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HOW TO RESOLVE THE CREDIT CRISIS: GIVING CREDIT WHERE CREDIT IS DUE

163 Responses

1. 

   Julian, on January 19, 2009 at 5:03 pm said:

   I contacted Paul Grignon directly. He suggests reading this page in order to clarify things.

   http://paulgrignon.netfirms.com/MoneyasDebt/disputed_information.html

   Reply
2. 

   Brock Moore, on January 19, 2009 at 5:03 pm said:

   – I have $1 million in high powered money
   – I deposit it with the Federal Reserve to establish my reserve account
   – I can now make loans of up to $9 million based on my reserve…
   ——————————————————–
   ———————————————————

   “High powered money” means central bank credit. The required reserve to deposit ratio, let’s say it is ten percent, means that the examiner can look at your books and see that an amount at least equal ten percent of your deposit liabilities are held in the form of reserves. Reserves are defined in the regulation as being your deposit balance at the central bank, plus cash in your vault. Cash is merely a tangible form of central bank credit.

   You are at all times required to redeem deposits in central bank credit on demand. Let’s say you extend a loan in the amount of two million, which is deposited in some other bank. That bank, through the clearing system, demands payment from you in the amount of two million in central bank credit. You couldn’t meet that demand from your central bank account inasmuch as you have only one million on deposit at the central bank. You would have to come up with the difference pretty damn quick. If you have sufficient cash on hand to cover it, you can send that into the central bank. But if the one million is all that there was, you go bust as a bank.

   The point is that no single bank enables credit expansion, but the banking system as a whole, together with its customers. The process of credit expansion takes time to accomplish.

   The required reserve requirement is a regulatory tool to limit credit expansion.

   You must differentiate the reserve requirement from what a prudent banker would keep on his own initiative to cover his deposit liabilities.

   With perfect coordination with the other banks, he would not need reserves, because he would be receiving one dollar in deposit in transfer from the other banks for every dollar in deposit that he is losing to the other banks. The technique of banking is premised on offsetting balances.
   –

   – So the initial $1 million in high powered money ends up generating interest collection on ~$90 million in loans, not $9 million.
   ——————————————————–
   ———————————————————

   All the textbooks say it is the inverse of the ratio, so a requirement of ten percent starting with reserves of one million means that they can support maximum deposits of ten million. So Grignon is just wrong on this. There are a lot of wrong things in the video. This is perhaps the most egregious.
   –

   – I get $1 million dollars and buy $1 million in treasuries
   – I deposit the treasuries with the Federal Reserve
   ——————————————————–
   ———————————————————

   Treasuries cannot be deposited with the Federal Reserve. The Fed sometimes purchases treasuries in the so-called “open market.” The money the Fed uses to purchase them is central bank credit, called “high powered money,” which add dollar for dollar to the total of bank reserves. When the Fed sells treasuries, the total of reserves is commensurately reduced. However, for at least the past two decades, the Fed mostly purchases and sells “repos” created by the member banks themselves to inject or extract reserves from the banking system. I believe that the Fed may have used other methods in the recent “stimulus” efforts and “bailouts.”
   –

   – I can then leverage and loan out up to $10 million dollars
   – I make the loan to myself and use it to buy $10 million in treasuries
   – I deposit the treasuries with the Federal Reserve
   – I can then leverage and loan out up to $100 million dollars
   – …you get the picture
   ——————————————————–
   ———————————————————

   This “picture” is just ridiculous. Only the Federal Reserve through its “open market” operations injects or extract reserves.
   –

   Brock

   Reply
3. 

   Dan, on January 19, 2009 at 5:16 pm said:

   John,

   government is not “asking” anybody but itself. It is the one that is rejecting oversight,and not some external entity. You insist at all cost, that your government is some how hostage here, but in fact this is not the case. The fact that special interests get the best of the deal is a result of the nature of politics. Especially a democracy. That’s why the best government is the one that governs the least. You’re not going to change the nature of politics. The founding fathers realized this which is whay they tried to limit it’s powers.

   Reply
4. 

   Julian, on January 19, 2009 at 5:58 pm said:

   @ Brock

   Thanks for clarifying. Between you and Paul I arrive at the conclusion that understanding all of this is going to be damn near impossible. Maybe when I lose my job in Depression Mk II I’ll have time to figure it out :-p

   Reply
5. 

   Zarepheth, on January 19, 2009 at 6:03 pm said:

   Physical force is only one means of control.

   As pointed out by other posters, manipulating information is another. From this I can relate personal experience.

   A few years back, my wife and I decided to invest in real estate as a way to increase our income. We paid for and attended seminars, purchased and read books, and listened to tapes and CDs. We attempted to apply our knowledge, but kept running into people who wanted their full asking price (or more), in cash, now! None of these sellers came close to what we were supposed to look for.

   We also joined a local group of real estate investors. Where we met a team of people who said they would help us find a good real estate deal. We took them at their word. We didn’t have any other leads for good properties, they sounded sincere, and were quite convincing. However, they got us into a couple properties that were not worth what we paid. They failed to do what they advertised and set us up for failure. Through lies and broken promises they gain for themselves between $9,000 and $12,000, but cost us over $50,000.

   When we went to a lawyer, we discovered that suing them would cost us as much as we’d recover — if we won. The police would not take a report, nor would our state’s Department of Commerce. So, no one held a gun to our heads, yet we were robbed. Had we known the truth before the transactions with these people, we would never have given them anything. By the time we learned the truth it was too late.

   Like many crimes, the victims lose more than the criminals gain. Due to the real estate market, we are still indebted to the banks on these properties, and still suffering a negative cash flow. The tax benefits do not make up for the out of pocket losses.

   Reply
6. 

   Philip, on January 19, 2009 at 8:05 pm said:

   Julian’s suggestion is well worth following up on. Paul Grignon offers intelligent insights and arguments in defense both of the claims he makes in “Money As Debt” and in acknowledgment of the inaccuracy of some of them. The url is http://paulgrignon.netfirms.com/MoneyasDebt/disputed_information.html. Make up your own mind whether he succeeds.

   Brock, I’m grateful for your stalwart attempts at clarifying the intricacies of reserve banking, but must admit it remains murky for me in a number of ways. The disagreements that have emerged in this discussion, among people who have studied the phenomena far longer than I, form IMHO an important part of the story we’re trying to tell: Our system’s out of whack, and its very obscurity is one of its failings. Experts disagree about how it works! One way or another, or in many ways simultaneously, we’ve got to create a new, transparent system in which real value and money are tightly linked, and in which honesty and sustainable goals are encouraged rather than subverted.

   Reply
7. 

   Dan, on January 19, 2009 at 8:53 pm said:

   Zarepheth,

   The use of physical force is required to compel one into an involuntary exchange. That is to force one to exchange against his will. That is at the time of the exchange, according to your judgment; you don’t expect a “gain”, yet you are “forced” to exchange for a “loss” by some means of coercion.

   What you are describing is quite different. At no point did the other party “force” you into the exchange. They didn’t threaten you, or point a gun to your head. You’ve made a judgment to trust the other party and proceeded to make the exchange in expectation to make a gain. In retrospect, you’ve come to realize that the judgment was erroneous.

   I certainly agree with you that if the other party deliberately kept information from you, or presented the information in a misleading manner (knowing that if it had been truthful, you would not likely to agree to the exchange), then that potentially constitutes “fraud”. It is no different then theft, and it is (or should be) a violation of your property rights.

   In an involuntary exchange, you don’t even have the right to make your own judgment. You could have suspected the other party, or determine that they are not trustworthy, or you’ve simply thought that they were not reputable, and you could have walked away from the exchange.

   Reply
8. 

   John Williams, on January 19, 2009 at 11:00 pm said:

   Brock

   In the Paul Grignon link given by Philip Paul Grignon states that the “debt virus” is a simplification. He also states that if all the interest was spent by lenders and the people who earned that interest money then lent it out themselves instead of spending it there would not be enough money to pay of principal and interest for all borrowers except through new loans with the same result as the “debt virus”
   He also says that if banks use some of their interest profits for investment in foreign exchange markets, new loans or other high finance investing there will not be enough money to repay interest and principal without new loans.
   He admits that theoretically the current fractional reserve system could work without the problem of the debt virus but that in reality since interest can be re-loaned (not spent) it does not.

   Do you disagree with this?

   Reply
9. 

   Brock Moore, on January 20, 2009 at 1:27 am said:

   Philip Grignon appears to be confused as to what reserves are and the definition of such terms as “high powered money.” It really isn’t confusing at all. Let me summarize.

   First of all, reserves and high powered money are the same thing, being two names for central bank credit. Central bank credit comes in two forms: 1. Deposits that banks have at the central bank; and 2. Cash held by the public and the banks. Central bank credit is created only by the central bank itself, through what are called “open market” operations. It is through these operations, where the central bank purchases and sells securities and other assets, that reserves are injected or extracted from the banking system. The central bank is the only bank in the system that can in principle expand credit without limit. There are however practical limits on how much credit the central bank may create.

   In the central banking fractional reserve system, accounts between banks are settled by the transfer of central bank credit from bank to bank. This follows from the requirement that banks have to redeem their deposit liabilities in central bank credit when demanded.

   If there were no deposit requirements imposed by the regulatory authorities, prudent bankers would individually keep a level of reserves they regard as sufficient to redeem their customer deposits when demanded. The requirement for redemption is actuarially projected into the future. In this sense banking in concept is similar to insurance. Indeed, the concepts of banking, insurance and the joint stock company are very similar. All of them were seventeenth century innovations that become fully developed by the end of the nineteenth century. Every firm manifests all three aspects in their day to day activities in the pooling of assets and the sharing of risks. The difference being that banks specialize in the financial aspect, and insurance companies specialize in the insurance aspect. Ordinary joint stock companies specialize in the commercial aspect. Their difference is in their degree of specialization.

   Individual banks may expand credit without limit, while at the same time remaining mindful that they may be required to redeem their deposit liabilities at any time. It is this mindfulness that effectively limits the amount of credit they may individually create.

   When a bank receives a deposit in transfer from another bank, the bank credits its new depositor in the amount of his deposit, and receives a credit to its central bank reserve account in that same amount in transfer from the other bank. The other bank has thereby satisfied its requirement to redeem its deposit liabilities in central bank credit when demanded.

   It works the same way if the bank has received a new deposit in cash. Cash is merely a tangible form of central bank credit. If the bank keeps the cash in its vault, it is counted toward its reserves. If it sends the cash into the central bank, the central bank will credit its reserve account by the like amount.

   Customer deposits are created in three ways: 1. When the central bank purchases securities or other assets; 2. When member banks extend loans; and 3. When the central bank and its member banks pay ordinary expenses and dividends to their shareholders. Customer deposits are canceled in three ways: 1. When the central bank sells securities or other assets; 2. When borrowers pay the principal of loans; 3. When borrowers pay the interest due on loans.

   During a normally expanding economy, the central bank and its member banks are always paying MORE than enough into circulation to pay interest back to the banks. In this case the flux from bank payments plus the principal is exceeding the reflux in loan amortization, including interest. The differential between the two represents the positive accumulation to account balances throughout the economy.

   In hypothetical steady state, the central bank and its member banks are paying exactly enough into circulation to pay interest back to the banks.

   In a deflationary environment, many debts cannot be paid, because past disbursements are being expensed against current sales, in which the past disbursements are exceeding current sales. Account balances throughout the economy are therefore depleting to the point of total depletion. At the point of total depletion economic activity stops.

   Brock

   Reply
10. 

    John Williams, on January 20, 2009 at 2:49 am said:

    Even if the banks are spending more than enough into circulation to pay interest back to the banks but the people who are earning that interest are not spending it and instead depositing it to be re-lent the problems associated with “debt virus” will still hold true.

    I am just wondering if you disagree with this.

    Also by spent do you mean the interest paid to depositors and labor only or are you including money used for speculation where the return will be greater than the investment because to me the latter is not really spent it is invested (in a new bank etc) since it is expected back plus a profit.

    Reply
11. 

    Dan, on January 20, 2009 at 3:03 am said:

    Brock: “In a deflationary environment, many debts cannot be paid, because past disbursements are being expensed against current sales, in which the past disbursements are exceeding current sales”

    Because they were malinvestments! The economy cannot absorb them.

    It never occurs to Brock, that the current system is simply flawed. It is economically non-viable, and it has evolved to what it is because it benefits government, banks, and who ever else is close to the plate.

    There is no steady state. The credit expansion is not sustainable indefinitely. There has never been a period in history that the credit expansion did not end in a collapse. The business cycle refutes your steady state. The deflationary state is the consequence of the credit expansion, which is MUST eventually collapse. This is what happends when you ignore the role of real savings, and think you can stimulate growth with credit out of thin air.

    I can appreciate Brock’s knowledge of the “mechanics” of how a modern bank operates, however, I think he ignores the bigger picture, which must take into account other factors.

    Reply
12. 

    Brock Moore, on January 20, 2009 at 3:40 am said:

    Even if the banks are spending more than enough into circulation to pay interest back to the banks but the people who are earning that interest are not spending it and instead depositing it to be re-lent the problems associated with “debt virus” will still hold true.
    ————————————————-
    ————————————————–

    No, this is not the debt virus hypothesis. This is something completely different. It is a completely different fallacy. The debt virus hypothesis is that interest cannot be paid without further borrowing, because the money to pay interest is not created in the lending process, causing debt to compound. That is a fallacy because the money to pay interest is in fact paid into circulation through bank disbursements for expenses and dividends, in reciprocal economic activity. What the recipients do with this money is the same as would occur with any income that is paid to income recipients, from any source, not just banks, if the recipients do not immediately purchase goods and services from the original spenders. At some point in the future the money or its equivalent returns to the original spenders, assuming they are making a profit. If the original spenders are not making a profit, then the totality of expenditure does not return. It is a statistical phenomenon. It is a fallacy to believe that there is something inherent in the process that prevents it from returning. Interest and any other sale occurs from the differential between the flux and its reflux, or positive account balances that are accumulating throughout the economy. The economy is a continuous dynamic system. See:
    

    Brock

    Reply
13. 

    Brock Moore, on January 20, 2009 at 3:42 am said:

    Brock: “In a deflationary environment, many debts cannot be paid, because past disbursements are being expensed against current sales, in which the past disbursements are exceeding current sales”

    Because they were malinvestments! The economy cannot absorb them.
    —————————————————-
    —————————————————–

    It is completely caused by the credit contraction, and would not occur if the contraction is avoided. Current sales are less than past disbursements for the simple reason that credit has been contracted. Malinvestment in any real sense is irrelevant to the discussion.
    –

    It never occurs to Brock, that the current system is simply flawed. It is economically non-viable…
    —————————————————-
    —————————————————–

    It is viable enough to support a world population of six and a half billion people, many times the population of any other animal species. It is many times what is possible for any other species, now, or into the future. In comparison, the human race has been very successful. I really think that such a negative attitude as you display should be excluded from polite discussion.

    Brock

    Reply
14. 

    John Williams, on January 20, 2009 at 4:17 am said:

    —No, this is not the debt virus hypothesis. This is something completely different. It is a completely different fallacy.—

    If it is the case it is not a fallacy. Also I said “the problems associated with “debt virus” will still hold true.” meaning that the only place to get the interest on principle will be from the money that is re-deposited by a non-bank party and re-lent with the same problems as the “debt virus”. I am only saying that your assertion that the bank “spends” all the interest does not mean the effects of the “debt virus” are immediately false since if the people who earn that interest deposit it to be re-lent the same problems will still ocurr where interest on principle is collecting interest itself.

    —-It is a fallacy to believe that there is something inherent in the process that prevents it from returning.—-

    I am not saying there is something inherently or theoretically wrong only that there are practical problems and to me it is a very good explanation of why money grows faster than goods.

    What is your explanation of the cause of inflation?

    Not that there is more money chasing the same amount of goods but the reason why money grows faster than goods?

    Reply
15. 

    Dan, on January 20, 2009 at 4:23 am said:

    Obviously it is not viable enough, since we are now looking at the biggest collapse in the history of this crony system.

    What causes the credit contraction?? You can’t blame the gold anymore. There is nothing to hold back further expansion.

    A sound business does not need endless debt to sustain it’s business. It needs revenue that exceed its costs. The contraction occurs because the investments cannot be sustained without further debt (they fail to become productive), and credit cannot expand indefinitely.. even out of a printing press.

    The contraction is the outcome, the symptom, the result, etc.. not the cause.

    The system has caused a great deal of harm. Our growth is despite the current system and not because of it. In fact, the growth of the US over the past few decades (in terms of real production of goods and services, and not just consumption financed by debt) is quite doubtful.

    So according to you, why is there a contraction all of a sudden every few years?

    Reply
16. 

    Dan, on January 20, 2009 at 4:52 am said:

    John,

    you asked borck, but allow me.

    “What is your explanation of the cause of inflation? ”

    If you mean why the dollar has lost about 98% of its value of the last 100 years, the answer is quite clear.

    it has to do with what I have been saying and that is the expansion of credit cannot lead to growth unless the credit comes from real savings. The boom phase of the business cycle is never real, which is why it always leads to a bust, followed by a recession. Since the government has hardly ever allowed for the deflation to occur after the bust (by bailing out, providing liquidity to banks, etc..) then yes, you can say that “money grows faster then goods”.

    Reply
17. 

    Brock Moore, on January 20, 2009 at 5:11 am said:

    I am not saying there is something inherently or theoretically wrong only that there are practical problems and to me it is a very good explanation of why money grows faster than goods.
    —————————————————–
    ——————————————————

    It is not an explanation at all. Interest is paid to the banks from positive accounts balances, which do not derive entirely from loans, but also from spending by banks for expenses and dividends. That the specific dollars received from bank spending are not paid immediately back to the banks is of no significance. The money paid back to the banks come from positive account balances that accumulate in part from bank spending. It is a statistical phenomenon.

    Inflation is a complex phenomenon without a single simple explanation. In part, I think, some inflation is inevitable even in the best of circumstances. Credit expansion enables the entrepreneur to organize the factors of production into their more efficient combination. Not all entrepreneurial projects succeed but many fail. Failed projects put money into circulation that does not reflux in its totality to the entrepreneurs in sales. That money will raise the price of other products and services. Other inflations, particularly hyperinflations, result from government spending, enabled by its central bank’s printing presses, in the face of collapsing tax revenues, such as is presently the case in Zimbabwe, which has the highest rate of inflation the world has ever seen. Some inflations can be explained through the A + B theorem. See C. H. Douglas’ essay, “The Nature of Price,” at
    http://geocities.com/socredus/compendium/chap2part2.txt

    Brock

    Reply
18. 

    Brock Moore, on January 20, 2009 at 5:13 am said:

    Obviously it is not viable enough, since we are now looking at the biggest collapse in the history of this crony system.
    ——————————————————-
    ——————————————————–

    Well, the “biggest collapse” has not yet occurred. The financial authorities are handling the situation reasonably well, having learned lessons from the experience of the Great Depression.
    –

    What causes the credit contraction??
    ——————————————————-
    ——————————————————–

    There are obviously deficiencies in the financial system. That there may be deficiencies does not mean that we go back to a stone age system such as you advocate. I advocate the Social Credit adjustments such as the national dividend and retail discount programs to sustain a permanent boom and the more complete utilization of productive capacity.
    –

    A sound business does not need endless debt to sustain it’s business. It needs revenue that exceed its costs.
    ——————————————————-
    ——————————————————–

    Which is impossible in a growing economy with a fixed quantity money supply.
    –

    The contraction occurs because the investments cannot be sustained without further debt (they fail to become productive), and credit cannot expand indefinitely.. even out of a printing press.
    ——————————————————-
    ——————————————————–

    This is a reflexive, sieg heil, true belief in a false religion type of attitude.
    –

    In fact, the growth of the US over the past few decades (in terms of real production of goods and services, and not just consumption financed by debt) is quite doubtful.
    ——————————————————-
    ——————————————————–

    If this is indeed the case, I think that free trade policies have more to do with it than monetary/financial policy.
    –

    I don’t claim that the system is perfect. I do claim that it is one hell of a lot better than the stone age system you promote.

    Brock

    Reply
19. 

    Dan, on January 20, 2009 at 6:17 am said:

    “religion type of attitude”

    You think that an economy can grow out of a printing press instead of real savings and I am religious?

    To my judgment, you have not provided any adequate explanation to any of the the phenomenas of chronic inflation, sudden contraction, depression, etc….
    It’s obvious that it is because your “theory” does not account for any of them.

    In fact, there is a perfectly logical explanation for all of this based on sound economic theory (what you call “stone age” economics). All of the above phenomenas are quite accurately predictable. You simply refuse to explore the alternatives, and perhaps see that there is more to all of this then what you simply observe from the “mechanics” of the process.

    John,

    In the modern economy, chronic inflation is always a result of monetary policy. For the general (aggregate) price level to rise, the money supply must grow, or demand for the money must fall. But since demand for money is not likely to permanently fall for no reason, It is the increase in money supply which causes the value of the money unit to fall.

    Brock, I wish you at least take a breath and explore some of this stuff before you respond.

    Reply
20. 

    John Williams, on January 20, 2009 at 8:17 am said:

    Brock

    As far as I understand it there are 3 types of inflation 1)Inflation that ocurrs because of regular supply and demand for goods. 2) Is really a subset of 1 where demand for dollars drops because of fears they will be worth less causing people to trade money for goods as basically an inflation hedge causing an inflationary cycle which can be corrected with high interest rates (higher than inflation) creating demand for money. The 3rd is long term and pervasive inflation.

    The causes of the first 2 are easily explained by normal market activity and changing preferences of consumers the 3rd cause is more difficult to ascertain. The reason I believe you are wrong about the problems with interest in our current system is because the system which was used by Benjamin Franklin where interest was spent by government was not inflationary, for around 50 years, to anywhere near the degree the current system is. Also systems used in Worgl Germany (in which the government spent the interest) and Guernsey Island (interest free currency) were were also nowhere near as inflationary. Can you explain why systems where the interest is spent by government or have no interest are nowhere near as inflationary (the 3rd type) as our current system?

    Dan

    I do not buy that the boom phase is never real. The industrial revolution was a boom phase and it was definitely real. The tech boom was real and created a lot of efficiencies. So to say “The boom phase of the business cycle is never real” is untrue. The speculative boom increases production in the sector it occurs but it is an inefficient boom because it creates products when they are not immediately needed taking away resources from where they would better serve. Any monetary system that slows production below the potential limits of resources and willing labor are inefficient and not complete. There is no right limit of production other than what people are willing to do, trade and the limits of resources and if the monetary system is the limiting factor than it is incomplete.

    Also I understand inflation is caused by monetary policy but I am wondering what part of monetary policy causes it to grow faster than goods. Demand does not determine monetary policy banks do and so somewhere there is a flaw in the policy since other systems are nowhere near as inflationary I believe the difference between them explains where the problem lies.

    Reply
21. 

    moneycreation, on January 20, 2009 at 8:49 am said:

    Since there’s some confusion regardig how the credit expansion is done I asked a Swedish economist to translate his excellent blogg on the subject on Ellens request. Here’s the English version, with some very good and simple examples:

    http://sundapengar.bloggagratis.se/

    Reply
22. 

    moneycreation, on January 20, 2009 at 9:39 am said:

    Some reflections on the Basel 2 as desbribed in the excellent blog above
    http://sundapengar.bloggagratis.se/2009/01/20/1302986-fractional-reserve-banking-part-2-in-english/

    Since the formula is:
    The size of the loan * (Capital Adequacy Ratio * Risk weight) = needed capital base.

    Let the loan be L.
    Let Capital Adequacy Ratio (CAR) be C
    Let Risk weight be R
    Let needed capital base.be N

    Then the the formula can be written as:
    L*C*R=N

    Which can be written as:
    L=N(1/C*R)

    Let substitute 1/C*R with m:
    gives:
    L=N*m

    So the size of the banks Loan simply a multlplier of the banks capital reserves depending on different borrowers . The loan is not based on deposits but an expansion of the banks capital base and there’s simply an expansion on both sides of the balance sheet.

    Note that the Risk for munipals and states equals zero. That implies that the multiplier in the equetion L=N*m will go to infinity. So banks can loan as much as they want to munipals and states based on zero capital reserves – in other words the leverage towards municipals and states can be EXTREME (not 10 to 1)

    Reply
23. 

    Brock Moore, on January 20, 2009 at 1:00 pm said:

    …systems used in Worgl Germany (in which the government spent the interest) and Guernsey Island (interest free currency) were were also nowhere near as inflationary.
    —————————————————-
    —————————————————–

    We don’t actually know that because both the Worgl and Guernsey stories are almost total mythology. The Worgle story was created by Gesellists in their propaganda in the 1930s and 40s. The only true part of the story is that there was and is a town named Worgl. The Guernsey story was created in the latter half of the nineteenth century by the Greenbackers, at least a half century after the alleged events. Guernsey in particular has had a conventional financial system for more than century. Today it is an interntional banking haven where criminals and tax cheats can hide their money, like Switzerland. Guernsey’s “financial sector” is by far its largest economic sector.

    Brock

    Reply
24. 

    moneycreation, on January 20, 2009 at 1:46 pm said:

    Brooke

    “Interest is paid to the banks from positive accounts balances, which do not derive entirely from loans, but also from spending by banks for expenses and dividends.”
    —————————

    Can you mathematically prove this statement? Are you saying that there are money created outside the debt system? In the form of what? From what? Denominated in what? Where does it show up in the balance sheets?

    Bernard Lietaer (former central banker in the central bank of Belgium and the “father” of ECU) use to say that the loan is created but not the interest,.is he wrong?

    But putting it simple:
    Imagine a society without any money starting a bank from scratch will at the beginning of a year have the total amount of Loan (L) in a society giving rise to X billion dollars.Hence at the beginning of the year there will be

    L=X billion dollars
    But on the loan an interest is taken I, so after one year the amount of the loan would be L+L*I,

    How exactly is this L*I created and balanced in the balance sheet? Because if nobody pays of there debt (and killing the same amount of credit, so the argumention will still mathematically be the same) the outstandimg loan need to be L+L*I and to balance that an equal amount of credit is needed to be created to balance the balance sheet. Hence:

    L+L*I=X+L*I

    Reply
25. 

    moneycreation, on January 20, 2009 at 2:08 pm said:

    There’s actualt a formula for the procentage that not be able to pay their loans whenthe banks raise their Interest (I). Given the principal (P)

    P/(P+I)= the procentage that vill not be able to pay their loans.

    Reply
26. 

    Brock Moore, on January 20, 2009 at 2:51 pm said:

    Bernard Lietaer is a Gesellist and Gesellism is a welter of fallacies.

    Banks create money when they credit customer transaction accounts for any reason whatever. We define transaction balances as the largest component of M1. The transaction accounts are bank liabilities, or promises to pay on demand in central bank credit. They credit transaction account balances when they extend loans and when they write checks for expenses, including salaries and wages, and dividends to their stockholders.

    Why do you think that this is not the case?

    Brock

    Reply
27. 

    moneycreation, on January 20, 2009 at 3:01 pm said:

    That’s not a mathematical proof. That’s embedding it in a lot of technical mumbo jumbo (actually seems to be the only thing economist are really good at). Show it mathematically. Disprove my formulas and the inherent logic.

    I respect Bernard Lietaer (former central banker at the Belgium central Bank and “father” of the ECU) knowledge. So pissing on him as person don’t impress on me.

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28. 

    Brock Moore, on January 20, 2009 at 3:05 pm said:

    No, it’s not a mathematical proof. It is a statement of fact. It’s your job to explain why not, if you disagree. Or shut up.

    Brock

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29. 

    moneycreation, on January 20, 2009 at 3:24 pm said:

    No, thats not a statement of fact if you can’t prove it. I have logicaly proved that a loan L with I will give give raise to a loan L+L*I . You say tha the L*I part is not created but still is created by “Interest is paid to the banks from positive accounts balances, which do not derive entirely from loans, but also from spending by banks for expenses and dividends.”

    You can’t have it both ways either they are created or not. Embedding it a lot of technical mumbo jumbo won’t change that.

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30. 

    John Williams, on January 20, 2009 at 3:37 pm said:

    Was the system Benjamin Franklin used in Pennsylvania also a myth invented by greenbackers?

    I still have not seen any explanation of the cause of long term inflation. Are you saying it is an unexplainable phenomena? I explained my understanding of the cause of two types of inflation and unrestrained Government spending would be one cause of the 2nd but do you have any rational alternative theory for what causes the 3rd?

    If the Pennsylvania system was not inflationary which historical records including writings of Adam Smith attest then the difference between the current system and that one must explain the reason why one is inflationary and the other was not.

    Reply