Representational Monetary Identity

[mirelo]

Mirelo, you really dont understand. Money today is almost universally credit money, its created based on debt, its literally created out of thin air by banks based on your or my pledge to repay it later and money therefore represents a debt itself.  This is true for your bank account which is created by the bank, its true for notes which are created by the central bank, usually based on government bonds (ie debt).

Let me just quote myself a few posts ago (https://bitcointalk.org/index.php?topic=144650.msg1538255#msg1538255) in answering to hazek:

Don't you know that almost all of our society's money is debt?

As you can see, I haven't missed that money "today is almost universally credit money." It is you that are missing that money being debt today is no proof that it has always been or must always be debt (what about Bitcoin?).

Our money  used to represent a debt by the issuer expressed in gold, which made it easier to understand (the money was redeemable for a fixed amount of gold, and therefore a 'good for gold' note, which really is just a tradeable  debt certificate). Now its value is no longer pegged against gold or anything, but it still works the exact same way.

What you are describing is the birth of fractional-reserve banking. Try to conceive of money in a different monetary system. This is not as hard as you think: money is much older than fractional-reserve banking.

If I have U$ 100,00 and a pair of shoes worth U$ 200,00 and you have U$ 200,00 and a knife worth U$ 100,00, I can give you my pair of shoes while you give me U$ 100,00 and your knife. In the end, we still own U$ 300,00 each, both in monetary and commodity form, and nobody owes anybody anything.

What you completely miss is that these banknotes already are a tradeable form of someone else's debt.

Again, I am not missing that today's money is debt: it is you that insist in putting all money in a fractional-reserve banking context (what about Bitcoin?).

Try to frame my example with sheer gold acting as money, and you will see there is no longer any place for debt left in it:

If I have an ounce of gold and a pair of shoes worth two ounces of gold and you have two ounces of gold and a knife worth an ounce of gold, I can give you my pair of shoes while you give me an ounce of gold and your knife. In the end, we still own three ounces of gold each, both in monetary (golden) and commodity form, and nobody owes anybody anything.

[CurbsideProphet]

Fractional reserve banking isn't the primary problem we face.  This back and forth over what is money largely misses the bigger problem. 

The main reason the economy as we know it is in jeopardy is due to the shadow banking system and the use of synthetic credit default swaps and other derivatives.  The shadow banking industry is north of $65 TRILLION.  It's essentially a giant casino where the spiderweb of derivatives is so entangled that they are impossible to unwind.  It's not about debtor and creditor.  It's about debtor, creditor, and 5 other players that have no position in the transaction but are making side bets as to the outcome.  Buffet didn't call derivatives "financial weapons of mass destruction" for no reason.

[mirelo]

Fractional reserve banking isn't the primary problem we face.

The primary problem is not necessarily the biggest in size.

This back and forth over what is money largely misses the bigger problem.

So all this has nothing to do with money, right?

The main reason the economy as we know it is in jeopardy is due to the shadow banking system and the use of synthetic credit default swaps and other derivatives.  The shadow banking industry is north of $65 TRILLION.

Don't get so impressed with these quantities: if you do not understand what money is, then it will make little difference whether you can figure out what a trillion is (I confess I cannot).

It's essentially a giant casino where the spiderweb of derivatives is so entangled that they are impossible to unwind.  It's not about debtor and creditor.  It's about debtor, creditor, and 5 other players that have no position in the transaction but are making side bets as to the outcome.  Buffet didn't call derivatives "financial weapons of mass destruction" for no reason.

Likewise, derivatives are not called this way for no reason: they derive from something. So unless you can figure out what they derive from, which is the process of debt becoming money, you will not have found the "primary problem" (it is a bit funny to look for something primary in something primarily characterized as derivative, don't you think?).

[mirelo]

Today, most money is debt, and the primary mechanism for debt becoming money (of which the first "derivative" is called central banking) is this: when a commercial bank makes a loan, it creates new money that, if deposited into another bank account in the same or any other bank, enables the latter bank to loan it again, creating even more money. This continuous creation of debt expands the money supply that we use to buy cars, houses, and cell phones, creating inflation---so this credit money is as much an illusion as the cars, houses, and cell phones it buys, or as the inflation it causes. As some of us know, if everyone were to withdrawal their money from all banks, there would be no money left for most of us to withdrawal. However, this is no longer because there are only 10% reserves, but rather because now less than half of that percentage exists in physical form---a percentage that continues to shrink.

The crux of all this is that each loan replicates the money from which it borrows, so the same loan must be:

• The money from which it borrows to still be a loan from it.
• Brand new money for the money from which it borrows to still belong to its original depositor.

What we must explain is: what makes this ambiguity possible? I propose an answer to this question at http://omniequivalence.com/fractional-reserve-banking/ and http://omniequivalence.com/representational-monetary-identity/.

[CurbsideProphet]

The primary problem is not necessarily the biggest in size.

That depends on which definition of the word primary you are using.  In your case you are using the definition:

first in order of time or development : primitive

While I am talking about:

of first rank, importance, or value

Bear Stearns, AIG, and a near systemic financial collapse in 2007-2008 was not caused by fractional reserve banking.  It was caused by a run on the Shadow Banking System.  

You can continue your little quibble but your efforts are misplaced.  To use an analogy, we're both standing on the beach, you're focused on the moon and its effects on tide patterns.  I'm worried about the giant Tsunami right in front of us.

[mirelo]

The primary problem is not necessarily the biggest in size.

That depends on which definition of the word primary you are using.  In your case you are using the definition:

first in order of time or development : primitive

While I am talking about:

of first rank, importance, or value

What about both? What about something that is of first rank, importance, or value because it is first in order of time or development, or primitive?

By making these two senses exclusive you are condemning yourself to fight just imminent problems and only recognize immediate causes.

Bear Stearns, AIG, and a near systemic financial collapse in 2007-2008 was not caused by fractional reserve banking.  It was caused by a run on the Shadow Banking System.

So according to your logic, even if floods are caused by rain, and rain is caused by evaporation, floods are not caused by evaporation. Amazing.

You can continue your little quibble but your efforts are misplaced.  To use an analogy, we're both standing on the beach, you're focused on the moon and its effects on tide patterns.  I'm worried about the giant Tsunami right in front of us.

Sorry to interrupt your worrying about that giant Tsunami with my little-quibble monetary theory, but I really don't see how a decent monetary theory can be of no use in avoiding future Tsunamis (the present giant wave is not the first, as you probably know). As for the present monetary Tsunami, do you really think you can avoid it? (And if not, then who's efforts are misplaced?)

So why don't you stop worrying for a moment and try to understand things for a change?

[CurbsideProphet]

So according to your logic, even if floods are caused by rain, and rain is caused by evaporation, floods are not caused by evaporation. Amazing.

No.  Lets say that flood was caused by a dam breach.  The dam failed due to neglect on the part of its owner.  In this case, I would focus on the owner's negligence which was the primary cause of the flood.  It would be rather stupid to focus on evaporation.

THAT is what I'm saying.

[mirelo]

So according to your logic, even if floods are caused by rain, and rain is caused by evaporation, floods are not caused by evaporation. Amazing.

No.  Lets say that flood was caused by a dam breach.  The dam failed due to neglect on the part of its owner.  In this case, I would focus on the owner's negligence which was the primary cause of the flood.  It would be rather stupid to focus on evaporation.

THAT is what I'm saying.

So you think you can have fractional-reserve banking without ever having central banking, right? And that you can have central-banking without sooner or later having the deregulation of banking and the merge between commercial and investment banks, right? And that you can have that merge without the explosion of derivatives, right?

Well, good luck with your dam.

[CurbsideProphet]

So according to your logic, even if floods are caused by rain, and rain is caused by evaporation, floods are not caused by evaporation. Amazing.

No.  Lets say that flood was caused by a dam breach.  The dam failed due to neglect on the part of its owner.  In this case, I would focus on the owner's negligence which was the primary cause of the flood.  It would be rather stupid to focus on evaporation.

THAT is what I'm saying.

So you think you can have fractional-reserve banking without ever having central banking, right? And that you can have central-banking without sooner or later having the deregulation of banking and the merge between commercial and investment banks, right? And that you can have that merge without the explosion of derivatives, right?

Well, good luck with your dam.

Where did I say any of that? 

[mirelo]

So according to your logic, even if floods are caused by rain, and rain is caused by evaporation, floods are not caused by evaporation. Amazing.

No.  Lets say that flood was caused by a dam breach.  The dam failed due to neglect on the part of its owner.  In this case, I would focus on the owner's negligence which was the primary cause of the flood.  It would be rather stupid to focus on evaporation.

THAT is what I'm saying.

So you think you can have fractional-reserve banking without ever having central banking, right? And that you can have central-banking without sooner or later having the deregulation of banking and the merge between commercial and investment banks, right? And that you can have that merge without the explosion of derivatives, right?

Well, good luck with your dam.

Where did I say any of that? 

Sorry, I forgot you were just talking about the weather.

[mirelo]

In this thread, these two opposite views of money showed up:

1) Money can only be an IOU.

2) Money cannot be an IOU.

These are precisely the two possible views of the phenomenon of money becoming debt, taken unilaterally. When a commercial bank makes a loan:

1) The new money created must be different from the money from which it borrowed so it can still belong to its original depositor. By taking this view unilaterally, we conclude: money can only be that loan itself.

2) The new money created must be identical to the money from which it borrowed so it can remain a loan from that original money. By taking this view unilaterally, we conclude: money cannot be that loan itself.

Although both views have a legitimate motivation, they are both wrong:

1) Money can be an IOU as the continuous expansion of our money supply as a debt overwhelmingly shows. The resulting debt-money supply is as much real as the resulting monetary crisis.

2) Money must not be and in itself is not an IOU, as this example shows:

If I have an ounce of gold and a pair of shoes worth two ounces of gold and you have two ounces of gold and a knife worth an ounce of gold, I can give you my pair of shoes while you give me an ounce of gold and your knife. In the end, we still own three ounces of gold each, both in monetary (golden) and commodity form, and nobody owes anybody anything.

I propose an explanation of how can money be an IOU without being in itself an IOU at http://omniequivalence.com/fractional-reserve-banking/.

[Puppet]

If I have an ounce of gold and a pair of shoes worth two ounces of gold and you have two ounces of gold and a knife worth an ounce of gold, I can give you my pair of shoes while you give me an ounce of gold and your knife. In the end, we still own three ounces of gold each, both in monetary (golden) and commodity form, and nobody owes anybody anything.

Your example makes no sense,  all that happens is that goods, gold or IOUs are traded. Its not because I trade one debt claim against another or one debt claim against some gold, that it stops being a debt claim.  Our fiat money is created as a debt, and therefore remains the representation of someone's debt  no matter how often it changes hands, no matter what its traded against, until the debt is repaid and the money destroyed.

[mirelo]

Your example makes no sense, [...]

Why would that be? Why would it make no sense to trade a pair of shoes for a knife and make up for the difference in price with a gram of gold?

[...]  all that happens is that goods, gold or IOUs are traded.

Not in my example, in which we exchange only a pair of shoes, a knife, and a gram of gold.

Its not because I trade one debt claim against another or one debt claim against some gold, that it stops being a debt claim.

Are you saying my pair of shoes is a debt claim? Or perhaps it is the knife?

Our fiat money is created as a debt, and therefore remains the representation of someone's debt  no matter how often it changes hands, no matter what its traded against, until the debt is repaid and the money destroyed.

Absolutely correct, provided you are talking about money as created by commercial or central banks, and not about money in general.

[Puppet]

Absolutely correct, provided you are talking about money as created by commercial or central banks, and not about money in general.

What other fiat money is there, besides money created by commercial or central banks?

[mirelo]

Absolutely correct, provided you are talking about money as created by commercial or central banks, and not about money in general.

What other fiat money is there, besides money created by commercial or central banks?

To find money not created by banks you just have to:

1) Remember that banks have not always existed and that money was once gold and silver (not to mention salt, cattle, etc).

2) Notice the forum you are in, which is about Bitcoin, a form of money created by a peer-to-peer network, rather than by banks.

No that difficult, is it?

[Puppet]

To find money not created by banks you just have to:

1) Remember that banks have not always existed and that money was once gold and silver (not to mention salt, cattle, etc).

2) Notice the forum you are in, which is about Bitcoin, a form of money created by a peer-to-peer network, rather than by banks.

No that difficult, is it?

No one ever mentioned bitcoin being debt based, thats just a daft argument. And those old notes and gold coins are no longer fiat money. Fact is 100% of our fiat money is now an IOU.

[mirelo]

To find money not created by banks you just have to:

1) Remember that banks have not always existed and that money was once gold and silver (not to mention salt, cattle, etc).

2) Notice the forum you are in, which is about Bitcoin, a form of money created by a peer-to-peer network, rather than by banks.

No that difficult, is it?

No one ever mentioned bitcoin being debt based, thats just a daft argument. And those old notes and gold coins are no longer fiat money. Fact is 100% of our fiat money is now an IOU.

You are a bit confused: I gave you Bitcoin as an example precisely of money that is not debt since you asked me for such an example. Yet even if I didn't, you have just conceded that money can be something other than debt, which is good enough.

[mirelo]

OK. This question has intrigued me too. As when I first learned about bitcoin I just assumed that FRB would work. The problem for me now is I just can't see any money-multiplier effect possible.

In FRB 90% of a deposit from person X at Bank A can become a loan to person Y at bank A.
Person Y can then deposit his borrowed money at Bank B. So there are now two deposit accounts with the "same" fiat money. With bitcoin, when a loan is made to person Y the bitcoins follow him to Bank B. Bank A no longer has the bitcoins.

Now you might say that Bank A can pretend to still have the bitcoins just as it would "pretend" to still have the fiat in the form a loan account in a fiat system.

The reason why fractional-reserve banking works is not because commercial banks "pretend" still to have the money they already loaned. It works because the representation of that money by different bank accounts remains mistaken for the same deposit money, which hence replicates itself among its different representations by those different bank accounts (or notes, checks, etc), in what I call a representational monetary identity.

Bitcoin prevents that by inherently distinguishing money (a private key) from its representation (a public key).

However, the latter case works as the FRB system is backed by central banks who can print fiat to supply to Bank A if depositor X wants his money back while the loan to person Y is still outstanding.

Fractional-reserve banking predates central banking: it is not necessarily "backed by central banks," although with central banks it will take longer to collapse.

In a bitcoin system the central bank would not be able to print bitcoin and would have to source it, from tax revenues perhaps. This is the inflexible part of the BTC monetary base.

A central bank that does not create money as a public debt is not a central bank.

[kwilliams]

This is of course not possible.  You are looking at a legalized accounting trick allowing the same thing to be counted as asset and liability at the same time. You bring $100 to the bank – it’s an asset to you and liability to the bank. Bank loans it out – now it’s an asset to the bank and a liability to the borrower. The grand total in circulation had not changed (still $100) but there are now $200 of assets and $200 of liabilities. The bank then proceeds to collect interest from the borrower while maintain the appearance of having your $100 at hand.  Some non-Christian type earns a bonus.

When economy goes wrong (every 5-7 years) the Bank cries foul, gets money from Government (your taxes) AND forecloses on borrower. The Bank is again whole, you lost your taxes, the borrower lost their property, more money was printed and the same non-Muslim type gets rich.

Rinse & repeat. In this process the “money” is nothing but a unit of account, used to quantify how much property can be squeezed from the hapless borrower and what percentage of your productive output (GDP) the bank can claim during bailout. The notion that money is “yours” is but a fiction. In fact the money has been assigned to you to quantify your temporary usefulness during property seizures / bailout negotiations. ("Look, we are too big to fail, there's XXX billion $ deposited in our bank ..."). If the bank believes it can squeeze more from you at a later date – you get more money (credit) and "get richer". When that perception changes – bang – you’re broke. How much you get or is taken from you depends on the "depth of the business cycle"

Last but not least, you can’t comprehend things because the language has been deliberately drained from meaning. It helps a great deal to confuse things. When you cant talk straight - you cant think straight. It's not obvious how wars get started by Department of Defense, schools are closed by Department of Education and oil & gas exploration is banned by Department of Energy. And yes the business cycle has nothing to do with your business. Things would be much clearer if it was named: "the banking cycle".

You do understand that wealth is a claim on labor? The so called "assets" - your car, house, ranch or factory are worthless unless there are people willing to toil on them. Therefore it's impossible for the majority to be wealthy - wealth is a minority thing - not for the average Hindu.

[mirelo]

When you cant talk straight - you cant think straight.

So let us talk straight:

1) If money cannot be a liability, then it cannot be an asset: my bank money can only be an asset to me by becoming a liability to the bank, and it can only be an asset to the bank by becoming a liability to borrowers. This is no "accounting trick": money can only be an asset if mistaken by a liability, as which alone banks can duplicate it in the borrower's account - the original form of this mistake is what I call representational monetary identity (http://omniequivalence.com/representational-monetary-identity/).

2) Wealth is not a claim on labor, despite having a monetary value and being a product of labor. Instead, money (not wealth) is a claim on wealth (not on labor). Wealth is in itself neither money nor labor: it is rather all things we produce because of their utility, without which they could have no monetary value (a piece of wealth taken in its monetary value is, precisely, an asset). The true meaning of "assets" is the one you put between quotes:

The so called "assets" - your car, house, ranch or factory are worthless unless there are people willing to toil on them.

While its false meaning is the one you leave unquoted:

You bring $100 to the bank – it’s an asset to you and liability to the bank. Bank loans it out – now it’s an asset to the bank and a liability to the borrower.

Instead of denouncing banks, you are just buying into the very confusion that allows them to make money: the mistaking of money for wealth (for assets).