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Author Topic: Growth, Interest and Wage Inequality - To the austrian economists here  (Read 5310 times)
Rassah
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July 18, 2011, 06:15:25 PM
 #41

Is not immoral to charge interest on money lending, is just the way money works as it is today.
But money is not a product, is more like a contract between all its users. And that contract can be flawed and lead to undesirable effects.

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Money is artificially scarce and is the only capital whose yields cannot drop to zero by competition. Ironically is also the only capital that doesn't produce anything of value.

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The difference is that profits disappear by competition and capital yields are artificially maintained "high" by the current design of money.

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Simply by competing "dishonestly" with other capitals. The accumulation of every type of capital stops when that type of capital yields less than money itself (which as said doesn't produce any good or service on its own).

Pretty much everything you said there is equally applicable to any kind of scarce resource, like oil, steel, or gold. They are all:
  • traded on contracts
  • are all scarce
  • all "don't produce anything of value" (they can be used as ingredients in production, but are not productions of value in themselves)
  • Their yields can not drop to zero by competition (way more demand than supply)
  • All have the potential stop accumulation of other types of capital when opportunities to invest in these commodities exists

And like money, many of these commodities can last almost for ever, too.

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July 18, 2011, 07:07:40 PM
 #42

Pretty much everything you said there is equally applicable to any kind of scarce resource, like oil, steel, or gold. They are all:
  • Their yields can not drop to zero by competition (way more demand than supply)
  • traded on contracts
  • are all scarce
  • all "don't produce anything of value" (they can be used as ingredients in production, but are not productions of value in themselves)
  • All have the potential stop accumulation of other types of capital when opportunities to invest in these commodities exists

And like money, many of these commodities can last almost for ever, too.

You've mentioned very different commodities. Gold is still money, so you can lend it at interest too.
Oil contains energy, which is not a form of capital but an spendable resource.
I'm not sure is very accurate to say that commodities have yield, but let's concentrate in steel as a form of capital.
For example, when you have a machine made of steel, you could say that is real capital that you will recycle later.
In that case, the reason why its yield cannot drop below the liquidity premium is again because of its competition against money.
If the "yield" you're talking about is the one produced by its changes in price, I would say it's not yield but profit, and drop to zero when an equilibrium is reached.

It doesn't matter that they're traded on contracts and they're scarce because of nature, not because their users have decided so.

They produce things of value when used as capital: a steel made robot arm produces, for example, cars.

They have the potential to stop capital accumulation. But the hoarders think that they will be more valuable in the future, they're putting an incentive on recycling and mining in some sense.
Investors in commodities are providing a service of arbitrage.
Being scarce, natural resources limit us naturally and not artificially.
In a free monetary market, the money users accept the properties of the money, and new moneys can be created to correct their deficiencies. Money can be made of paper and bits without the intervention of a state.

Good for us that they can last forever, that will allow us to mine the dumps in the future.
But is not good for us that most moneys last forever and at the same time are scarce because that's what produces the liquidity premium.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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July 18, 2011, 07:50:02 PM
 #43

Is not immoral to charge interest on money lending, is just the way money works as it is today.
But money is not a product, is more like a contract between all its users. And that contract can be flawed and lead to undesirable effects.

Money is a product because it produces a service. Just like a bus ticket allows me to take the bus, money allows me to trade with other people. Money is just a product. The fact that the product raises from social interaction as a kind of implied contract or agreement does not change the fact that money is a product.

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Exactly. And the same could happen with happen with capital yields. Only when some lack of a certain capital good is in place can that capital produce yield.
If the demand for that capital was fully satisfied, the capital yield would tend to zero.
By competition between the capitals of the same type, the yield would drop to zero, but capital not only has to compete with the capitals of its same type, but with all the capital.

No exactly with all the rest, but yeah, there are level of substitution.

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Money is artificially scarce

Depends on the system. If you mean in the present monetary system, no, money is not artificially scarce (except in some puntual moments), the problem is the distribution and management.

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and is the only capital whose yields cannot drop to zero by competition.

Well, the Fed has the federal fund rate at 0 right now... The thing is that the yields of nothing never get to 0. Its a tendency.

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Ironically is also the only capital that doesn't produce anything of value.

See, this is where you have it wrong. Money produces a service of very important value. It allows people to trade (avoiding barter). This is an incredible service that I think you take for granted, but without it developed human civilizations could not exist.

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Freicoin would start with no value at all, just like bitcoin did. I don't believe you can expect inflation from there.
You believe that no one would accept it, but if some people did; How would it produce poverty?
Why demurrage is not producing poverty in the communities that operate with it?

I was assuming that a working currency changes to Freicoin system. If it has to start from zero, I dont think it would be widely adopted, maybe only by ideology. And in case it was adopted by ideology competition would end up taking over.

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Ehm...It's a system that monetizes mostly debt, but everyone can do it to the extend their partners trust them, not only banks. I hope I can contribute with the implementation soon.

Maybe I have the system wrong, but monetizes a service or a product. If I give you a product, now I have credit with you at Ripple. Now I can use that credit with someone that thinks you are trustworthy. Well, yeah, you are monetizing the debt. Its still fine. There is nothing wrong on trading the debts.

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Fair enough, but there's examples of free money operating right now, look at how many times "Liquidity Tax", "Circulation Incentive", "Demurrage" or "circulation-protection fee" appears in this list.

Youll have to be more specific. The list is huge.

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You're judging freicoin without having even started so I guess that we can.

See above.

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The difference is that profits disappear by competition and capital yields are artificially maintained "high" by the current design of money.

Actually no. The interest are not mantained artificially high. The problem in the present system is the way money is distributed and managed. Again, the Fed has the fed fund rate at 0%.

Quote
Simply by competing "dishonestly" with other capitals. The accumulation of every type of capital stops when that type of capital yields less than money itself (which as said doesn't produce any good or service on its own).

I think you are getting it upside down. Money produces a yield because there are people willing to borrow it. If nobody borrows money does not produce interest.

Now if there are no real world projects that are profitable at a certain interest rate, nobody will borrow. Therefore money will yield absolutely nothing. What savers will do (through the financial system) is lower interest rates until they find someone willing to borrow, meaning that the yield of capital will be higher than the interest of money. Does that makes sense?
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July 19, 2011, 11:26:52 AM
 #44

Is not immoral to charge interest on money lending, is just the way money works as it is today.
But money is not a product, is more like a contract between all its users. And that contract can be flawed and lead to undesirable effects.

Money is a product because it produces a service. Just like a bus ticket allows me to take the bus, money allows me to trade with other people. Money is just a product. The fact that the product raises from social interaction as a kind of implied contract or agreement does not change the fact that money is a product.

Ok, let it be a product then. But the bus company produces the tickets, its value (by giving a service) and takes the profits from selling it.
Money, on the other hand can be produced by nature (gold), by a state (national currencies) or by a free software program (bitcoin). Is the whole community of users who "produces" the value of money (by offering goods and services in exchange) but only the money owner takes the profits from it.
Money provides the service of finding a path (of value transfers) between the buyer and the seller. By by the implied contract of accepting money, all its users can be directly connected.
Money, as you said, serves as a substitute for direct barter. But the capitalist doesn't produce anything of value by lending money, he just gets the yield of a capital "produced" by the society as a whole.
Well, that's not very accurate. The banker provides a services and must charge to, at least cover his costs of operation. This includes the risk premium, that can be reduced with collateral.
But lenders take the liquidity premium without providing any service to society. The money holder has the power to enable commerce and he will exploit this advantage in his favor.
The mistake was for the society to tell the money holder when he received it: "You have a certificate that the society as a whole owes you something. You can redeem it for whatever you want and whenever you want. Now you have the ability (at zero cost) to impede the ability of others to give something of value to society through this mechanism. You can exploit this necessity of others members. Now you can charge the liquidity premium".
A capitalist with enough funds can live his whole live (no matter if there's growth or depression) without providing any service to society and still have his fund untouched.
He can't do it because is his right, but because we allow him to do it, we give him that power through the way we've designed money. We got to take this power back.

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Exactly. And the same could happen with happen with capital yields. Only when some lack of a certain capital good is in place can that capital produce yield.
If the demand for that capital was fully satisfied, the capital yield would tend to zero.
By competition between the capitals of the same type, the yield would drop to zero, but capital not only has to compete with the capitals of its same type, but with all the capital.

No exactly with all the rest, but yeah, there are level of substitution.

So do you agree that the capital yield not being zero is a prove that the demand of that type of capital is not fully satisfied?

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Money is artificially scarce

Depends on the system. If you mean in the present monetary system, no, money is not artificially scarce (except in some puntual moments), the problem is the distribution and management.

By scarce I mean that it cannot be produced on demand by anyone who needs it. Although Bernanke makes that USD look abundant, they're still scarce in that sense.
I mean scarcity as opposed of the abundance of mutual credit systems like LETS or Ripple. So that scarcity is not solved through monetary inflation.

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and is the only capital whose yields cannot drop to zero by competition.

Well, the Fed has the federal fund rate at 0 right now... The thing is that the yields of nothing never get to 0. Its a tendency.

The Fed can lend at zero by increasing the money supply. Normally you would be a fool if you don't charge the liquidity premium when lending the money you own. But they don't own it, they just create it.
But the real saver asks for his liquidity premium. These measures distort the financial market destroying partially the information that you were talking about earlier, but don't end with the liquidity premium.
They lead to more catastrophic effects than the basic interest itself (which they don't eliminate because they cheat the financial market without completely destroying it).

Quote
Ironically is also the only capital that doesn't produce anything of value.

See, this is where you have it wrong. Money produces a service of very important value. It allows people to trade (avoiding barter). This is an incredible service that I think you take for granted, but without it developed human civilizations could not exist.

I know. There's no (meaningful) division of labor without money. But, like with intellectual property, I don't think that someone has to specially profit from this invention. Math is also an "incredible service" but I can create all the numbers I want in my notebook while I cannot create money.
I need society for my money to have value, but the concept of money is not scarce.

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Freicoin would start with no value at all, just like bitcoin did. I don't believe you can expect inflation from there.
You believe that no one would accept it, but if some people did; How would it produce poverty?
Why demurrage is not producing poverty in the communities that operate with it?

I was assuming that a working currency changes to Freicoin system. If it has to start from zero, I dont think it would be widely adopted, maybe only by ideology. And in case it was adopted by ideology competition would end up taking over.

I have heard that no one would accept a currency with demurrage many times in the forum. I guess I can't do anything but to provide examples of working systems with demurrage for that.
Then we just can try it and see what happens. I just don't want to start freicoin while I'm the only one in the world that believes in the block chain and demurrage at the same time.
Anyway I'm more concerned with the belief that it would have a negative impact to the economy like creating poverty.

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Ehm...It's a system that monetizes mostly debt, but everyone can do it to the extend their partners trust them, not only banks. I hope I can contribute with the implementation soon.

Maybe I have the system wrong, but monetizes a service or a product. If I give you a product, now I have credit with you at Ripple. Now I can use that credit with someone that thinks you are trustworthy. Well, yeah, you are monetizing the debt. Its still fine. There is nothing wrong on trading the debts.

Cool. I think Ripple can eliminate the liquidity premium too.
I have heard that Ripple would create inflation and though you may think the same. It doesn't make much sense to me because ripple IOUs can be denominated in anything, including "the dollar in 1920" (calculating inflation), and reference currencies similar to terra.

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Fair enough, but there's examples of free money operating right now, look at how many times "Liquidity Tax", "Circulation Incentive", "Demurrage" or "circulation-protection fee" appears in this list.

Youll have to be more specific. The list is huge.

There's many example of such currencies in the list. I can't tell how many because the list is huge. In the "Cost-Recovery Mechanism" they have descriptions like the ones I told you.

http://www.chiemgauer.info/
http://augusta-regional.de/
http://www.regiogeld.de/
http://www.dreyecker.de/

They're mostly in Germany and, as far as I know, are all local complementary currencies.

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The difference is that profits disappear by competition and capital yields are artificially maintained "high" by the current design of money.

Actually no. The interest are not mantained artificially high. The problem in the present system is the way money is distributed and managed. Again, the Fed has the fed fund rate at 0%.

Well, you can think in the old gold system if you prefer it. I still think that Bernanke's actions don't eliminate the liquidity premium and create other problems.
I agree. A problem in the present system is the way money is distributed and managed.

Quote
Simply by competing "dishonestly" with other capitals. The accumulation of every type of capital stops when that type of capital yields less than money itself (which as said doesn't produce any good or service on its own).

I think you are getting it upside down. Money produces a yield because there are people willing to borrow it. If nobody borrows money does not produce interest.

Now if there are no real world projects that are profitable at a certain interest rate, nobody will borrow. Therefore money will yield absolutely nothing. What savers will do (through the financial system) is lower interest rates until they find someone willing to borrow, meaning that the yield of capital will be higher than the interest of money. Does that makes sense?

That makes perfect sense.
The problem is that we can't reach the point where nobody borrows because there's no capital to invest in. Before reaching that point we reach the point where nobody lends, because holders can make more profit from their liquidity than what they could get from borrowers.
That point, even with no growth, is well above 0% (2%, 3%?).

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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July 19, 2011, 02:44:33 PM
 #45

But lenders take the liquidity premium without providing any service to society.

The money holder has the power to enable commerce...

So, which is it? Money holders/lenders don't provide any service, or money holders/lenders enable commerce?

You are also apparently focusing in on the "liquidity premium" as the main evil of interest. Is liquidity, aka easy access to capital, a useless/worthless service?

The problem is that we can't reach the point where nobody borrows because there's no capital to invest in. Before reaching that point we reach the point where nobody lends, because holders can make more profit from their liquidity than what they could get from borrowers.

How can you make a profit on liquidity without lending???

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July 19, 2011, 04:31:41 PM
 #46

But lenders take the liquidity premium without providing any service to society.

The money holder has the power to enable commerce...

So, which is it? Money holders/lenders don't provide any service, or money holders/lenders enable commerce?

Money provides the service, lenders take the profit. Also they enable other "capitalists" to take it too.
Since money impedes the yield of other capitals to drop below the liquidity premium you don't have to be a lender to enjoy the privilege of profit without contributing.

You are also apparently focusing in on the "liquidity premium" as the main evil of interest. Is liquidity, aka easy access to capital, a useless/worthless service?

I focus on it because I don't want to attack the risk premium.
No, liquidity is so important that influences all the economy and capital accumulation.

The problem is that we can't reach the point where nobody borrows because there's no capital to invest in. Before reaching that point we reach the point where nobody lends, because holders can make more profit from their liquidity than what they could get from borrowers.

How can you make a profit on liquidity without lending???

Very good question.
The easy answer (just like the borrowers would do it) doesn't apply here, because we're supposing that we're in a recession environment in which no borrower can make any investment that yields more than the liquidity premium in any sector of the economy. A very extreme scenario, by the way, I bet impossible within capitalism.
That's what merchants do. They make profit on liquidity through the wares. If they're borrowers, they pay it to their lender.

Probably it would be simpler if you quote the sentences that you consider false in Gesell's book directly.
That chapter is not long and talks precisely about what we're talking here right now.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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July 19, 2011, 04:51:57 PM
 #47

But lenders take the liquidity premium without providing any service to society.

The money holder has the power to enable commerce...

So, which is it? Money holders/lenders don't provide any service, or money holders/lenders enable commerce?

Money provides the service, lenders take the profit. Also they enable other "capitalists" to take it too.

Is that like "rental car provides the service, rental car agency that maintains the fleet or cars take the profit?"

You are also apparently focusing in on the "liquidity premium" as the main evil of interest. Is liquidity, aka easy access to capital, a useless/worthless service?

I focus on it because I don't want to attack the risk premium.
No, liquidity is so important that influences all the economy and capital accumulation.

But, without liquidity, economic activity would grind to a slow pace, since everyone who needs capital for whatever purpose will have to wait a long time until their request for such is fulfilled (like putting a buy price at MtGox, and waiting for hours until your order is filled, if it ever does)

How can you make a profit on liquidity without lending???

Very good question.
The easy answer (just like the borrowers would do it) doesn't apply here, because we're supposing that we're in a recession environment in which no borrower can make any investment that yields more than the liquidity premium in any sector of the economy. A very extreme scenario, by the way, I bet impossible within capitalism.
That's what merchants do. They make profit on liquidity through the wares. If they're borrowers, they pay it to their lender.
[/quote]

Using exact definitions of the words, a "liquidity premium" is basically what the money holder can get on a spread in a currency market. If no one is borrowing/buying money (no trading of currency), the spread will be irrelevant, and thus might as well be 0. What's your definition of this liquidity premium? I think mis-communication as to what you mean by that is what may be causing problems in this discussion.
By the way, I've come to the conclusion that Gesell is a TERRIBLE writer, since the book tends to have a lot of words with little explanation regarding the assumptions behind them. What is YOUR definition and explanation of it?

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July 20, 2011, 07:03:03 AM
 #48

But lenders take the liquidity premium without providing any service to society.

The money holder has the power to enable commerce...

So, which is it? Money holders/lenders don't provide any service, or money holders/lenders enable commerce?

Money provides the service, lenders take the profit. Also they enable other "capitalists" to take it too.

Is that like "rental car provides the service, rental car agency that maintains the fleet or cars take the profit?"

No. The rental car agency has produced or bought the car. The money owner has bought the money, but nobody (but the state?) can produce the money on its own.
Even if the state produces it, we could still reject it.
If you're thinking about gold-money, you can mine gold, but you need the whole society to treat it as money.  

You are also apparently focusing in on the "liquidity premium" as the main evil of interest. Is liquidity, aka easy access to capital, a useless/worthless service?

I focus on it because I don't want to attack the risk premium.
No, liquidity is so important that influences all the economy and capital accumulation.

But, without liquidity, economic activity would grind to a slow pace, since everyone who needs capital for whatever purpose will have to wait a long time until their request for such is fulfilled (like putting a buy price at MtGox, and waiting for hours until your order is filled, if it ever does)

Yes. Liquidity is very important, that's what I said. With free money you still have liquidity, but nobody profits from it.

How can you make a profit on liquidity without lending???

Very good question.
The easy answer (just like the borrowers would do it) doesn't apply here, because we're supposing that we're in a recession environment in which no borrower can make any investment that yields more than the liquidity premium in any sector of the economy. A very extreme scenario, by the way, I bet impossible within capitalism.
That's what merchants do. They make profit on liquidity through the wares. If they're borrowers, they pay it to their lender.

Using exact definitions of the words, a "liquidity premium" is basically what the money holder can get on a spread in a currency market. If no one is borrowing/buying money (no trading of currency), the spread will be irrelevant, and thus might as well be 0. What's your definition of this liquidity premium? I think mis-communication as to what you mean by that is what may be causing problems in this discussion.
[...]
What is YOUR definition and explanation of it?

Is it important that is my definition or Gesell's ?
Liquidity premium = basic interest:
1) A component of the gross interest, when you subtract the inflation and risk premiums.
2) The mother of all capital yields. The yield of money.
3) What merchants can take from the wares.
4) What workers have to sacrifice to exchange their products for what they need/want.

By the way, I've come to the conclusion that Gesell is a TERRIBLE writer, since the book tends to have a lot of words with little explanation regarding the assumptions behind them.

Well, that chapter is almost at the end of the book. He assumes that you have read the previous parts.
Mathematicians and philosophers do it too. First define concepts and then make more complex propositions based on those concepts.
I find his style pretty clear though.
You could read the whole book but you don't have to: you can ask me whatever you don't understand and I'll try to explain it to you.
You haven't quoted any false sentence from the chapter. Do you agree with everything?

By the way, you don't even have to read the first two parts on land to understand free money. In the Spanish translation, the first two parts were at the end, and I didn't noticed that until I saw the English translation.    

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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July 20, 2011, 02:42:45 PM
 #49

Is that like "rental car provides the service, rental car agency that maintains the fleet or cars take the profit?"

No. The rental car agency has produced or bought the car. The money owner has bought the money, but nobody (but the state?) can produce the money on its own.
Even if the state produces it, we could still reject it.
If you're thinking about gold-money, you can mine gold, but you need the whole society to treat it as money.  

But why does it matter who printed the money, if it's just a tool of exchange for work I produce, and I am the one who decides how to use it and what interest to charge on lending it?

Yes. Liquidity is very important, that's what I said. With free money you still have liquidity, but nobody profits from it.

Every time you say "free money" it makes me cringe. You mean specifically "free to borrow" money, right? I still don't know how that could work, since those who have will always charge rent to whose who don't...

What is YOUR definition and explanation of it?

Is it important that is my definition or Gesell's ?
Liquidity premium = basic interest:
1) A component of the gross interest, when you subtract the inflation and risk premiums.
2) The mother of all capital yields. The yield of money.
3) What merchants can take from the wares.
4) What workers have to sacrifice to exchange their products for what they need/want.


And this is the part that I just don't get. Money itself yields nothing, unless it's put to work producing goods or services. Merchants take what they feel they deserve for providing services such as manufacture, storage, and transportation. Workers only sacrifice if they buy on credit, and only what their banks believe is their risk premium. If you take the gross interest, and subtract assumed inflation rate and the risk premium, the only thing left would be profit, which in our vastly large, liquid, and competitive currency market, is pretty much 0. That's profit on just currency lending alone. But most profit comes from either sale of services or goods. Paper itself doesn't give a profit other than through someone else's work, and that someone else is free to chose where they get their paper in an extremely competitive and saturated market. So I just can't wrap my head around this claim. Where is this hidden, and seemingly impossible, profit coming from? Is it a relic of when banks were few, information wasn't easily exchanged, and banks could get away with charging you way more for the loan than your risk called for?

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July 20, 2011, 04:00:33 PM
 #50

Is that like "rental car provides the service, rental car agency that maintains the fleet or cars take the profit?"

No. The rental car agency has produced or bought the car. The money owner has bought the money, but nobody (but the state?) can produce the money on its own.
Even if the state produces it, we could still reject it.
If you're thinking about gold-money, you can mine gold, but you need the whole society to treat it as money.  

But why does it matter who printed the money, if it's just a tool of exchange for work I produce, and I am the one who decides how to use it and what interest to charge on lending it?


You were arguing that the capitalist somehow deserves to profit forever from owning money, an invention he didn't made.
If you prefer, consider the whole community the owners and the money holder just a tenant. But in this case, the tenant is not charged and he rents the property for profit. 

Yes. Liquidity is very important, that's what I said. With free money you still have liquidity, but nobody profits from it.

Every time you say "free money" it makes me cringe. You mean specifically "free to borrow" money, right? I still don't know how that could work, since those who have will always charge rent to whose who don't...

No, is free as in freedom (freigeld in german). It may or may not be free to borrow. I didn't invent the term nor made the translation to English.
But I think he means free for trade:
"If the mediator of exchange, the capitalist, is deprived of the power of interrupting the exchange of wares for the purpose of exacting basic interest - as is achieved by Free-Money - money must give its services free of cost and the wares can be exchanged as in barter, without the payment of interest."
I guess he would consider Ripple and LETS free money too.

What is YOUR definition and explanation of it?

Is it important that is my definition or Gesell's ?
Liquidity premium = basic interest:
1) A component of the gross interest, when you subtract the inflation and risk premiums.
2) The mother of all capital yields. The yield of money.
3) What merchants can take from the wares.
4) What workers have to sacrifice to exchange their products for what they need/want.


And this is the part that I just don't get. Money itself yields nothing, unless it's put to work producing goods or services. Merchants take what they feel they deserve for providing services such as manufacture, storage, and transportation.

No, merchants take their cost plus interest, just because they can.
As proof, merchants that borrow the money they need can pay the interest to their lender and still compete with merchants who own their own money.
"If a commodity is to be burdened with basic interest it must of course be capable of bearing this burden, that is, it must meet with market conditions permitting the payment of its cost price, plus basic interest, out of its selling price"

Workers only sacrifice if they buy on credit, and only what their banks believe is their risk premium. Workers only sacrifice if they buy on credit, and only what their banks believe is their risk premium.

No. The basic interest is discounted from their wages.
From the same short text:
"Wares collect basic interest from the consumer, not for the producer but for the possessor of money (medium of exchange), somewhat as a postman collects the price of a cash-on-delivery parcel."

If you take the gross interest, and subtract assumed inflation rate and the risk premium, the only thing left would be profit, which in our vastly large, liquid, and competitive currency market, is pretty much 0. That's profit on just currency lending alone. But most profit comes from either sale of services or goods. Paper itself doesn't give a profit other than through someone else's work, and that someone else is free to chose where they get their paper in an extremely competitive and saturated market. So I just can't wrap my head around this claim. Where is this hidden, and seemingly impossible, profit coming from? Is it a relic of when banks were few, information wasn't easily exchanged, and banks could get away with charging you way more for the loan than your risk called for?

So the liquidity premium/basic interest doesn't exist? It's only profit that tends to zero by competition, inflation and risk premiums for money?
Do you at least agree that it would cause (if it existed) the undesirable effects I'm describing?

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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July 21, 2011, 01:32:54 PM
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My point is that with money interest will never go to zero.

If the demand for that capital was fully satisfied, the capital yield would tend to zero.

Quote
Simply by competing "dishonestly" with other capitals. The accumulation of every type of capital stops when that type of capital yields less than money itself (which as said doesn't produce any good or service on its own).

I think you are getting it upside down. Money produces a yield because there are people willing to borrow it. If nobody borrows money does not produce interest.

Now if there are no real world projects that are profitable at a certain interest rate, nobody will borrow. Therefore money will yield absolutely nothing. What savers will do (through the financial system) is lower interest rates until they find someone willing to borrow, meaning that the yield of capital will be higher than the interest of money. Does that makes sense?

That makes perfect sense.
The problem is that we can't reach the point where nobody borrows because there's no capital to invest in. Before reaching that point we reach the point where nobody lends, because holders can make more profit from their liquidity than what they could get from borrowers.
That point, even with no growth, is well above 0% (2%, 3%?).


Combining the three statements, you say:

capital yield > interest > capital yield > 0
Which can't be.


If you take the gross interest, and subtract assumed inflation rate and the risk premium, the only thing left would be profit, which in our vastly large, liquid, and competitive currency market, is pretty much 0. That's profit on just currency lending alone. But most profit comes from either sale of services or goods. Paper itself doesn't give a profit other than through someone else's work, and that someone else is free to chose where they get their paper in an extremely competitive and saturated market. So I just can't wrap my head around this claim. Where is this hidden, and seemingly impossible, profit coming from? Is it a relic of when banks were few, information wasn't easily exchanged, and banks could get away with charging you way more for the loan than your risk called for?

So the liquidity premium/basic interest doesn't exist? It's only profit that tends to zero by competition, inflation and risk premiums for money?
Do you at least agree that it would cause (if it existed) the undesirable effects I'm describing?


I pretty much agree with the gross interest consisting of risk premium and profit. The aggregate profit I would call growth of economy. If there is nothing to grow (Japan by the way is a great example, as mentioned here before!), profits of all firms tend to zero (a few may last a bit longer and grow faster and quickly reach the equilibirum). So one could assume, the interest still consists of the risk premium. This is theoretically correct, but if there are no borrowers, there is also no risk premium. Also it becomes almost inifitely easy to pay back loans, since interest tends to zero. So both components of interest tend to zero. Imagine a market where nobody wants any money! There can neither be interest nor can there be use for the money-owners.
One could loosen the assumptions here and say "in reality, it never reaches zero", because of several reasons:
-there is always some rate of technological development
-there is always someone who needs money because he did miscalculation within his budget
-there is always someone who thinks he can make money from investment even if he can't

Nevertheless, the implications of my theory remain valid: Higher growth rates lead to higher wage gap, higher wealth gap and to a higher worth of money and education.
Japan actually is a really nice example because some "numbers" of japan appear at the top of some ranking, e.g. Japan in the 90's was the second most equal contry of the world (only highly redistributing denmark had a lower gini coefficient).
japan has the highest government debt in the world. this might have different reasons, but the reason the debt remains is, that due to low interest its somehow irrelevant.
japan has the worlds highest wealth per capita (200.000$). Fits in my theory. Wealth isnt s valueable within a low interest framework, so you need more to provide for the future AND that high wealth did not lead to higher gap in income as one could assume in a high interest environment.

I am lazy but somewhere you wrote something like "how can there be interest while a depression".
I am not sure if we ever had a worldwide recession at a time where we also surveyed data about interest and growth. In the latest recession there still was economic growth in the average world (I think around 4%). The only thing that makes my model somewhat unrealistic is, that large differences in interestrates are possible between countries. e.g. why doenst china suck up all the low interest money of japan and US and boost their growth a little? interestrates should then converge; again this is somewhat prohibited by customs and central bank policies. Maybe this is already happening on a larger scale as I think and it just takes its time.
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July 21, 2011, 04:23:35 PM
 #52

capital yield > interest > capital yield > 0

I didn't meant that part.

If the demand for that capital was fully satisfied, the capital yield would tend to zero.

With this I mean that the existence of capital yield for a given type of capital proves that the demand for that capital is not fully satisfied and that capital yields aren't profits, because if they were, competition would vanish them.

If you take the gross interest, and subtract assumed inflation rate and the risk premium, the only thing left would be profit, which in our vastly large, liquid, and competitive currency market, is pretty much 0. That's profit on just currency lending alone. But most profit comes from either sale of services or goods. Paper itself doesn't give a profit other than through someone else's work, and that someone else is free to chose where they get their paper in an extremely competitive and saturated market. So I just can't wrap my head around this claim. Where is this hidden, and seemingly impossible, profit coming from? Is it a relic of when banks were few, information wasn't easily exchanged, and banks could get away with charging you way more for the loan than your risk called for?

So the liquidity premium/basic interest doesn't exist? It's only profit that tends to zero by competition, inflation and risk premiums for money?
Do you at least agree that it would cause (if it existed) the undesirable effects I'm describing?


I pretty much agree with the gross interest consisting of risk premium and profit. The aggregate profit I would call growth of economy. If there is nothing to grow (Japan by the way is a great example, as mentioned here before!), profits of all firms tend to zero (a few may last a bit longer and grow faster and quickly reach the equilibirum). So one could assume, the interest still consists of the risk premium. This is theoretically correct, but if there are no borrowers, there is also no risk premium. Also it becomes almost inifitely easy to pay back loans, since interest tends to zero. So both components of interest tend to zero. Imagine a market where nobody wants any money! There can neither be interest nor can there be use for the money-owners.
One could loosen the assumptions here and say "in reality, it never reaches zero", because of several reasons:
-there is always some rate of technological development
-there is always someone who needs money because he did miscalculation within his budget
-there is always someone who thinks he can make money from investment even if he can't

Here again, if they were profits they would tend to disappear or remain only when there's growth as you claim. If it can't go to zero by competition, I would prefer to not call it profit or that we pick another word to distinguish that kind of profit (the one that tends to zero).
If the basic interest/liquidity premium/liquidity profit is equal to the average growth of the economy, Why must money profit as much as the average growth without risk?

Nevertheless, the implications of my theory remain valid: Higher growth rates lead to higher wage gap, higher wealth gap and to a higher worth of money and education.

I agree with those claims, although I would say that is necessary that the growth comes somehow from innovation.
What I don't agree with is that the interest would disappear without growth.

I am lazy but somewhere you wrote something like "how can there be interest while a depression".
I am not sure if we ever had a worldwide recession at a time where we also surveyed data about interest and growth. In the latest recession there still was economic growth in the average world (I think around 4%). The only thing that makes my model somewhat unrealistic is, that large differences in interestrates are possible between countries. e.g. why doenst china suck up all the low interest money of japan and US and boost their growth a little? interestrates should then converge; again this is somewhat prohibited by customs and central bank policies. Maybe this is already happening on a larger scale as I think and it just takes its time.

Yes. Somewhere I said something like "That basic interest exists within depressions proves that doesn't need growth to be there".
Correct me if I'm wrong.
Is your argument that we've never had a global depression and that the interest only came from the growth in other countries?

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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July 21, 2011, 06:41:08 PM
 #53

Why must money profit as much as the average growth without risk?

This! ^^^  That right there is the part that keeps making me go "What?Huh" What do you mean by "money making profit?" Money by itself doesn't make profit, and money lent makes profit that is equal to interest based on the borrowers risk rate and the supply of available money to be lent. Is the second part, the supply of available money, the part you are calling "money profit" that you are against?

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July 21, 2011, 08:11:58 PM
 #54

Why must money profit as much as the average growth without risk?

This! ^^^  That right there is the part that keeps making me go "What?Huh" What do you mean by "money making profit?" Money by itself doesn't make profit, and money lent makes profit that is equal to interest based on the borrowers risk rate and the supply of available money to be lent. Is the second part, the supply of available money, the part you are calling "money profit" that you are against?

Money can take the basic interest from the wares. If the wares don't pay the interest, they aren't sold. And the wares lower its price until they're sold, that's their nature.
The supply of money is scarce (or that money concrete money dies by hyperinflation) and no sector has produced it (forget our current regulated financial system): the whole community has given it the value.
Money takes profit because its scarce and it (unlike wares and the time of workers) last forever at no cost.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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July 21, 2011, 09:12:05 PM
 #55

Money can take the basic interest from the wares. If the wares don't pay the interest, they aren't sold. And the wares lower its price until they're sold, that's their nature.

I'm stuck in the mindset that if wares don't cover fixed and variable costs (costs of producing the wares), they aren't sold. If they do, they are sold even if profit is $0, simply because wares produce a benefit by their existence/use value. Interest doesn't come into this at all...

The supply of money is scarce (or that money concrete money dies by hyperinflation) and no sector has produced it (forget our current regulated financial system): the whole community has given it the value.
Money takes profit because its scarce and it (unlike wares and the time of workers) last forever at no cost.

So, essentially, a representation of a good or a representation of someone's time/work can be stored in a medium that lasts for ever at no cost. I think I'm getting this part, but where is the profit coming from? The difference between the retained value of money, and the decreased value of the expiring good it used to represent?

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July 21, 2011, 11:10:00 PM
 #56

Money can take the basic interest from the wares. If the wares don't pay the interest, they aren't sold. And the wares lower its price until they're sold, that's their nature.

I'm stuck in the mindset that if wares don't cover fixed and variable costs (costs of producing the wares), they aren't sold.

They aren't produced.


If they do, they are sold even if profit is $0,

Even if the selling price is below the production costs.

simply because wares produce a benefit by their existence/use value. Interest doesn't come into this at all...

Yes, they don't need profit, but they need to pay the interest to be traded within the market. You could see interest as a distribution cost.

The supply of money is scarce (or that money concrete money dies by hyperinflation) and no sector has produced it (forget our current regulated financial system): the whole community has given it the value.
Money takes profit because its scarce and it (unlike wares and the time of workers) last forever at no cost.

So, essentially, a representation of a good or a representation of someone's time/work can be stored in a medium that lasts for ever at no cost. I think I'm getting this part, but where is the profit coming from? The difference between the retained value of money, and the decreased value of the expiring good it used to represent?

Yes, but not only that, even if the wares don't expire they are something that the producer doesn't want. They must find their way to the customer and they have to pay the "highway" tax.
The selling price must include the production costs, the proportional wage of the merchant and the tribute to money for letting all this happen. If the game stops, money is the only one immune, so it can exact a profit from its privilege.
There's two solutions:

1) A negative incentive to money for not stopping the game, Gesell's proposal.    
2) Don't let money stop commerce, that is non scarce money like LETS or Ripple.

I think we should use both to have a more diverse and resilience monetary system.
Gesell only saw the first possibility, and though that government was the only one who could issue his freigeld.
Bernard Lietaer's Terra could be implemented privately and it has a demurrage that covers the storage costs.
I like Terra as a stable reference currency for contracts, but I don't like the "storage of a basket of assets" to back a currency concept.
In fact, I don't like the concept of backing a currency. Money doesn't need to be backed. The "intrinsic value" of gold is not needed.
The block chain shows us that private hands can issue "fiat" money. By fiat I mean unbacked here, "let it be" (that's what fiat means), not that is empowered by a state.
That's what I think is the best of bitcoin. Is a "fiat" money that doesn't "belong" to any state. And private currencies were usually backed before. I think there's also local currencies that are issued through charities.
I think non mutual credit (scarce) moneys should be all this way.
And I also think that between scarce moneys, wares would chose free moneys to not pay interest and be sold for less and faster. Faster, because the buyer has an incentive to think faster (or before having even sold his own wares) what he wants in exchange for (indirectly) his production.
By the way, money does not represent any particular ware/labor, it's like a wild card.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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July 21, 2011, 11:29:57 PM
 #57

Money can take the basic interest from the wares. If the wares don't pay the interest, they aren't sold. And the wares lower its price until they're sold, that's their nature.

I'm stuck in the mindset that if wares don't cover fixed and variable costs (costs of producing the wares), they aren't sold.
-----------------

If they do, they are sold even if profit is $0,

-----------------
simply because wares produce a benefit by their existence/use value. Interest doesn't come into this at all...

-----------------
The supply of money is scarce (or that money concrete money dies by hyperinflation) and no sector has produced it (forget our current regulated financial system): the whole community has given it the value.
Money takes profit because its scarce and it (unlike wares and the time of workers) last forever at no cost.

So, essentially, a representation of a good or a representation of someone's time/work can be stored in a medium that lasts for ever at no cost. I think I'm getting this part, but where is the profit coming from? The difference between the retained value of money, and the decreased value of the expiring good it used to represent?

Yes, but not only that, even if the wares don't expire they are something that the producer doesn't want. They must find their way to the customer and they have to pay the "highway" tax.
The selling price must include the production costs, the proportional wage of the merchant and the tribute to money for letting all this happen. If the game stops, money is the only one immune, so it can exact a profit from its privilege.

Before we get to solutions...
What is this highway tax? Is it the cost of transporting goods, the cost to recoup storing goods, or the cost of the price going down to get rid of the goods because they are taking up space? The only way I know of that a producer can "push" products out is by lowering the price until it is both, lower than the competitor's price, and lower than the costumer's "utility" price (I won't pay for something if I don't need it). I still don't understand what serviceexactly this tribute is paying for?

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July 22, 2011, 06:34:30 AM
 #58

Uups, I'm sorry, Those -------------- aren't supposed to appear.
I have edited my last post.

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July 22, 2011, 06:48:09 AM
 #59

Before we get to solutions...
What is this highway tax? Is it the cost of transporting goods, the cost to recoup storing goods, or the cost of the price going down to get rid of the goods because they are taking up space? The only way I know of that a producer can "push" products out is by lowering the price until it is both, lower than the competitor's price, and lower than the costumer's "utility" price (I won't pay for something if I don't need it). I still don't understand what serviceexactly this tribute is paying for?

I would say "the cost of the price going down to get rid of the goods".
The service that is paying for is going from the producer to the consumer without the need of direct barter.
If the ware doesn't pay that tribute to money, it get stuck with barter. Money doesn't have anything to lose, it doesn't need to flow; the wares are the ones in a hurry to get to the consumer.

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July 22, 2011, 01:15:27 PM
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maybe I got it now. in contrast to barter, money is slightly "overvalued" because it is more flexible than say a goat. WIth money I can buy anything, with a goat I can only buy products that are offered by a guy acceting goats. I agree. Lets consider the case where I sell one month of work for a certain wage and buy stuff with that money, spending everything. Would you agree, that in this case the "money-premium" is irrelevant? I think the problem you are talking about arises when people are hording money, right? So they need an incentive to spend it (e.g. freigeld).

Lets see what happends in a village of ten people with a fixed amount of money:

10 people
different goods, a,b c, fix production!!
using money they agreed upon, say shells
fixed amount of shells: 1000 shells
There is constant demand and supply of a,b and c giving prices p_a, p_b and p_c.
Now I claim the following: If 500 shells are destroyed (and no new shells can be found), all three prices will double. this implies that you have to pay double and that you earn double when selling a good.

Now consider there is one rich guy who achieved to own 590 shells, but he saves/hordes the money and only uses 90 for his daily business. There is one thing happening that is in my opionion not considered by Gesell: With hording of half the shells (forever) the prices and wages double as in the above example. The richdom of richguy is theoretically double but he does not use it so everyday life of the 10 people is unchanged. Actually the other 9 had a profit "P" because the prices decreased due to richguys savings. Now lets say richguy wants to use the money before he dies and buys more goods than usual. If he spends all his money, the prices will go up depending on how many "productionperiod" he needs to spend everything. In an extreme case, he buys almost all of the  goods but the few that are needed for the other 9 to survive. But independet of the strategy of spending (one period all money vs. 10 periods 10% of the money), he does not get the goods for the halfed price and is in sum always paying a Premium "B". To understand that, keep in mind, that the production is fixed! I claim "P" equals "B". So richguy gets his well-deserved amount of goods that costed 500 shells in the beginning and nothing more.

So I claim, that hording is irrelevant, moneypremium is irrelevant and Gesell is irrelevant Smiley We could of course discuss, what happens on a larger scale, when we also consider that inflation and deflation takes some time to take place. Nowadays this gives central banks, banks and companies an advantage because we life in an inflationary world. This discriminates the ones farthest from the tap, e.g. pensioners and workers. I think yours and Gesells problem disappears when this problem disappears, which is when we life in a world with a fix amount of money which implies, that this money deflationates with the rate of economic growth. If your wage is constant but money deflationates, you can buy x% more goods, x being the rate of growth. So everybody participates in the growth with the same rate. In the real world, you at first don't participate in growth and also your wage is devaluated by the inflationrate i, so if you (as an worker or pensioner) can claim your fair wage/pension after say a year, then you where "taxed" (1+x)(1+i). Nowadays this is something between 5 and 8 percent. Its of course lower, if wages are adjusted faster. So actually I would say the third solution is a fixed amount of money.
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