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Binabik
Responsible
Legendary Hero
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posted November 06, 2009 03:27 AM |
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There's nothing inherently wrong with debt, it can be very beneficial. But only if it's done responsibly.
As far as the definition of money, I think it's very context sensitive. What it boils to, is that money is nothing but a unit of measure.
Talking about the "creation" of money is like talking about the creation of degrees.
*John comes inside after chopping wood, then throws some logs on the fire*
His neighboor George knocks on the door. John answers and invites George inside.
George: You sure have a lot of degrees in here!
John: I thought it was warm in here from the wood I cut and threw on the fire, but I know what you mean.
Be careful not to confuse the unit of measure with that which is being measured. The unit of measure is just a number. "Money" is just a standard unit that we use to measure things of value. As the number of "things" increases, so does the unit of measure.
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mvassilev
Responsible
Undefeatable Hero
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posted November 06, 2009 03:32 AM |
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Death:
Long-run vs. short-run. In the short run, while more money is created, inflation doesn't occur (yet) because no one (other than the borrower and the lender) knows that that particular bit of money has been created. It's not until that money is spent that it starts to have an effect on prices. And then it shifts into the long run as it spreads throughout the economy. And in the long run, the loan may have increased productivity, so it may not result in inflation.
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Eccentric Opinion
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Corribus
Hero of Order
The Abyss Staring Back at You
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posted November 06, 2009 04:01 AM |
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Reading, reading, reading. It's an interesting discussion. I have nothing to add right now, but I'm paying attention.  
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I'm sick of following my dreams. I'm just going to ask them where they're goin', and hook up with them later. -Mitch Hedberg
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Binabik
Responsible
Legendary Hero
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posted November 06, 2009 08:40 AM |
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Edited by Binabik at 09:20, 06 Nov 2009.
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Quote:
if someone loans money.......new money (or debt) is being created (due to interest), without increasing the number of products (all other things being static, for simplification). So more money, same amount of products, means inflation.
No No new money is created, not by debt, and not by interest.
You say this created money without new products. You're limiting "products" to tangible assets, in other words physical stuff. Lending of money is a service, and the lender gets paid for that service because it has value. If it didn't have value, then nobody would pay for it. It's not really any different than paying someone to cut your hair, or Joe giving Fred 100 eggs to borrow his tractor for a day.
So where does the money come from that you use to pay the interest on the loan? It comes from the same place where you got the money for the haircut. I assumed you earned it somehow. (or stole it)
So you went to work and got a paycheck. Where did THAT money come from? The company you work for sold something, that's where.
If they sold something then somebody bought it. Where did THAT money come from?
Can I assume this is where you get stuck in an endless loop? Me too.
Mvass grows 100 bushels of corn
TheDeath grows 50 bushels of carrots
Binabik grows 2 bushels of hot peppers
Corribus grows 1 kilogram of cilantro
Carpenter builds cabinets
Barber gives haircuts.
The above people start trading until everyone gets what they want. This includes both tangibles and intangibles. Everyone comes to an agreement and everything is distributed.
Now if you take the results, you can assign a trade value to the products. For example:
1 bushel of corn = a haircut
10 grams of cilantro = 5 hot peppers
etc.
Now let's create a standard unit of measure called a zonk. We arbitrarily assign a value to the zonk, and it works out approximately to 1 zonk = 1 hot pepper. The zonk equivalent of the other products can be derived from that. The zonk isn't really anything, it's completely worthless of any intrinsic value. It's just a unit of measure, a number.
Without working out the math, let's say the total zonk equivalent of all the products is 1000 zonks.
Now, Mvass and TheDeath get better at farming and increase their yield to 150 and 75 bushels. Binabik breeds hotter peppers. Corribus has a kid who helps out and they now produce 1.5 kg of cilantro. Carpenter and Barber both get better at what they do.
If we keep the zonk equivalent the same, but the total number or quality of products has increased, we have more total zonk equivalent now, right? Instead of 1000 zonk equivalent, we now have 1500 zonk equivalent. Did we create new zonks? No, we created more corn and carrots and cabinets. The increase in zonks is just a number that reflects the increase in products.
Now TheDeath, being a bourgeoisie capitalist pig, decides he wants to grow more corn. To do this, he needs to buy some fertilizer. But he doesn't have the money to buy it. So he goes to the bank (where Binabik deposited some zonks that he didn't need right away) and borrows 100 zonks at 10% interest.
He buys the fertilizer and his corn yield increases to 300 bushels. He gets 150 additional zonks for the extra corn, and uses it to pay off the loan plus interest.
Has he created new zonks? No, he created new corn, and zonks are just a measure of the that.
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TheDeath
Responsible
Undefeatable Hero
with serious business
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posted November 06, 2009 05:28 PM |
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Well that's an interesting way to look at it, I like simplified examples like that. But I'm still confused at something. You mentioned there are 1000 zonks in "circulation" (not 'money', let's just say 'virtual' for simplification).
Where and how and to whom exactly does the 500 additional zonks come from? Who receives them? How exactly is that handled?
I mean, even if money is just a unit, more money has to appear or otherwise deflation would occur massively. Assume that there are 1000 zonks in circulation (what people have), but someone found a magic wand and can now produce diamonds for cheap.
Because the people may have demand, but they may not have the necessary zonks to pay it off, he'll need to massively decrease the prices of the diamonds, otherwise no one would buy them as there wouldn't be enough zonks... Example if a diamond would cost normally 700 zonks because of the huge amount of production (without the wand).
Now suppose that someone else ALSO found out a magic wand that grows rubys.
These two "magicians" can now trade between them, but NOT with zonks -- there are only 1000 in circulation (or people's deposits), and needing 700 alone for just 1 diamond is not feasible. They could trade rubys for diamonds directly though, but then, "ordinary" citizens couldn't!
On the other hand, if they modify the zonks value, the other people at the bottom (without magic wands) will experience a lot of differences even when IGNORING these two magicians, since if a diamond can be bought with 1 zonk, how much can a corn be?
So everyone gets richer, but only the two magicians made an effort? (or found the "magic wand")
This is what is bugging me.
sorry if this doesn't make much sense. 
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mvassilev
Responsible
Undefeatable Hero
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posted November 07, 2009 10:28 PM |
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I asked this question elsewhere, and here's the response I got.
Quote:
Me: So a bank lends out $100 at, say, a 3% interest rate. The borrower spends that money, and the recipient deposits $80. The bank then lends out, say, $60 (assuming a 25% reserve requirement) at an interest rate of 3%. Then the process repeats over and over. The money supply increases, but each time, the money demanded by the bank in return is 3% greater than the money it lent out.
Response:
Okay, I think I see where you're confused now. You're conflating different forms of money; specifically you're conflating M0 with M1 money. M0 is just physical money (all the actual dollar bills in circulation in the economy), while M1 includes M0 plus nonphysical money (money created through loans i.e. demand deposits). The term "money supply" refers to M1, not M0.
Your example of total debts exceeding the money supply would only hold if we take "money supply" to mean M0.
I'll even illustrate this process going by your example, where the commercial rate is 3% and the reserve ratio is 25%
1) If the bank lends $100 with a reserve ratio of 25%, then that means the bank initially had total deposits equal to $133.33 (it could only lend $100 because it had to keep $33.33 in reserve). Therefore the initial condition is M0 = M1 = $133.33.
2) The bank lends $100 at 3% interest. But the very act of lending increases the money supply by that amount. Therefore current conditions are now M1 = $233.33, and total private debts = $103. (M0 would still equal $133.33, but this is irrelevant since money supply is measured by M1)
3) Borrower spends the money, recipient deposits $80, bank lends out $60 at 3% interest. Conditions are now M1 = $293.33, and total private debts = $164.80. At this stage, even though total private debts exceed M0 (which will always remain at $133.33 until more money is physically printed), it does not, nor will it at any subsequent stage of the lending process exceed M1.
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Eccentric Opinion
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TheDeath
Responsible
Undefeatable Hero
with serious business
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posted November 07, 2009 10:48 PM |
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So basically you get free money from the bank, seeing as it is actually created, not comes from anyone else.
What the hell happens when you return it? Does it get subtracted? If so, then how does money supply increase? (yes I'm talking about M1)
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mvassilev
Responsible
Undefeatable Hero
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posted November 07, 2009 10:59 PM |
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If I understand this correctly, when you return it, the money supply decreases by 3% (assuming everyone pays their debts at exactly the same time, which doesn't happen). But the money supply is four times greater than it was, so that 3% is just a drop in the bucket.
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Eccentric Opinion
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TheDeath
Responsible
Undefeatable Hero
with serious business
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posted November 07, 2009 11:07 PM |
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Quote:
If I understand this correctly, when you return it, the money supply decreases by 3% (assuming everyone pays their debts at exactly the same time, which doesn't happen). But the money supply is four times greater than it was, so that 3% is just a drop in the bucket.
Why?
Let's assume the interest is 0% to make this clearer. So you have to return the same amount the bank lends to you.
You get $1000, you pay off something (give money to someone), and are left with $0, but then people come and give you money (=buy stuff from you). And you give $1000 back to the bank, which gets us to the original position... doesn't it?
All this money was already in the system.
If not, and if the bank has issued +$1000 in the system, where exactly, on WHAT account, is it?
I don't see any "additional" money being created. 
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mvassilev
Responsible
Undefeatable Hero
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posted November 07, 2009 11:14 PM |
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Quote:
You get $1000, you pay off something (give money to someone), and are left with $0, but then people come and give you money (=buy stuff from you). And you give $1000 back to the bank, which gets us to the original position... doesn't it?
No. Assuming an interest rate of 0% and a reserve requirement of 25%, it works like this. If the bank lends you $1000, that means it has $1250 in its deposits. So M1 is now $2250. You take that money and spend it, and eventually it is deposited in another bank, which lends out 75% of it ($750), so M1 is now $2000. And so on. So when you pay it back, you're paying out of the total money created, not just what you borrowed.
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Eccentric Opinion
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TheDeath
Responsible
Undefeatable Hero
with serious business
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posted November 07, 2009 11:24 PM |
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I'm not following the math tbh.
Let's not complicate this with multiple banks or further deposits, let's assume you return it before it's deposited anywhere else.
Also "spending" money isn't something that does anything to the total, because it just 'changes hands' (it would be like giving someone money, same thing). I want to know where does new money get poured in, and to who's account, etc.
Let's make this more precise: suppose the bank has $1250 deposits and people have $10000 total in their hands, everyone having $100 for simplicity.
Now explain with this how it works because I can't see it.
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mvassilev
Responsible
Undefeatable Hero
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posted November 07, 2009 11:30 PM |
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Indeed, spending money doesn't change the total - but lending increases it.
Quote:
I want to know where does new money get poured in, and to who's account, etc.
When the bank lends to the lender.
Quote:
Let's make this more precise: suppose the bank has $1250 deposits and people have $10000 total in their hands, everyone having $100 for simplicity.
Okay. So, in the beginning, before any lending took place, the bank has $1250 and the people have $10,000. So M0 = M1 = $11,250.
Then one of the guys goes to the bank and borrows $1000. So M0 = $11,250, but M0 =/= M1, because M1 = $12,250 now.
Then he spends that money until someone deposits it in the bank. So now the bank can lend out $750 off of that $1000.
And so on.
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Eccentric Opinion
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TheDeath
Responsible
Undefeatable Hero
with serious business
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posted November 07, 2009 11:40 PM |
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What happens to M1 when the original guy returns it? Let's assume he returns it before someone else deposits some further cash. Where's the "increase"? Does it decrease now, to make it even? (but then no money is created...)
Or picture this: there are 3 people on the planet (), except the bank staff. Guy borrows $1000, then goes to pay $1000 to Joe, which builds him a production facility (example).
In the meantime, Joe (with his new $1000 from Guy) bought something from Smith with $500 from those $1000.
Guy then makes some products with his new facility, and Smith+Joe (the other two) come and buy stuff from him, each with $500, which is the exact money that Guy borrowed (i.e he gets it back!).
(let's assume he doesn't make more money for simplicity, and that interest is 0%)
Then he goes and gives the bank back the $1000. The exact same money he borrowed.
Where's the increase?
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mvassilev
Responsible
Undefeatable Hero
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posted November 07, 2009 11:49 PM |
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Because to have lent out $1000, the bank must have had (at least) $1000 in its deposits, so M1 is now $2000. If he just pays the money back, then of course M1 shrinks back down to $1000. But if there are multiple deposits, then M1 continues to increase.
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Eccentric Opinion
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TheDeath
Responsible
Undefeatable Hero
with serious business
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posted November 07, 2009 11:55 PM |
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But eventually he does pay it back, doesn't he? Even if there are more cycles, eventually he'll pay it back right?
And of course the interest balances itself due to the interest of deposits -- of course there's a difference so the bank can make some profits, but that could be analogous to just "pay the bank some cash for services" (the difference in interest) which is just a 'change of hands' type, like any other job.
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del_diablo
Legendary Hero
Manifest
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posted November 07, 2009 11:57 PM |
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Written in a simplified form: The bank gets more of the money in circulation.
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mvassilev
Responsible
Undefeatable Hero
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posted November 08, 2009 12:02 AM |
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Quote:
Even if there are more cycles, eventually he'll pay it back right?
Right, but by that time, M1 is much larger than when he first borrowed the money.
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Eccentric Opinion
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TheDeath
Responsible
Undefeatable Hero
with serious business
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posted November 08, 2009 12:08 AM |
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Quote:
Right, but by that time, M1 is much larger than when he first borrowed the money.
Yeah but then other people will return their loans, and so it would remain at a constant level, if people deposit & loan at the same rate, wouldn't it?
Thought this still doesn't say where there is more money -- because frankly M1 doesn't even represent money, seeing as it only works as long as people don't want to get their deposited money.
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mvassilev
Responsible
Undefeatable Hero
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posted November 08, 2009 12:30 AM |
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Quote:
Yeah but then other people will return their loans, and so it would remain at a constant level, if people deposit & loan at the same rate, wouldn't it?
When those loans are paid back, the bank can just loan the money back out again, thus keeping the money supply at the increased level.
Quote:
M1 doesn't even represent money
M1 represents money. It's a different way of looking at it than the more layman-friendly M0, but it's still money.
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TheDeath
Responsible
Undefeatable Hero
with serious business
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posted November 08, 2009 12:42 AM |
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That would keep it at a constant level, wouldn't it?
Example (time increases with each new line):
original
+lend
+lend2
-lend (returned)
+lend3
-lend2
+lend4
-lend3
...
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