Dismantle This Argument

Miscellaneous General
1

"If a man borrowed 100 coins he would have to repay 110 coins (at 10% interest) at the end of the year. Where did the extra 10 coins come from? If the borrower was able to produce 10% more, the coins were minted to reflect the production and the lender received the extra production.

If the borrower did not increase production, the coins were still minted, but there was no production to back the coins; the money supply was artificially inflated. All money held less value. The purchasing power decreased. If the interest rate on the loan exceeds the increase in production, the result is inflation. It makes no difference if we are talking about gold coins or digital entries on a computer. The only reasons to increase money supply are to match the economic growth from increased production (this does not cause inflation), or to match the increase from debt (this causes inflation).

The Federal Reserve creates money by increasing debt. The government issues bonds and the money is created by the Federal Reserve to purchase the bonds. It really is that simple – the Federal Reserve creates money out of thin air. Interest taken on debt does not represent value for goods produced. Most of the money in circulation is not printed or minted, but digitally added to the money supply to correspond to the increase in credit. The banks add money to circulation by making more loans. The result is too much money chasing too few goods. Each coin, each dollar, each measurement of money in circulation holds less value. Usury causes inflation. "

This was posted by some spammer on Peter Schiff’s Facebook page. He has been posting for weeks on how interest causes major economic problems. Any thoughts?

2

Circulation.

We have individuals A, B and C, and a money supply of 100. A borrows all 100 coins from B at 10% annual interest to buy a machine from C. C now has 100, B and A have 0. A starts producing and sells to C for 10 coins. He then pays these 10 coins to B as debt service. Now, B can spend 10 coins at A’s each month that A in turn gives back to B to service his debt, and after 11 month, all the debt plus interest will be repaid without the need to create new coins.

It sounds complicated, but that’s just one example. In an economy with more participants, it’s way easier because no one single loan is going to comprise all the monetary assets of said community. At least, it’s very unlikely. And even then, as we have seen, it is possible to repay the loan plus interest.

3

If the money supply were fixed, he could also agree to do work for the loaner. Mow his lawn or something. In current practice it is simply more convenient to charge a premium at the back end in the form of interest.

4

I have a few thoughts.

He is right that printing new money causes inflation. Before the govt decided to obscure things to its own advantage, that was the very definition of inflation.

But it has nothing to do with debt. Even if nobody ever borrowed anything. but the govt just dropped money down from the sky at random, a free gift with no debt, all the troubles of inflation would follow. Because the laws of supply and demand apply to money too. The more money there is, the less value it has, meaning its purchasing power declines. Ask Zimbabwe about this.

Furthermore, even if good old farmer Brown or whoever it is was able to produce 10% more, there is no reason to print more money. The increased supply of goodies will just lower the price for everyone, which is all to the good. The purchasing power of money has increased with respect to what he made. So more money will be freed up for everyone to spend on other things. Thus nature’s bounty becomes a gift to everyone.

This happens all the time in the real world. Prices of computers, cell phones, everything for which there is no govt interference , is going down all the time.

In the real world, interest rates are related to inflation, in that when the govt decides to have low interest rates [for its own nefarious reasons], it does this by lending money to the banks it favors at the low rate it has decided upon, as much as the banks want. Where does the govt get all that money to lend? It prints it, or more technically accurately, it does what the poster described, adding zeroes into the banks accounts. But that makes no diff, it’s the same thing.

So oddly enough, the reverse of what the poster wrote is true. Low interest rates [=lesser usury] produces MORE inflation, because it involves printing more money.

Bottom line, inflation has to do with printing money. Debt is irrelevant to the whole question.

5

And note that, in a natural money economy*, if there is a reason to produce more money (more profits to be earned by money production), more money will be produced. If gold, for example, were money and gold prices rose, then gold mines, mints, assayers, coin shops, etc. can earn more money by producing more coins. So, as demand for money increases, the profitability of money production increases and more money will be produced in the market. As demand for money decreases, the marginal value of gold-as-money against gold-as-commodity will decrease and monetary gold will be converted to its commodity uses. The price-fixing of money which central banks engage in only causes the usual effects of shortages and surpluses along with the attendant reverberations throughout the economy that Austrian Business Cycle Theory predicts.

It is deeply disturbing to ponder the orders of magnitude wealthier that society would be but for the meddling, monopolization and intervention of the State.

*sigh

Clayton -

*A natural money economy is an economy which has free currency competition

6

Prime wrote the following post at Sat, Jun 26 2010 6:39 PM: "If a man borrowed 100 coins he would have to repay 110 coins (at 10% interest) at the end of the year. Where did the extra 10 coins come from? If the borrower was able to produce 10% more, the coins were minted to reflect the production and the lender received the extra production.

Easy answer. The 10 coins are the cost of receiving the money a year earlier then he should have received it. He is buying money. Either as a time preference, " I want it now, and don’t want to save for it" or, “Within a year, I can turn 100 coins into 200 coins.” So the loan would make me a 90 coin profit because I have the ability to efficiently use the resource.

7

Buy from someone else.