Money as debt or how Bitcoin can have a bright future

[bobitza]

I know you might be familiar with the money videos on YouTube, but I found these two ones really interesting.

Money as Debt II - Promises Unleashed
http://www.youtube.com/watch?v=lsmbWBpnCNk

Money as Debt III - Evolution Beyond Money
http://www.youtube.com/watch?v=3P7izAUe3ZM

We need a money reform now before it's too late. Bitcoin seems the right way to do it.

Also, the digital coins should come in 2 types: perpetual and credit (as per the following video)
http://www.moneyasdebt.net/

[knight22]

Agree.

Here is the first one: Money as Debt I

[johnyj]

Good, learned something new: The banks will spend the interest they earn and that part of money will also go into the circulation

Before, I always thought that the interest must be paid back by new printed money entering the system thus the money printing speed need to accelerate exponentially if interest rate is above zero

[Zangelbert Bingledack]

Not this crap again.

http://www.freedomforceinternational.org/freedomcontent.cfm?fuseaction=money_as_debt

[johnyj]

Not this crap again.

http://www.freedomforceinternational.org/freedomcontent.cfm?fuseaction=money_as_debt

In part II, this interest problem has been solved by adding bank comsumption, in my opinion, it still needs some explaination

On a small island with only 2 people, if bank only loan out 100$, there is only 100$ in the whole island at any given moment, let's say the interest is 5$, then no matter how it is paid back to bank and consumed, the total amount of money at any time will never reach 105$

So, 105$ never existed at the same time in someone's account, it is just a double count of the same money AT DIFFERENT TIME

It's the same as: Although the total consumption of goods and services on the island in one year could reach 100$, the money needed to enable the transaction of these goods and services can be as low as 1$ (100 times transaction happened during one year)

Because every economic activity need time to carry out, it is important to include time axis into diagnosis, that added another dimension in all the analysis and it becomes more difficult to see the clear picture, currently animation is the best method, but it is quite difficult to make an animation, these films are good attempt

[johnyj]

Another problem with such a system is that people are very dependant on the bank's consumption, (The interest of a mortgage can be as high as the mortgage itself), if they do not consume, no one can payback their interest, and that is the case now, since all the banks got problem with their mortgage backed securities, their asset are deep underwater

We are really very dependant on the banks, I guess it is not very easy to find an alternative, since this banking system has been existed for hundreds of years and it takes TIME to get there, time is the most powerful force in the universe

[bobitza]

Leaving the "let's hate the bankers" part aside, from a technical perspective the system is conceptually flawed because of the interest and how money are created as debt. There should be no interest and money should enter the system as more products/services enter the system, not created out of this air. Of course this will open another can of worms but at least we can start the discussion on/with a system that is not conceptually flawed.

Another interesting concept is the the self-credit option and the creation of a "credit coin" as gold based or other commodity based currencies do not permit easily money supply expansion needed for economic development. Basically, the "credit coins" are money self-issued by the producers and not the banks which are later redeemed by the same producers after the project they were used for is completed. And this is where Bitcoin fells short.

[herzmeister]

and money should enter the system as more products/services enter the system

isn't lending money a service?

[johnyj]

And I don't think interest is a problem, it is just a natural thing

Given same amount of money, if it is utilized and invested in future projects to produce new products, it will generate profit, the interest is a benchmark for the average investment return for the whole society. If the society is poor, even the interest rate is very high, there still will be people taking loans, since any investment will generate higher return than interest. If the society is very wealthy, the interest will get closer and closer to zero, means most of the new investment will normally generate no profit

So it is not the interest caused the continuous increase of money supply, it is the investment return growth require that the money supply to catch up, interest is just an indicator of general investment return

[johnyj]

and money should enter the system as more products/services enter the system

isn't lending money a service?

The service of another service, is a derived concept. Just like derivatives, they are based on the basic service, if basic service changed or the relationship broke, the derivatives will be affected heavily

I think basic services have nothing to do with money, money is just a tool to facilitate the exchange of services and goods, but unfortunately only people with good economy knowledge realize this, for normal people, money is as good as goods and services, as long as price is stable

[bobitza]

And I don't think interest is a problem, it is just a natural thing

No it's not. When you create the money for the principal you don't create money to cover the interest. Those money do not exist and the only way for them to come into existence is for someone to take another loan to pay for your interest. But then what about the principal on that loan ... and the interest on that loan? And so on.

A system based on the need to continuously generate debt is mathematically, conceptually and morally flawed.

RE: lending money
Many say/expect Bitcoin to be a deflationary currency. In this environment and as long as we value BTCs from comparing them to fiat, the concept of lending money gets confusing. Let's say the BTC appreciates 5% per year compared to USD. If you are to take a loan at around 4%, how would you see that? Loan value + 4%? Loan value - 1% (4%-5%)?

RE: money as a tool
Is hard to delimit between money as good as goods and services and money as a tool. For money to fulfill its mandate as a transactions "tool" (regardless of its shape or form: digital, paper, metal), money has to first be trusted by the parties that when received, it can be traded back to receive a similar amount of goods and services. Isn't that the same thing? Ofc, as long as prices are stable ...

[knight22]

You might be interested in this:

http://www.rayservers.com/images/ModernMoneyMechanics.pdf

[bobitza]

You might be interested in this:

http://www.rayservers.com/images/ModernMoneyMechanics.pdf

That seems to be the PDF describing how the flawed fractional reserve system works. Your point?

[knight22]

You might be interested in this:

http://www.rayservers.com/images/ModernMoneyMechanics.pdf

That seems to be the PDF describing how the flawed fractional reserve system works. Your point?

Only that it is the main reference of "Money as Debt"

[johnyj]

And I don't think interest is a problem, it is just a natural thing

No it's not. When you create the money for the principal you don't create money to cover the interest. Those money do not exist and the only way for them to come into existence is for someone to take another loan to pay for your interest. But then what about the principal on that loan ... and the interest on that loan? And so on.

Let's discuss this with a simple example

On an island with only 2 people and one market:
Each day, A capture 2 fish and sell to market for 2$, he use that 2$ to buy 1 basket of fruits and 1 fish
B pickup 2 basket of fruits and sell to market for 2$, he use that 2$ to buy 1 basket of fruits and 1 fish

As long as they are doing this everyday, the total amount of money supply is constant, 4$ at maximum, and they are existing money

They can also take 0-intrest-loan to achieve this: A take 2$ loan, buy one fish and 1 basket of fruits for today's consumption, after one day's work, he capture 2 fish, sell them and return the loan, the second day, same thing happens...


If their productivity increased, A will capture 3 fish and B will pick up 3 basket of fruits every day, but they still consume 1 fish and 1 basket of fruits, then there will be stock of goods (1 extra fish and 1 extra basket of fruits), and there will be extra money supply, 6$ total for each day, and each day there are 2$ go into A and B's saving

Since the island does not have any way to store the fish and fruits more than one day, those goods have to be consumed. If A and B took loan to make the work possible, after A and B paied back the loan, they need to pay 1$ interest to the bank, thus bank get the interest, bought those extra fish and fruits from market and consumed them

So, the interest appears only when the productivity increased and there are extra products in the society. If the productivity stayed the same, there will not be enough goods to sell to market and get the money to pay back the interest, so bank's interest rate should be 0 correspondingly

Positive interest means continuously improved productivity in society as a whole, this has been the case for hundreds of years, and I think there is still room for more and more productivity increase, since people need to improve the quality of life all the time

This is a simplified model, market get loans from bank to facilitate the trade (adding money into circulation), they also need to pay back the interest, so the sell price from market will include these interest and the consumption of market itself, but do not change the way it works

From this point of view, banks, market etc all benefit from an increase in productivity, they just like some kind of middle man, take a small bite in the whole trading process, but since people are dependant on the service they provide, their charge basically get accepted

[bobitza]

...
Positive interest means continuously improved productivity in society as a whole, this has been the case for hundreds of years, and I think there is still room for more and more productivity increase, since people need to improve the quality of life all the time

...
From this point of view, banks, market etc all benefit from an increase in productivity, they just like some kind of middle man, take a small bite in the whole trading process, but since people are dependant on the service they provide, their charge basically get accepted

While I dont agree 100% with your example, I do somehow agree with the quoted paragraphs. There should be some way for more money to get into the money supply but that would have to come via increases in good and services so that we maintain price stability. Here's a question for you ... if a country happens to have a decrease in GDP (aka production of goods and services) what should be the consequence? Take away money from people? So it's not that clear for me if this is a good example.

Why should the banks benefit from the increase in productivity of us all? Why not us? The farmers, the workers, the producers? The banks should be like a non-profit organization or like an utility company. There is no interest in money loaned but there are fees for the banking services offered. In the end they just provide a service to the community: they organize, maintain and keep safe the money supply. Yes, somebody has to do it and I'm willing to pay for it just like I'm paying for my cellphone bill and water.

[Lethn]

Seen this before, it's a very good video, money can't be used as debt forever, it's supposed to be a means of paying for goods, bankers have gone and twisted entirely what currencies are meant to be used for.

[Roger_Murdock]

and money should enter the system as more products/services enter the system

isn't lending money a service?

If it comes from savings, yes. In that case, you are performing a service to the borrower by agreeing to defer your right to consume. Money is just information. The real loan is your claim on a certain amount of stuff. On the other hand, if you're a central bank and the "money" you "lend" is simply conjured into existence, then no, you are not providing a service. You are in effect counterfeiting. The "borrower" certainly receives value, specifically the ability to make an immediate claim on goods and services in the real world. But where did that value come from? Not from the bank deferring consumption it had earned as a consequence of its production. Instead, it came from (was stolen from) every other person who was holding the currency. But we're not the ones that collect the interest on that "loan," are we? And if we bought ourselves a fancy printer and tried to get in on the fun, they'd put us in jail, wouldn't they? Frankly when you think about it, the whole thing seems kind of, well, messed up, doesn't it?

[johnyj]

While I dont agree 100% with your example, I do somehow agree with the quoted paragraphs. There should be some way for more money to get into the money supply but that would have to come via increases in good and services so that we maintain price stability. Here's a question for you ... if a country happens to have a decrease in GDP (aka production of goods and services) what should be the consequence? Take away money from people? So it's not that clear for me if this is a good example.

Suppose the price does not change and productivity decreased, A will capture 1 fish and B will pick up 1 basket of fruits every day

In such a case, they will have less income, only 1$ to spend on the fish and fruits, so each of them can only consume half a fish and half a basket of fruits, the amount of money supply needed for transaction will drop from 4$ to 2$

And market will have excessive amount of money at hand (2$) without corresponding goods, this will cause inflation in a real world scenario. To keep price stability, central bank will reduce the amount of money loaned out to market, this is by raise the interest rate and in turn reduce the available loan to market

It means, when central bank start to tighten, the amount of money already exceeded the amount of goods, this could be caused by either too fast expanding of credit or decreased GDP, but typically the first reason, because in a loan financed model, A and B seldom have the freedom to reduce their production, since they have to payback the loan, they have to produce more than they consume

Why should the banks benefit from the increase in productivity of us all? Why not us? The farmers, the workers, the producers? The banks should be like a non-profit organization or like an utility company. There is no interest in money loaned but there are fees for the banking services offered. In the end they just provide a service to the community: they organize, maintain and keep safe the money supply. Yes, somebody has to do it and I'm willing to pay for it just like I'm paying for my cellphone bill and water.

I think central bank is a non-profit driven organization and their mandat is to keep price stability and low unemployment

If the productivity increase is 5% per year and bank charge 5% interest per loan, the profit will all go into bank's pocket, this is a good reason to say no to loan financed projects. But there are many projects have more than 50% of return, for them the loan is the fastest way to expand the business

[BobbyJo]

and money should enter the system as more products/services enter the system

isn't lending money a service?

If it comes from savings, yes. In that case, you are performing a service to the borrower by agreeing to defer your right to consume. Money is just information. The real loan is your claim on a certain amount of stuff. On the other hand, if you're a central bank and the "money" you "lend" is simply conjured into existence, then no, you are not providing a service. You are in effect counterfeiting. The "borrower" certainly receives value, specifically the ability to make an immediate claim on goods and services in the real world. But where did that value come from? Not from the bank deferring consumption it had earned as a consequence of its production. Instead, it came from (was stolen from) every other person who was holding the currency. But we're not the ones that collect the interest on that "loan," are we? And if we bought ourselves a fancy printer and tried to get in on the fun, they'd put us in jail, wouldn't they? Frankly when you think about it, the whole thing seems kind of, well, messed up, doesn't it?

This is very true.  Banks no longer lend out savings, they create money from thin air, then lend this out and add it to their balance sheet as an asset!  The thing is the vast majority of pople still believe that the mortageg they took out with the bank is actually someone elses savings, instead of a fabrication created by the bank.