Money As Debt [video]
video.google.com
video.google.com
As others have pointed out, this video is pure trash. I would encourage others to flag it and get it removed from the front page, where it has no place or value other than the handful of comments that debunk it (though, sadly, I'm sure they'll soon be followed by countless angry replies trying to argue with the debunkings on some emotional "bankers are evil" basis).
http://news.ycombinator.com/item?id=460096
By that logic, either net.kook conspiracy theories are on topic, or something hasn't worked quite according to plan.
I see meta-threads like this as the commit-list-flames of the OSS-world. You screw up the repository, and the crotchety regulars tell you how and why. This both educates and triggers social cohesion-fu, which maintains some level of quality.
If we imaged, for instance, that we were to remove those flames from the OSS world, and suddenly, shitty code would be silently disappeared by the invisible hand of coding goodness, I don't suspect that would be nearly as effective. People would keep committing bad code. Turns out telling them why their code is bad teaches them to write better code.
The video is PURE TRASH, and I know that because I was raised by economists.
But I strongly suspect it is not at all obviously pure trash to a lay person.
That's what's so worrying about articles like that, they are not obviously crap to a majority of people.
Right of the top of my head I can point out that the video contradicts itself.
It claims both that A:
The money supply is constantly being inflated (that's correct)
And B:
That interest guarantees some borrowers MUST go broke.
(that's wrong, we just agreed the money supply is constantly being inflated.)
For more discussions:
http://forums.somethingawful.com/showthread.php?threadid=295...
The video did not do a great job of explaining what happens when debt is repaid. Let's say that the amount of bank-created money is defined as the total amount of money in everyone's account, minus the total amount in the bank's vaults. When one makes a payment on a loan, the payment is always part interest and part principal. The latter is dropped into the vault, and does not appear in anyone's account. So, this actually constitutes a removal of bank-created money from the system. The interest becomes revenue for the bank; the bank is a business and it should make money just like any other business. That revenue is used to pay the bank's operating expenses, dividends to the shareholders, and interest to all the depositors. So, it's not constantly accumulating in the hands of a wealthy few.
And that brings up another important point that the video neglected to mention. Debt may increase exponentially, but so do savings.
The other important detail left out is that payments are made with government-created money. Banks cannot print paper money... only the government. So the money in your wallet was not created by the bank. When your ATM served that money, the bank had to provide real cash. When you write a check, the bank has to transfer real money (entries on the Fed reserve's books) to the other bank. However, there are systems in place to reduce the amount of government-created money necessary (intra-bank transfers don't require any at all... inter-bank transfers are aggregated and canceled out where possible). So, the payments you make paying off your mortgage happen with government-created money, and do decrease the total amount of money and debt in the system.
I'd suggest the free literature from the Mises institute if you want to understand banking.
As a society, we do want to grant promissory notes to encourage growth. However, banks, as commercial entities, quickly run away from simple, society-uplifting investments to derivatives and subprime credit.
As rational businesses they are motivated to grow, so the value/paper ratio goes steadily down as they expand.
There is clearly something missing in the equation, and I think the video hints at it nicely. Something is wrong when the rules of the business encourage banks to make increasingly lower value loans over time.
And bailouts make them even less likely to be prudent with the power we give them.
http://en.wikipedia.org/wiki/Fixing_Global_Finance
The Economist has been dedicating a lot of space to the topic as well. Neither one of them advocates throwing the baby, bathtub, and one's self out of the window.
The last time I felt this way was in the mid-late 90s sitting on the porch with my dad in rural Nebraska. We couldn't figure out why so many tech companies were darlings of the stock market. And sure enough, while there was some (read: substantial) lasting value in the internet business, there were a lot of really stupid dot coms that didn't bring anything to the table.
I believe that there's a large amount of capital seeking returns right now. That is to say, I think at this stage of the world's economic evolution many organizations have obligations to invest large amounts of money, and that there's some ratio of money to real work that is off kilter possibly. For this reason I think tech and the financial bubbles represent a class of problem that we're going to see repeat itself (irregularly) going forward. It would sure be nice to be able to capitalize on it, somehow. :)
Those guys have an Agenda with a capital A themselves. I'd suggest reading a broad variety of sources, including some (mostly, actually) mainstream ones. With economics, there is an unfortunate tendency for "free on the internet" to mean "extremist", which is quite different from all the free programming docs we are used to hoovering up. Imagine if the documentation to color forth were the only thing you could get for free on the internet...
BTW, this is one notable exception:
So for example,
I deposit $10 at bank A
Bank A can now lend 10x ($100) to you
You deposit that at Bank B, who can again lend 10x ($1000)
For me, that is the scam. Why can't we exist only allowing banks to lend out what they actually have instead of creating money out of thin air?
If you deposit $10 then, assuming a 10% reserve rate, the bank will keep $1 and loan $9. In return, you get a $10 bank balance, so the money supply has increased by 10$.
However, the money that was created cannot be loaned again. You can't loan your bank balance to someone else, and neither can the bank. However, the remaining $9 cash can be re-deposited by someone else. Again, the bank keeps 10% and lends the remaining $8.10, creating a $9 account in the process. Then the $8.10 can be re-deposited and so on. The total amount of money that can be created is therefore given by the equation
m = d/r
http://en.wikipedia.org/wiki/Fractional-reserve_banking#Mone...
What confuses everyone is that in normal circumstances, banks don't give cash-in-hand loans. Instead, they open an account for the borrower, who has the option of withdrawing that cash, but will probably leave it there. In effect, the $9 has been immediately deposited back at the bank, where it can be reloaned. This doesn't really change anything though. It just means that the same bank is reloaning the money rather than a different bank. The total money loaned to the bank is effectively $19 (the original $10 plus the borrower who has loaned their borrowed money back again). If the borrower transfers the money to another account, then a different bank will hold the money, but it makes no overall difference to the system.
But of course you're right, that banks still lend out more than they have, which I agree is scam.
Banks are not doing anything different to this. They are just loaning the cash deposited with them. Although the original $10 loan will eventually lead to $100 being created, it has also lead to $100 dollars worth of loans to banks. There's no scam here, it's just the way that debt works. It's no different to people loaning money to each other.
* You deposit $10 at a bank
* The bank is allowed, to lend a *multiple* of that $10.
This is not how normal lending works. It's like if you lend me your bike, and I have magical powers that allow me to then summon 4 more bikes out of thin air, so that I can lend out 5 bikes.
Please explain to me how a bank can create base money, which is exclusively issued by the central bank.
* The bank is allowed, to lend a multiple of that $10.
False! The bank can lend only a fraction of that $10. However, if the borrower deposits that money back in the bank (i.e. makes a loan) then the bank can lend the money again, just like with normal borrowing.
You should at least watch the video so you can see what we're discussing...
It's also worth pointing out that bank runs are incredibly rare events. In a correctly functioning market, a bank can always pay its depositors by securitizing its loans. In a dysfunctional market (such as now) there are usually government guarantees that help smooth the process. The big problem with banks at the moment is that they have been keeping insufficient capital to cover their losses. Insufficient reserves has not been a problem.
The first fallacy is the Malthusian fallacy: namely that humans cannot grow indefinitely. If anything, history has shown as that we can. People have been predicting the coming scarcity apocalypse every few decades and they have always been wrong (the most recent predicted famines in 1985. Then people came up with artificial nitrates...).
The second fallacy is that a certain number of borrowers must default: The money can go in a circle reflecting the value created by the borrowers in excess of interest.
Fallacy 3: It assumes that if nobody had any debt, then there would be no money. The fallacy is that the original money issue (~$2 trillion for the US) is unaccounted for. If there are absolutely no debt, we would still have that amount. (Which can go on ...)
The replacement ideas suggested are idiotic beyond words. This video starts well and quickly degenerates into loony-ville.
He went wrong in a much more subtle way, and one that I can't really blame him for. He went wrong in the assumption that humans would continue to grow geometrically until all resources were expended, then be forced back down by resource starvation.
Instead, human growth has been tapering off in industrialized countries, and long-term forecasts of human population in the year 2100 has been dropping for a long time now. Many, many, many people have all the food they need and the continued realistic prospect of all the food they need, yet choose not to have children.
That is Malthus' fallacy, even though he was reasonable to believe it. Now, as it turns out, he was also wrong about where the resources would run out because he grossly failed to account for human ingenuity, but that just moves the "end-of-resource" date around if humans still grow geometrically, it doesn't actually ruin his argument. Voluntary, pervasive non-geometric growth does, especially when combined with continuing human ingenuity.
(This is very poorly understood on the internets.)
You are badly misrepresenting his theory.
Care to detail?
(I mean, yeah, there's a lot of fairly uninteresting stuff about how selfish people are and such, but whether or not he realized that, that also just fiddles around with "when" the catastrophes happen, not "whether". My summary rather gives him the benefit of the doubt.)
Nothing grows geometrically forever.
Malthus's discovery was that any increase in food supply was matched by an increase in population until food per person was pretty much the same. He didn't actually say anything about limits to growth. But guess what? He perfectly described all human societies all over the world for over 50K years. The data clearly show that Victorians and cavemen and modern day residents of Ghana had basically the same quality of diet on average.
The Malthusian equation has only "stopped" being clearly applicable in a select few industrialized countries and since different points in time after about 1820. For most of humanity the equation actually still works. That's a pretty flimsy set of evidence to start talking about the "Malthusian fallacy" with its huge pile of evidence.
No, not in the empirical sense but the universe is large and, as far as we know, ours for the taking.
By "'stopped' being clearly applicable", you mean completely irrelevant and flat out wrong.
Also, >200 years of data is flimsy? In a scientific sense maybe, but economics isn't a science -- you can't really perform controlled experiments on the entire economy. Also, if some of the third-world countries do indeed start to grow in economic terms, I am certain that their food production capabilities will catch up. India can feed its 1 billion population and I am pretty sure that 50 years ago, that would have been considered impossible.
At the same time, however, my money would be lent out. While my money is in the bank the banker can lend it out at interest. For the 2 or 3 year expected circulation time there is an additional $100 out there. I get interest on that $100 for a couple years, that isn't really mine. So in Canerica I (and to a lesser extent, my bank) am the net benefactor due to the inflation I've created.
That is basically what the banks have done, only they never need to cash their cheques. They can deposit them, lend them out again, collect more interest. But one day people are either going to get their deposits back or their debtors are not going to be able to pay their interest and it is all going to come crashing down. With a reserve ratio of 10:1, only 10% of their depositors need to claim for the bank to go bankrupt.
With an original cash deposit of $1111.12, and 10% reserve requirement, you should end up with $10,000 of total credit.
90% of the $1111.12 gets loaned out, but goes right back into the banking system. Repeat. 90% of that sum gets loaned out, but goes back into the banking system. The loan sizes approach zero.
Each time a loan is made, more of the original $1111.12 becomes part of the reserve. At some point, it is all reserve, which means it represents 10% of all the money circulating in the system. At that point, the banking system has $10,000 total in all accounts.
While certainly a bit hysteric, it's still a nice intro to the history of english-american monetary system. According to the book, the main problem is not the debt itself, but the banks that control it - they are all private. It turns out that federal reserve system is completely under private banks control: they issue new money to the government to raise the national debt and the government has to pay interest on it (which it wouldn't have to, if it had issued money itself).
Be a little more careful when it comes to agency. It makes a big difference. Also, with the level of regulation that banks have, they are not really private entities any-more and after the round of share buying done by the US govt., they are effectively public utilities, something that I think is going to haunt us a few years down the road.
http://en.wikipedia.org/wiki/Endowment_effect
"The endowment effect is a hypothesis that people value a good or service more once their property right to it has been established."
So, people do anything to keep their home usually, and work hard. Creating a note payable secured by someone's house seems like a valid way to build things for people who haven't saved for years for them.
Various governments who change the currency rules constantly to manipulate the money supply seems like it might be an outdated idea, though I'm not sure how we'd create an alternative.