If there is no liability attached to the receipt of that money, there is no constraint on the creation of money, and if there is no ability to create money in advance of the production, each increase in injections or drop in leakage rates would be met with a liquidity crisis.
The "financial system we know" is only two to three decades old ... in the financial crisis to date, having the financial system we used to have would prevented the financial melt-down. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
Why? Should I suddenly decide to produce something after my working day -I don't know, violin lessons, baking cakes... and sell it, I could hope to divert a tiny part of the monetary base in my direction. Then, either the price of some goods might fall in proportion, so that they don't stay unsold, in which case we have a tiny deflation, or there could be a liquidity injection to match, so that we keep the same prices. In either case, there was no expansion prior to the increase of production. Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
"In any monetary production economy, in order to expand production, and hence real income, there needs to be an expansion in money first, preceding the expansion of production." Why?
Why?
Credit is needed for the creation of productive assets. The money we use is credit. Therefore money is conventionally needed.
The examples you give relate to you, the individual, producing objects and services by investing your time in their production.
You thereby create new "Money's worth" with a value in exchange and you may liquidate this value in exchange in two ways:
(a) straight barter - eg cakes for fish, with no "money" involved, and no reference to money;
(b) delayed barter - ie with credit, or "time to pay", and this requires "Money".
There are two mechanisms for delayed barter.
The conventional route is that a bank creates credit as an interest-bearing IOU, or in the case of a Central Bank/ Mint, a non-interest-bearing IOU such as a Ten Pound Note. You then accept the IOU in exchange (the first leg of the barter) and in due course exchange it for something of value (the second leg of the delayed barter transaction). This system uses a "credit intermediary", which is the function of a Bank.
The second possibility is of disintermediated or "Peer to Peer" credit, and this takes place where settlement is made in due course - after a period of time - through the acceptance by the seller of "money's worth" either from the original buyer or from someone else within a monetary system, by reference to a "Value Unit".
The WIR Bank is the closest there is to such a system.
This is a Swiss Business to Business (B2B) barter system with in-built credit. The discipline which has supported this system and made it so sustainable is that members have to give a charge over their property. So any debit balance would be settled by disposal of property.
In other words the WIR is a property-backed monetary system where money's worth of goods and services changes hands not for Swiss Francs, but by reference to Swiss Francs as an abstract Value Unit.
My ambition is facilitate the networked and viral spread of such systems to retail "B2C" transactions through the use of "Guarantee Society" framework agreements. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
But my question is why should the expansion of money need to take place before the expansion of production. In my example, it either took place afterwards, or not at all (with a deflation that increased the value of existing money). Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
As far as I can see, this would be - conventionally - deflationary, since there is, all else being equal, now relatively less (albeit infinitesimally so) money than money's worth available to buy.
Provided you can "afford" to provide these goods and services (ie it's in your "spare time", and your cost of living is met from other sources), then money is not needed.
But normally you will need money (or rather, money's worth purchased with money..!) to survive in the period before people pay you. ie the period in which you are giving your employer credit. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
If its part of an expansion of production, that requires either an increase in the velocity of circulation of money or an increase in the money supply ... and while the velocity of circulation can increase, it cannot increase without limit, therefore the ability to sustainably increase production requires the ability to expand the money supply in advance of production.
It is misleading to refer to money as "debt" or "credit" and especially to refer to money under one set of institutions as "debt" and under a different set of institutions as "credit", because a financial debt is also a credit and a financial credit is also a debt ... a financial asset is a commitment, with someone obligated to perform some activity on one side of the relationship and someone who is the beneficiary of that activity on the other side. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
If I buy equipment, that equipment had to be produced. If it wasn't produced before, it is an increase in production, even though it may come a year or more before the finished good that I have in mind is on the market. Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
The workers that produce the equipment need to be paid, after all, and even for lengthy production projects requiring payment for work in progress ... the payment is for meeting benchmarks, so its payment for the work that has been finished. The materials and other costs of production and the wage bill must still be financed. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
Perhaps the money we use today, but not in the times of the gold standard. Then all money was backed up by gold. Gold is a natural resource (which has mostly just exchange value) and not debt.
Oh no it does not! The price of gold increased tenfold in real terms over the past 40 years (something like that -my wife is in Laos with the book that has the source, namely "The Accidental Theorist by Krugman, so I can't check for the exact numbers). Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
Not in real terms i believe. The purchasing power of 1oz of gold, i believe, is about the same today as it was 40 yrs ago. My point, however was against the idea that money is debt. Money is exchangeable property. You can change your not-so-well-exchangeable property to money, it is not debt. If you find piece of gold somewhere, it is not debt. It is debt if you borrow money.
ie credit has been "monetised".
Gold backing for monetised credit ended in 1971 ie the practice of requiring the "Capital base" to be stocks of gold bullion so that credit was nominally redeemable in gold.
There is not remotely enough gold in existence sufficient to meet the needs of the global economy. What gold does exist is demonstrably subject to routine manipulation by intermediaries (and Central Banks appear to be the worst offenders), so it would be inappropriate to use it as the basis of a currency.
IMHO we should use as a basis for a currency Units redeemable for other, more abundant, forms of value, in particular land rental values and energy. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
That is absolutely correct.
"The money we use is interest-bearing debt created by credit institutions upon the base of an amount of capital set by the Bank of international Settlements in Basel."
This is very interesting and complicated. I will have to read what is written about this..
Really?
I can't find the figures for 40 years ago, but let's try 1971 then -37.
As you can see here Deflators, 40$ in 1971 would get you in 2007 (figures not available for 2008, but it would be around 3% extra):
$204.73 using the Consumer Price Index $165.75 using the GDP deflator $222.12 using the value of consumer bundle (probably the most relevant) $200.31 using the unskilled wage $336.89 using the nominal GDP per capita (that makes little sense in terms of purchasing power) $490.02 using the relative share of GDP (makes no sense at all in terms of purchasing power -you'd have to have newcomers receiving zero to bring it to the previous, already inflated, figure)
As you can see here Gold price history, an ounce of gold was worth around $35 (I didn't want to be told that my figures were due to rounding the graph too low, hence my 40$ above). That reached around 680 in 2007.
So OK, my tenfold was way off, it's actually threefold (or maybe it's not over 40 years at all, but much longer, or rather over the seventies, where it was indeed tenfold in real terms), but as I said I didn't have the figures with me. The point is that it's a legend to hold gold as fully representative of purchasing power. Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
And, no, if it is not a monetary production economy ... if money is not required in order to gain command of the means of the production ... then money is not required to expand production and income.
For example, in a pure freeholder subsistence economy, in which the means of production are inherited or otherwise allocated as inalienable property, producers can work longer hours to produce more, provided they can perform the production with the resources they already command.
If they have to buy something in order to produce more ... a tool, seeds for a new crop, fertilizer ... then they either have to have physical savings ... something stockpiled that they can sell to raise funds ... or access to credit. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
Well, that's an important alternative isn't it? I know savings had a bad name in the States lately, but if I reckon that a direct investment will yield more (risk balance taken into account) than my savings account and to that respect divert some money from them to the investment, I'should be doing exactly that.
I know everyone wants huge returns from extreme leveraging, but that may be part of the problem. We now see absurd situations where investors massively buy US bonds that yield negative real returns when there are essentially risk free investments (like Jérôme's projects in areas with feed-in tariffs) that struggle to happen even though they would yield enough to easily repay a bank loan should the bank have money to lend.
If there truly is a savings glut as many argue, then there should be no need for monetary creation. All capital projects should happen and happen frequently. Except that people want double digits returns on capital and to be bailed out when one investment fails, but if one demands the unachievable, it should come as no surprise that it cannot be achieved. Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
I know everyone wants huge returns from extreme leveraging, but that may be part of the problem.
Most leverage comes from the use of credit and it is the worthless nature of bank-created credit that is directly responsible for inflation of asset prices, and an indirect contributor to retail price inflation.
The principal cause of retail price inflation is fiscal deficit. ie when government credit which is not backed by taxes is spent into circulation (as opposed to being invested in windfarms etc).
Cyrille:
If there truly is a savings glut as many argue, then there should be no need for monetary creation. All capital projects should happen and happen frequently. Except that people want double digits returns on capital and to be bailed out when one investment fails, but if one demands the unachievable, it should come as no surprise that it cannot be achieved.
At the heart of our problems is people's unrealistic inflationary expectations combined with the hybrid nature of the money as debt that we use.
Money has no cost - unless it happens to be debt.
Credit (as distinct from money) does have a cost - and that is the cost of defaults, combined with system operating costs.
The use of Capital - by which I mean productive capital, such as land, energy equipment, and, increasingly, knowledge - does not so much have a cost, as a market price.
Capital in existence (your savings glut - largely consisting of land rentals monetised through mortgage intermediaries) has expanded massively over time, and the market price of "low risk" Capital has shrunk from 25% pa in Babylonian times, through 10% pa in medieval times, and 5% before the dawn of the industrial revolution, to what is probably 1 to 2% now - maybe even less.
I am proposing what is a Debt/Equity swap on a massive scale, the effect of which will be to reduce massively the financial claims on property users by removing the debt obligation. The result will be that debt owners will not be wiped out,but will have a tradable form of quasi equity carrying a reasonable real return.
So the vast pool of "savings" out there - which is rapidly disappearing down a black hole as market prices of land in particular collapse - may be redeployed in low risk "affordable" housing and in refinancing low risk existing public infrastructure.
This will give investors a low risk real return. Those looking for greater returns must take a greater risk, which will typically be "development risk" in new projects. Good returns are possible here without leverage, but not without risk.
Not everyone with savings is prepared to take such risk, and the problem has been that people have been looking for rates of return in excess of the populations' capability to pay them, one of the reasons for that being that capital ownership is not widely spread.
Mathematically, this debt money spree had to end, and from Babylonian times onwards we have always known that debt is unsustainable - which is where the concept of the Jubilee comes from.
What I am proposing is not so much to "forgive" debt but to reinvent it into a new type of equity. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
An individual decision to spend out of "saving" is handing financial assets to someone else, and they hand money over, and that money is spent. It changes the identity of the person spending the money on goods and services, not the quantity of money spent.
You are trying to get a handle on it from the bottom up, without looking at the system within which it is located. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
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