In December 2009, Sepp Hasslberger introduced to us Bibo, a proposed standard for stable currencies, that would replace the current inherently unstable banking money system.
This article has become our most comment rich article, in particular through a recurring debate between one of the Bibo co-authors Marc, and Ardeshir Mehta.
Ardeshir has written an article that challenges one of the main points of monetary reformers, i.e. that the current system leads to the infinite creation of debt through compound interest.
You can find it here.
The context:
“Currently, most if not all money is loaned into existence by banks, and is thus based on interest-bearing debt. There is no question that neither interest nor debt-based money are good for society, and I have written denouncing both debt and interest elsewhere. However, there is a fairly common thesis, based on the fact that money is loaned into existence as interest-bearing debt, that if new loans are not continually being issued in ever-increasing amounts, enough money will not be created to pay the interest on existing loans; and as a result, at least some those loans will be defaulted upon, resulting in inevitable foreclosures. “
this is *so* chicago school, bad old chicago school economics math, that it is really funny.
reality dare not strike these perfect and immaculate amortizing equations.
but in that nasty old real world, the withdrawal of circulating debt-issued currency whether for interest or principal,
1. happens always in an uneven, lurching fashion with impossible to foresee specific outcomes within the larger economy.
However, we can say with certainty, that *some* actors who have circulating debt-issued fiat currency continuously withdrawn from their cash flow, will fail, and become bankrupt and the value not only of their forfeited goods/collateral, but the even greater potential value of their vacated economic-niche will accrue to those who hold debt. thus continuously pushing the concentration of real assets upwards in a reverse peristalsis;
and 2. it is so obvious as to be impossible to overstate, the effect of continuously decreasing the amount and flow of circulating debt-issued currency within the greater economy; in its extreme manifestation we have great depressions.
and the fact that new debt-issued money is pushed out by the central bankers onto their best banker buddies at zero percent, does not obscure the picture we see today, where the circulating currency retreats from the lower rungs of the economic ladder inch by inch, day by day. as it pools overhead in gigantic overvalued asset collections in global stock markets and speculative activities–little of which trickles down to the bottom 10, 20, 30, now 50% of the population, now in their 3rd year of money drought.
the fact that the interest payments continue to re-circulate as new debt, and therefore the equations say there is still enough money to pay off the total debt, does not speak to the dried out mummies that the masses of lower rung economic participants have become.
all other things are never equal.
p.s. the really clever thing which happens, and which remains unclarified in those nice amortization schedules at
http://homepage.mac.com/ardeshir/DebunkingTheDebt-VirusHypothesis.html
is that the original amount of the principal borrowed, (which remains unpaid, and therefore nominally it circulates at large), is gradually and inevitably turned from (borrowed) principal, in the form of cash in hand, into *interest* duly repaid in those installments. this is a true and real effect, and it is one of the underlying mechanisms of wealth transfer via debt issue money: the principal turns into interest, and the sums needed to repay the principal must indeed be vacuumed out of the larger economic environment.
the capital you borrow, is largely converted to interest when you repay it, and the *value* of work that you had to perform to stay alive while you gather together those monthly P & I payments is lost to you, and accrues mostly to debt holders. you have surrendered time, labor, and opportunity on the installment plan, and not mere interest payments.
therefrom arises the great truth of money: the rich get richer.
I agree with Katie’s comments here.
My own view is much the same, perhaps expressed in a different way. Here is what I wrote in a recent email with regard to the exchange of comments Michel mentions:
“it is a largely technical discussion and I hope it can resolve, although I have doubts that the two people doing the discussing can listen to each other, or comprehend and find common ground.
Probably the operative word in this (the subject of contention) is a difference between “infinite” and “unbounded”.
While there is no infinite creation of debt, it certainly is unbounded, meaning the system does not provide a limit to the debt being created. As a matter of fact, charging interest on money created by the banks substantially out of nothing, initiates a flow of resources towards the banks that becomes ever greater, the more the economy grows. Since most of our money we currently use is created by commercial banks through loans, most of our money (except a small part that is actual cash) is expected to pay interest. As individual loans are repaid, other loans must take their place, so overall, our economy is perpetually in debt, and perpetually pays a tribute to the banks creating the money, through the mechanism of interest.
It is this mechanism that brings about instability of the economy. There can be no growth without a corresponding growth of the tribute, which incidentally is never being created. Only the principal is being created, but the repayment is ALWAYS more than the principal. So under the current system, the more we work the faster everything we produce and everything we own, will end up being owned by the banks. There is nothing to be done about it, under the current system. Therefore we can say that the system is unstable.
Ardeshir argues that every individual loan gets paid back within a certain number of years, and therefore the debt cannot grow towards infinity. He fails to see that every paid back loan must be replaced by two new loans, leading to exponential payments to the banks by the economy as a whole.
In Ardeshir’s own paper, he has several tables of repayment of loans. Looking at those tables (let’s use the first table in his article), it is quite clear that the money created by the loan (the balance in year 1) is 13,800. After 30 years, the total of payments made is 28,260, more than double of the money first created. So an initial sum of money is created, and after a period of years, twice that money is paid back to the bank, extinguishing the original loan. The taker of the loan had to 1) pay back the money he originally obtained, and 2) pay back another time that much, which he had to obtain from somewhere else.
In the overall view of the economy, two things are necessary to do so.
1) Someone else has to take a loan of 13,800 just to keep the economy going steady state (the money originally borrowed vanished out of the economy by repayment and has thus to be replenished).
2) Someone else again has to take a loan of 14,460 so that the first person taking the original loan could find somewhere in the economy the money to pay the interest.
By accumulation of interest, the whole of the economy thus ends up working for the banks, in addition to being forced to continually expand (with consequences for us humans in the rat race, and for the environment being destroyed in the process). So there is really little argument that the system is inherently unstable.
Marc expresses that instability with a mathematical formula. Ardeshir says the instability does not exist (actually his argument is a technical one saying the instability isn’t infinite). Anyone who can conceptualize the economy as a whole, as opposed to just one single loan, can see that something doesn’t add up and that reform is urgent.”
… when I say “the banks” in the above comment, I do mean the people who own the banks. Just as Katie said, the rich get richer, and it’s an automatic consequence of the normal running of our economic system.
The rich got so rich they did not know what to do with all that money any more, so they got into speculative games and the bubble of those games has become larger, acutally WAY larger, than the real economy of production of goods and services, which finds itself unable to attract sufficient funds to properly work.
Since governments are unlikely to put in severe restrictions on the financial gambling that’s going on (as evidenced by bank bailouts) it seems that the only way out of this is to start making our own currency, one that will stay in the real economy and at least allow us to function until we figure out how to get the monster off our backs.