not..

Not sure where a bank is REQUIRED to take his tickle and some of mine.

[loginandtonic]

bit esoteric for me. I lend john a few bob, he pays it back..maybe with a tickle on the side.

If I dont have enough, John has to see several people with cash, and tickles them all.

Maybe John will be successful in his venture..maybe not..

Not sure where a bank is REQUIRED to take his tickle and some of mine.

+ if all goes pear-shaped one imagines there's a lot more tickle of the old tackle in lieu