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Money, Credit and Mathematical Echoes

by ChrisCook
Sat Jun 26th, 2010 at 06:50:10 AM EST

An interesting dialogue with das monde prompted me to create this Diary.

(Chris Cook) Those who say that our bank created money is debt have the polarity reversed: it is a claim over debt.
Asia Times Online : Henry Liu
Credit drives the economy, not debt. Debt is the mirror reflection of credit. Even the most accurate mirror does violence to the symmetry of its reflection. Why does a mirror turn an image right to left and not upside down as the lens of a camera does? The scientific answer is that a mirror image transforms front to back rather than left to right as commonly assumed. Yet we often accept this aberrant mirror distortion as uncolored truth, and we unthinkingly consider the distorted reflection in the mirror as a perfect representation.

In the language of finance economics, credit and debt are opposites but not identical. In fact, credit and debt operate in reverse relations. Credit requires a positive net worth and debt does not. One can have good credit and no debt. High debt lowers credit rating. When one understands credit, one understands the main force behind the modern finance economy, which is driven by credit and stalled by debt

das monde:

Hmmm. That money is neither debt or claim on debt.

You are correct, I used sloppy language.

In fact it is a demand deposit which is an undated non-interest-bearing claim against the bank. On the other side of the bank's balance sheet is their assets, which mainly consist of interest-bearing loans.

das monde:

It is still not clear to me how the money is "destroyed".

This is the $64 billion dollar question.

I have come to think that a maverick thinker called Steve Consilvio is on the right track here by seeing deficit-based money as a 'mathematical echo'. He also believes - as I do - that profit, by definition, causes inflation, but that is another story.

OpEdNews - Diary: Obama: Right and Wrong

Every transaction in the economy has a mathematical echo. The goods or services are consumed, but the mathematical value of what was created never expires. The Federal Debt of $13 trillion represents the cumulative value of every transaction for the last 230 years of American history. Other nations have their own numbers, in their own currency. It is all the same phenomenon.

He is on the right track because a deficit-based dollar is irredeemable for value, because there is nothing backing it.

When a debt is repaid, the debt is cancelled, but the original credit money creation (the mathematical echo) remains, as does the new credit created which was necessary to pay the interest.

Non-performance of loans occurs when the incoming flow of credits slows down or ceases, causing illiquidity. In order to prevent system breakdown, these credits have to be replaced, and this requires new credits, which at the moment can only come from the public sector.

If a default event then occurs, then the way I see it the debt is written off, or converted to equity. But the 'mathematical echo' of that debt principal remains as a nominal part of the surreal 'National Debt'.

das monde:

When a credit is paid back with interest, the initial credit amount is presumably canceled and the interest goes to bank's profit. But how does that happen technically? Is it first or last mortgage payments go to bank's profit and CEO bonuses? Or does the bank appropriates all payments, and the money gets really "destroyed" when a bank cannot pay out current cash or transaction requests?

What happens is that when there is a repayment:

(a) the capital element is credited to the borrower's account as a deduction from principal;

(b) the interest element is credited to the bank's Profit and Loss account.

The cool bit is that the bank is creating new credit when it debits its P& L and credits its staffs' accounts or pays other costs, or credits the accounts of its shareholders with dividend payments. By doing this a private bank is spending new money into existence.

In neither case is credit - the mathematical echo, which is IMHO analogous to a redeemable share - destroyed.

The point of the latter is that private banks do not just create credit when they lend money, they also do so when they spend money. Quantitative Easing is what happens when a Central Bank spends money into existence. The normal method is that Treasuries create debt eg T-bills, and private banks spend money into existence which buys that debt and the government's expenditure is thereby 'funded'.

I could do the same if I gave you my IOU against value received from someone. If a third party then accepted my IOU from that person in settlement of a debt owed by him then the result is a monetary system. The difference between me and the bank is that I have to provide real value to someone in settlement of my IOU.

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Money, Credit and Mathematical Echoes | 24 comments (24 topical, 0 editorial, 0 hidden)

Small Correction (none / 1)

I think you mean "Echoes" in the title, Chris.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (myfriends@thisispancakes.com) on Sat Jun 26th, 2010 at 07:44:53 AM EST

Re: Small Correction (none / 1)

Cheers, Drew

Amazing how many newspaper articles have typos in the title....

Modern conservatives engage in one of man's oldest exercises in moral philosophy: the search for a superior moral justification for selfishness.Galbraith

by ChrisCook (cojockathotmaildotcom) on Sat Jun 26th, 2010 at 08:13:21 AM EST
[ Parent ]

Re: Small Correction (none / 1)

Journamalism! :)

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (myfriends@thisispancakes.com) on Sat Jun 26th, 2010 at 08:17:07 AM EST
[ Parent ]

Re: Small Correction (none / 1)

Yup.

The 'Guardian' wasn't known as the 'Grauniad' for nothing......

Modern conservatives engage in one of man's oldest exercises in moral philosophy: the search for a superior moral justification for selfishness.Galbraith

by ChrisCook (cojockathotmaildotcom) on Sat Jun 26th, 2010 at 08:24:16 AM EST
[ Parent ]

Re: Small Correction (none / 1)

True, but, in fairness, the Grauniad isn't so up tight that they can't make fun of themselves now and then about it. Example: grauniad.co.uk actually redirects to their website. It's a nice little in-joke.

Plus, their reputation for screw-ups is more from the period prior to spellcheck. It's tough to tell sometimes when they screw up whether it's a real screw-up or just the editors fucking with us.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (myfriends@thisispancakes.com) on Sat Jun 26th, 2010 at 08:30:32 AM EST
[ Parent ]

Re: Small Correction (none / 0)

Was it Gekkos before that?

You can't be me, I'm taken

by Sven Triloqvist on Wed Jun 30th, 2010 at 10:21:09 AM EST
[ Parent ]

Re: Money, Credit and Mathematical Echoes (none / 0)

The NYT has assigned someone to form an opinion about the Best Party candidate. Ruh roh.

Mr. Gnarr said his idea for the Best Party was born of the profound distress and moral confusion after the banking collapse, when Icelanders fiercely debated their obligation to repay ruined [!!!] British and Dutch depositors.
Practically speaking, Mr. Gnarr said he had no qualms. "Why should I repay money I never spent?" he asked, a common sentiment here. But on a deeper level, he had misgivings.
"I consider myself a very moral person," he said. "Suddenly, I felt like a character in a Beckett play, where you have moral obligations towards something you have no possibility of understanding. It was like `Waiting for Godot' -- I was in limbo."
Read more...

Diversity is the key to economic and political evolution.

by Cat on Sat Jun 26th, 2010 at 07:41:40 PM EST

Re: Money, Credit and Mathematical Echoes (4.00 / 2)

Note how the article harps on the Best parties' leaders background in punk, music, and comedy; that Gnarr "At 14, he was sent to a boarding school for troubled teenagers and stayed until he was 16, when he left school for good" and, thus, doesn't have the 'proper' education.

It's a shiv piece. The Best Party isn't Serious™. They have unqualified© people making decisions:

"A lot of us are singers," said Ottarr Proppe, the third-ranking member of the Best Party, who was with the cult rock band HAM and the punk band Rass. Mr. Proppe now sits on the city's executive board, where he will be deciding matters like how much money to allocate for roads. "Making a video was very easy," he said.

This matters. On May 25th the Best Party was polling 42% and on track to win 8 seats and a clear governing majority. After a bout of "Unserious They Is" attacks their final voting percentage was 34.7% -- a significant drop.

The single most important task facing "The Left" - those who wish to change the CW - is intellectual respectability. Before change can occur enough people have to decide to listen to voices for change and their alternatives.

No one could have predicted

by ATinNM on Sun Jun 27th, 2010 at 01:56:40 PM EST
[ Parent ]

Re: Money, Credit and Mathematical Echoes (4.00 / 2)

re: "Before change can occur enough people have to decide to listen to voices for change and their alternatives."

I agree. This profile is a shiv, sporting a scrimshaw handle as befits the industrious standards of the NYT. I could not help but be impreseed by Mr Gnarr's remark about repaying money he neither borrowed nor ever spent. He refers of course to interest amount demanded by a lender and perceives somehow that the rationale of "value added" to a measure of money is exceedingly obscure, not unlike a muscular tick whose origins occupy a remote region of conscious life. This thought and his affinity with constituency is subversive to certain, international principles of governance.

I suspect but cannot be certain the writer understands this, so felt compelled to characterize Mr Gnarr's opinion of money management as ambivalence or "misgivings" about his own competence to perform the business of Reykjavik.

I suspect, Mr Gnarr meant to convey a sense of his ephiphany --sudden recognition of the absurd roots of financial theory-- when, or if indeed, he declared, "I felt like a character in a Beckett play, where you have moral obligations towards something you have no possibility of understanding." That something is the supposed "good" moral of agreeing to surrender more (interest, premium, opportunity cost, profit) than one ought to owe another in consideration.

Seems clear to me: Mr Gnarr discovered another rule by which to negotiate the world. I'll bet, you've encountered this drawing before (right). I've been surprised how many times it's turned up in my own experience and how many people struggle to switch their perception of the image. The illustration by E. G. Boring is a test device. The struggle demonstrates that what one sees on a conscious level is not the pattern on the retina but the constitution of rules to which one match a pattern. How one selects a rule for perception has been described by Michael Gazzaniga. His theory implies that ones a rule is selected, a perception may be fixed and dictates certain responses --conscious and involuntary. Understanding or anticipating pattern recognition and response processes is even more complicated, when we consider the automatic selection from backfield patterns.

Diversity is the key to economic and political evolution.

by Cat on Tue Jun 29th, 2010 at 12:19:44 PM EST
[ Parent ]

Re: Money, Credit and Mathematical Echoes (4.00 / 2)

The cool bit is that the bank is creating new credit when it debits its P&L and credits its staffs' accounts or pays other costs, or credits the accounts of its shareholders with dividend payments.

So, banks have the privilege to pay their employees and costs not in "real" earned money, but in credit transactions? Other companies can only dream on...

Thus, everything that bank does is just an arithmetic operation on its balance sheet? Since capital fraction requirements are quite arbitrary, and no-one except interested specialists wish to follow bank operations and economic conditions closely, banking is a quite a seperate (independent but demanding) world.

The goods or services are consumed, but the mathematical value of what was created never expires. The Federal Debt of $13 trillion represents the cumulative value of every transaction for the last 230 years of American history.

Most of that Federal Debt is interest. Only so much of tangible value was ever created, but the aggregate claim on the debt is there and growing, regardless of what could ever be created. We have a mathematical hurricane, sucking all production into free lunch profits.

by das monde on Mon Jun 28th, 2010 at 02:37:34 AM EST

Re: Money, Credit and Mathematical Echoes (4.00 / 2)

das monde:

So, banks have the privilege to pay their employees and costs not in "real" earned money, but in credit transactions?

Yes, but to be fair to banks they actually do provide value. The economic function of a bank is as a risk intermediary, providing a guarantee of the credit of a borrower or trade buyer, and backing that guarantee with the shareholders' proprietary capital.

das monde:

We have a mathematical hurricane, sucking all production into free lunch profits.

That sums it up beautifully.......but you will observe that the 'free lunch' extends only to the bank's profits, not its (reasonable) costs or default costs.

There is in fact a solution, I believe, and that is a 'debt/equity swap' - through 'unitisation' of property rentals in particular - which will have the effect of turning most of the National Debt to a National Equity.

There is a compelling reason (minimal capital requirements) why banks will actually take this road - becoming risk service providers - since those who do not will be at a disadvantage to those who do.

Modern conservatives engage in one of man's oldest exercises in moral philosophy: the search for a superior moral justification for selfishness.Galbraith

by ChrisCook (cojockathotmaildotcom) on Mon Jun 28th, 2010 at 04:23:21 AM EST
[ Parent ]

Re: Money, Credit and Mathematical Echoes (none / 0)

I agree that bank services are useful. But still, some lunches are more free or rich than others. When all economy is indebted to bankers and almost no enterprise is standing on its own, that is an end of a road to some serfdom.

by das monde on Mon Jun 28th, 2010 at 04:46:26 AM EST
[ Parent ]

Re: Money, Credit and Mathematical Echoes (none / 0)

das monde:

When all economy is indebted to bankers and almost no enterprise is standing on its own, that is an end of a road to some serfdom.

But that is not really the case: the banks are only middlemen, and deficit-based credit is only part of the problem.

Banks as risk intermediaries have been the instruments through which the rich and powerful have become more rich and powerful. The 90% are only nominally in debt to the banks - in reality it is the other 10% who are on the other side of the banks' balance sheets to whom we are indebted.

The combination of compounding debt and private property (historically in land) can only ever end in one way. For thousands of years this combination has unsustainably concentrated wealth in the hands of the few. That is why kings used to have 'Jubilees' if they wished to keep their heads on their shoulders.

We have turbocharged this combination through institutionalising both greed - through the profit motive - and irresponsibility - through 'free' limitation of liability.

The current system is terminally broken, and it is Time for a Change.

Modern conservatives engage in one of man's oldest exercises in moral philosophy: the search for a superior moral justification for selfishness.Galbraith

by ChrisCook (cojockathotmaildotcom) on Mon Jun 28th, 2010 at 05:18:49 AM EST
[ Parent ]

Re: Money, Credit and Mathematical Echoes (none / 0)

We may make a distinction between working intermediate bankers and that 10% other side... How would you call the other side? They are mostly in Wall Street, do nothing else besides intermediating between themselves and collecting payments, and any kind of banking is the easiest business for them.

by das monde on Mon Jun 28th, 2010 at 06:00:03 AM EST
[ Parent ]

Re: Money, Credit and Mathematical Echoes (none / 0)

Don't confuse the Wall Streeters with their client/counterparty base.

The 10% are the wealthy in Society who benefit the most from privileged property rights over Commons like land. While some (too many) of the 10% are in Wall Street, most are not. 90% of us are indebted to the 10% via the Banks.

Wall Street serves the Wealthy 10% and applies a de facto Wealth Tax on them. But it's not Wall Street/the City who own most of the land eg in the UK 0.3% of the population owns 69% of the land.

Modern conservatives engage in one of man's oldest exercises in moral philosophy: the search for a superior moral justification for selfishness.Galbraith

by ChrisCook (cojockathotmaildotcom) on Mon Jun 28th, 2010 at 06:09:34 AM EST
[ Parent ]

Re: Money, Credit and Mathematical Echoes (none / 0)

What better those 10% do? Are they just old-fashioned rentiers?

If they couldn't indebt the planet so easily, what is their wealth for?

by das monde on Mon Jun 28th, 2010 at 07:48:44 AM EST
[ Parent ]

Re: Money, Credit and Mathematical Echoes (none / 1)

... in the UK 0.3% of the population owns 69% of the land.

Why I think Land Reform is needed in the UK allied with a real Green Revolution© -- a change in the way agriculture is done, not just pouring a butt load of petro-chemicals all over the place raping the future to profit in the present.

No one could have predicted

by ATinNM on Mon Jun 28th, 2010 at 08:45:31 AM EST
[ Parent ]

Re: Money, Credit and Mathematical Echoes (none / 0)

Wall Street serves the Wealthy 10% and applies a de facto Wealth Tax on them.

They definitely tax most of economic activity, for as much as it is dependent on credit. Government taxes are peanuts.

by das monde on Mon Jun 28th, 2010 at 08:47:01 AM EST
[ Parent ]

Re: Money, Credit and Mathematical Echoes (4.00 / 2)

I have an acquaintance who accounts himself a very well informed observer of the economic scene. He believes banks can only lend what they can borrow and that every lender has to be matched by a borrower. The notion that banks can create money (credit) ex nihilo is so much double Dutch to him. Sovereign debt has to be repaid in his world, and in an ideal world there is no such thing as debt as it is almost a moral infirmity (or at best a temporary life cycle phenomenon) to owe money to someone else.

It seems to me his world view is somewhat analogous to a Newtonian view of astronomy. Quite reasonable (if v. conservative) in the inter-personal world, and utterly out of touch where the macro world of hyper finance is concerned. And yet I suspect his world-view is what informs most "ordinary people's" voting choices and political outlook.

How do we make the arcane subjects of money, value, credit, debt, derivatives and banking practices accessible to non-specialists? After all it is the general population which is paying the price for the depredations of the few.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot dotty communists) on Wed Jun 30th, 2010 at 09:33:00 AM EST

Re: Money, Credit and Mathematical Echoes (none / 0)

Frank Schnittger:

How do we make the arcane subjects of money, value, credit, debt, derivatives and banking practices accessible to non-specialists? After all it is the general population which is paying the price for the depredations of the few.

I don't think we need to, Frank.

We just need to act to implement a new model and invite people to participate. If it works for them they will.

From the outside the new model will look reasonably familiar.

As Bismarck said, people don't have to know how the sausage is made, but if they are curious enough to ask we have to be able to tell them.

It will be recognisably a sausage, but the difference is that this sausage won't give you food poisoning or worse.

Has your acquaintance never heard of 'equity' by the way?

Modern conservatives engage in one of man's oldest exercises in moral philosophy: the search for a superior moral justification for selfishness.Galbraith

by ChrisCook (cojockathotmaildotcom) on Wed Jun 30th, 2010 at 12:10:55 PM EST
[ Parent ]

Re: Money, Credit and Mathematical Echoes (none / 0)

Equity is what is used to proportionately assign profits and meet some arcane regulatory requirements.
ChrisCook:

We just need to act to implement a new model and invite people to participate. If it works for them they will.

Who is this WE? If it is to be established by the state, we will have to mobilise popular demand and support for it.

If it is to arise privately because it is in most people's best interests that it arise, then why isn't this happening on a large scale now?

If anything, it is my acquaintance's world-view which is currently informing global policy choices. not yours How do we change that situation?

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot dotty communists) on Wed Jun 30th, 2010 at 12:59:53 PM EST
[ Parent ]

Re: We (none / 1)

Who is this WE? If it is to be established by the state, we will have to mobilise popular demand and support for it.

At best, a new model spreading bottom up will be by sovereign (private?) individuals coming together for a common purpose. I doubt whether it will be established by the State but it may be facilitated by the State.

We change things by acting; through implementing prototypes, or pointing out people who do; and getting the word out there.

Modern conservatives engage in one of man's oldest exercises in moral philosophy: the search for a superior moral justification for selfishness.Galbraith

by ChrisCook (cojockathotmaildotcom) on Wed Jun 30th, 2010 at 02:52:00 PM EST
[ Parent ]

Re: Money, Credit and Mathematical Echoes (none / 0)

I believe the problem is deeper than a deficit-based dollar. Originally, paper currency represented a bullion stash. You could exchange that dollar for gold. There were a couple of problems with this. First, gold isn't good for much in and of itself. Second, why should a country's currency be controlled by the size of its gold mines? The dollar and the ruble should have been on par all those years? I don't think so.

So the US made a switch. Instead of saying, "This dollar is backed by the gold in Fort Knox," it said, "This dollar is backed by forests, factories, stockyards, oil fields, etc., etc. You can use this dollar to buy stuff" (The Soviet Union's response for the ruble was, "Wanna buy a bowl of borscht? How about a slightly used T-54?"). We tied the dollar to the national economy.

The problem is that we've gradually dismantled that economy over the last half-century. What do we make now? Electrons and paper. Those products are irrelevant (or only peripherally or derivatively so) to the vast majority of people, and the dollar is irrelevant to those products. In other words, they ain't buyin' what we're sellin'. That's the dollar crisis.

by rifek on Wed Jun 30th, 2010 at 05:27:30 PM EST

Re: Money, Credit and Mathematical Echoes (none / 0)

Quite paradoxically, it seems that, for the last twenty years, the US dollar has been backed by the US consumer, who until 2008 was drawing down the 'wealth' created by serial asset bubbles to make up for the decreasing exportable goods and services the economy was producing. The financial sector was profiting off of the flow and didn't care what generated the flow so long as it flowed. The spice must flow.

But assets are no longer going up and no one can figure out how to get them to resume their former appreciation. This has put a severe crimp in the game. The way it was played by the financial sector never really took account of what might happen if assets stopped appreciating. Most of those in the financial and regulatory world are as confounded as if gravity suddenly became a repulsive force. Their world is flying apart and they don't know why, or are afraid to admit that their darkest fears might be the problem, and thus they can't figure out how to fix it.

In order for the financial community and related players in the government and regulatory institutions to understand what is happening they would have to accept that they were engaged in massive, systemic fraud and that most of them belong in jail. They can't and won't admit that. Therefore the responses are to everything but the real problem. That is why the responses can't and won't work.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer at eurotrib.com) on Wed Jun 30th, 2010 at 11:30:12 PM EST
[ Parent ]

Money, Credit and Mathematical Echoes | 24 comments (24 topical, 0 editorial, 0 hidden)

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