I believe it was more or less a year ago that Michel Bauwens pointed me to the International Currency System Engineering Group, ICSEG (http://www.icseg.org/) which was running a discussion list about the architecture of monetary systems.
I joined the list and the discussions were of great interest. There has now been a conclusion. Just recently, a dedicated web page was put up with the currently available documents, including a proposed standard that would ensure stability of any currency.
With several p2p currencies on the drawing board, it would seem important to take a look at what may be the fatal flaw of the bank money we are using universally today, with a view of how to avoid those same pitfalls when discussing currency alternatives. The proposed standard could be used in any kind of currency, whether issued by governments, banks or of private/collective origin.
BIBO – Bounded-Input-Bounded-Output is an engineering term. In Control Systems Theory it signifies that any system, to be stable, must respond to a bounded input with a bounded output.
Bank money is not BIBO compliant, it is argued on http://bibocurrency.org/
From a rigorous control system theory stability analysis of the current world de facto standard currency system we identify a root instability in the form of the growth component of Debt associated with the money creation process. We thus establish the inherent instability of Common Lending Practices (application of interest). Then we further chart the logical consequences of said root instability as it affects the economy as a whole and we identify how it provokes a systematic divergence between debt and value attributed to wealth in past cycles with the minimum value required in current and future cycles as those incorporate past unpaid debt. i.e. systematic compounding of debt. We also identify how the only means available within the current system design for staving off inflation is through the continued contribution of collateral wealth as guaranty for the creation of new principal debt money commensurate with past debt growth. Finally, we illustrate how compounding debt inevitably leads to a point where the inability to provide new wealth to guaranty new money to keep up with past debt growth becomes chronic at which point either runaway inflation or a definitive collapse of the system inevitably ensues.
Financial System walkthrough
1. Wealth is generated by ingenuity, human effort and resources made available through past investment of units of currency.
2. Through the process of asset evaluation, a fixed amount of existing wealth is attributed a fixed collateral value in the form of a sum of units of currency.
3. The fixed collateral sum is used as the basis for the creation of new currency in the form of a second fixed value i.e. the principal sum of loans issued into circulation through current account entries. Since both the collateral and principal loan sums are fixed, they maintain a constant ratio to the wealth pledged.
4. Current account units are distributed back to wealth producers through purchasing transactions or may be saved or stored (at a compounding interest rate) or used to cancel debt thus reducing the total amount of money in circulation.
5. Total debt due is the principal sum entered as a negative number in a loan account to which interest is added such that the debt grows as a function of time.
6. Because the total debt created always exceeds the amount of money available to satisfy it, the system produces a minimum residual debt that must be refinanced in subsequent cycles thus compounding it.
There are three documents available at the bibocurrency site:
Formal Stability Analysis of common lending practices
Passive BIBO Currency Rationale
Draft Passive BIBO Currency Specification
Documents may be updated with time, so to get the latest version, check at the source:
There are some serious errors in the document entitled “Formal Stability Analysis of common lending practices” available from . Among them are the following:
1.
In PRACTICE the output of a financial system is NOT unbounded: loans do not usually continue for much beyond 30 years. Hence it is not true in PRACTICE that – as the document says on Page 6, “[…] if no reduction of principal is produced, the total debt grows to infinity in a linear fashion.”
2.
The article says, on Page 14:
[QUOTE]
Production of W(k) is the result of a fixed spending of previously created P(k1) so that the ratio W (k): P(k-1) is constant such that,?
1. W(k) ? P(k-1)
[END QUOTE]
This, however – if the symbol “?” is used to signify “is proportional to”, as it usually does (though the paper does not specify the exactly sense in which the symbol is used) – does not fit the economic reality. The value of any wealth created in the real world as a result of spending a given amount of money is often unrelated to the amount of money spent to create it. An extreme example is wealth created by an artist like Picasso using just a pen and paper worth just a few pennies, ending up in a few minutes with a drawing having a monetary value of thousands if not even tens of thousands of dollars. This drawing can then be pledged to create a new amount of money almost as large as the monetary value of the drawing. Therefore a borrower, if he has the ability, can use the borrowed money to create wealth whose monetary value is much greater than the borrowed amount, then sell that wealth, and thereby pay off his or her entire loan, and thereafter remain debt-free.
In the article it is assumed that once a loan is paid off, the money supply in the economy is reduced by an amount equal to the principal of the loan. Therefore, if every borrower were to pay off his or her loan, there would be no money left in the economy; and, as a corollary, if borrowers were to pay off their loans gradually but in increasing numbers, the money supply in the economy would shrink very noticeably over time. However, the article fails to note that when that happens, in the real world it will become clear that something needs to be done, and, as a result, in any reasonably-competent economic system, debt-free money will be injected into the system (since this will be only solution capable of injecting money into an economy in which few if any people or organisations are in debt).
3.
The article reads (at Page 13):
[QUOTE]
Given the basic operation of the financial system as described below and assuming in the best case scenario that all loans are simple interest it will be possible to show that the prevalent financial system is unstable as a whole because it has a bounded (finite) pledged wealth but has an unbounded debt output.
[END QUOTE]?
However, the statement above, to the effect that wealth is bounded (or finite), is simply not true, since wealth increases with increasing technology – indeed it is virtually the only way, in the modern world, in which wealth increases – and there is no readily discernible upper limit to technology, given enough time. Thus there is no reason to suppose that the monetary value of wealth cannot grow, with time, as fast as, if not even faster than, the growth of debt, thus keeping input and output growing in sync … if not, indeed, favouring the growth of input (i.e, wealth).
Real data from at least one nation (the USA) bear this out. The total public and private debt of the USA as of the third quarter of 2010 was around $55 trillion (rounded off to the nearest $5 trillion), while the private wealth of all its citizens was around $110 trillion; so that the net worth of all American citizens, taken as a whole – i.e., their assets minus their liabilities – is around $55 trillion. (Sources: “Americans’ net worth up for 3rd straight quarter”. U.S. Federal Reserve, 2010-03-11; “Components of US debt”, Federal Reserve web site, retrieved 3 July 2010.) This shows that in America today, private wealth alone has about twice the monetary value of the total debt, both public and private. (And it is to be noted that this includes only privately-owned wealth; it does not include the wealth in government coffers, which is given in the Comprehensive Annual Financial Reports – or CAFRs – of the American States and Municipalities.)
As a result, the conclusion of the article, namely that interest represents a point of instability in the economic system (as pointed out at Page 15), is false.
Indeed, a little common sense confirms this. Interest on loans is only due after some time has passed: if a loan is paid off almost as soon as it is issued, say the very next day, no interest is charged. If a loan is in force over a reasonable amount of time, wealth continues to be created in the economy during that time. If the rate of increase of net wealth per given amount of time – say, per annum – increases faster than the real interest rate (i.e, the nominal interest rate minus the inflation rate), the total monetary value of the wealth in an economy will increase, and as a consequence, it will not be possible for an instability of the sort the article claims will manifest, to do so.
The commentator has proven on another list to not understand and apparently does not want to understand stability in general. The question of whether or not interest could be paid or not does not determine the stability of the system. The key question is if growth continues when either principal or interest is not paid. If it does, then the system is unstable. If the refinancing of any such residual debt would give way to compounding then by definition debt would grow to infinity on the aggregate.
In any event the commentator might want to propose with a similar mathematical control systems analysis why the empirical data show unbounded debt growth following near exponential growth. He may also wish to illustrate to everyone what would necessarily have to take place for a zero interest model to grow as does the empirical data.
That would be constructive, the rest is opinion based commentary to draw people away from one level of discussion to a lesser and more unambiguous level where almost anything goes and where those that are not quite sure can be awarded the same consideration than do those that express their views in exact unambiguous language.
The commentator confuses many basic notions for example the amount of wealth specifically backing issued money which is historically fixed, with the potential for overall wealth production to increase due to technology. He writes:
“However, the statement above, to the effect that wealth is bounded (or finite), is simply not true, since wealth increases with increasing technology”
The above statement is too elementary an error that shows the shallowness of his analysis. Because the boundedness of the wealth is in reference to the wealth being used as collateral at the moment of being pledged as collateral in discrete loan contracts NOT with respect to the general capability of wealth to be increased on the aggregate due to improved technology.
This level of confusion is chronic with this poster, to the point that one wonders if he is simply confused or doing this on purpose to confuse the discussion.
A correction to my last post:
Where I write:
That would be constructive, the rest is opinion based commentary to draw people away from one level of discussion to a lesser and more unambiguous level where almost anything goes and where those that are not quite sure can be awarded the same consideration than do those that express their views in exact unambiguous language.
Should read:
That would be constructive, the rest is opinion based commentary to draw people away from one level of discussion to a lesser and more AMBIGUOUS level where almost anything goes and where those that are not quite sure can be awarded the same consideration than do those that express their views in exact unambiguous language.
Another point regarding the Picasso example:
The commentator tries to use the example of a Picasso painting worth pennies then becomes so valuable that selling the painting generates the owner a fortune. Aha! says Ardeshir, the painting’s value is not bounded. But what Ardeshir misses, is that as far as the assessment in a loan contract is concerned, its value does not change in fact it is fixed! And therefore with respect to the ratio of the painting to the debt and money supply it is bounded. Furthermore, any change in the assessment value of the painting would have to take place at another point in time, under different market conditions and with a completely new and independent loan contract that would surely provide a new bounded or fixed value for the painting and as well as a different debt principal and corresponding current account entries.
Corrigenda to my response to “BIBO – A Standard for Stable Currencies” dated January 20th, 2011 at 11:03 pm
In my above-noted comment, some typographical errors have crept in which I should like to correct.
1.
I wrote:
{quote}
There are some serious errors in the document entitled “Formal Stability Analysis of common lending practices” available from .
{end quote}
There is a URL missing before the period. The URL is
http://bibocurrency.org/
2.
I wrote:
{quote}
The article says, on Page 14:
[QUOTE]
Production of W(k) is the result of a fixed spending of previously created P(k 1) so that the ratio W (k): P(k-1) is constant such that,?
1. W(k) ? P(k-1)
[END QUOTE]
{end quote}
This, however – if the symbol “?” is used to signify “is proportional to”, as it usually does (though the paper does not specify the exactly sense in which the symbol is used) – does not fit the economic reality.>>
The symbol represented by a question mark (“?”) in the formula “W(k) ? P(k-1)” should instead be the mathematical symbol for “is proportional to”, which looks somewhat like the Greek letter “alpha”.
Also, the words “previously created P(k 1)” should read “previously created P(k-1)”.
3.
There is a question mark after one of the phrases [END QUOTE] which reads
[END QUOTE]?
The question mark is a typographical error, and should not be there.
Marc writes, on January 21st, 2011 at 6:07 pm:
“The commentator has proven on another list to not understand and apparently does not want to understand stability in general. The question of whether or not interest could be paid or not does not determine the stability of the system. The key question is if growth continues when either principal or interest is not paid. If it does, then the system is unstable.”
Reply to Marc’s above-quoted remarks:
The above criticism is vague and ambiguous. Growth of what? Of debt, or of wealth? And is Marc referring to ALL the principal or interest, or only part of it? And is Marc referring to the real world, in which some borrowers are indeed unable to pay back all the principal and/or interest they borrow, and yet economic growth continues with no end in sight; or is he referring to a hypothetical world, in which debt incurred many decades, even centuries ago has to remain in force, as in his model, to end up growing to infinity?
Marc continues:
“If the refinancing of any such residual debt would give way to compounding then by definition debt would grow to infinity on the aggregate.”
Reply to Marc’s above-quoted remarks:
Surely it is only possible for debt to grow to infinity if the debt is refinanced an infinite number of times. But, as was pointed out in my comment, in PRACTICE no debt continues for an indefinite time: indeed, the vast majority of debts are not in force for much more than 50 years, if even that. Thus debt can never grow to infinity regardless of whether the interest is simple or compound.
Marc continues:
“In any event the commentator might want to propose with a similar mathematical control systems analysis why the empirical data show unbounded debt growth following near exponential growth.”
Reply to Marc’s above-quoted remarks:
In the real world of PRACTICAL economics, such “mathematical systems control analysis” does not apply, since it assumes that the PERIOD of debt is unbounded. But, as pointed out earlier, in PRACTICE no debt continues for an indefinite time: indeed, the vast majority of debts are not in force for much more than 50 years, if even that. Debt cannot be unbounded if the PERIOD of debt is not unbounded!
Marc continues:
“He may also wish to illustrate to everyone what would necessarily have to take place for a zero interest model to grow as does the empirical data.”
Reply to Marc’s above-quoted remarks:
It is difficult to understand this sentence. Is it the “zero interest MODEL” that is supposed to be growing? Or is the “empirical data” supposed to be growing? In what sense does a MODEL grow? And just where is the EMPIRICAL data showing what happens with a MODEL? The comment just just too confusingly-worded to allow a clear response to be given.
Marc continues:
“That would be constructive, the rest is opinion based commentary to draw people away from one level of discussion to a lesser and more ambiguous level where almost anything goes and where those that are not quite sure can be awarded the same consideration than do those that express their views in exact unambiguous language.”
Reply to Marc’s above-quoted remarks:
Exactly what is this supposed to mean? In what way are any of my remarks ambiguous?
Marc continues:
“The commentator confuses many basic notions for example the amount of wealth specifically backing issued money which is historically fixed, with the potential for overall wealth production to increase due to technology. He writes:
‘However, the statement above, to the effect that wealth is bounded (or finite), is simply not true, since wealth increases with increasing technology’
“The above statement is too elementary an error that shows the shallowness of his analysis. Because the boundedness of the wealth is in reference to the wealth being used as collateral at the moment of being pledged as collateral in discrete loan contracts NOT with respect to the general capability of wealth to be increased on the aggregate due to improved technology.”
Reply to Marc’s above-quoted remarks:
If, as Marc claims, “the boundedness of wealth is in reference to the wealth being used as collateral at the moment of being pledged as collateral in discrete loan contracts”, then why is the unboundedness of debt not also considered at that same moment? What sense does it make for the boundedness of wealth to be considered at another time, indeed infinitely far in the future?
Marc continues:
“This level of confusion is chronic with this poster, to the point that one wonders if he is simply confused or doing this on purpose to confuse the discussion.”
Reply to Marc’s above-quoted remarks:
This ad-hominem remark is hardly worthy of a response.
Marc Says, on January 21st, 2011 at 8:06 pm:
“Another point regarding the Picasso example:
“The commentator tries to use the example of a Picasso painting worth pennies then becomes so valuable that selling the painting generates the owner a fortune. Aha! says Ardeshir, the painting’s value is not bounded.”
Reply to Marc’s above-quoted remarks:
That is not what I said. I was not referring to the painting’s value being unbounded, but to the value of the total wealth in the economy, which can grow in pace with the increasing debt, so that at any given moment of time, there is enough or more-than-enough wealth in a given economy to pay off all the debt.
“But what Ardeshir misses, is that as far as the assessment in a loan contract is concerned, its value does not change in fact it is fixed! And therefore with respect to the ratio of the painting to the debt and money supply it is bounded.”
Reply to Marc’s above-quoted remarks:
That, however, is not what I said. I was not referring to the PAINTING’S value being unbounded, but to the value of the total WEALTH in the economy, which can grow in pace with the increasing debt: so that at any given moment of time, there is enough – or even more-than-enough – wealth in a given economy to pay off all the debt in that same economy.
“But what Ardeshir misses, is that as far as the assessment in a loan contract is concerned, its value does not change in fact it is fixed! And therefore with respect to the ratio of the painting to the debt and money supply it is bounded.”
Reply to Marc’s above-quoted remarks:
As I said, I did not say that the value of the painting is unbounded.
“Furthermore, any change in the assessment value of the painting would have to take place at another point in time, under different market conditions and with a completely new and independent loan contract that would surely provide a new bounded or fixed value for the painting and as well as a different debt principal and corresponding current account entries.”
Reply to Marc’s above-quoted remarks:
This is irrelevant, as I did not say that the value of the painting is unbounded.
Ardeshir,
First you continue to confuse the bounded value of wealth as pledged in loan contracts with the phenomenon of wealth increasing as a function of technology.
You also don’t understand stability as it is defined in engineering. The principle you miss is that debt growth as a function of time is what is unstable irrespective of whether or not that process is arrested at a given point in time.
Since you invoked the “real world” to try to imply that our work was irrelevant, I responded with the challenge to explain what would have to occur for a zero interest system to produce the empirical data. The idea was that since the real empirical data shows unbounded debt growth, and as you say that interest is not the cause of unbounded debt growth, then you should be able to show how unbounded debt growth such as that observed empirically, would take place without interest.
Please do so, but use math as your prose lack logical consistency.
Stability in a design is not determined by whether the instability is arrested it is determined by whether or not it is in the design.
The analysis of the standard interest bearing debt growth equation shows in the most trivial terms that applying interest is unstable.
Since you claimed that interest is not a root cause of instability and since the empirical data shows a debt growth as an output consistent with instability, I requested you to show how the system would produce such output without interest.
So please do so but use math to avoid any ambiguity.
QUOTE
In PRACTICE the output of a financial system is NOT unbounded: loans do not usually continue for much beyond 30 years. Hence it is not true in PRACTICE that – as the document says on Page 6, “[…] if no reduction of principal is produced, the total debt grows to infinity in a linear fashion.”
ENDQUOTE
There is one type of debt that in practice is meant to be perpetual: funds where only a portion of the interest income are withdrawn and the principal, programmed to grow over time, are meant to be kept in perpetuity.
Marc writes, on January 24th, 2011 at 5:21 pm:
“First you continue to confuse the bounded value of wealth as pledged in loan contracts with the phenomenon of wealth increasing as a function of technology.”
Response to Marc:
There is no confusion, since as wealth is increases it can be “monetised” – i.e., pledged as collateral for loans – so as to create more money thereby. The amount of debt will grow as the amount of wealth grows.
Marc continues:
“You also don’t understand stability as it is defined in engineering. The principle you miss is that debt growth as a function of time is what is unstable irrespective of whether or not that process is arrested at a given point in time.”
Response to Marc:
Please note that I have not addressed the issue of stability in my critique.
Marc continues:
“Since you invoked the ‘real world’ to try to imply that our work was irrelevant, I responded with the challenge to explain what would have to occur for a zero interest system to produce the empirical data. The idea was that since the real empirical data shows unbounded debt growth, and as you say that interest is not the cause of unbounded debt growth, then you should be able to show how unbounded debt growth such as that observed empirically, would take place without interest.”
Response to Marc:
It depends on what you mean by “unbounded debt growth” here. If you mean debt growing endlessly and without discernible limit, then in an economy where all money is created via debt, if the wealth in the economy were to keep on increasing endlessly – certainly there is no discernible limit on the growth of wealth – and this wealth were to be used to create more and more money by being pledged as collateral for more and more debt, then it is hard to see how debt would not grow endlessly as a result – whether interest were charged on such debt or not.
Marc continues:
“Please do so, but use math as your prose lack logical consistency.”
Response to Marc:
Please point out the inconsistency.
And if you wish me to use mathematics, please use mathematics yourself in your criticism, to clarify what you are saying, so that I can respond in kind.
Marc continues:
“Stability in a design is not determined by whether the instability is arrested it is determined by whether or not it is in the design. The analysis of the standard interest bearing debt growth equation shows in the most trivial terms that applying interest is unstable.”
Response to Marc:
Please note again that I have not addressed the issue of stability in my critique.
Dear Marc,
I wonder if you would be interested in writing an “Update to Bibo”, to explain to our readers the further evolution of your project and what to expect in the future.
Dear Ardeshir, perhaps you would like to formalize your critique for the general reader, in a article, after which March can then respond once more ?
This debate may be little hard to follow for most of our readers?
Ardeshir,
You have conceded then. By saying that the rubber bands stabilise the grenade you are accepting that the grenade is unstable.
On Jan 26, 2011, at 12:39 AM, Ardeshir Mehta wrote:
Pledgeable wealth also grows TOWARD infinity – not, of course, TO infinity – and can therefore keep up with the growth of debt.
MG: No, in a loan contract the value of collateral is fixed. Only the debt grows towards infinity. Therefore wealth generating wealth necessarily lags behind debt growth.
Furthermore, there is nothing in nature that says wealth must grow towards infinity. There is a failed attempt to have wealth grow exponentially which is expressed in our analysis as the attempt to create more and more collateral to back the new money required to refinance old debt either directly or indirectly.
AM: It’s like a grenade with the pin out but the lever held down with numerous rubber bands around both the grenade and the lever. Quite stable.
MG: Yes debt is like a grenade but without the rubber bands because debt is allowed to grow. But as I am mentioned above claiming the rubber bands are needed in the grenade analogy is an admission of the inherent instability BY DESIGN which is the whole point of our stability analysis.
But there aren’t any rubber bands in loan contracts. Your argument that re-cycling interest is more akin to claiming that because theoretically you could find all the pieces and reconstitute the grenade, there was no initial instability. But alas, that is truly wrong.
So your argument boils down to that the grenade is not unstable because we put it back together after we have blown it up!!
There are many systems that use containment of instability. So the intelligent thing to ask, is how does the public at large benefit form the instability? Not to try to prove that instability doesn’t exist because you contain it with rubber bands or put the things you blow up back together again.
Marc
Dear Michael,
We are working on several projects that I hope will flourish into a truly constructive contribution to this most important movement to stabilise money while those formally charged with that task continue to fail at the expense of those who least can afford it.
Having said that, I can report that our findings are proving concrete in that we have managed to clarify the question of how stability is understood in economics. This has been a difficult task because for one, economists do not understand stability as do engineers and scientist, secondly there is a difficulty in general to accept that purely logical systems such as money are subject to stability analysis. It is like someone saying that an exponential on paper has no impact on the real world, it is just abstract musing. However, in the case of economics, there is a real attempt to have economic growth follow the arbitrary growth of debt that we refer to in our stability analysis. And in reality, the growth is coerced through fear of enforcement of loan contracts.
So in concrete terms, our thesis is starting to take hold as people realise what stability is. Stability is not a complex thing to understand, it simply is the tendency for something to grow in a particular direction requiring it to be restrained. So once people realise that indeed “Common Lending Practices” are unstable by design, our thesis follows, namely that our actions without correcting that root instability will never allow us to correct the course that instability has sent us on.
The great news is, that a new non partisan awakening is taking place without the dichotomies of old to divide and concur with. People of all races, creeds and beliefs are converging on the absurdity of certain things while cherishing the important things, such as human rights, personal freedom and autonomy. Those that would attempt to mechanically implement mass control are finding that things are just not and are not likely to ever work out as planned. Also, the number of whistle blowers is increasing both from within and without the establishment. All this is good, because it requires everyone to accept that change is necessary while at the same time understanding that unilateral change is no longer viable.
The great expectation is that the world’s woes, that are indeed rooted in the faulty mechanics of money will be resolved not through conflict nor by an obscure occult power, but openly as in our proposal for an open technical specification for a Passive BIBO currency. Such an expectation is now growing as a truly pragmatic option as opposed to that of a purely idealistic one far from ever being implemented. It is only a matter of time, when it becomes unavoidably clear that the only of establishing a reversal of the trend in debt levels and trade imbalances the US and China for example, is by freeing the creative capacity of the US to produce wealth with the highest added value, not to try to artificially manipulate the value of the dollar against the yuan. This can only be achieved by providing absolute stability in money, no one can afford to continue having their money lie to them. Stability means real consistent backing of the unit and only a BIBO compliant system can achieve that. It does not mean artificial scarcity of the money in the market place.
We need not fret about the past or blame anyone for anything, this nightmare will end and we all have contributed to its existence to some or other degree. What is important is that when it ends, that we shed the compulsion to repeat such nightmares by defensively justifying them using false science. As Buddha said, nothing is permanent and nothing is independent. The wisdom is to establish the correct dependencies and not plan on material permanence.
This debate may be little hard to follow for most of our readers?
Agreed – the debate is hard to follow, but as any debate, it is a healthy thing to have. I like the idea of updates from the viewpoint of Marc and – if he so desires – Ardeshir.
Meanwhile, it seems to me that Thomas Greco agrees with the point Marc makes with his BIBO proposal: The current system is fatally flawed.
http://www.realitysandwich.com/worlds_ominous_reckoning
The World’s Ominous Reckoning
“If the world has become so prosperous and productive, why all this debt, and why does it continue to grow ever more rapidly?
It is not a matter of policy, i.e., how we operate a flawed system. The problem is structural and systemic. The system is designed to create debt, and ever more of it. Like a pernicious cancer, debt is a parasite that is killing us, and in the end a parasite will die along with its host. How much of our well-being shall we sacrifice to keep feeding this cancer? Are we willing to starve ourselves and our children, to endure cuts in spending for education and public services, to sacrifice our hard-won freedoms, in order to sustain a system that despoils the earth, destroys the social fabric, and creates ever greater economic inequities?
A few have been calling for “debt forgiveness,” a remedy analogous to cancer surgery. That may be a good start, but even that does no go far enough. We can excise the cancer, but if we do not recognize and eliminate its fundamental cause it will simply grow back. We can restart the game of Monopoly, but the outcome of the next round will be very much like that of the previous round unless we change the rules — or choose to play a different game.
The fact is, there is a debt imperative that is built into the global system of money and banking, and debt is eating us alive…”
Thanks Marc!
Your welcome!
Below I have corrected some typos (CORRECTIONS IN UPPER CASE:
Dear Michael,
We are working on several projects that I hope will flourish into a truly constructive contribution to this most important movement to stabilise money while those formally charged with that task continue to fail at the expense of those who least can afford it.
Having said that, I can report that our findings are proving concrete in that we have managed to clarify the question of how stability is understood in economics. This has been a difficult task because for one, economists do not understand stability as do engineers and scientist, secondly there is a difficulty in general to accept that purely logical systems such as money are subject to stability analysis. It is like someone saying that an exponential on paper has no impact on the real world, it is just abstract musing. However, in the case of economics, there is a real attempt to have economic growth follow the arbitrary growth of debt that we refer to in our stability analysis. And in reality, the growth is coerced through fear of PHYSICAL enforcement of loan contracts.
So in concrete terms, our thesis is starting to take hold as people realise what stability REALLY is. Stability is not a complex thing to understand, it simply is the tendency for something to grow in a particular direction requiring THAT GROWTH to be restrained. So once people realise that indeed “Common Lending Practices” are unstable by design, our thesis follows, namely that our actions without correcting that root instability will never allow us to correct the course that instability has sent us on.
The great news is, that a new non partisan awakening is taking place without the dichotomies of old to divide and concur US with. People of all races, creeds and beliefs are converging on the absurdity of certain things while cherishing the important things, such as human rights, personal freedom and autonomy. Those that would attempt to mechanically implement mass control are finding that things are just not and are not EVER likely to work out as planned. Also, the number of whistle blowers is increasing both from within and FROM OUTSIDE the establishment. All this is good, because it requires everyone to accept that change is necessary while at the same time understanding that unilateral change is no longer viable.
The great expectation is that the world’s woes, that are indeed rooted in the faulty mechanics of money will be resolved not through conflict nor by an obscure occult power, but openly as in our proposal for an open technical specification for a Passive BIBO currency. Such an expectation is now growing as a truly pragmatic option as opposed to that of a purely idealistic one far from ever being implemented. It is only a matter of time, when it becomes unavoidably clear, that the only WAY of establishing a reversal of the trend in debt levels and trade imbalances BETWEEN the US and China for example, is by, IN THIS CASE, freeing the creative capacity of the US to produce wealth with the highest added value AND not BY trying to artificially manipulate the value of the dollar against the yuan. This can only be achieved by providing absolute stability in money, no one can afford to continue having their money lie to them. Stability means real consistent backing of the unit and only a BIBO compliant system can achieve that. It does not mean artificial scarcity or abundance of the money in the market place.
We need not fret about the past or blame anyone for anything, this nightmare will end and we all have contributed to its existence to some or other degree. What is important is that when it ends, that we shed the compulsion to repeat such nightmares by defensively justifying them using false science.
As Buddha said, nothing is permanent and nothing is independent. The wisdom is to establish the correct dependencies and not plan on material permanence.
Just one more correction:
The third paragraph should read:
So in concrete terms, our thesis is starting to take hold as people realise what stability REALLY is. INstability is not a complex thing to understand, it simply is the tendency for something to grow in a particular direction requiring THAT GROWTH to be restrained. So once people realise that indeed “Common Lending Practices” are unstable by design, our thesis follows, namely that our actions without correcting that root instability will never allow us to correct the course that instability has sent us on.
Michel Bauwens writes, inter alia, on January 26th, 2011 at 6:09 am:
“Dear Ardeshir, perhaps you would like to formalize your critique for the general reader, in a article, after which March [I presume MIchel means Marc] can then respond once more?
This debate may be little hard to follow for most of our readers?”
Thank you Michael. I shall do so when I have a little more time. I may not be able to do so for a few days more, however.
Marc writes *inter alia*, on January 26th, 2011 at 7:34 am:
“Ardeshir,
You have conceded then. By saying that the rubber bands stabilise the grenade you are accepting that the grenade is unstable.’
Not at all. It is no more unstable than a grenade with a pin in it. Such grenades with pins in them are stockpiled by the tens of thousand in warehouses, and they don’t explode!
It is true that a grenade with the pin OUT and nothing else holding the lever down is unstable, but (in analogy), interest is not like that. Interest CAN be unstable but doesn’t HAVE to be so.
Don’t get me wrong: I am against interest. But the argument that interest NECESSARILY and INEVITABLY causes instability is clearly incorrect.
Marc also writes:
“So your argument boils down to that the grenade is not unstable because we put it back together after we have blown it up!!”
That is not my argument, of course: and I would appreciate it if you would read and interpret my words more carefully.
Thanks, there is no hurry, it’s an open invitation,
Michel
Ardeshir wrote:
Don’t get me wrong: I am against interest. But the argument that interest NECESSARILY and INEVITABLY causes instability is clearly incorrect.
What causes instability in the current system, in my view, is the fact that a large part of all extant money (up to 90 %) is being created on an ongoing basis by commercial banks as they grant loans to customers. Those loans are burdened with interest, and thus the majority of the money we use to mediate economic interactions is by the nature of its creation burdened with interest. Thus the majority of our economic interactions are only made possible if we consent to pay interest for the money needed to mediate them. THAT is the source of instability in the current financial/economic system, not the mere fact that interest exists.
As a matter of fact, Marc argues in his paper that CURRENT LENDING PRACTICES are unstable, and he proves that statement by calculating the interest on money loaned. He never said – as far as I know – that interest NECESSARILY and INEVITABLY causes instability.
Ardeshir seems to be attempting to shoot down a strawman’s argument that he himself put up.
Ardeshir,
As I said before, you have confused contained instability with stability in design.
I don’t care what you think. The standard control systems engineering definition of instability is what we give not what you insinuate in your prose. We talk in math used in standard Control Systems Theory for a case that is relatively trivial for that domain.
As I requested before, please disprove the math then we can talk otherwise this discussion can go on forever and without ever being resolved. Something that I frankly don’t have time for.
All,
In order for people less inclined to follow the formal stability analysis of “Common Lending Practices” whose math can be daunting allow me to try to put in unambiguous layman terms.
First some definitions
Stability/Instability:
1) Anything that NEVER has unbounded inputs or outputs is inherently STABLE.
2) As a corollary to 1) Anything whose design CAN produce unbounded inputs or outputs for any reason is inherently UNSTABLE.
Passive Stability: A stable system whose Outputs never exceed Inputs.
Unbounded: Unbounded means any growth over time that approaches infinity.
The rule that states that for any outstanding Principal sum the amount required to be paid will increase as a function of time, necessarily corresponds to the definition of instability. Because if left any time, the debt will grow approaching infinity. This is the case for both simple and compound interest.
Since debt is explicitly programmed to grow as a function of time then it is clear that the inherent instability is not contained i.e. actually takes place.
Sources of confusion:
1) Because debt never actually grows to infinity i.e. is arrested at some point in time, the debt is really bounded:
Response: The statement is incorrect, because the instability is defined by any debt growth whose limit is NOT part of the growth function itself.
2) A system that has an unstable component that can be countered or compensated for is stable.
Response: The statement is incorrect, only systems where the instability of one of its components is countered exactly and completely for ALL POSSIBLE CASES can be considered stable. Otherwise the system remains inherently unstable.
The instability of the money system:
Our obsession is that the interest function is for one completely unnecessary for managing a free market economy and secondly it is not contained nor compensated for in a systematic way.
In short, the system is inherently unstable because the only systematic instability in its design being interest is not contained for ALL POSSIBLE CASES. In fact the unbounded growth actually takes place explicitly by design in all cases.
Passive stability is necessary because just bounded outputs greater than inputs will, particularly in the economy, give rise to aggregate system instability.
I hope this helps in understanding better where we are coming from. We really need to get on to developing a solution which is simply to provide a standard exchange mechanism that provides all the functionality of money without the headaches. This in the 21st century is a real option.
Marc
Michel Bauwens wrote, *inter alia*, on January 26th, 2011 at 6:09 am:
“Dear Ardeshir, perhaps you would like to formalize your critique for the general reader, in a article, after which March [I presume MIchel means Marc] can then respond once more?
This debate may be little hard to follow for most of our readers?”
I replied, at that time:
“Thank you Michael. I shall do so when I have a little more time. I may not be able to do so for a few days more, however.”
Michael,
In response to your invitation, I have written and uploaded to the following URL, on my web site:
… a general article critiquing the commonly-held view 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. In essence, I critique the thesis that if an amount P is created as the principal of a loan (or of a combination of loans), the loan(s) cannot be fully paid back if the total amount of the debt exceeds P – as is necessarily the case when interest is charged. In other words, there would not be enough money in the economy to pay off the entire debt, and therefore some of the borrowers must perforce default.
My article contains several tables, and I do not know if they will show up well if I were to cut and paste it here. So I invite all people interested in this debate to simply go to the URL given above, and read my article there.
Cheers.
ADDENDUM
The URL that should be in the previous message is
http://homepage.mac.com/ardeshir/DebunkingTheDebt-VirusHypothesis.html
Sorry about that!
Hello everybody,
Marc wrote, *inter alia*, on January 29th, 2011 at 12:58 pm:
“All,
[…]
“First some definitions
“Stability/Instability:
“1) Anything that NEVER has unbounded inputs or outputs is inherently STABLE.
“2) As a corollary to 1) Anything whose design CAN produce unbounded inputs or outputs for any reason is inherently UNSTABLE.
“Passive Stability: A stable system whose Outputs never exceed Inputs.
“Unbounded: Unbounded means any growth over time that approaches infinity.”
As I pointed out in my original comment dated 20 January 2011, In PRACTICE the interest, which is to say the output of a financial system, is NOT unbounded: loans do not usually continue for much beyond 30 years. I defy anyone to show me a loan which started even as little as 200 years ago, let alone 2,000 years ago, and which is still in force, whether as a result of refinancing or otherwise!
Thus interest is also not unbounded in PRACTICE, i.e., approaches infinity (as per the definition of “unbounded” given above by Marc). And if interest is not unbounded in PRACTICE, by the above definition the system is nor unstable in PRACTICE (as per the definition of “unstable” given above by Marc).
Thus what Marc says confirms what I have been saying all along.
Best wishes.
Thanks Ardeshir, that one is too technical for us, but I’ll ask Sepp, our ‘money’ correspondent, if he can summarize and link to it,
Michel
Ardershir wrote:
“As I pointed out in my original comment dated 20 January 2011, In PRACTICE the interest, which is to say the output of a financial system, is NOT unbounded: loans do not usually continue for much beyond 30 years.”
And as it was explained to you the life of a loan does not determine its unbounded nature, it is the fact that the growth until arrested APPROACHES infinity. Any debt growth designed to approach infinity is unstable whether or not you arrest that growth at a point in time.
To make the practice stable the limit must be built into the function i.e. it must not be depend on outside events to arrest the growth e.g. paying all the installments, forgiving or canceling part of the debt.
Finally, our work makes another equally important observation and that is not only must the system be BIBO it must be Passive also. That is even if the output of loan contracts were to be BIBO, if the output exceeds the input, those contracts although stable would become for a number of reasons destabilising to the economy as a whole i.e. cause inflation.
This last point can be confirmed by the simple fact that interest is the only source of a cost increase that is not associated with any corresponding contribution of wealth. It is a source of systematic inflation that if refinanced would make BIBO practices non BIBO at the aggregate level.
Sepp writes, on January 29th, 2011 at 10:18 am:
[QUOTE]
Ardeshir wrote:
“Don’t get me wrong: I am against interest. But the argument that interest NECESSARILY and INEVITABLY causes instability is clearly incorrect.”
What causes instability in the current system, in my view, is the fact that a large part of all extant money (up to 90 %) is being created on an ongoing basis by commercial banks as they grant loans to customers. Those loans are burdened with interest, and thus the majority of the money we use to mediate economic interactions is by the nature of its creation burdened with interest. Thus the majority of our economic interactions are only made possible if we consent to pay interest for the money needed to mediate them. THAT is the source of instability in the current financial/economic system, not the mere fact that interest exists.
As a matter of fact, Marc argues in his paper that CURRENT LENDING PRACTICES are unstable, and he proves that statement by calculating the interest on money loaned. He never said – as far as I know – that interest NECESSARILY and INEVITABLY causes instability.
Ardeshir seems to be attempting to shoot down a strawman’s argument that he himself put up.
[END QUOTE]
I should have been more clear. Marc claims that current lending practices are inherently unstable, AND that they are unstable due to the presence of INTEREST (for, as I understand Marc’s argument, if interest were abolished, even current lending practices would not be unstable). And he claims that the instability results from the fact that INTEREST is unbounded: that is, approaches infinity. My argument against Marc’s position is that current lending practices, even WITH INTEREST, are not inherently unstable in PRACTICE, because in PRACTICE, even according to common lending practices, loans are NEVER issued for unlimited amounts of time; and thus the interest on them never grows towards infinity. In other words, there is a limit after which, in PRACTICE, interest does NOT grow. Thus what I am saying is that Marc’s thesis is altogether theoretical; it does not apply to what happens in PRACTICE.
Also, as I understand Marc’s thesis, the problem he identifies has nothing to do with debt *per se*. As I understand Marc’s thesis, as long as interest is abolished, growing debt would not be a problem; nor would money created exclusively as debt be a problem. I myself don’t agree that debt is not a problem as long as interest is abolished, nor that money created exclusively as debt is not a problem; and I have written a paper on the subject which can be found on line at
http://homepage.mac.com/ardeshir/Debt-FreeMoneyIsBetterThanDebt-BasedMoney.html
Best wishes.
Ardeshir wrote:
“My argument against Marc’s position is that current lending practices, even WITH INTEREST, are not inherently unstable in PRACTICE, because in PRACTICE, even according to common lending practices, loans are NEVER issued for unlimited amounts of time; and thus the interest on them never grows towards infinity”
Our argument is not that loans must grow to infinity to be unbounded, which is what Ardeshir’s argument necessarily implies. But rather our argument has always been that whatever amount of growth that takes place if it is towards infinity it is unstable. Common lending practices do grow towards infinity by definition, so by definition they are unstable period.
If we take Ardeshir’s statement that because loans do not go on forever they are not unbounded, therefore they are stable. it then implies that in order for stability to manifest loans must go on forever. But that is not the definition of instability. The definition is that any growth TOWARDS infinity is unstable no matter how limited that growth is!
The test is quite trivial, leave an interest bearing loan device on its own and debt will grow towards infinity, leave an interest free loan on its own and debt will remains constant. The former exhibits instability and the latter does not i.e. is stable.
Marc
A typo correction in upper case
Ardeshir wrote:
“My argument against Marc’s position is that current lending practices, even WITH INTEREST, are not inherently unstable in PRACTICE, because in PRACTICE, even according to common lending practices, loans are NEVER issued for unlimited amounts of time; and thus the interest on them never grows towards infinity”
Our argument is not that loans must grow to infinity to be unbounded, which is what Ardeshir’s argument necessarily implies. But rather our argument has always been that whatever amount of growth that takes place if it is towards infinity it is unstable. Common lending practices do grow towards infinity by definition, so by definition they are unstable period.
If we take Ardeshir’s statement that because loans do not go on forever they are not unbounded, therefore they are stable. it then implies that in order for INSTABILITY to manifest loans must go on forever. But that is not the definition of instability. The definition is that any growth TOWARDS infinity is unstable no matter how limited that growth is!
The test is quite trivial, leave an interest bearing loan device on its own and debt will grow towards infinity, leave an interest free loan on its own and debt will remains constant. The former exhibits instability and the latter does not i.e. is stable.
Marc
Ardeshir wrote:
“My argument against Marc’s position is that current lending practices, even WITH INTEREST, are not inherently unstable in PRACTICE, because in PRACTICE, even according to common lending practices, loans are NEVER issued for unlimited amounts of time; and thus the interest on them never grows towards infinity. In other words, there is a limit after which, in PRACTICE, interest does NOT grow. Thus what I am saying is that Marc’s thesis is altogether theoretical; it does not apply to what happens in PRACTICE.”
First point when debt grows and it does, it grows towards infinity. The fact that the loan progression may be arrested or limited does not change this fact.
We have already been through this, Ardeshir’s statement:
“loans are NEVER issued for unlimited amounts of time; and thus the interest on them never grows towards infinity.”
Implies that to him any loan that does not grow TO infinity is bounded growth. But by definition interest bearing debt grows TOWARDS infinity while it grows. That is what by definition makes interest bearing debt unstable. The definition says that the growth is TOWARDS infinity not TO INFINITY.
For the last time. Debt need not grow TO infinity for the growth to be of an unbounded nature, it is sufficient that the growth be defined to grow TOWARDS infinity. In other words if the debt is left on its own it will grow TO infinity. Whereas by contrast, an interest free loan left on its own, does not grow to infinity and therefore is stable.
Marc
Marc writes, on February 5th, 2011 at 10:49 am:
[QUOTE]
Ardershir wrote:
“As I pointed out in my original comment dated 20 January 2011, In PRACTICE the interest, which is to say the output of a financial system, is NOT unbounded: loans do not usually continue for much beyond 30 years.”
And as it was explained to you the life of a loan does not determine its unbounded nature, it is the fact that the growth until arrested APPROACHES infinity. Any debt growth designed to approach infinity is unstable whether or not you arrest that growth at a point in time.
To make the practice stable the limit must be built into the function i.e. it must not be depend on outside events to arrest the growth e.g. paying all the installments, forgiving or canceling part of the debt.
[END QUOTE]
And as I pointed out earlier, this statement is entirely THEORETICAL. In PRACTICE, interest NEVER approaches infinity.
Consider the growth of bacteria in a petrie dish. Yes, the growth is exponential at first, but eventually it is stopped by the size of the petrie dish! It never “approaches infinity” – not even CLOSE.
Likewise, the growth of interest may even be exponential (if it is compound interest), but it never “approaches infinity” in PRACTICE: not even CLOSE. The “approach to infinity” is altogether THEORETICAL, and has NO bearing on the REAL world
Marc added:
[QUOTE]
Finally, our work makes another equally important observation and that is not only must the system be BIBO it must be Passive also. That is even if the output of loan contracts were to be BIBO, if the output exceeds the input, those contracts although stable would become for a number of reasons destabilising to the economy as a whole i.e. cause inflation.
This last point can be confirmed by the simple fact that interest is the only source of a cost increase that is not associated with any corresponding contribution of wealth. It is a source of systematic inflation that if refinanced would make BIBO practices non BIBO at the aggregate level.
[END QUOTE]
This is not an aspect of your paper with which I am in disagreement. I do not deny that interest causes inflation: and I have, indeed, explained why it does so at the end of my paper found on-line at
http://homepage.mac.com/ardeshir/DebunkingTheDebt-VirusHypothesis.html
Cheers.
Ardeshir wrote:
“And as I pointed out earlier, this statement is entirely THEORETICAL. In PRACTICE, interest NEVER approaches infinity.”
Whenever interest debt grows it does so approaching infinity by mathematical definition.
So in PRACTICE the growth is TOWARDS infinity.
You are confusing reaching infinity with approaching infinity.
All,
Let’s review Ardeshir’s posts:
Ardeshir Mehta Says:
January 25th, 2011 at 7:17 pm
Please note that I have not addressed the issue of stability in my critique.”
Yet it is his central point of attack.
Then On Jan 26, 2011, at 12:39 AM, Ardeshir Mehta wrote:
“Pledgeable wealth also grows TOWARD infinity – not, of course, TO infinity – and can therefore keep up with the growth of debt.”
So according to Ardeshir debt does grow towards infinity.
But then!
Ardeshir Mehta Says:
February 6th, 2011 at 5:08 pm
“And as I pointed out earlier, this statement is entirely THEORETICAL. In PRACTICE, interest NEVER approaches infinity.”
Ardeshir obviously confuses approaching infinity with reaching infinity.
He also makes the outlandish claim that wealth ALSO grows towards infinity. But he is unable to provide the mathematical model that proves that wealth multiplies TOWARDS infinity to “keep up with the DEBT” acknowledging that debt does grow towards infinity.
The definition of instability is not that the growth reaches infinity but that the debt approaches infinity. This distinction qualifies the type of growth NOT its extent. Any function whose output approaches a finite sum is stable, any function that approaches an infinite sum is not, period. IRRESPECTIVE OF WHETHER IT REACHES INFINITY WHICH OBVIOUSLY NOTHING DOES.
So for the last time Ardeshir, does debt growth approach infinity or not? Please provide the growth function not a payment schedule.
And please take note that APPROACH means that the function aims at infinity not that it reaches infinity.
Finally, show that the system is unstable without interest debt growth. Because if you claim that interest debt growth is not unstable, then instability would have to persist without interest. To show that instability you also need a mathematical model. Please provide that model.
Marc
Michel Bauwens wrote, on February 5th, 2011 at 10:17 am:
Thanks Ardeshir, that one is too technical for us, but I’ll ask Sepp, our ‘money’ correspondent, if he can summarize and link to it.
Michel,
I have simplified the paper somewhat so that anyone can understand it. It is still available on-line at
http://homepage.mac.com/ardeshir/DebunkingTheDebt-VirusHypothesis.html
Cheers.
Marc,
I would like to join in and perhaps help break the current deadlock in the argument. But first, I need some clarification about your assumptions in your control analysis paper.
Your paper says that the simple interest model is intrinsically unstable because if no payment is made, the interest due will grow linearly without limit. Did I understand this paper of the paper correctly?
Roberto
Sorry, the last sentence should have read: “… this part of the paper correctly?”
Marc writes, on February 6th, 2011 at 2:47 pm:
Ardeshir wrote:
“My argument against Marc’s position is that current lending practices, even WITH INTEREST, are not inherently unstable in PRACTICE, because in PRACTICE, even according to common lending practices, loans are NEVER issued for unlimited amounts of time; and thus the interest on them never grows towards infinity. In other words, there is a limit after which, in PRACTICE, interest does NOT grow. Thus what I am saying is that Marc’s thesis is altogether theoretical; it does not apply to what happens in PRACTICE.”
First point when debt grows and it does, it grows towards infinity. The fact that the loan progression may be arrested or limited does not change this fact.
We have already been through this, Ardeshir’s statement:
“loans are NEVER issued for unlimited amounts of time; and thus the interest on them never grows towards infinity.”
Implies that to him any loan that does not grow TO infinity is bounded growth. But by definition interest bearing debt grows TOWARDS infinity while it grows. That is what by definition makes interest bearing debt unstable. The definition says that the growth is TOWARDS infinity not TO INFINITY.
For the last time. Debt need not grow TO infinity for the growth to be of an unbounded nature, it is sufficient that the growth be defined to grow TOWARDS infinity. In other words if the debt is left on its own it will grow TO infinity. Whereas by contrast, an interest free loan left on its own, does not grow to infinity and therefore is stable.
Under Marc’s above-quoted explanation of what “growing towards infinity” means, ANY growth whatsoever – even towards a fixed limit – would also qualify as growth “towards infinity”, would it not?
If so – to illustrate how amazing such a definition of “growing towards infinity” would be – consider a baby: it would also “grow towards infinity” … right? 😉 Or consider a tree sapling: we may plant a seed and water it, and during its initial stages this sapling would also “grow towards infinity” – would it not?
Personally I find such a definition of “growing towards infinity” rather ludicrous; though no doubt Marc thinks otherwise.
Perhaps, however, Marc would like to provide us with an example of growth that is NOT “growth towards infinity”. Then let us see if the growth of interest – as it takes place in actual practice, in the real world – fits his definition.
Cheers.
OK, I’ll do something with it,
Michel
# Roberto Verzola Says:
February 7th, 2011 at 5:52 pm
Your paper says that the simple interest model is intrinsically unstable because if no payment is made, the interest due will grow linearly without limit. Did I understand this paper of the paper correctly?
Yes bounded growth requires that the limit be defined in the growth function if it is not it requires external circumstances to limit it. This is precisely the definition of instability in control systems engineering.
Marc
Ardeshir Mehta Says:
February 7th, 2011 at 11:52 pm
Under Marc’s above-quoted explanation of what “growing towards infinity” means, ANY growth whatsoever – even towards a fixed limit – would also qualify as growth “towards infinity”, would it not?
This is absolute non-sense, I clearly distinguished between growth towards infinity and growth that does not approach infinity e.g. that approached a finite sum.
Ardeshir can’t tell the difference, that is why he doesn’t understand stability. He makes references to logistic growth when he talks about natural growth i.e. a baby, a seedling etc. These types of growth are modeled by using the standard logistic curve:
P(t) = 1/(1 + e^-t) or P(t) = 1/ (1 + (1/e^t))
But this is precisely an example of where a growth is limited to a finite sum and hence is not inherently unstable. By simply taking the limit as t approaches infinity the system stabilises to the value 1/1 = 1. Why? Because as t -> infinity 1/e^t ->0.
The function oscillates between the values 0 and 1 and the rate of change of the function (derivative) at P(0)and P(1) is = 0, i.e. at its maximum rate of growth the function stops growing i.e. is limited.
This is not the case of the standard interest debt formula as analysed in our paper. Debt = P(1+ik) has no limit as k-> infinity and its derivative is never zero at different values of k it is always Pi the slope of the curve.
The fact that Ardeshir would resort to the logistic growth as being equivalent to constant linear growth, proves that he doesn’t know what he is talking about.
There are functions that contain there own limit and those that do not. Any function that does not converge to a finite sum is unstable period.
Marc
Marc writes, on February 7th, 2011 at 12:02 pm:
All,
Let’s review Ardeshir’s posts:
Ardeshir Mehta Says:
January 25th, 2011 at 7:17 pm
“Please note that I have not addressed the issue of stability in my critique.”
Yet it is his central point of attack.
I was referring to my ORIGINAL critique written on January 20 at 11:03. In that critique I had taken the position that interest was BOUNDED in PRACTICE.
Marc of course claims that interest is unbounded and THEREFORE causes instablility; but then, if I can demonstrate that interest is NOT unbounded in PRACTICE, by Marc’s own reasoning the system would be stable.
But the stability or otherwise of the system is not the point of my critique: all I wanted to demonstrate is that IN PRACTICE, interest is NOT unbounded. And this can be confirmed by anyone with the slightest familiarity with interest in the REAL world (and not only in mathematical models, which do not always apply to the real world).
Marc went on to say:
Then On Jan 26, 2011, at 12:39 AM, Ardeshir Mehta wrote:
“Pledgeable wealth also grows TOWARD infinity – not, of course, TO infinity – and can therefore keep up with the growth of debt.”
So according to Ardeshir debt does grow towards infinity.
My apologies: I should have been more clear in my writing. In THIS context, by “debt” I don’t mean any SINGLE debt, but debt IN GENERAL, which certainly CAN grow towards infinity – as can wealth IN GENERAL. But every SINGLE debt is BOUNDED practice. I defy anyone to show me an instance of a debt in which the total interest is a hundred times the principal! (Perhaps illegal loans issued by the Mafia are like that, but I am not referring to loans such as those).
Marc then writes:
But then!
Ardeshir Mehta Says:
February 6th, 2011 at 5:08 pm
“And as I pointed out earlier, this statement is entirely THEORETICAL. In PRACTICE, interest NEVER approaches infinity.”
Ardeshir obviously confuses approaching infinity with reaching infinity.
I have dealt with this in a previous post. To repeat: perhaps Marc would like to provide us with an example of growth that is NOT “growth towards infinity”. Then let us see if the growth of interest – as it takes place in actual practice, in the real world – fits his definition (as implied by his example).
Marc added:
He also makes the outlandish claim that wealth ALSO grows towards infinity. But he is unable to provide the mathematical model that proves that wealth multiplies TOWARDS infinity to “keep up with the DEBT” acknowledging that debt does grow towards infinity.
I am not talking about mathematical models, but about the REAL world, in which wealth has been growing ever since the stone age, with no end in sight … as any historian can confirm!
Marc added:
The definition of instability is not that the growth reaches infinity but that the debt approaches infinity. This distinction qualifies the type of
growth NOT its extent. Any function whose output approaches a finite sum is stable, any function that approaches an infinite sum is not, period. IRRESPECTIVE OF WHETHER IT REACHES INFINITY WHICH OBVIOUSLY NOTHING DOES.
Again, perhaps Marc would like to provide us with an example of growth that is NOT “growth towards infinity”. Then let us see if the growth of interest – as it takes place in ACTUAL PRACTICE, in the REAL world – fits his implied definition.
Marc added:
So for the last time Ardeshir, does debt growth approach infinity or not? Please provide the growth function not a payment schedule.
And please take note that APPROACH means that the function aims at infinity not that it reaches infinity.
I repeat once more: perhaps Marc would like to provide us with an example of growth that is NOT “growth towards infinity”.
If one plots a graph of interest as it exists in the REAL world, the line would rise at first, perhaps even at an accelerated rate; but then, after a certain stage, it would either level off, or – more likely – simply come to an END. Interest NEVER grows endlessly, as any familiarity with interest in the REAL world confirms.
Marc finished by saying:
Finally, show that the system is unstable without interest debt growth. Because if you claim that interest debt growth is not unstable, then instability would have to persist without interest. To show that instability you also need a mathematical model. Please provide that model.
Please note that I am not claiming that any system is unstable WITHOUT interest. I am only claiming that interest is NOT UNBOUNDED. If anyone wishes to draw an conclusions from that fact (a fact which can be confirmed by anyone with any experience of interest in the real world), they are welcome to do so.
Best wishes.
Marc writes, on February 8th, 2011 at 11:11 am:
Ardeshir Mehta Says:
February 7th, 2011 at 11:52 pm
Under Marc’s above-quoted explanation of what “growing towards infinity” means, ANY growth whatsoever – even towards a fixed limit – would also qualify as growth “towards infinity”, would it not?
This is absolute non-sense, I clearly distinguished between growth towards infinity and growth that does not approach infinity e.g. that approached a finite sum.
Ardeshir can’t tell the difference, that is why he doesn’t understand stability. He makes references to logistic growth when he talks about natural growth i.e. a baby, a seedling etc. These types of growth are modeled by using the standard logistic curve:
P(t) = 1/(1 + e^-t) or P(t) = 1/ (1 + (1/e^t))
What are the terms “P”, “t”, and “e” intended to stand for, here?
Marc added:
But this is precisely an example of where a growth is limited to a finite sum and hence is not inherently unstable. By simply taking the limit as t approaches infinity the system stabilises to the value 1/1 = 1. Why? Because as t -> infinity 1/e^t ->0.
The function oscillates between the values 0 and 1 and the rate of change of the function (derivative) at P(0)and P(1) is = 0, i.e. at its maximum rate of growth the function stops growing i.e. is limited.
I might be able to respond if Marc were to specify what his terms stand for. As it is, the formulae given by Marc can mean anything.
Marc continued:
This is not the case of the standard interest debt formula as analysed in our paper. Debt = P(1+ik) has no limit as k-> infinity and its derivative is never zero at different values of k it is always Pi the slope of the curve.
The problem is that here, k – which, according to page 4 of Marc’s paper, stands for “the kth period of a loan, whatever the period a week a month etc.” – does not approach infinity in PRACTICE: it is itself BOUNDED; there has never been a loan, for example, in which k has exceeded 5,000 months (i.e., 416 years and 8 months), and, realistically, there never will be any such loan. So by Marc’s own formula, debt must also be bounded in PRACTICE.
Marc finished by saying:
The fact that Ardeshir would resort to the logistic growth as being equivalent to constant linear growth, proves that he doesn’t know what he is talking about.
There are functions that contain there own limit and those that do not. Any function that does not converge to a finite sum is unstable period.
This may be true of a mathematical model; but the REAL world does not fit the model. In the REAL world, the growth of interest is as bounded as the growth of a baby or a sapling, or of the growth of bacteria in a petrie dish: because the time period of a loan is always bounded in PRACTICE.
Best wishes.
Just one correction:
The function oscillates between the values 0 and 1 and the rate of change of the function (derivative) at P(0)and P(1) is = 0, i.e. at its maximum rate of growth the function stops growing i.e. is limited.
Should read
The function HAS values BETWEEN 0 and 1 and the rate of change of the function (derivative) at P(0)and P(1) is = 0, i.e. at its maximum rate of growth the function stops growing i.e. is limited.
# Ardeshir Mehta Says:
February 8th, 2011 at 6:41 pm
……
P(t) = 1/(1 + e^-t) or P(t) = 1/ (1 + (1/e^t))
AM:What are the terms “P”, “t”, and “e” intended to stand for, here?
MG: As I said this is the standard logistic curve that describes natural growth such as Population, embryos, babies, seedlings etc. Look it up, if you are going to criticise the work of others on the level you are attempting you better know what you are talking about and obviously you don’t.
Marc added:
MG: But this is precisely an example of where a growth is limited to a finite sum and hence is not inherently unstable. By simply taking the limit as t approaches infinity the system stabilises to the value 1/1 = 1. Why? Because as t -> infinity 1/e^t ->0.
MG: The function takes on values between 0 and 1 and the rate of change of the function (derivative) at P(0)and P(1) is = 0, i.e. at its maximum rate of growth the function stops growing i.e. is limited.
AM: I might be able to respond if Marc were to specify what his terms stand for. As it is, the formulae given by Marc can mean anything.
MG: Ardeshir I have already told you what the formula is, look it up if you don’t understand! But to make the comments and comparisons you have, you should know what a the logistic growth function is when you see it.
MG:There are functions that contain there own limit and those that do not. Any function that does not converge to a finite sum is unstable period.
AM:This may be true of a mathematical model; but the REAL world does not fit the model. In the REAL world, the growth of interest is as bounded as the growth of a baby or a sapling, or of the growth of bacteria in a petrie dish: because the time period of a loan is always bounded in PRACTICE.
MG: You have completely missed the point logistic growth and the interest debt function are fundamentally different and both describe real world phenomenon. One is stable the other is not.
MG: You have to do much better than this to be so brash in your criticism clearly without the requisite technical acumen.
Best wishes.
Ardeshir:
P may stand for population of some organism
t is time
e is a number, 2.71… that occurs frequently in the natural sciences (it also crops up when interest is compounded continuously
The logistic equation usually closely describes organic growth that initially appears exponential but then approaches an upper bound a time approaches infinity. Its graph appears like an “S” that is stretched forward.
Marc:
I’m still trying to understand your argument. You said that your model of simple interest is inherently unstable because if the interest is not paid, it will grow indefinitely, i.e., towards infinity.
However, your model is open-loop. If it is used as component in a larger closed-loop model that provides negative feedback, that larger model can be made stable, right?
So my next question is, would you consider stable or not a larger model — which is BIBO-stable, but which includes one component which, analyzed separately, is unstable?
I’ll give an example from my own field but which you are surely familiar with: if you connect an inductor to a voltage source, current will flow according to the equation e = L di/dt, with i increasing exponentially towards infinity, clearly unstable (very similar to the compound interest case you discuss in your paper). But if we add a resistive component in series, we get e = Ri + L di/dt, in which i will approach e/R, making it stable.
What Ardeshir has been trying to argue, I think, is that your simple model of interest is open-loop, and admittedly unstable. But just as pure inductors are never connected alone across a DC voltage source because current flow will increase indefinitely, unpaid interest is never allowed to grow indefinitely in any financial model either. This open-loop component is always part of a larger arrangement. Like you, I am not ready to concede that the larger financial system is stable, and your paper interested me precisely because it claimed to prove such instability. However, you seem to be basing your conclusion on the open-loop characteristics of the simple model you have chosen.
Does this line of inquiry make sense to you?
Greetings,
Roberto Verzola
Roberto wrote:
“I’m still trying to understand your argument. You said that your model of simple interest is inherently unstable because if the interest is not paid, it will grow indefinitely, i.e., towards infinity.”
MG: The argument is that the charging of interest is inherently unstable and that the root instability is not compensated for because:
a) The effect of the instability immediately resonates throughout the system in the form of increased costs without any corresponding collateral wealth.
b) Refinancing the linear growth compounds the debt resulting in an exponential debt seed that continues to resonate in the cost structure.
c) The system responds by increasing unit production in order to balance the ever increasing prices due to debt growth.
d) Eventually and after the empire syndrome of stealing wealth abroad and physical production rates at home reaching their limits either because of physical limits or because there is no need for more wealth, the problem continues and the means by which new value is concocted (arbitrary speculative bubbles) leads to a complete break down of the system, as it becomes evident that the only solution is to create money to pay debt.
MG: All this derives precisely because the root interest is not resisted. In fact the whole point of the growth is to maximise the instability in order to redirect the unbounded output.
MG: In your example the root instability is contained by the resisters this would be similar to a carrying capacity in an ecological system giving way to a logistic output. But as you clearly point out that does not make your inductor stable, it simply states that as long as the resistors are in place the instability will be contained. But note that this can only be the case in a closed loop, that is you cannot say that in the case of an open loop, your inductor output would be stabilised as it would quite likely multiply depending on the environment. Of course it would eventually be absorbed but alter having first caused considerable unpredictable damage to the surroundings.
MG: This is precisely the case with interest, there is no one to one containment of the instability and the root instabilty begins from the first instant resonating throughout the economy at large, creating a chain of reactions that cannot be compensated for by simply arresting the growth of the debt in the future. Indeed the root instability feeds back as we describe in our paper.
MG: Your example is not equivalent to the case of interest whether arrested or not, precisely because the instability is not channelled through a closed loop as in your circuit example. The arresting of debt growth at a particular point of time is not at all the same as providing an exactly measured resistance. The model of what takes place in the economy is more akin to turning the inductor on for a period of time without any resistance and then turning it off.
In any event Ardeshir’s argument was nothing comparable to what you are proposing because he himself said that he agreed that interest causes inflation as we describe. But if that is the case, that interest causes inflation then clearly the root instability is not contained and continues to propagate and feeding back in the price index as we describe.
MG: The application of interest is not designed to be compensated for as in the case of you closed circuit. Also, the purpose of the inductor is clear and is an example of a useful application of control theory. But what is or what could be a really rational purpose of interest?
Marc
Marc writes, on February 9th, 2011 at 1:22 am:
# Ardeshir Mehta Says:
February 8th, 2011 at 6:41 pm
……
P(t) = 1/(1 + e^-t) or P(t) = 1/ (1 + (1/e^t))
AM:What are the terms “P”, “t”, and “e” intended to stand for, here?
MG: As I said this is the standard logistic curve that describes natural growth such as Population, embryos, babies, seedlings etc. Look it up, if you are going to criticise the work of others on the level you are attempting you better know what you are talking about and obviously you don’t.
Marc added:
MG: But this is precisely an example of where a growth is limited to a finite sum and hence is not inherently unstable. By simply taking the limit as t approaches infinity the system stabilises to the value 1/1 = 1. Why? Because as t -> infinity 1/e^t ->0.
MG: The function takes on values between 0 and 1 and the rate of change of the function (derivative) at P(0)and P(1) is = 0, i.e. at its maximum rate of growth the function stops growing i.e. is limited.
AM: I might be able to respond if Marc were to specify what his terms stand for. As it is, the formulae given by Marc can mean anything.
MG: Ardeshir I have already told you what the formula is, look it up if you don’t understand! But to make the comments and comparisons you have, you should know what a the logistic growth function is when you see it.
MG:There are functions that contain there own limit and those that do not. Any function that does not converge to a finite sum is unstable period.
AM:This may be true of a mathematical model; but the REAL world does not fit the model. In the REAL world, the growth of interest is as bounded as the growth of a baby or a sapling, or of the growth of bacteria in a petrie dish: because the time period of a loan is always bounded in PRACTICE.
MG: You have completely missed the point logistic growth and the interest debt function are fundamentally different and both describe real world phenomenon. One is stable the other is not.
MG: You have to do much better than this to be so brash in your criticism clearly without the requisite technical acumen.
Best wishes.
(Is there really cause for ad-hominem remarks here?) The relevant point I was trying to make is that in Marc’s formula
Yk = P(1+kr1)
– where k stands for the period of the loan (weeks, months, or any other time period at which repayment instalments are due), Y stands for the total debt, Yk stands for the total debt at period k, P stands for for the Principal and r1 stands for for the regular interest rate – given on page 5 of his paper entitled “Formal? Stability ?Analysis ?of?Common? Lending ?Practices ?and ?Consequences ?of ?Chronic? Currency ?Devaluation?” found at
http://bibocurrency.org/Formal%20Stability%20Analysis%20and%20experiment%20(final)%20rev%203.4.pdf
… the term k is bounded in THE REAL WORLD.
If anyone – including Marc – wishes to deny this, let them show us a loan IN THE REAL WORLD of which the period k has extended beyond 5,000 months!
If no such loans exist in the REAL WORLD, then it stands to reason that k must at all times be less than 5,000 months; and since R1 is also less than 50%, Y – the total debt – can never be unbounded in the REAL WORLD.
Best wishes.
Roberto Verzola writes, on February 10th, 2011 at 2:04 pm
Ardeshir:
P may stand for population of some organism
t is time
e is a number, 2.71… that occurs frequently in the natural sciences (it also crops up when interest is compounded continuously
The logistic equation usually closely describes organic growth that initially appears exponential but then approaches an upper bound a time approaches infinity. Its graph appears like an “S” that is stretched forward.
Yes, indeed. I got that when Marc said (later) that his was the equation for a logistic curve.
I was, however, just responding to Marc’s original statements, quoted below, along with my response, as follows:
[QUOTE]
Ardeshir’s statement:
“loans are NEVER issued for unlimited amounts of time; and thus the interest on them never grows towards infinity.”
Implies that to him any loan that does not grow TO infinity is bounded growth. But by definition interest bearing debt grows TOWARDS infinity while it grows. That is what by definition makes interest bearing debt unstable. The definition says that the growth is TOWARDS infinity not TO INFINITY.
For the last time. Debt need not grow TO infinity for the growth to be of an unbounded nature, it is sufficient that the growth be defined to grow TOWARDS infinity. In other words if the debt is left on its own it will grow TO infinity. Whereas by contrast, an interest free loan left on its own, does not grow to infinity and therefore is stable.
Under Marc’s above-quoted explanation of what “growing towards infinity” means, ANY growth whatsoever – even towards a fixed limit – would also qualify as growth “towards infinity”, would it not?
If so – to illustrate how amazing such a definition of “growing towards infinity” would be – consider a baby: it would also “grow towards infinity” … right? 😉 Or consider a tree sapling: we may plant a seed and water it, and during its initial stages this sapling would also “grow towards infinity” – would it not?
[END QUOTE]
Cheers.