Saturday, December 15, 2012

Thomas H. Greco — Coming soon: a world without money and banks.

Who in their right mind would be so bold as to predict the end of money and banking as we’ve known it (besides yours truly, that is)?
Well, how about the Governor of the Bank of England?
“There is no reason products and services could not be swapped directly by consumers and producers through a system of direct exchange – essentially a massive barter economy. All it requires is some commonly used unit of account and adequate computing power to make sure all transactions could be settled immediately. People would pay each other electronically, without the payment being routed through anything that we would currently recognize as a bank. Central banks in their present form would no longer exist – nor would money.”
– Mervyn King – Governor of the Bank of England
Beyond Money
Coming soon: a world without money and banks.
Thomas H. Greco, author of The End of Money and the Future of Civilization
(h/t Michael Bauwens via Twitter)

116 comments:

andy blatchford said...

Chris Cook has been banging on about this forever! energy standard.

geerussell said...

At first I couldn't make heads or tails out of the idea because looking at the King quote I couldn't see how it was anything other than a step backwards. If you and I are both in the same currency zone we already have a common unit of account with no barriers to transacting.

Then I clicked the Greco link and there wasn't much there either outside of the King quote but it contained this link and finally I had something I could understand. It talks about barter as an international tool across currency zones.

In much the same way as clearinghouses are used among banks to net out transactions and minimize the expense of transacting in central bank reserves, an international barter trade exchange allows its members to net out exchanges of real goods denominated in a reserve unit of account, minimizing the need to obtain actual reserve currency.

It seems like a nice idea for most of the same reasons that bank clearinghouses serve a purpose. That said, the King quote still looks shaky to me.

Dan Kervick said...

A lot of these "end of money" guys seem confuse money per se with physical currency.

If you have a system in which you can accumulate and hold any kinds of points or credits in exchange for goods and services, then you have a monetary system.

If you have any administrators or systems, public or private, for storing these points or credits electronically, and protecting your legal title to them, then you have a system of banks of one kind.

If you have a system for exchanging points that you already possess with someone who wants them, in exchange for a promise of a greater quantity of points to be delivered back to you later, then you have banks in the full blown sense.

Barter will never be adequate to the needs of thoughtful economic agents. People will always want to make use of whatever kinds of surpluses they have to accumulate something that they can exchange later when they need it. If you are a farmer and have a huge bumper crop of whatever you raise, you aren't going to want to exchange it all for stuff you can consume or otherwise use immediately. You are going to want to exchange some of it for something liquid that you can save for now, and then exchange back for usable stuff when you really needs it. That's why people always want monetary systems.

The Arthurian said...

Kervick: exactly.

Matt Franko said...

right and Dan's point makes it plain that both Mervyn King and the author of this story Greco dont know what the hell is going on presently....

to me, what Dan is saying is "we already do that"...

More evidence of a great ignorance exhibited by King and Greco here...

rsp,

Paulo Garrido said...

D. Kervick wrote

"If you have a system in which you can accumulate and hold any kinds of points or credits in exchange for goods and services, then you have a monetary system."

Right. And one could add that to have a proper money system the number of points exchanged for each good or service results from subjective judgments of buyers and sellers and an underlying social and governmental context.

'Economic value' is not a local objective quantity measurable by a physical instrument, like distance, force or temperature. The "economic value" of a good or service is established by its transaction price, and, in general, transaction prices result from subjective judgments and social behavioral contexts.

Greco and is predecessors, how magnificent are their proposals for future, always failed to understand this social role of money: money is, among other things, a tool for socially establishing the values of goods and things through transactions.

Matt Franko said...

Paulo,

"The "economic value" of a good or service is established by its transaction price, and, in general, transaction prices result from subjective judgments and social behavioral contexts."

Looks like you are in good company:

"Nomisma by itself is a mere device which has value only by nomos (law) and not by nature; so that a change of convention between those who use it, is sufficient to deprive it of value and its power to satisfy our wants." — Aristotle, "Politica."

frlbane said...

If you have a system for exchanging points that you already possess with someone who wants them, in exchange for a promise of a greater quantity of points to be delivered back to you later, then you have banks in the full blown sense. Dan Kervick

Only if you believe in the "loanable funds" theory of banking. Instead, the banks create new "points" thereby diluting the value of existing points. That would be OK if the owners of those existing "points" gave their genuine consent to their dilution or could use other monies for the payment of private debts to escape that dilution but that is not the case now with the current government enforced money cartel.

Dan Kervick said...

The mere fact that banks create new points does not dilute the value of existing points. In a growing economy new points have to be created constantly just to keep prices stable. If you have more goods being produced, and want things to be changing hands at the same prices as before, then you need a net injection of more points in the system.

When a banking system, public or private or some combination of the two, creates new points in the process of advancing a loan, and the new points are used to finance the production of new goods and services so that the total quantity of goods and services available grows, then the value of existing points in the system is not diluted.

We are talking here about a system of lending at interest. This has nothing to do with the loanable funds doctrine. You can have a system of lending at interest with a system that preserves a fixed stock of available points, and in which potential lenders are therefore constrained by the amount of funds available to be loaned. But you can also have a system of lending at interest in a system that constantly generates new points in the act of loaning them.

y said...

frlbane

what you're really saying is that the inflation target should be 0% rather than 2%. The private monies thing sounds like a nonstarter, largely because of tax (still has to be paid in state currency).

y said...

"then the value of existing points in the system is not diluted."

Dan, what would you say the cause of inflation is then?

y said...

frlbane

a problem with a 0% target is that variation around the target involves going into deflation...

It's not possible to always be at 0%. But with a 0% target you might spend half the time in -2% deflation and half the time at 2% inflation.

y said...

frlbane

if you had a "full reserve system" in which increases in the money supply could only come from govt, it might be possible to always hit a price level target, or it might not.

Hayek thought competing currencies would lead to a stable price level with generally 0% inflation, but that's highly doubtful, as well as being a problematic concept for all sorts of other reasons.

frlbane said...

In a growing economy new points have to be created constantly just to keep prices stable. Dan Kervick

I understand that the creation of new money is necessary and good (to avoid rewarding money hoarding) but that money creation must be done ethically. That means no government privilege for private money creators and no public banks either since the lending of a government enforced money supply into existence is inherently discriminatory.

frlbane said...

if you had a "full reserve system" in which increases in the money supply could only come from govt, it might be possible to always hit a price level target, or it might not. y

All government money MUST ONLY come from government and it MUST ONLY be inexpensive fiat for ethical reasons. But private currencies (for the payment of private debts ONLY) would allow the private sector to escape the consequences of government money mismanagement except for too little money creation. But since the private sector would no longer have to worry about too much government money creation (because taxes would be cheaper in real terms) then generous spending by the monetary sovereign should not have much opposition from that quarter.

y said...

"All government money MUST ONLY come from government"

it does. The "lender of last resort", FDIC insurance, etc, make life v easy for banks though.

"taxes would be cheaper in real terms"

How so?

"But private currencies (for the payment of private debts ONLY"

People can pay each other with things like gold or commons stock if they want to. However:

1. they have to pay taxes in state currency on those transactions anyway.

2. They're not recognised as legal tender so there can be no recourse to the law to prove payment has been made.

3. Banks don' accept them in payment (I'm not sure if this is because of the law or not).

y said...

"would allow the private sector to escape the consequences of government money mismanagement"

how?

paul said...

fribane, for what it's worth, credit is a necessity for business investment…how do you propose we get around that reality?

frlbane said...

"taxes would be cheaper in real terms"

How so?
y

Because excessive government money creation relative to taxes would make government money cheaper to buy with a private money.

frlbane said...

how do you propose we get around that reality? paul

1) With a universal bailout of the entire population,including non-debtors, until all deposits are 100% backed by reserves. Business would then have a large pool of private savings to honestly borrow from.

2) By encouraging ethical forms of finance such as common stock, including its use as a private money form.

paul said...

"Business would then have a large pool of private savings to honestly borrow from." - fribane

OK, where will the pool of private savings come from?

frlbane said...

"would allow the private sector to escape the consequences of government money mismanagement"

how?
y

By switching to a private currency for all debts except, of course, for paying taxes. When the time to pay taxes came, if the government had over-issued its money relative to taxation, then tax money would be relatively cheap on the open market.

frlbane said...

OK, where will the pool of private savings come from? Paul

A ban on new credit creation would allow an equal bailout of the entire population, including non-debtors, with new full legal tender fiat without significant price inflation risk IF the bailout were metered to just replace existing credit as it is repaid and IF the bailout ceased once deposits were 100% backed by reserves.

paul said...

"A ban on new credit creation would allow an equal bailout of the entire population" - fribane

Are you talking about forgiving all $54 Trillion in private debt or part of it? Which part?

We have household debt and business debt, split between financial and non-financial.

Dan Kervick said...

y, I'm not saying that monetarily-induced inflation is impossible, either because a private banking system or a public banking system injects money at a rate exceeding growth. I am just rejecting frlbane's frequent contention that the mere fact that such a system continually creates money means that the value of money already in existence is being diluted. Whether it is or isn't depends on how and under what circumstances, and for what financing purposes, the money is created.

The Arthurian said...

frlbane: "That would be OK if the owners of those existing "points" gave their genuine consent to their dilution"

Banks create money. That is the system we have. Your use of money constitutes acceptance of these terms and conditions.

frlbane: "money creation must be done ethically."

Oh I see, this is what-should-be economics, not the-way-it-actually-works economics. There's a name for that, ordinal and cardinal or something. I can't remember :)
Personally, I don't think we should be doing what-should-be economics until we have a handle on the-way-it-actually-works economics. We don't have that handle, obviously.

frlbane: "a universal bailout of the entire population,including non-debtors, until all deposits are 100% backed by reserves."
frlbane: "A ban on new credit creation would allow an equal bailout of the entire population, including non-debtors, with new full legal tender fiat without significant price inflation risk IF the bailout were metered to just replace existing credit as it is repaid and IF the bailout ceased once deposits were 100% backed by reserves. "

I like the theme here. But not the rigidity.

The problem I see is the excess of total debt relative to spending money... or anything similar. Perhaps an excess of PrivateBankMoney relative to GovernmentMoney.

Words aside, I think we share this concern. But the trouble, I think, is the excess of the one relative to the other. The economy worked very well for a long time, until the excess developed. The problem is the excess, I think.

And then I turn it around, and say 100% reserves is simply another form of excess.

Dan Kervick said...

I understand that the creation of new money is necessary and good (to avoid rewarding money hoarding) but that money creation must be done ethically. That means no government privilege for private money creators and no public banks either since the lending of a government enforced money supply into existence is inherently discriminatory.

It's not just about whether money is "hoarded". Once again, the point is that if an economy is growing, the supply of money needs to grow along with the economy just to preserve stability.

How this is should happen, what mechanisms should be employed, and the best architecture for the financial system as a whole are questions of public utility. They can't be answered just by appeal to intuitive moral instincts.

Clonal said...

Dan,

I don't think that Tom Grecko would disagree with you in principle. His main thrust is that money as it is currently constituted, serves as both a medium of exchange, and as a store of value. These two covalent functions lead to problems of money shortage, saving and hoarding. The current system also leads to an uneven playing field with different competing currencies.

He has been trying to find solutions that separate out the functionality of money. His site,Reinventing Money is actually quite good, and has very good resources on money.

Dan Kervick said...

Sorry Clonal, but I'm not at all interested in free banking. It's just another laissez faire path to more instability. These guys have learned zero from history.

paul said...

Debt forgiveness for households generally eliminates liabilities, increases net worth but doesn't increase the pool of savings significantly. For most their savings is represented by their homestead. Investors can't borrow this.

Debt forgiveness for businesses creates net savings as a very large pool. financial wealth has been shifted massively in the direction of the 0.1%. Wonderful.

The fundamental problem is this…nothing has changed but aggregate demand, temporarily, which is still dependent on government spending.

I say this because at the end of the day, businesses spend two to get three, and the difference must come from savings or net government spending.

Households still have no savings they are willing or able to spend.

Changing the credit circuit to full reserve has had no effect on this dynamic, businesses will not invest if the government isn't going to monetize their gains.

What's the upside?

I agree with Art…it's all about the distribution.

Tom Hickey said...

Barter will never be adequate to the needs of thoughtful economic agents. People will always want to make use of whatever kinds of surpluses they have to accumulate something that they can exchange later when they need it. If you are a farmer and have a huge bumper crop of whatever you raise, you aren't going to want to exchange it all for stuff you can consume or otherwise use immediately. You are going to want to exchange some of it for something liquid that you can save for now, and then exchange back for usable stuff when you really needs it. That's why people always want monetary systems.

Dna, brater systems are at present complementary. They work because they are based on exchanging inventory. It's another way to made sales. Many of my friends that own businesses with physical products or provide services and have down time use barter exchanges aka "barter clubs." Some used to use it in part to avoid paying taxes until the big IRs bust some years ago. But after that, they continued to use barter exchange credits and paid their taxes, too, because they made money doing it. There are other advantages to barter eschanges, too, that are explained in the links. They are like banks in that they extend credit, but it's interest free. They don't need a bank license (yet).

This is not a new idea, but it is starting to catch on in a much more visible way now.

Matt Franko said...

Dan,

" the best architecture for the financial system as a whole are questions of public utility. They can't be answered just by appeal to intuitive moral instincts."

right it looks like The Pope has the same/correct "moral instincts" but like many, he and his Vatican staff cant see how to architect/design/operate the system to best achieve the just and righteous "moral" results he has in view... the Vatican is concerned about "the deficit" and "the debt" too...

This has me concerned about a new MMT shift in "meme" towards the "moral"... I think there are plenty of people out there that "get the morals"... but not that many that "get the math"...

We have a "moral" plurality on this as evidenced by the Obama victory... we dont have a plurality on operational understanding...

rsp,

Tom Hickey said...

Say you are a business that joins a B2B barter exchange to provide an outlet for inventory and a chance to trade to advantage. The bater exchange advances you credit depending on your needs and resources to get you going, say a thousand points for a small firm and 10,000 point for a large one. This is interest free and you can start purchasing before you sell. It's an old idea and there are a number of barter exchanges in the US, chiefly B2B, largely because business have inventories. But tradespeople and professionals with down time also participate. Also eateries, hotels, time shares, etc are providers of hospitality and recreational services. Barter exchanges can be quite large and the points very liquid since there are usable for many goods and services than everyone uses.

Matt Franko said...

Tom,

King's statement here: "There is no reason products and services could not be swapped directly by consumers and producers through a system of direct exchange – essentially a massive barter economy. All it requires is some commonly used unit of account and adequate computing power to make sure all transactions could be settled immediately. People would pay each other electronically, "

This is NOT barter in the first place, it's like Dan says it's basically what we are already doing.... so his whole premise is out of left field here... King doesnt know what the hell is even going on...

rsp,

Dan Kervick said...

I am really disappointed that Kucinich got him self mixed up in these libertarian and quasi- secessionist movements. To me they are the very opposite of "progressive". They represent an impulse in the direction of localism and disaggregation that will continue to weaken the capacity of the national government to mobilize the public and its resources for the pursuit of solutions to massive national and global challenges.

I guess Kucinich hates the United States as much as Ron Paul does and and wants its to unravel it too.

Also, to the extent that these local systems rely on the notion of voluntariness, they will be both wildly ineffecient, and fraught with the potential for routine financial collapse with a few unlucky suckers holding the bag.

Barter can't accomplish a single thing that a medium of exchange system doesn't accomplish just as well; but medium of exchange systems can accomplish many things that barter can't. Nor is there any economic benefit to a motley assortment of hundreds or even thousands of separate local currency systems. To the extent that those systems seek to interact economically with other currency systems.

If the purpose of these things is to run off the books economies that can avoid taxation, then I say sick the Feds on them. Because in that case, they are parasites - operating systems of production and exchange whose basic security, access to resources from the outside world, and dependence on a broader rule of law that is difficult and expensive to maintain.

y said...

"That would be OK if the owners of those existing "points" gave their genuine consent to their dilution"

Do you give your consent every time a new car rolls off the assembly line? Or a new potato is put on the supermarket shelf? Or a new house is built?

If you want to protect your savings from inflation you can buy assets which appreciate in value or provide interest income.

I'm not a great fan of inflation, but I'm not sure a 0% inflation rate target would be much better than a positive inflation target overall.

Contrary to most internet austrians, Hayek wasn't in favour of deflation. He thought a system of competing currencies would provide a stable and predictable price level which would stay close to 0% inflation.

Tom Hickey said...

This has me concerned about a new MMT shift in "meme" towards the "moral"... I think there are plenty of people out there that "get the morals"... but not that many that "get the math"...

I think we can safely lead with the math when speaking with the math literate, which is presumably most economists. However, for everyone else, leading with the math will lose them right out of the gate.

frlbane said...

I am just rejecting frlbane's frequent contention that the mere fact that such a system continually creates money means that the value of money already in existence is being diluted. Dan Kervick

It certainly has been diluted except wrt consumer goods. Cheaper/better consumer goods are the "mess of pottage" we get in exchange for our birthright.

Matt Franko said...

And Greco here: "The End of Money and the Future of Civilization"

No, state currencies are a FEATURE OF civilization... should be perhaps: "The End of State Currency is the End of Civilization" or

"The end of money and civilization has no future"...

Tom Hickey said...

What King is saying in effect here is just that money as a token is chiefly a unit of account on sets of books rather than a medium of exchange and a store of value. ONce one sees this, one realizes that it's just an accounting issue. But one has to get over the idea of money as a thing.

y said...

Dan,

"They represent an impulse in the direction of localism and disaggregation"

Maybe the reason so many Americans seem to hate the fedral gubmint is because the country is 'too big', the government too distant and alien.

I wonder whether democracy can really work well on such a large scale?

y said...

frlbane

"our birthright"

what are you referring to exactly?

Matt Franko said...

f,

Check out the 13:00 mark in the MMT video at the following link to learn about so-called "inflation" under a FFNC system....

http://mikenormaneconomics.blogspot.com/2011/11/infaltion.html

govt "ratifies" new prices created by what would otherwise be short term supply shocks... via the prices paid for govt provision or the prices they allow the banks to use for collateral... THERE IS NO "DILUTION" ...

rsp,

Tom Hickey said...

y Maybe the reason so many Americans seem to hate the fedral gubmint is because the country is 'too big', the government too distant and alien.

I wonder whether democracy can really work well on such a large scale?


This is the Bernard Lietaer v. MMT debate. It's a central question going forward in the unfolding of a global economy.

Tom Hickey said...

Contrary to most internet austrians, Hayek wasn't in favour of deflation. He thought a system of competing currencies would provide a stable and predictable price level which would stay close to 0% inflation.

And what I don't believe he factored in is transaction cost. I have never seen this mentioned, but I am not up on everything he wrote on this either.

Tom Hickey said...

the prices they allow the banks to use for collateral

Think lending on the bogus appraisals that led to the housing crisis, especially after the FBI had warned of massive mortgage fraud in 2005. Chief regulator Greenspan blew it off as isolated frothiness in a few markets that would self-correct.

Dan Kervick said...

The barter exchange advances you credit depending on your needs and resources to get you going, say a thousand points for a small firm and 10,000 point for a large one.

In such systems, Tom, do spot exchanges take place at the same price as contracts for future delivery?

Barter exchanges can be quite large and the points very liquid since there are usable for many goods and services than everyone uses.

But even in reasonably large ones, the credits will usually not be accepted by people outside the exchange. To make purchases in these external systems, one needs to exchange something people in that system will exchange - could be goods, but more likely a more universal medium of exchange, i.e. credits in some more comprehensive credit system. The need for conversions sets up a whole additional economy of conversion agents building up exchanges and reserve stocks of credits, piling on wasteful transaction costs just for the people in one of these little economies to do business with people in another. This waste is of course why people in local zones eventually unify their credit/currency systems into more integrated systems - usually at the level of the most comprehensive institutions of political sovereignty, i.e. the national government.

So do we really have to go through some round of romantic dark ages localism in order for people to rediscover why they have powerful national governments and a national currency system in the first place? Why don't we just skip that business, and jump to the stage where we begin working on making the p0werful national system we already have work better.

Dan Kervick said...

It certainly has been diluted except wrt consumer goods. Cheaper/better consumer goods are the "mess of pottage" we get in exchange for our birthright.

I can't interpret that statement in any way that makes sense.

y said...

"what I don't believe he factored in is transaction cost"

It's one of many problems with his theory.

When countries have experimented with free note issuance (free banking) in the past (though this isn't wuite what Hayek is talking about I think), it's generally been dropped because it was so chaotic. There were no real benefits whatsoever.

As frlbane pointed out in the other thread, for private money to 'work' in the way envisioned you basically need to abolish capital gains and other taxes on them... (problematic methinks)

Tom Hickey said...

In such systems, Tom, do spot exchanges take place at the same price as contracts for future delivery?

Depends on the deal negotiated, Dan. The way the deal is figured is on the basis of one's cost of goods inventoried or deliverable in the future, like a service, and what one is getting for it. The unit of exchange isn't what is uppermost on the traders' minds. It the relative value to each party v. the actual cost. Generally a B2B barter exchange will be more advantageous to both parties than a market exchange in the unit of account. That's a big reason why businesses like it, in addition to having a greater opportunity to turn over inventory that would otherwise be idle.

In general, forward sales are nominal, tho. For example, suppose the inventory of one party is use of a time share over some years, or so many restaurant meals that will extend over a significant period, then one is selling forward at the nominal price today. This is pretty common.

Dan Kervick said...

Tom, money is not just a unit of account that allows us to compare different kinds of goods and services with respect to a single unit of measure. It is something we receive in exchange for those goods and services, besides the goods and services themselves, which allows us to engage in more complex and convenient exchanges across space and time.

Tom Hickey said...

Yes, but in a purely digital system this is jus adjusting figures in accounts. Financial exchanges are now purely digital systems, for instance. They are open systems in which ther is a flow in and out to other accounting systems. But the financial exchange itself as a closed system in self-contained and purely digital marking up and down accounts.

Dan Kervick said...

I wonder whether democracy can really work well on such a large scale?

American democracy is a highly variegated system of government consisting of a national government, 50 state governments, and thousands of local city governments, town governments, precinct governments, etc., each with its own established powers pertaining to its own sphere. Small governments for small local problems; big governments for big problems.

I think Americans hate government these days because they have evolved into a decadent gang of spoiled and entitled adolescents, who hate rules and obligations of all kinds, and take the manifold services provided by government entirely for granted, while grousing about everything they are asked to do in return.

Matt Franko said...

Tom,

That and Rumsfeld's DoD cleaned out all of the building materials for Iraq re-construction ($50/sheet plywood that you can buy today for $12) at the same time as the GSEs were enabling home owners to buy homes at the new costs of $200 psf...

these morons actually placed one part of the govt, DoD, in direct competition with another part of the govt, GSEs, BOTH WITH UNLIMITED CHECKBOOKS!

Once the DoD bid was removed from the marketplace, building materials prices of course collapsed and now you can buy new construction at $125/psf EASILY... meanwhile the GSEs just got finished signing everybody up for mortgages at $200/psf....

What a bunch of MORONS!

Tom Hickey said...

me what is uppermost on the traders' minds.

Let me break that out. Say I want to trade something for something else. I know my own cost of goods, my cost of sales and the profit based on market price. The cost of goods sold is what it would take to get a USD for use in the market. But in barter I am actually only paying the cost of goods. There is much less cost of sales, transaction cost including a small % to the exchange. So the profit margin is potentially greater if I make a good deal. The person on the other side of the trade is thinking the same way, so it is really exchanging at the wholesale price without having to go through the market to get the funds to buy at market.

So what it does in effect is to create a larger market than would exist otherwise, and offers the opportunity to both reduce inventory that would otherwise be idle advantageously while buying advantageously.

It addition it is fun. Business people enjoy doing business in addition to just making money, and this is another way to pursue one's vocation. There is also a community element to it that counts as "goodwill."

Dan Kervick said...

Tom, my point about spot exchanges vs. future delivery exchanges is that if the future price is higher than the spot price, then you have a system with interest. If Fritz the honey producer wants to buy some bacon from Hans the hog butcher, and the butcher is willing to accept 4 quarts of honey for 20 lbs of bacon on the spot, but requires 5 quarts of honey for the same amount of bacon if the bacon is to be delivered on the spot, but the honey delivered a year from now, then there is interest involved in that exchange.

If what Fritz is giving for the bacon if money instead of honey, and the spot price is $100 dollars, but $125 dollars if paid a year from now, then we have the same basic economic system. And that is why when people exchange money for money, with a time factor involved, the person who is surrendering money on the spot generally surrenders less than the one who is surrendering the money a years from now.

If in the local credit exchange, the prices are freely negotiated among the participants to the exchange, and we find this difference between the spot price and future price, then the system is not interest-free.

If on the other hand, the system is regulated so as to forbid such differences, then I suspect people will not find it convenient for managing exchanges with significant time lags between the delivery times in the contract.

Dan Kervick said...

The fact that the currency in a system is nothing but an electronic entry in an electronic accounting system, or a pencil mark in a ledger of some kind, does not mean that the currency is nothing but a unit of account. This is an equivocation on two different uses of the word "account"

An electronic scoreboard might display numbers to record both the number of points that have been awarded to the players, and also the heights of the players in terms of some standard unit of measure. But the function of these numbers is entirely different.

Tom Hickey said...

Dan, I simply said that the exchange front credit at no interest (if it were a bank it would charge interest) as the market maker. It gets its "vig" as a small % of each transaction. So a member can have credit on books and pay no interest and also run a positive balance and receive no interest.

The exchange acts as market maker bringing together participants will to barter that can barter indirectly instead of directly. It expands the market through the barter community.

Of course, the principles of buying spot and forward hold because these are business people who understand dealmaking. That is why they are in the bater club in the first place.

As bater exchanges exist now they are complementary to existing currencies and markets. The only people that use them are people that it makes $ and sense" for.

frlbane said...

I'm not a great fan of inflation, but I'm not sure a 0% inflation rate target would be much better than a positive inflation target overall. y

I'm not arguing for a 0% inflation rate. Instead, government should create as much government money as the market will bear given the presence of genuine private monies for the payment of private debts only. Most people would accept mild loss of purchasing power in fiat for the convenience of being able to use the same money for both private and government debts.

Besides, it is the banking cartel that is the chief source of deflation since the money it lends into existence is destroyed when it is repaid plus the interest is transferred to those with a lower propensity to spend it.

frlbane said...

I can't interpret that statement in any way that makes sense. Dan K

Let me help. People used to be able a house with a 10-year mortgage. Now it is 30 years in the US and in Europe interest only mortgages exist to make housing affordable. And that is DESPITE the advances in construction methods and materials.

Malmo's Ghost said...


"I think Americans hate government these days because they have evolved into a decadent gang of spoiled and entitled adolescents, who hate rules and obligations of all kinds, and take the manifold services provided by government entirely for granted, while grousing about everything they are asked to do in return."


A simplistic and cynical sweeping generalization, which is ill informed and just plain ridiculous. It's extremely mean spirited too. I hope you have no power over anyone. You're brand of domineering leftism will never bring people together. It's insulting, divisive and repugnant.

Matt Franko said...

f,

oil used to be $3 per bbl too

OPEC raises the price, govt "ratifies" this price by having the military purchase petro products at the new higher prices, and on and on up and up and up...

new oil prices ratified by govt cause building materials and labor to build houses to increase... Congress tells GSEs to increase the conforming limit for home loans (now at $417k in US)... now the collateral price for the loans "ratifies" the new home prices and on and on and on and up and up and up...

If govt allowed banks to go out tomorrow and lend $1M against mobile homes, the price of mobile homes would instantly be $1M...

there is NO "free market", there is a price setting function by the currency monopolist (ie govt), period.

There is NO DILUTION going on here...

(watch the video at the link I included in a comment above... 13:00 mark)

rsp,

y said...

"they have evolved into a decadent gang"

Some are also being fed a diet of nonsense by people who either know nothing of history, or else are purposefully ignoring/misrepresenting it for their own ideological purposes.

Problem is, these counterfeiters of the past have superficially believable stories, which appeal to the ignorant, angry and deluded.

y said...

frlbane

"government should create as much government money as the market will bear given the presence of genuine private monies for the payment of private debts only"

But you're assuming that these "private monies" would operate on an equal playing field. That's never been the case, nor is it likely to be the case, until the govt gives up its rights and powers as the 'sovereign'.

Gold has gained massively on the dollar - but do you see people using it as money?

What would be required to make gold, as gold, become 'money'?

frlbane said...

What would be required to make gold, as gold, become 'money'? y

Government privilege such as accepting it for taxes.

y said...

"A simplistic and cynical sweeping generalization, which is ill informed and just plain ridiculous"

Agreed, really.

The govt does/ has done so much that is simply wrong.

Problem is, getting rid of govt is not the solution.

y said...

"Government privilege such as accepting it for taxes"

Ok, well what about other potential forms of 'private money' such as common stock? What has to happen for that to become 'money'?

Dan Kervick said...

Let me help. People used to be able a house with a 10-year mortgage. Now it is 30 years in the US and in Europe interest only mortgages exist to make housing affordable. And that is DESPITE the advances in construction methods and materials.

frlbane, here I don't think you are talking about inflation or other monetary phenomena. You are talking about a change in the relative prices of houses and labor. Assuming that the houses are roughly equivalent in value, then if people have to work three times as long now as their parents had to work to buy an equivalent house, then that is due either to a change in the real value people assign to houses, or the real costs of producing the, or to a change in the return to labor over time. Even in a society with 100% annual inflation, the real cost of a house in terms of labor can stay the same if wages and prices rise together. And even in a society with 0% annual inflation, the labor cost of a home can rise over time.

Tom Hickey said...

What would be required to make gold, as gold, become 'money'?

ZH has the answer — when the currency stops being accepted. There was a post over there recently that this is already happening internationally and the inflection point to hyperinflation is imminent. So buy that gold all the up, no matter how high it gets! You'll be glad you did.! :)

Don't these folks look at long term charts. I guess they haven't realized that gold price in inversely proportional to interest rates either, and that low rates correspond to disinflation rather than inflation. Their answer is that at the actual rate of inflation is far higher than reported. I guess no one but them has noticed. Even fellow "Austrian" Mish realizes that this is bonkers.

y said...

"People used to be able a house with a 10-year mortgage. Now it is 30 years in the US and in Europe interest only mortgages exist to make housing affordable"

ok so potential solutions to the increase in house prices are:

1. a shiny metal specie system.

2. some sort of private money system where, somehow, 'the market' stops such things from happening.

3. a 'full reserve' system where govt controls such things through the money supply.

4. a system where house price rises are limited by rules.

- Like the sort of thing that used to exist before all those rules were destroyed from 1979 onwards..

Matt Franko said...

Gold price in USD is necessarily a function of the price govt agrees to pay for oil which is the major energy source used to mine/produce it (diesel) and the price the govt agrees to pay for actual gold...

We have to get to the point where new US production can displace Saudi supplied oil to the point that Saudi's production must fall to a level whereby they lose price setting control as WM's "swing producer"... then oil price will collapse and along with it the gold price... rsp,



y said...

Or just build more, provide more public housing/ affordable housing, etc

Dan Kervick said...

The govt does/ has done so much that is simply wrong.

Of course. The government does many things that are wrong. It also does an enormous number of routine things that work fine and hold the society together.

But most of the libertarians I encounter do absolutely nothing to participate in the work of governance and society-building in any significant way, other than to agitate to further dismantle the systems of obligations and requirements they find so annoying, in the name of their rights. They live in a world in which their are rights only, without corresponding obligations.

Did you ever notice that about 99% of libertarians are male? And also middle class and white. Interesting. I think that's because women tend to have, on average, a much more realistic understanding of the massive amount of work that goes into keeping a family, a household and a community together and functioning properly. I try to take libertarians seriously, and sometimes do when they are complaining about serious major crimes and abuses of government. But most of the time, I just see libertarian rants as the cries of big, caterwauling, spoiled babies - like the teenager who melts down over the unendurable oppression of being asked to clean his room, or do any other chores, but expects mommy to make his dinner every night and expects the electricity to flow into his television on demand.

y said...

"They live in a world in which their are rights only, without corresponding obligations"

If you really push them, they end up saying that in their utopia laws would be made by property owners on their own property... But who guarantees/protects or legitimates those property rights to begin with?

The cry of "theft" and "violence" regarding tax, is basically an overblown way of saying "I don't want to pay my membership fees. Blaaaaaaaaaaa!"

Matt Franko said...

"The govt does/ has done so much that is simply wrong"

"Government" doesnt "do" anything... it' the people who occupy positions in govt that "do things"...

saying "government does..." is a teleological statement and is accordingly absurd...

This is like the libertarians of the right complaining that running higher fiscal deficits is "out of control government" it's absurd...

Tom Hickey said...

Objection. There is a huge difference between "libertarian" and "Libertarian." The former is a much larger class that contains the latter as a subset. In fact, many libertarians would reject inclusion of Libertarians in the class "libertarian" because they are about property rather than liberty. Therefore, they are properly called "Propertarians."

Tom Hickey said...

It's adolescent anti-socialism in order to assert individuality against the authority of the parents, especially the father. It's to be expected until the mid-teens. After that it become arrested development.

y said...

"saying "government does..." is a teleological statement and is accordingly absurd..."

ok,

those occupying (elected to) positions of power (otherwise known as the government) have done things that are 'wrong', in my opinion.

Tom Hickey said...

those occupying (elected to) positions of power (otherwise known as the government) have done things that are 'wrong', in my opinion.

Important. Economic models do not include power, of course. As a result, policy conclusions drawn from them often ignore the role that power plays and who wields it. Hint; In a capitalistic society, ownership and financial wealth both translate to power and tend to go together.

Greg said...

Whew, late to this conversation!

fribane (I think it was you); one thing to remember about a banks and new credit money creation. While it creates it out of thin air, it only gives it to me if it knows with a strong degree of certainty it will get it back + interest from me. So its not lending me anyone elses money its lending me my own future income.

This also gives rise to what I think is large driver of inflation, the cost of finance. As the cost of finance goes up anything that relies on finance will rise in price (which is just about everything). Just like rising oil prices drove the 70s inflation, finance costs have driven inflation since Reagan.

y said...

Tom,

"they are about property rather than liberty"

They're more properly called "private propertarians", or perhaps "privatarians".

They believe that it's impossible and/or immoral for a public organization to own property. As such, any public claims to property (such as tax) are denounced as "theft" and "violence against private property".

Tom Hickey said...

This also gives rise to what I think is large driver of inflation, the cost of finance. As the cost of finance goes up anything that relies on finance will rise in price (which is just about everything).

The interest rate is chiefly the cost of capital. By changing the rate, the cb influences the spread, i.e, what business pay to borrow to finance investment. This is the prime rate. Loans are calculated wrt the prime rate based on risk.

paul said...

"its not lending me anyone elses money its lending me my own future income." - Greg

Exactly, or more precisely, lending you your own future savings, which you dis-saved when the proceeds of the loan were spent.

I make this distinction because credit (debt) is a function of net saving...and any potential gains realized fail if additional net saving isn't realized.

In other words, MMT (sectoral balances) net saving is the basis of economic growth, and does not necessarily translate to "income not spent". More accurately it can be thought of as the "money stock" that is leveraged by the credit circuit to finance growth.

The View from Mars.

frlbane said...

So its not lending me anyone elses money its lending me my own future income. Greg

It's lending you the stolen purchasing POWER of others including and especially from the poor who are deemed less "credit-worthy."

Moreover, the deflation of loan repayment is problematic even with 0% interest.

Tom Hickey said...

While it creates it out of thin air, it only gives it to me if it knows with a strong degree of certainty it will get it back + interest from me.

This is the role of collateral in a secured loan and net worth in an unsecured loan. Credit is not extended on income or reputation alone.

Dan Kervick said...

If you really push them, they end up saying that in their utopia laws would be made by property owners on their own property... But who guarantees/protects or legitimates those property rights to begin with?

Yes, it's a world in which everyone has total economic freedom to contract, produce, accumulate and exchange to their heart's content, but in which - marvelously - no one ever coerces anyone else.

Some of them are at least willing to tolerate a government powerful enough to enforce property rights when they are violated or threatened by very powerful economic agents. But for some tho code of voluntariness is so strong, they are not even willing to tolerate coercion in defense of their own libertarian system. So the whole thing is juts an idle fantasy.

y said...

"the stolen purchasing POWER"

I'm not sure "stolen purchasing power" is a valid concept.

Prices go up when businesses put up prices and workers demand higher wages. Are they stealing your "purchasing power"?

frlbane said...

Ok, well what about other potential forms of 'private money' such as common stock? What has to happen for that to become 'money'? y

1) Abolish all government privileges for the banks such as deposit insurance and a legal tender lender of last resort.

2) Eliminate the capital gains tax.

As for gold, it could not compete as a purely private money form, imo. It's just too silly.

y said...

"Some of them are at least willing to tolerate a government powerful enough to enforce property rights"

Yes, but this drives them into a self-contradiction. Those who are aware of this pitfall retreat instead into pure fantasy.

frlbane said...

Are they stealing your "purchasing power"? y

No, because they are not creating a government enforced monopoly money supply as the banks are allowed to do.

y said...

"Abolish all government privileges for the banks such as deposit insurance and a legal tender lender of last resort."

I'm not sure how the FDIC insurance works. Don't banks have to pay for that insurance?

Agreed, the central bank is a service which bestows a privilege on banks that they don't deserve.

"Eliminate the capital gains tax."

Are you joking?


y said...

"No, because they are not creating a government enforced monopoly money supply as the banks are allowed to do."

Hang on,

your 'purchasing power' reduces when people put up their prices. They are "stealing your purchasing power" by charging you more.

frlbane said...

your 'purchasing power' reduces when people put up their prices. y

Prices in what currency? With genuine private money alternatives, I might use a common stock money with low price inflation. And should that common stock money appreciate (price deflation), then the company could buy new assets with new stock to temporarily reduce its value and/or distribute new shares to existing money holders on a pro rata basis (stock split).

Matt Franko said...

"Agreed, the central bank is a service which bestows a privilege on banks that they don't deserve."

right now, as the regulators are NOT forcing banks to liquidate the collateral items assigned to non-performing loans, they are SCREWING EVERYONE ELSE as prices can remain elevated for banks and property owners to take advantage of... the rest of us have to deal with it with no help via fiscal...

If they would simply MAKE banks liquidate the assets within 90 days and take the mark downs, the economy could move on imo... rsp,

frlbane said...

Are you joking? y

No, but that should be done ONLY after a universal and equal bailout of the entire population, including non-debtors, with new full legal tender fiat (Greenbacks) until all private debt is paid off or at least until all deposits are 100% backed by reserves. That would level the playing field between the rich and non-rich quite a bit and justly too since credit creation cheats both debtors (by driving them into debt) and non-debtors (via negative real interest rates on their deposits).

y said...

"With genuine private money alternatives, I might use a common stock money with low price inflation"

So you're saying that sellers would offer multiple prices - state money prices, common stock prices, gold prices, etc...?

It seems more likely that prices would be quoted in one currency, as they are now, and that you would then have the option to buy common stock or gold as an investment for your money, as you do now, as a way to protect yourself against inflation, if that's what you wanted.

The seller is more likely to just put up his prices (denominated in state currency) and then invest his profits in assets (if that's what he wants to do), rather than bother with trying to calculate multiple selling prices, which change by the minute.

y said...

frlbane,

you're saying that we should eliminate capital gains tax. Don't you think there might be a teeny-weeny problem with that?

frlbane said...

The seller is more likely to just put up his prices (denominated in state currency)... y

No problem since if those increased prices were based on a loss of purchasing power in state currency then that state currency would be cheaper to buy with a private currency that had retained its value.

Tom Hickey said...

The seller is more likely to just put up his prices (denominated in state currency) and then invest his profits in assets (if that's what he wants to do), rather than bother with trying to calculate multiple selling prices, which change by the minute.

Transaction cost. This is a big reason that we don't have free banking anymore. It ain't "free."

frlbane said...

Like I said, the capital gains tax should only be eliminated AFTER a major decrease in relative wealth disparity. Land reform might easily be called for too since the banks basically stole the family farm from very many people.

Tom Hickey said...

No problem since if those increased prices were based on a loss of purchasing power in state currency then that state currency would be cheaper to buy with a private currency that had retained its value.

Have you dealt with transaction cost figuring this?

frlbane said...

Modern computers and communications should make transaction costs negligible. And those merchants who refused to accept private currencies would soon lose customers to those who did.

Heck, look at ATMs. Do you really think banks like having to make cash withdrawals easy? Yet competitive pressure forces them to.

paul said...

fribane, your arguments have become detached from mathematical reality.

Because you wish for these things to be true will not make them so. The system has a mind of its own. Changing a law here or there won't do much to alter it. In fact, laws can only limit the output and distribution of the system, they can't change the overall behavior.

The system will produce maximum output (limited by resources and productivity) as long as the necessary liquidity is provided...from there anything we do can only reduce output from the optimum.

I'm not saying that we can't create a more equitable system for distributing liquidity, however...the things you are proposing are based on wishful thinking, not logic or arithmetic.

We aren't talking about a system here that responds to good intentions.

frlbane said...

As long as liquidity is lent, not spent, into existence we shall have the boom-bust cycle. Even honest usury for pre-existing money is mathematically unsustainable since the interest eventually compounds faster than real economic growth. Otoh, common stock is spent into existence so the supply of it need never decrease. Nor does common stock require renting someone else's money since common stock itself can serve as money.

frlbane said...

Fiat can be and is spent into existence because it is absolutely necessary in order to pay taxes. Private monies, otoh, would have to offer genuine value in order for people to accept them, up to and including an equity share in profits of the money issuer.

Tom Hickey said...

Heck, look at ATMs. Do you really think banks like having to make cash withdrawals easy?

A friend that works at one of the big banks told me that they lose $ on ATM business provided as a customer service, like free checking.

y said...

"that state currency would be cheaper to buy with a private currency that had retained its value."

Ok, gold has gained a lot of 'dollar value'.

What's stopping it from being money?

You're saying that capital gains tax should be eliminated, so that private 'money-issuers' and their clients can gain profit without having to pay tax on it?

Is that the basis of your 'private monies' concept?

y said...

I only ask because I want to know..

Dan Kervick said...

Modern computers and communications should make transaction costs negligible. And those merchants who refused to accept private currencies would soon lose customers to those who did.

For a while - util those private currencies go belly up, as they usually do. The US already experimented with free banking in the 19th century. Depressions were routine.

Greg said...

I dont like the term "stolen purchasing power" because anyone with a reliable income can get money from a bank. Problem is there are too many people who dont have a reliable income...... and the banks cant really do anything about that, only govt can. Well I guess banks COULD stop standing in the way of govt doing something to add to income security.

When I get a loan it does not prevent anyone else with an income from getting a loan too. There is plenty for everyone.

It could be argued I suppose that when too many of us get near maxed out on our credit, those with very little income find it harder to pay for their basic consumption, however by maxing out on our credit the rest of us are also adding the demand which COULD/SHOULD lead to more income for those with little income. However we know that it simply gets sucked up by the top end of town and never makes it to the lowest paid workers.

paul said...

"Private monies, otoh, would have to offer genuine value in order for people to accept them, up to and including an equity share in profits of the money issuer." - fribane

I suspect people might object to being paid with private money. Which one will they be paid in? Who will accept it? Can it be used anywhere? Will it hold it's value?

Valuation of equities can swing wildly. Will people accept this kind of behavior for their money? Without a government backstop the value of your money could drop to zero overnight.

These are not trivial obstacles.

frlbane said...

You're saying that capital gains tax should be eliminated, so that private 'money-issuers' and their clients can gain profit without having to pay tax on it? y

Capital gains are measured in fiat so a decline in the real value of fiat can masquerade as a real capital gain in a money supply that has not lost value.

You might then say "Well, subtract out the inflation rate to get the real component of the capital gain" but measuring price inflation is subjective to a large extent and is probably fudged downward anyway since price inflation in fiat is an embarrassment to the party in power.

But like I said, the capital gains tax should not be repealed until AFTER a universal bailout of the population and perhaps land reform too.

frlbane said...

Valuation of equities can swing wildly. paul

Yes, because of two forms of counterfeiting - buying on margin with bank credit and naked short selling. We should do away with both.

As for workers, they could choose to be paid in fiat and most probably would do so UNLESS that fiat was mismanaged to a large extent by, say, bailing out the banks.

frlbane said...

The US already experimented with free banking in the 19th century. Dan K

People would not need banks at all if the monetary sovereign, as it should, provided a risk-free storage and transaction service for its fiat. That service, btw, should pay no interest and especially not make any loans.
.

And after that service is established then government deposit insurance and the legal tender lender of last resort should be abolished.

Of course free banking doesn't work. But who cares? Who needs banks anyway? Common stock is an ideal private money form that requires no borrowing, no usury and no reserves.

paul said...

"Yes, because of two forms of counterfeiting - buying on margin with bank credit and naked short selling."

fribane, the absence of these actions will not guarantee the stability of private currencies, and you still haven't addressed the problem of fungibility re multiple currencies.

This looks like a currency barter system…you will only be able to buy stuff from those that accept your currency…a person with a cow to trade has to find someone that needs a cow and also has what he needs for a transaction to take place.

What's the difference?

"most probably would do so UNLESS that fiat was mismanaged to a large extent by, say, bailing out the banks"

Bailing out the banks added zero fiat to the non-government (the part that we exist in). All it did was make them appear solvent, another accounting abstraction and a different topic, but it is a failure by our regulatory system.

There is no significant consequence to banks having massive excess reserves from the point of view of a non-government participant.

If banks were able to lend more money, it would not be because of reserves, it would be because of demand and creditworthiness, but any spending created would draw from savings in the future unless the government creates the funds to cover repayment.

Household credit enables the transfer of wealth from one segment of the economy to another without the requisite income (and thus savings) being earned, that is part of the problem.

The fiduciary responsibility of making only sound loans has been violated on a massive scale. The problem isn't credit per se, the big problem is the institutions that were trusted with the responsibility betrayed that trust.

This is a failure of regulation and the rule of law, not a credit system, which functions just fine if operated within reasonable bounds.

Business credit operates through a completely different dynamic and is unrelated to your objections to private credit.

Financial businesses use of credit is the elephant in the room, they access the source of funds directly and serve only to extract finacial wealth from the system while performing zero benefit to the population at large, meaning, a small number of individuals get the benefit, everyone else gets screwed, and the government is helping them do it.

y said...
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