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| Thread: I want the earth + 5% |  This thread is pages long: 1 2 3 4 · NEXT» |
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Moonlith
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posted December 12, 2008 03:10 PM |
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Edited by Moonlith at 15:11, 12 Dec 2008.
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I want the earth + 5%
I actually squeeled and bounced around on my seat in hysterical joy as I read this article, which very easily explains how the financial system of the world has operated and will operate since the barter ages.
I want the earth plus 5
Particularly this small bit I find to the point:
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One day a thoughtful man went to see Fabian. "This interest charge is wrong", he said. "For every $100 you issue, you are asking $105 in return. The extra $5 can never be paid since it doesn't exist.
Farmers produce food, industry manufacturers goods, and so on, but only you produce money. Suppose there are only two businessmen in the whole country and we employ everyone else. We borrow $100 each, we pay $90 out in wages and expenses and allow $10 profit (our wage). That means the total purchasing power is $90 + $10 twice, i.e. $200. Yet to pay you we must sell all our produce for $210. If one of us succeeds and sells all his produce for $105, the other man can only hope to get $95. Also, part of his goods cannot be sold, as there is no money left to buy them.
He will still owe you $10 and can only repay this by borrowing more. The system is impossible."
The man continued, "Surely you should issue 105, i.e. 100 to me and 5 to you to spend. This way there would be 105 in circulation, and the debt can be repaid."
Fabian listened quietly and finally said, "Financial economics is a deep subject, my boy, it takes years of study. Let me worry about these matters, and you look after yours. You must become more efficient, increase your production, cut down on your expenses and become a better businessman. I am always willing to help in these matters."
It perfectly lines out the defining flaw in the financial system.
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mvassilev
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posted December 12, 2008 03:33 PM |
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This assumes that productivity never ever increases. Which is certainly not the case.
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JollyJoker
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posted December 12, 2008 07:09 PM |
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It assumes FRIENDLY competition as well.
However, competetion is not friendly: If I take a loan for an interest rate I do it because I expect that people will buy the stuff I produce, meaning they will avoid other products in favor of mine.
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friendofgunnar
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posted December 13, 2008 04:08 AM |
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The defining flaw in that story is the lack of any mention of the introduction of bankruptcy laws. The basic idea of bankruptcy is that you declare that you can't pay off your debts. All your assets are calculated and then sold off to pay the people you owe money to. Usually it's a ratio, for example 1 dollar paid back for every 4 that you owe. (The U.S. bankruptcy laws are actually much more lenient than banks would like. Just as three simple examples, in a personal bankruptcy you get to keep your home, your TV, and if you need your car to get to work, you can keep that too.) In a case like that, all that money that the bank loaned you vanishes and you get a clean slate. (You'd also be surprised at how many people will loan money to you after a bankruptcy).
The banker is not just reaping in money, he (she) has to do research to find out if you're actually able to repay the money. There's actually work involved. There's also the element of competition, because a bank that can more accurately assess risk will do better than one that can't.
I'll also give a simple parable that illustrates Mvasses point about increasing production.
Bob the farmer gets three wheat crops a year that he can sell for 30 bucks a crop. He meets Jim who has been tinkering in his shop and Jim says that he can make a tractor that will allow Bob to harvest his wheat faster, enabling 4 crops a year instead of 3. Jim will build the tractor for 90 bucks. Bob says "It'll take me years and years to save up that amount of money."
So Bob goes to Fabian for a loan. Fabian loans Bob the 90 dollars plus 10 percent interest. Bob knows that he wouldn't be able to pay back the loan with only 3 crops a year. But this is the age of capitalism. Bob takes the 90 bucks and gives it to Jim. Jim makes the tractor and gives it to Bob, and since he's got extra money he doesn't know what to do with, he gives it to Fabian. (because Fabian is going to give Jim 2 dollars to let him keep it in his bank and put it to work).
Bob harvests a crop and brings it to Fabian to sell. Fabian gives him 30 bucks for his crop, and Bob gives it right back saying "69 more to go". Then he gets back to planting more seeds. Two more crops later and Bob has paid off his original debt. It's only october though! Bob rushes back to his plantation to plant the final crop. On December 31st he harvests the last of the wheat and comes by Fabian's bank. "Well done" Fabian says and hands him 30 dollars for the crop. Bob hands back 9 dollars and says "and here's your interest". "Why thankyou Bob, and and look who's here, It's Jim". Jim rolls up and says "I'd like that 2 dollars that you owed me please". Fabian says "Sure" and hands it over.
So you can see that even though there was never any more than 90 dollars at any one time, the entire process created wealth for everybody.
Bob made 21 dollars more than the year before . Jim got a 2 dollar bonus just for letting Fabian use his money. And Fabian got 7 bucks (9 minus 2) for letting somebody use his money for a year. The key to understanding the entire process is that because Bob got to use Fabian's money (instead of saving up 20 years first) the wheat crop was increased 133%.
Yes its a gross oversimplification, but it adequately addresses the gross oversimplification that was introduced in the story.
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mvassilev
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posted December 13, 2008 06:37 AM |
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Azagal
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posted December 13, 2008 09:26 AM |
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Quote:
Bankruptcy is ridiculous and should be abolished.
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Moonlith
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posted December 13, 2008 03:35 PM |
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Edited by Moonlith at 15:37, 13 Dec 2008.
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Wow, for once I agree with Mvass!
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All your assets are calculated and then sold off to pay the people you owe money to.
I think you missed a part.
If there is 100$ in circulation, but 105$ needs to be repayed, that means at least SOMEBODY will ALWAYS be unable to pay his or her debts. How can you not see this as a flaw??
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<Your story>
And clearly you do not see the flaw. What happens is that Fabian LOANS something to someone (In our current age, nothing but AIR since the money loaned is created out of thin air, digitally, with no backing), Bob has to do all the work / being productive, and Fabian can practicly lean back. Because Fabian has "capital" ? How the hell did he get that capital? And that's where you are missing the whole point. You act as if Fabian is the legal owner of the entire money supply, which is WRONG.
Money itself is not some "product" that has any value. The only purpose of money is as a trade tool to buy and sell actual PRODUCTS. As such, it is rediculous one can loan and lend money and charge interest over it. The one who loans it (banks) DO NOT ACTUALLY GIVE AWAY ANYTHING. But that's not even the point.
The point is that money's only and sole purpose is to buy and sell goods, a currency. As such it is a TOOL that should SERVE the society. Meaning, it is a tool that should be regulated by the government to keep the available amount of money in check according to the amount of goods produced. THAT is what prevents inflation too: Loans in fact increase inflation.
Why does a society have to pay INTEREST over its OWN money ? That makes no sense whatsoever!
Capital does NOT belong to bankers, it cannot belong to ANYONE, it is no more than an exchange tool. Which pretty much underlines the fraudulent nature of the capital markets.
Heck, in the USA, if all debts were payed off, there would be no money in your system. Doesn't that proof it is nothing but owed slavery?
Money based on debts = wrong.
As for increasing productivity, naturally as I said, the government should control the money supply, and increase it when productivity rises to keep the prices the same.
Funny thing is, by the way, people always state that if our population wouldn't grow, it would translate into losses. I don't get this. For companies, maybe? But for the people? If your productivity goes up and your population remains the same, obviously this means there are more goods available for your people. I don't know about you, but I would call this a GOOD thing.
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TheDeath
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posted December 13, 2008 04:04 PM |
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Heck, in the USA, if all debts were payed off, there would be no money in your system. Doesn't that proof it is nothing but owed slavery?
Money based on debts = wrong.
QFT
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executor
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posted December 13, 2008 10:57 PM |
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With FoG's marvellous, oversimplified example there is no need to explain how this system can work out. What people often do not perceive is that money constantly circulates, and the money supply is never equal to the sold output, always lesser. However, an equation Y*P = M*V is upheld, where Y is product vector, P is prices vector, M is money supply and V is the velocity of money circulation. (V = 2 means that every dollar is spent in a transaction two times a given period, usually year). With US product amounting over $10 trillion in value, there is less than $3-4 trillion in circulation, be they paper or electronic. Another $1,5 trillion exists outside US, but they circulate outside US as an international currency and do not affect US product at home(except for exchange rates).
And this is not only in USA. Euro is made and circulates just the same way dollar does, and so do yen, pound, Swiss frank or zloty here in Poland.
The only problem in USA I can see is that FED is an organisation of private banks, and therefore almost all dollar bills are owed to private financial institutions, not to public ones as in Euro zone or in Poland.
Why almost all? Because some part (very small) of monetary basis enters the system through open market operations (central bank buying stocks, bonds etc.), and operating expenses of the central bank. Yet overwhelming most of it is credit-based.
And by the way, the most inflationary practice is keeping budget deficits, as central banks usually are obliged to give government a loan to finance it. Hence inflation is a form of indirect taxation by irresponsible and/or corrupt governments.
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mvassilev
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posted December 13, 2008 11:29 PM |
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Moonlith:
Money is a medium of exchange. Capital is a means of production. Money, when used as a medium of exchange, isn't capital.
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If there is 100$ in circulation, but 105$ needs to be repayed, that means at least SOMEBODY will ALWAYS be unable to pay his or her debts. How can you not see this as a flaw??
Did you not read FoG's excellent story? The debts are being repaid because the debtor becomes more productive! Obviously, if there is a massive discrepancy between the interest rate and how much productivity increases, then there is a problem. But, otherwise, there isn't.
"Interest payments reflect the higher value of present goods over future goods. Other things equal, everyone wants to consume sooner rather than later. The current price of a computer might be $1,000, but the price of a claim to a computer delivered in one year would currently sell for less than that, say $900. An entrepreneur might invest $900 in labor and raw materials in order to sell a product next year for $1,000; his implicit interest return is due to the fact that the factors of production represent technological "claims" on future consumption goods, and thus their current price (the $900) is less than their ultimate sale price ($1,000)." - Mises.org
Thus, say I'm a farmer and need a plow to increase my productivity. Let's say a plow costs $1000, but I don't have $1000. Thus, I can either try to save money, or I can go and take out a loan for $1000. However, the lender (who is not necessarily a bank!) says, "I have a thousand dollars. But why should I lend you that money? You'll get your plow, but it'll take me a while to get my thousand dollars back." So we negotiate an interest rate: 5%. Thus, I can get my plow immediately, and he is rewarded for lending me his money by getting an extra fifty dollars. Mutual benefit - because otherwise I wouldn't have gotten the plow at all. Then my productivity increases by 10%. Thus, I am able to enjoy my increased productivity and am able to pay back my debt.
And I actually agree with you in saying that inflation should be kept even with increases in productivity. However, how can the government exactly predict how much productivity is going to increase? They either guess too low (causing deflation) or too high (causing inflation). But that's a problem we have to live with.
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Heck, in the USA, if all debts were payed off, there would be no money in your system.
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TheDeath
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posted December 13, 2008 11:35 PM |
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Did you not read FoG's excellent story? The debts are being repaid because the debtor becomes more productive! Obviously, if there is a massive discrepancy between the interest rate and how much productivity increases, then there is a problem. But, otherwise, there isn't.
Let me say this, how I view it (not Moonlith so don't take it as it's from him).
You have 100$ in circulation, right? You loan all of them, and then become more productive. You need to pay back 105$. Where do you get the extra 5$ if there are only 100$ in circulation? 
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mvassilev
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posted December 13, 2008 11:37 PM |
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You can't pay it back with the money, but, since this is obviously a primitive economy, you can pay it back with whatever is the result of your increased productivity. If you produced for potatoes, you give him $105 worth of potatoes. If it's chickens, then chickens...
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TheDeath
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posted December 13, 2008 11:43 PM |
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Yes that would work in a primitive economy like you said (I agree), but not in the real world we live in today. It would cause inflation.
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mvassilev
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posted December 14, 2008 12:21 AM |
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Yes, but in today's economy neither do we have one regular guy and one banker.
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TheDeath
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posted December 14, 2008 04:39 PM |
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The way I see it:Quote:
the extra money had never been issued, therefore someone had to miss out
So if the farmer becomes more productive, and he can't print more money, then it's going to collapse, unless the government prints more money -- which makes us go back to the problem with the incorrect prediction of productivity
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del_diablo
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posted December 14, 2008 06:19 PM |
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Quote:
This assumes that productivity never ever increases. Which is certainly not the case.
The productivity can increase, but in this case the value is locked.
If you manage to get 120kr then somebody is 20kr short instead of 5kr. Etc.
If you borrow 1000 for a plow, there is the trick. Fabians trick is that by the time they have managed to get the orginal sum of money the rent have built up the loan so its 5% bigger than the orginal amount. There is a finetiv amount of coin per time of loan here, so the system itself is almost bulletsafe.
The story only got 1 single place where they could have broken out of Fabians system. At a point there is mentioned you can trade mined gold for money, since you do not take a loan to get the money this is the only place where somebody can break out of it. This would however require that the total amount of gold traded in is greater than the social debt, someting that is very unlikely.
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TheDeath
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posted December 14, 2008 06:43 PM |
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Exactly. You still have the same amount of gold, aka "hard-money", but with more "soft-money" (printed money).
If you have 1 gram of gold and 100$, then 100$ represents 1 gram of gold. If you print another 900$, then 1000$ will represent 1 gram of gold -- a ten times inflation!
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mvassilev
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posted December 14, 2008 07:19 PM |
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Here's my question: why would Fabian borrow any money if he and the banker are the only two people on Earth? I mean, usually somebody borrows money from the bank in order to pay somebody else - but here, there's nobody else to pay.
Overlooking this problem, though, I would assume that the farmer would sell his increased yield to the banker, and then use that money to pay the banker back.
Quote:
If you borrow 1000 for a plow, there is the trick. Fabians trick is that by the time they have managed to get the orginal sum of money the rent have built up the loan so its 5% bigger than the orginal amount. There is a finetiv amount of coin per time of loan here, so the system itself is almost bulletsafe.
Fabian is taking a risk and assuming that his productivity will increase quckily enough so that he will be able to pay it back.
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TheDeath
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posted December 14, 2008 07:30 PM |
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Quote:
Overlooking this problem, though, I would assume that the farmer would sell his increased yield to the banker, and then use that money to pay the banker back.
"Increased yield"? Sure, that means he took from someone else.
Look, when you have X money, and you want X+5 back, it's kinda impossible. Unless you print more money, but that isn't feasible since it will cause inflation; because the gold that the money represents is still the SAME. If you have 100$ or 1000$ both representing the same amount of gold, then it's gonna be the same.
If the farmer gives back 105$, then it means SOMEONE ELSE must be worse off, since the total must be let's say 200$ (total money in circulation).
If originally, the farmer had 10$, Bob had 90$ and Fabian had 100$, and the farmer loans 100$ from Fabian (which demands 105$ back), then since there is ONLY 200$ in circulation, if the farmer gives 105$ back and has 10$ left for himself, then Fabian has 100$, the farmer 10$, and Bob 85% instead of 90%, because the farmer took it from Bob to pay off Fabian, in some way.
Printing more isn't necessarily a solution, because the gold is the same. Further, notice Fabian didn't even LOSE the gold, it's still in his vault! And it is the same amount.
This is inflation: print more money, which represent the same amount of gold. 100$ or 1000$ are the same if they both represent the same amount of gold
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mvassilev
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posted December 14, 2008 07:35 PM |
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Firstly, who said anything about gold? 
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If the farmer gives back 105$, then it means SOMEONE ELSE must be worse off, since the total must be let's say 200$ (total money in circulation).
I don't think you understood what I meant. The farmer borrows $100 at 5%. Then he produces $110 worth of potatoes. Then he gives $105 worth of potatoes to the banker, and thus pays off his debt.
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