bilby
Fair dinkum thinkum
- Joined
- Mar 6, 2007
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- 34,074
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- Strong Atheist
Debt is money, and money is debt.
If I have a sheep, but I want two goats, I can take the sheep to a market and swap it for two goats. But if Joe is at the market, and wants a sheep but he doesn't have any goats with him, I can give Joe the sheep, and he now OWES me two goats. So Joe gives me a note that says 'I promise to give bilby two goats'. Well, that's OK, but what if I now want a pig? I go to the guy who has pigs, and give him the note Joe gave me, crossing out my name, and substituting his, so HE can now collect the two goats from Joe. In fact, we can simplify things, and have the note simply say "Joe the Goatherd promises to pay the bearer two Goats". Now Joe the Goatherd is acting as a Commercial Bank that issues its own banknotes; and as long as he has as many goats as he has notes, everything is peachy.
In fact, there is no need for Joe to ever give up the goats. That two goat bill can circulate in the economy for as long as we like; if everyone agrees that Joe is good for it, and that they could have those goats at any time if they wanted them, then the notes are better than the goats, because they fit neatly in your wallet.
Of course, there needn't be goats at all; you can have debts denoted in pure trust - fiat money, which is worth a dollar because everyone will accept it in exchange for $1 worth of stuff. Its value persists because people expect everyone else to keep accepting it; and a good way to ensure that everyone wants those dollars and therefore keeps on treating them as valuable, is to have a government that says 'We will always accept taxes in dollars, and we will ONLY accept taxes in dollars'.
So the total value of anything can be calculated in terms of dollars; and how many dollars you need to buy a goat is determined by the scarcity of both items - if dollars are scarce you need fewer of them to get a goat; and if goats are scarce, you get more dollars for each one.
So how do you control the number of dollars that are out there? Well, firstly you stop people from just printing as many bills as they want. Banknotes are an indication that someone owes you - they are the record of a debt - so you can't allow people to print them when no debt has been created. But bills are not where most money is kept anyway; most money is in other kinds of agreements to give stuff to people. If you have $1,000 in your savings account, that's not 100 $10 bills sitting in the vault at the bank - it's an agreement that the bank will give you that money at any time on demand. Because money and debt are the SAME THING. The paper isn't the money - the paper is just a record of the debt, and the debt is the money, whether it is recorded on a banknote, or in a computer, or on a contract.
Of course, there is no need for the bank to store enough paper money to pay out all of it's depositors; They only need enough money to pay the fraction of depositors who want to draw out money at any given time. So the rest of the money can be loaned - and as money IS debt, making a loan creates money - I won't go into the details of
fractional reserve banking here, but it is not a difficult concept to grasp.
Now, along comes Government. Notice that up to now, we have been able to produce fiat money in practically unlimited quantities without a government; the Government isn't needed to 'print' money, but by being a single place to which almost all citizens MUST pay taxes, it acts as a stabiliser - there is no benefit to an American citizen to decide to do all his business in Polish Zloty, because he cannot pay his taxes in anything other than US Dollars. This stabilises the value of the dollar, and provides a level of trust that is hard to get elsewhere - as money is debt, the presence of an economic actor who can be relied upon to never disappear, and to always accept your dollars, is a solid reason to trust that the value of the dollar will remain at least mostly stable.
Now the government doesn't really control the money supply. As shown above, money comes into existence just because debt exists; and disappears when debt is paid off. But the government can strongly influence the money supply, by borrowing money to create more of it; or by paying down debt to reduce the amount of it that is out there. By this means, the government can influence the speed of the economy directly. The other, more indirect option to control money supply, is to set the base interest rate. Interest rates are simply the cost of debt, and debt and money are synonymous, so interest rates are also the cost of money. By increasing rates, the central bank and/or government can make money more expensive - high rates mean that people want to pay off their private debts (ie destroy money); conversely, low rates encourage people to create money by taking on private debt.
So if rates are low (as they are now), but people are nevertheless paying off debt rather than taking out new loans (as they are now), the total amount of money is falling. This leads to less economic activity, as there is less reason to spend money today, if it will still be of much the same value tomorrow; Inflation - the measure of how much the amount of money that exists is devaluing vs the amount of non-money 'stuff' that people could buy from, or sell to, each other - is low, and people are not starting new ventures, or expanding their existing ventures, because they expect to get much the same return on their wealth by simply paying off debt, as they could be taking on debt and investing it in making or doing stuff.
An 'economy' is all the transactions that take place within a border. The border can be anything you like; A 'Household Economy' is all the transactions within a household; Cities, States, Nations, regions, etc. all have 'economies', and it makes sense to also divide economies by their choice of currency, to the 'US dollar economy' is all the transactions that involve US Dollars, no matter by whom or where those occur.
Most economies are open systems; money sent out of an economy is 'lost' to that economy, and money coming in from outside is 'gained'. So there are three ways that an economy can reduce its money supply - it can reduce its total net debt by paying off loans made to it, or by lending money out; or it can buy stuff that rapidly loses its value (or sell stuff that rapidly gains value); or it can isolate money so it does not circulate. The same options in reverse can increase money supply - increased debt from borrowing; buying stuff that increases in value or selling stuff that loses its value; and freeing up money that was previously isolated.
In a household economy, you can get a good overview of this by looking at how to change the amount of cash in your wallet. Borrow money - more cash in hand. Pay back a loan - less cash in hand. Sell something you no longer need - more cash in hand. Buy a hamburger - less cash in hand; Buy same shares that gain value, then sell them - more cash in hand. Stuff $1,000 into your mattress and forget about it - less cash in hand. Find the stash granddad hid in the 1970s - more cash in hand.
In a national economy, there are more actors, so it's less easy to see; but the same basic rules apply. So if the government borrows money from outside the economy, that increases the money supply. If that money is spent on a bridge to nowhere, it is easy to think that this is like me buying a hamburger - but that's a mistake, because while Burger King is not part of my household economy, the guys who build bridges to nowhere ARE a part of the national economy. The bridge doesn't do a lot of good, so no real value is created; it would have been better to spend the money elsewhere. But the money has not left the economy! It's now in the pockets of the construction workers, the steel workers, the miners, the engineers, etc.; And they may use it for something of more long-lasting value. And if the construction worker spends it on beer? Well maybe the barman will use the money to get an education; or the brewery will decide to build a new fermenter. Only money that leaves the economy - by paying off debt, by buying stuff from outside the economy, or by being stuffed into a mattress - is truly gone.
The government should therefore be able to regulate the economy by adjusting its own level of debt - taking on more debt when private borrowing is sluggish; and/or by adjusting interest rates down, to encourage private indebtedness; or when the economy is overheated, raising interest rates to encourage private savings and paying off of private debt; or by taking money in taxes, and destroying that money by paying off debt with it.
The problem comes when the mad conservatives decide that the nation is like a household. National austerity measures, with low levels of public debt and public spending, are perfectly calculated to destroy even more money in an already sluggish economy, converting recession into depression. The government may not be the best actor to choose how money is spent; but better that it be spent poorly (and thereby get into the hands of private actors who will spend it more wisely) than that it not be spent at all. Obviously private debt would be a preferable source of money supply for those who believe that private investors are better at picking high value-added projects to invest in; But those private debts are not being taken on - interest rates are at record lows, and yet citizens are fearful of taking on debt. It's a viscous circle - in a sluggish economy, private debt is risky; so people avoid private debt; so the money supply remains small; so the economy remains sluggish. The solution is helicopter money. The government can borrow, creating money; and can then get the money out into the economy by any means possible. Once the economy is re-booted, then raising taxes to pay off that government debt, and remove the excess money from the system shouldn't be difficult.
The British government plan is a perfect solution for a household with a large credit card bill and a real prospect of the breadwinner being made redundant. It is a perfect disaster for a national economy with high unemployment, low interest rates, low inflation and low growth. Nation states are nothing like households - not least because most economic activity in a household is EXTERNAL, while most activity in a national economy is INTERNAL. Until the likes of David Cameron grasp this concept, the British economy is doomed.
If I have a sheep, but I want two goats, I can take the sheep to a market and swap it for two goats. But if Joe is at the market, and wants a sheep but he doesn't have any goats with him, I can give Joe the sheep, and he now OWES me two goats. So Joe gives me a note that says 'I promise to give bilby two goats'. Well, that's OK, but what if I now want a pig? I go to the guy who has pigs, and give him the note Joe gave me, crossing out my name, and substituting his, so HE can now collect the two goats from Joe. In fact, we can simplify things, and have the note simply say "Joe the Goatherd promises to pay the bearer two Goats". Now Joe the Goatherd is acting as a Commercial Bank that issues its own banknotes; and as long as he has as many goats as he has notes, everything is peachy.
In fact, there is no need for Joe to ever give up the goats. That two goat bill can circulate in the economy for as long as we like; if everyone agrees that Joe is good for it, and that they could have those goats at any time if they wanted them, then the notes are better than the goats, because they fit neatly in your wallet.
Of course, there needn't be goats at all; you can have debts denoted in pure trust - fiat money, which is worth a dollar because everyone will accept it in exchange for $1 worth of stuff. Its value persists because people expect everyone else to keep accepting it; and a good way to ensure that everyone wants those dollars and therefore keeps on treating them as valuable, is to have a government that says 'We will always accept taxes in dollars, and we will ONLY accept taxes in dollars'.
So the total value of anything can be calculated in terms of dollars; and how many dollars you need to buy a goat is determined by the scarcity of both items - if dollars are scarce you need fewer of them to get a goat; and if goats are scarce, you get more dollars for each one.
So how do you control the number of dollars that are out there? Well, firstly you stop people from just printing as many bills as they want. Banknotes are an indication that someone owes you - they are the record of a debt - so you can't allow people to print them when no debt has been created. But bills are not where most money is kept anyway; most money is in other kinds of agreements to give stuff to people. If you have $1,000 in your savings account, that's not 100 $10 bills sitting in the vault at the bank - it's an agreement that the bank will give you that money at any time on demand. Because money and debt are the SAME THING. The paper isn't the money - the paper is just a record of the debt, and the debt is the money, whether it is recorded on a banknote, or in a computer, or on a contract.
Of course, there is no need for the bank to store enough paper money to pay out all of it's depositors; They only need enough money to pay the fraction of depositors who want to draw out money at any given time. So the rest of the money can be loaned - and as money IS debt, making a loan creates money - I won't go into the details of
fractional reserve banking here, but it is not a difficult concept to grasp. Now, along comes Government. Notice that up to now, we have been able to produce fiat money in practically unlimited quantities without a government; the Government isn't needed to 'print' money, but by being a single place to which almost all citizens MUST pay taxes, it acts as a stabiliser - there is no benefit to an American citizen to decide to do all his business in Polish Zloty, because he cannot pay his taxes in anything other than US Dollars. This stabilises the value of the dollar, and provides a level of trust that is hard to get elsewhere - as money is debt, the presence of an economic actor who can be relied upon to never disappear, and to always accept your dollars, is a solid reason to trust that the value of the dollar will remain at least mostly stable.
Now the government doesn't really control the money supply. As shown above, money comes into existence just because debt exists; and disappears when debt is paid off. But the government can strongly influence the money supply, by borrowing money to create more of it; or by paying down debt to reduce the amount of it that is out there. By this means, the government can influence the speed of the economy directly. The other, more indirect option to control money supply, is to set the base interest rate. Interest rates are simply the cost of debt, and debt and money are synonymous, so interest rates are also the cost of money. By increasing rates, the central bank and/or government can make money more expensive - high rates mean that people want to pay off their private debts (ie destroy money); conversely, low rates encourage people to create money by taking on private debt.
So if rates are low (as they are now), but people are nevertheless paying off debt rather than taking out new loans (as they are now), the total amount of money is falling. This leads to less economic activity, as there is less reason to spend money today, if it will still be of much the same value tomorrow; Inflation - the measure of how much the amount of money that exists is devaluing vs the amount of non-money 'stuff' that people could buy from, or sell to, each other - is low, and people are not starting new ventures, or expanding their existing ventures, because they expect to get much the same return on their wealth by simply paying off debt, as they could be taking on debt and investing it in making or doing stuff.
An 'economy' is all the transactions that take place within a border. The border can be anything you like; A 'Household Economy' is all the transactions within a household; Cities, States, Nations, regions, etc. all have 'economies', and it makes sense to also divide economies by their choice of currency, to the 'US dollar economy' is all the transactions that involve US Dollars, no matter by whom or where those occur.
Most economies are open systems; money sent out of an economy is 'lost' to that economy, and money coming in from outside is 'gained'. So there are three ways that an economy can reduce its money supply - it can reduce its total net debt by paying off loans made to it, or by lending money out; or it can buy stuff that rapidly loses its value (or sell stuff that rapidly gains value); or it can isolate money so it does not circulate. The same options in reverse can increase money supply - increased debt from borrowing; buying stuff that increases in value or selling stuff that loses its value; and freeing up money that was previously isolated.
In a household economy, you can get a good overview of this by looking at how to change the amount of cash in your wallet. Borrow money - more cash in hand. Pay back a loan - less cash in hand. Sell something you no longer need - more cash in hand. Buy a hamburger - less cash in hand; Buy same shares that gain value, then sell them - more cash in hand. Stuff $1,000 into your mattress and forget about it - less cash in hand. Find the stash granddad hid in the 1970s - more cash in hand.
In a national economy, there are more actors, so it's less easy to see; but the same basic rules apply. So if the government borrows money from outside the economy, that increases the money supply. If that money is spent on a bridge to nowhere, it is easy to think that this is like me buying a hamburger - but that's a mistake, because while Burger King is not part of my household economy, the guys who build bridges to nowhere ARE a part of the national economy. The bridge doesn't do a lot of good, so no real value is created; it would have been better to spend the money elsewhere. But the money has not left the economy! It's now in the pockets of the construction workers, the steel workers, the miners, the engineers, etc.; And they may use it for something of more long-lasting value. And if the construction worker spends it on beer? Well maybe the barman will use the money to get an education; or the brewery will decide to build a new fermenter. Only money that leaves the economy - by paying off debt, by buying stuff from outside the economy, or by being stuffed into a mattress - is truly gone.
The government should therefore be able to regulate the economy by adjusting its own level of debt - taking on more debt when private borrowing is sluggish; and/or by adjusting interest rates down, to encourage private indebtedness; or when the economy is overheated, raising interest rates to encourage private savings and paying off of private debt; or by taking money in taxes, and destroying that money by paying off debt with it.
The problem comes when the mad conservatives decide that the nation is like a household. National austerity measures, with low levels of public debt and public spending, are perfectly calculated to destroy even more money in an already sluggish economy, converting recession into depression. The government may not be the best actor to choose how money is spent; but better that it be spent poorly (and thereby get into the hands of private actors who will spend it more wisely) than that it not be spent at all. Obviously private debt would be a preferable source of money supply for those who believe that private investors are better at picking high value-added projects to invest in; But those private debts are not being taken on - interest rates are at record lows, and yet citizens are fearful of taking on debt. It's a viscous circle - in a sluggish economy, private debt is risky; so people avoid private debt; so the money supply remains small; so the economy remains sluggish. The solution is helicopter money. The government can borrow, creating money; and can then get the money out into the economy by any means possible. Once the economy is re-booted, then raising taxes to pay off that government debt, and remove the excess money from the system shouldn't be difficult.
The British government plan is a perfect solution for a household with a large credit card bill and a real prospect of the breadwinner being made redundant. It is a perfect disaster for a national economy with high unemployment, low interest rates, low inflation and low growth. Nation states are nothing like households - not least because most economic activity in a household is EXTERNAL, while most activity in a national economy is INTERNAL. Until the likes of David Cameron grasp this concept, the British economy is doomed.
