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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
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