Article : why debt growth must exceed interest payments

[sishya]

Re: Article : why debt growth must exceed interest payments

TPC : I agree in your example case the money supply need not grow.
- So in your case the Money Printer(GNK) got an asset for free using the labour of TPC.
- If this scenario is continually repeated, does it mean all assets of a country belong to the Central Bank.
It also corresponds to actual life because most people have large debts on their assets effectively being renter class.
- Question : Won't there be a leakage of money from TPC because there are other expenses for TPC(food) ? which can impair paying back the loan to GNK and cause default.

[ThePythonicCow]

Re: Article : why debt growth must exceed interest payments

Question : Won't there be a leakage of money from TPC because there are other expenses for TPC(food) ? which can impair paying back the loan to GNK and cause default.

Well, in my example there was no such leakage. Apparently either TPC doesn't eat, or she is a free range cow, grazing on the public lands.

Certainly in a more realistic example one would have to account for other activity.

I claim that so long as the loan repayments flow back into the community fast enough, and so long as the debtors could earn sufficient additional income from that cash flow to meet their payments, then no increase in the total volume of money is needed. An amount of money equal only to total principle of outstanding debt is sufficient to repay both principle and interest. This does result in a reallocation of money, from the debtor to the lender, not too surprisingly. The debtor is forced to monetize his labor or other assets (home equity, say), in order to acquire the money needed to pay the interest.

The usual, though not mathematically necessary, result is that such debt and interest burden keeps growing, eventually resulting in one of:

• forcing the debtor into debt slavery,
• forcing the lender to repossess the collateral property from the debtor,
• forcing some form of default, typically either by cheapening the currency used to repay the debt or by the lender having to write off some of the value of the loans,
• forcing the debt to be "bailed-out" by deeper pockets (kicking the problem upstairs),
• stealing some other asset to cover the deficiency, or
• systemic collapse.

[lomaxzoltor]

Re: Article : why debt growth must exceed interest payments

TPC's math and scenario are accurate and are a very concise proof that a debt based system does not necessarily need increasing debt beyond interest payments to remain stable. You are attempting to force double-entry accounting and clearly have no understanding of single-entry bookkeeping or even simple logic. In a system where money is simply created (like the 100 notes in the hypothetical example or if I dig 100 gold pieces from a river), in single-entry accounting, that would be my opening cash balance. PERIOD. There is no more explanation required.

[ThePythonicCow]

Re: Article : why debt growth must exceed interest payments

Thanks for the support, lomaxzoltor.

[Rajiv]

Re: Article : why debt growth must exceed interest payments

The question I have for you is the following.

What differentiates a bank from a counterfeiter?

Both create money out of nothing. This I believe lies at the root of the difference of thought between TPC, Neville, Aetius and myself. The double entry system alerts us, and if we are careful, prevents us from confusing a banker with a counterfeiter. This is particularly the case in a debt based money system when money can be created from nothing.

Think of money as a pointer to an object, and not as the object itself (TPC in programming terminology) The analogy is not perfect, but it is good enough in my mind to get the concept across. In programming, why do you use pointers? Why not just use the objects themselves? Wouldn't that be simpler? But pointers are used instead of the objects, because they are easier to manipulate, once you know how to use them. For begining programmers, pointers are a source of much angst, because of the confusion between the pointer and the object itself.

[ThePythonicCow]

Re: Article : why debt growth must exceed interest payments

The question I have for you is the following.

To whom do you address yourself?

What differentiates a bank from a counterfeiter?

This was addressed in one of the papers you recommended above: Fractional Reserve Banking as Economic Parasitism. You really should read that paper, Rajiv . The differences (from what I remember from my reading) are scarcity and who benefits. Legitimate creation of monetary credits (whether paper currency or checking account credits) are limited in quantify (so that existing money doesn't lose value) and done with public awareness and consent for the benefit of the public. Counterfeiting benefits someone else and has fewer limits on expansion of the monetary base.

The double entry system alerts us, and if we are careful, prevents us from confusing a banker with a counterfeiter.

Double entry bookkeeping is certainly a useful tool. I have no doubt of that. I've used it for many years myself, both for my personal accounts and for the accounts of businesses in which I had some interest. I doubt that it prevents counterfeiting; crooks can count too.

[Rajiv]

Re: Article : why debt growth must exceed interest payments

My answer was slightly different from yours, and that was that the bank has legal checks and balances, that prevent the banker from using the created money to enrich himself other than through the process of giving the money as a loan (investment), and having to cover the losses if the loan defaults or the investment goes bad. The losses come from the capital of the bank, and not from the deposits in the bank.

This possibility of having to take a loss, and having to write off that loss against the bank's capital is what prevents bankers from giving indiscriminate loans. This is where you went wrong in your single entry accounting. What happens to gnk if tpc defaults, and how does that impact gnk's ability to make future loans.

Of course in the current system if gnk has become "too big too fail," he gets his loss covered by the tax payers, and gives himself a big fat bonus!

[LargoWinch]

Re: Article : why debt growth must exceed interest payments

Of course in the current system if gnk has become "too big too fail," he gets his loss covered by the tax payers, and gives himself a big fat bonus!

...which is highly inflationary and more importantly: extremely hard for the populace to establish the "true cost" of such policy in time.

[ThePythonicCow]

Re: Article : why debt growth must exceed interest payments

My answer was slightly different from yours, and that was that the bank has legal checks and balances, that prevent the banker to use the created money from enriching himself other than through the process of giving it as a loan

Could you quote that to which you respond?

Legal checks and balances, including limitations on what a bank can do with its assets, can reduce fraud and misappropriation of assets, yes. It is not clear to me to what or whom you are responding or what your response has to do with that.

This is where you went wrong in your single entry accounting. What happens to gnk if tpc defaults, and how does that impact his ability to make future loans.

You say I am wrong in my single entry accounting, but then explain with details of my simple scenario used to demonstrate that debt doesn't make growth of the monetary base mathematically necessary. That's confusing.

Whether I used single or double entry accounting in presenting my simple scenario is a minor matter of presentation -- use what will be clearest to my readers.

I am certainly not recommending that the books of serious businesses be done using single entry accounting. So if you're saying I'm "wrong" for recommending the use of single entry accounting for serious businesses, you misunderstand. I recommend no such thing.

If what you really mean to say was wrong was my simple scenario (because it does not provide for defaults), not my use of single entry accounting, then I have another reply. My simple scenario did not handle many things, including conditions of default. The point of my simple scenario was to illustrate a single point; I removed all distracting detail toward the purpose. I certainly don't recommend entering into financial arrangements without considering the terms of default. My simple scenario was not prescriptive; it was a mere counter example to a single hypothesis.

Perhaps I misunderstood your point.

[jtabeb]

Re: Article : why debt growth must exceed interest payments

Self liquidating Cow (with emphasis on "Self"). Your car could not pay for itself, you paid for it. Yes the quote "Used for any other purpose, it is non-self-liquidating and results in payment obligations with no countervailing source of income." balls up what should just simply be stated as "productive" VS "unproductive" Debt. I think we would all agree that the BmR was not a productive debt, but a consumption based debt.

Hope that makes sense and you don't have to translate Jtabeb again (which you should be getting paid overtime for).

V/R

JT

[Nivelles]

Re: Article : why debt growth must exceed interest payments

... I am at a bit of loss ...

I'm sure you're at a loss. People who don't know a subject are always at a loss when the subject is discussed.

And of course you can't see your own mistakes in a subject you don't know. That's no surprise.

Let's try this. Maybe you'll be able to understand this. I'll keep it as simple for you as I possibly can. There is no offense in that. Anybody who doesn't know a subject will need elementary explanations, of course. And you obviously know absolutely nothing at all about even simple bookkeeping, let alone accounting.

Look at Week 1.

What are the net expenses in Week 1 in your scenario? -- They are:

1. A $10 loan payment;
2. A $1 wage payment.

That is a total of $11. Right? Yes, of course that's right, and you can see that it is.

Now, what are the net incomes in Week 1 in your scenario? -- They are:

1. gnk, $10-$1=$9;
2. tpc, $1.

That is a total of $10. Right? Yes, of course that's right, and you can see that it is.

So, you have $11 of net expenses, and $10 of net income.

The way you tried to handle that, was to count one of the $1 notes twice. But you are not allowed to do that. You are not allowed, in a proper accounting, to count a note twice.

Now do you understand where you went wrong? Do you understand that you mistakenly counted a $1 note twice?

Oh, and I do notice what you always include at the bottom of your posts:
Most folks are good, honest people. A few aren't.

I am beginning to wonder which category you, yourself, are in. Are you a good, honest person, or not?

The way you reply to this post will tell me more about you.

[Nivelles]

Re: Article : why debt growth must exceed interest payments

That's how double entry bookkeeping is done. ...

No, TPC, that's how "balancing the books" is done.

When you give tpc a +100 you have to give gnk a -100. That is called "balancing the books."

You have to do that with any kind of bookkeeping. In any kind of bookkeeping, or accounting, the books have to balance. The only thing that changes, in different systems, is in the details of balancing the books, not in the basic fact of doing it.

You did not balance the books. You started gnk off at 0. That was wrong.

[Nivelles]

Re: Article : why debt growth must exceed interest payments

... I claim that so long as the loan repayments flow back into the community fast enough, and so long as the debtors could earn sufficient additional income from that cash flow to meet their payments, then no increase in the total volume of money is needed. An amount of money equal only to total principle of outstanding debt is sufficient to repay both principle and interest. ...

It's necessary to remind readers that although TPC does make that claim, he is wrong. He obviously knows so little about accounting, and even simple bookkeeping, that nothing he says on the subject can be trusted.

He made his scenario work by continuously counting a $1 twice, without even knowing he was doing that.

[Nivelles]

Re: Article : why debt growth must exceed interest payments

TPC's math and scenario are accurate ...

The actual fact is that TPC's excuse for accounting would get him thrown in prison.

[Nivelles]

Re: Article : why debt growth must exceed interest payments

What differentiates a bank from a counterfeiter?

Essentially, the law.

Both create money out of nothing. ...

Well, a bank creates money, in the form of loans, out of the prospect that the borrower will pay it back (with interest.) A counterfeiter has no such concern.

This I believe lies at the root of the difference of thought between TPC, Neville, ...

My difference with TPC boils down to the fact that, in trying to make his scenario work, he foolishly kept counting the same $1 note twice. He didn't realize he was doing that, but I noticed it, of course.

Oh, and just because TPC mentioned double entry bookkeeping doesn't mean it's actually relevant. He knows so little about the subject that he can't tell what's relevant. Single entry vs. double entry really has nothing at all to do with anything.

The books have to balance in any system, y'know. ;-) When it's done right.