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JakeS:
The banker needs to eat. I am the only guy in our toy economy who makes food. Ergo, the banker will buy my products. Banks are not computers that only have balance sheets - they have real-world expenses (their employees have to eat and sleep, and their shareholders need to eat and sleep too...).

Indeed. But we must distinguish between:

(a) the bank as a legal person;

(b) the bankers as professional employees; and

(c) the owners of the bank as rentier shareholders.

Sure, individuals need to eat, too. But you are talking about the bank buying the food. Banks only buy food to sell. Banks don't eat, bankers do, and rather well, at that.

JakeS:

I don't follow.

Scenario 1: I pay the bank interest of - say - € 100 on my debt. This destroys € 100.

Your payment in relation to interest destroys no money: only repayment of loan principal destroys money.

JakeS:

The bank then pays its employees and shareholders € 100 that they use to buy my produce. This creates no new money. Aggregate change in the money supply: - € 100.

It is very little known (even by people who think they understand the system) that when banks credit the accounts of employees and shareholders (ie pay them) they are creating credit aka new money in just the same way as they do when extending loans. The difference is that these payments are not interest-bearing loans.

Any profit they have made from the interest you paid the bank will extend its capital base and underpin more credit creation of new money, whether for loans or for expenses or dividends.

JakeS:

Scenario 2: I cut a deal with the bank when I take out the loan, saying that don't pay any interest, but in return I have to give € 100's worth of my produce to the bank's employees and stockholders. Aggregate change in the money supply: € 0.

Interesting scenario. The bank would credit your account, extinguishing money.  But they now have an additional €100 of assets instead of (say) an additional €100 on their account with the ECB. They also have commodity price risk.

JakeS:

But these two scenarios are functionally identical! The same stuff gets moved around in the same way between the same people. The only difference is in the bookkeeping. I realise that fiat money is kinda sorta fictional, but surely it's fictional in a consistent fashion?

They are not functionally similar but I can see why you thought so.

JakeS:

I fail to see how this changes the scenario. If I have a secured loan of € 1 million and operating credit of € 100 thousand, then it just means that the effective interest rate I'd pay on the € 100 thousand in the above example would be ten times as high. The question here is where the interest payments go, not what happens to the principal, because the principal always nets out to zero when it's repaid, in terms of money created and destroyed.

The point is that economic growth has to take place to enable both the principal and the interest tobe repaid.

What happened at the point of Peak Credit (about mid 2007, I reckon) is that the pyramid of financial claims - comprising both principal and interest repayments - outstripped the capacity of the productive economy to meet these claims.

One of the limiting factors was the supply of liquid fuels I think, which was the straw that broke the camel's back.

My solution is not to change the quantity of claims but rather their quality, by removing the debt obligation of a repayment date.


"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Feb 22nd, 2009 at 02:56:27 PM EST
[ Parent ]
The point is that economic growth has to take place to enable both the principal and the interest tobe repaid.

Why? If the interest rate is lower than the real return on investment in terms of consumables (that is, if the investment sustainably yields more - say - grain per year than is required to pay the interest), then no economic growth - that is, increase in the amount of stuff produced each year - appears to be needed.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Feb 22nd, 2009 at 03:17:23 PM EST
[ Parent ]
Now you are looking at economic growth in terms of real stuff. Unfortunately it's measured in funny money, not actual money's worth.

It is true that at a minimal interest rate which covers the costs of defaults and reasonable system operating costs (ie without insane banker salaries and perks), and with serious constraints on credit creation, then the system can actually burble along reasonably well for quite some time before strains would become apparent.

Unfortunately that's not what happens, because in a "For profit" system greed always gets the better of people, whether shareholders, managers, or both.

Greenspan's triumph was that he enabled the system to come crashing down many years to early by letting greed rip.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Feb 22nd, 2009 at 03:35:25 PM EST
[ Parent ]
Retail banks should not be run for profit. Retail banks are utilities and should be run by the government, like all other utilities. And their interaction with the rest of the financial system should be heavily regulated.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Feb 22nd, 2009 at 03:43:33 PM EST
[ Parent ]
JakeS:
Retail banks should not be run for profit.

Retail banks are unnecessary - and in fact moribund - intermediaries. Retail banking - ie credit creation and clearing - is a necessary utility function.

JakeS:

Retail banks are utilities and should be run by the government, like all other utilities.

I do not believe Government should run utilities.  I think that an optimal enterprise model for utilities is a cooperative of service providers in partnership with a cooperative of service users, within parameters set by government.

I believe that such a "Not for Loss" utility model is both possible and necessary.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Feb 22nd, 2009 at 04:50:02 PM EST
[ Parent ]
I wasn't trying to give precise prescriptions for the fine details of the architecture.

In a well-run society, it is not clear that it is trivial to distinguish between "government" and "non-government" - witness the role of labour unions as a kind of quasi-government in 20th century Scandinavia. So what I meant to say was "should be run by an entity that's more state and/or collective than private and/or individual." Your model would certainly qualify as that. Although I'm not convinced that it's necessarily the optimal model for things like water and railroads (and to some degree electricity) which are by their very nature large, integrated systems that must be micromanaged to a considerable extent by a central hub.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Feb 23rd, 2009 at 02:40:41 PM EST
[ Parent ]
JakeS:
Your model would certainly qualify as that. Although I'm not convinced that it's necessarily the optimal model for things like water and railroads (and to some degree electricity) which are by their very nature large, integrated systems that must be micromanaged to a considerable extent by a central hub.

Ummm...good point, but a strong management core need not necessarily mean hierarchy,just a much more significant node on the network.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Feb 23rd, 2009 at 03:19:51 PM EST
[ Parent ]
More and less significant nodes are a hierarchy.
by Colman (colman at eurotrib.com) on Mon Feb 23rd, 2009 at 03:26:46 PM EST
[ Parent ]
I don't think so, any more than more or less significant people connected directly are a hierarchy.

It's about direct routing of information, disintermediation, and flat, rather than multi-level structures.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Feb 23rd, 2009 at 05:20:06 PM EST
[ Parent ]
Railways are fundamentally a different kind of network that the internet. The internet is scale-free, railroads are not. So an organisational structure that's adapted to internet reality has a high probability of not being viable when applied to railroads, and vice versa.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Feb 23rd, 2009 at 04:40:02 PM EST
[ Parent ]
hmmm running the railways as the internet. Packet switching individual carriages? Passengers allowed to debark when the train is re-assembled at the far end?

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Mon Feb 23rd, 2009 at 05:07:21 PM EST
[ Parent ]
My point is that direct - instantaneous "network presence" - connection is leading to an entirely different architecture of generic application.

The enterprise model - legal XML, if you like - is only just beginning to adapt to this.

For physical networks, different rules apply.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Feb 23rd, 2009 at 05:16:10 PM EST
[ Parent ]

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