This is my first post here. I’m puzzled by the problem of interest. It seems to me that since money comes about through the creation of debt plus interest, there is always a greater amount of debt in the system than there is money. This creates an organic need in the system for defaults, and gives excessive power to the holders of money, not because they are productive, but simply because they hold money. As a system founded on this basis expands, it inevitably creates an unequal distribution of wealth. I raised these concerns to Tom Woods and he recommended this article by Robert P. Murphy - http://mises.org/daily/4569 .
In the article, he states that “my modest point in this article was to correct the widespread misconception that in a system of ‘debt-based money,’ further rounds of inflation are mathematically necessary to avoid default on previous loans. In general, this simply isn’t true, because the bankers can spend their interest payments on real goods and services, thereby returning that money to the public, which can then use it again for further debt payments.” But isn’t it extremely unlikely that bankers would spend 100% of their interest payments back into the economy? They are more likely to save a large amount, or re-invest in some interest-bearing asset. So this doesn’t really address the basic problem. Am I missing something here?
In that thread I quoted from G. Edward Griffin’s book The Creature From JekyllIsland (pp. 191-192) where he describes the same kind of scenario. But if you go through that thread that may help clarify some things as well. One thing to keep in mind is they don’t have to spend 100% of their interest payments back out every payment period…debtors could get paid from the holdings of other people in the economy who do not have to make interest payments of their own. Yes, eventually if the central bank never spent any money, it would come to reduce the money supply and at some point hold all the money in the economy…but that doesn’t even work in theory, as the bank would have to constantly be spending money just to remain functioning. Bank employees, janitorial services, electricity, paper, ink, groundskeeping, building maintenence…the myriad of things necessary to keep a central bank running mean constant costs, and constant outflows of payments of the money. And the bigger the bank gets, the more of these costs there will be.
But even still, this “one entity controlling money supply” is part of the reason people like Ron Paul argue in favor of competing currencies, so that you never have to worry about any real influence…because unless there are laws forcing everyone to transact in the one currency (legal tender laws), if one entity or group acquires enough to manipulate the market, people will just use something else.
(But in reality, it won’t ever even get close to that point because people will constantly be using something else…and as more of the supply gets concentrated with one group some other kind of money will more and more gradually come into use…meaning there would be no point to try and gain all the money in the system, because by the time you did it, the economy would be already functioning without it…meaning it wouldn’t be worth anything near as much as you paid to acquire it.)
Thanks for your reply. It is just fantastic to live in the internet age and have immediate access to resources like this. So even though it is true that if all loans were due at the same time, there would not be enough money to pay them off - the fact that the maturities of loans are spread out over time means that this theoretical problem never becomes a reality? I guess my problem is just that banking and finance are so removed from the real world these days - making money from making money from making money. So although the original concept of charging interest on money that has been earned from productive work may be sound, the idea of charging interest on money that has come from money that has come from money… seems deeply unethical to me. And this applies to the average individual as well - the idea that people should be able to plop their money in a savings account or mutual fund, forget about it, and expect a steady stream of interest just for the use of their money… it just doesn’t seem right. I guess economics doesn’t traditionally enter into value judgements… money is money and we just assume that it represents real value?
The more I read, especially about the recent crisis, the more I feel that many of our economic problems can be boiled down to two words: moral hazard. There was this naive idea that by inventing all these financial instruments to spread risk across the world, that you could eliminate risk from the system. Then, we find out that the risk was just placed on the back of the taxpayer. So I think the more we can do to connect lenders with the fate of the lendee, the better. After all, people are supposed to lend money because they believe in the prospects of the lendee, right? That’s why this quote by Smiling Dave from the thread you recommended bothered me: “The only difference is the insistence on the banker’s part that win or lose, he gets his money plus his profit. The justification for this insistence is that the banker has to defer enjoyment and use of his tools until he gets his tools back.” Banking is about allocating capital in the most productive way for society, and since this necessarily involves risk, it is a skill that deserves to be rewarded. But to say that “win or lose, he gets his money plus his profit” is an attempt to take risk out of the equation, and reward bankers whether they do their job well or not.
The idea that all money is debt is just a rabbit-trail to distract you from the real point: when they print new money or loan non-existent money, they are stealing from you. The details of how they steal are irrelevant except as a matter of curiosity.
No. Charging interest on money that did not previously exist is unethical.
Scenario 1: A banker loans out 100 gold coins, earns 10 gold coins in interest. Next year, he loans out 110 gold coins, earning 11. Ad infinitum. There is nothing unethical about this anymore than if he had been a sword-maker instead who made 10 gold coins in income one year and 11 gold coins of income the next year.
Scenario 2: Counterfeiter drafts up 100 gold banknotes, loans them out, “earning” 10 genuine gold notes in interest.
The second scenario is unethical because the counterfeiter is stealing from the other holders of the counterfeited banknote, even though he is “merely” giving a loan of the counterfeited money rather than simply disbursing it. This is the Fed’s bullshit game. It says, “Oh, all the money we create is merely a loan and must be repaid so bada-bing, bada-boom, our asset sheet stays value-neutral which means we can’t possibly be creating new money!” But this is a charade. A loan of counterfeited money is stealing in just the same way as directly spending the counterfeited money, it just occurs at a more gradual rate.
Yeah, you’re right about that first scenario. I’m referring more to the Wall St. casino of today, where profits are generated from moving money around without producing anything of value. Would you agree that that is unethical? I suppose I’m trying to square the idea of minimal regulation that Austrians promote with the realities of today. I assume the Austrian perspective would be that if we didn’t have all this funny money created by the FED and banking system than none of this casino-economy would even be possible, and money would more fully represent real value?
In certain ways, that’s true. I’m not completely sure what Dave means by “win” and “lose”, but yes, moral hazard is created when you remove risk but allow the potential to profit to remain. There are things the individual can do to minimize risk on his own, but of course these come with costs. The unethical part comes in when force is involved…such as the bailouts. When the government takes your money under threat of force (i.e. you have no choice) and then hands it over to someone else, obviously that is wrong. (See “George Ought to Help”).
Not so fast. As Thomas Sowell has pointed out (I think in this interview actually, and elsewhere) people believed the same thing about the Jews in the past…that they were just useless middlemen who provided no value at all…they just shoved themselves in the middle of transactions and took a piece of the action withtout adding anything…but when all these money merchants were shoved out of town, the economies fell apart. There is a social function of stock speculators, as well as insurance, futures markets, credit default swaps, and banks.
The tough part comes in when you have to account for gains made by money being printed out of thin air…and then, not only that, but money being printed and then “lent” to an organization with the monopoly power of force, which then uses that power to steal money from a bunch of other people to pay back its debt. That’s where it gets hard to really talk legitimacy of profit, because at the root of the whole system lies illegitimacy.
You’re close. As Clayton points out, it’s not the fact that you’re charging interest…it’s the fact that money has been created out of thin air to begin with. That’s when it became unethical…
Basically, yeah. You can definitely get into more detail and specifics, but that’s basically it…
I’m not arguing that there is no place for Wall St. in our society. And obviously traditional banks play a vital role in the healthy functioning of an economy. But don’t you think it has gone way overboard? Sure, speculators provide some useful information to investors, but rampant speculation also leads to huge price distortions, like the oil spike in 2008, which as far as I know had nothing to do with supply and demand and everything to do with speculation in the futures market. Credit default swaps tie into what I said in the previous post - a futile attempt to spread risk in order to justify reckless behavior. And what about people using credit default swaps to ensure assets they didn’t even own? You can’t possibly argue this has a social function, it is pure gambling. There may be a legitimate limited use for CDS (and if you know of a resource that explains this I’d like to read it), but clearly they were abused in the run up to the crisis in 2008.
Thanks for the links you provided, I’ll check them out.
Incorrect speculations by definition hurt only the incorrect speculator if you have sound money. The problem is that institutional Wall St. speculators can borrow at sub-market rates from commercial banks (who borrow at sub-market rates from the Fed) and then use this artificially cheap money to engage in speculation they could never have afforded to engage in if they had to put only their own money and true credit rating on the line. With the end of Glass-Steagal, this was made 10x worse because now you didn’t even have to borrow from a bank to speculate, the banks themselves could directly engage in speculative investments.
The problem is not speculation and there is no such thing as “rampant speculation” in a sound money economy because there is no way for the speculator to force others to pay for his mistakes. It’s only with this funny-money economy where profits are privatized while losses are socialized that you can have such a thing as excessive speculation.
The problem is not CDS or MBS or any of these instruments… the instruments are precisely what the word says: instruments. Means to an end. The end is to monetize the cheap credit available from the Fed. Schmuckety-schuck Joe Wall St. Investor has access to a sub-market line of credit from the Fed (whether directly or indirectly doesn’t matter) and he wants to take that spread and turn it into cash in his bank account. To do this, he needs something to invest in… the riskier the better because he’s not even putting his own money on the line, particularly with the Fannie Mae/Freddie Mac MBS crap. Joe Wall St. had already crunched the political numbers and realized that there’s no way the Federal government could allow America to go bankrupt. Why do you think a bank with the name “Bank of America” was bailed out while another with the name “Lehman Brothers” was not. It really is that juvenile.
Yeah, definitely do that. Those articles on the social functions of those industries will address the concerns you just raised. But as Clayton points out, all the problems stem back to money being printed out of thin air, and people being forced to use it (i.e. legal tender laws, and taxes). Definitely watch that video.
Thanks for that explanation, that makes a lot of sense. I feel like if Ron Paul was more articulate in explaining these positions he’d have a lot more support. So why do you think there is such strong resistance to sound money? Among those who have access to the cheap money the reason is obvious, but what about everyone else? How did mainstream economists become so clueless? Are they all just bought and paid for by the establishment - i.e. speaking fees, consulting fees, etc. Is there a worry that lending would get too tight under a sound money system, and economic growth would stagnate?
In terms of Lehman not being bailed out - I wouldn’t be surprised if that had something to do with Goldman’s political influence.
My understanding is that most economists work in academia, big business (particularly the financial variety), or the government. Take that how you will.
I think the resistance to sound money concerns people wanting to have their cake and eat it too. In other words, sound money would reveal to them that things are actually scarcer in many ways than they want to believe.
The event that led to the creation of the Federal Reserve System was the Panic of 1907. Looking at the history of this event, it seems that the banks involved were technically already insolvent before the panic erupted. “A shortage of money and credit” was blamed for the panic, but what did people mean by that? Based on subsequent events, apparently they meant that banks weren’t able to get away with printing even more bank notes (not backed by real money, i.e. gold) and make even more loans using those bank notes.
Also keep in mind that, while there was no central bank in the United States between 1836 and 1913, banks were regulated by some level of government during the entire intervening period. See this Wikipedia article for some good background information.
That’s an interesting point. So how would you see this playing out? Our natural resources and skills/human capital would be unchanged, so how would this change of mindset affect society? Do you imagine that the overall standard of living would drop in a sound money system due to this scarcity no longer being masked by artificial credit creation? Trying to wrap my head around the psychology of it. I’m always amazed when people talk about a “crisis of confidence” as if our economy was more about psychology than anything concrete. But in our current system, if this confidence stalls for even a moment, the whole thing comes crashing down.
Hmm meant to quote your sentence “I think the resistance to sound money concerns people wanting to have their cake and eat it too. In other words, sound money would reveal to them that things are actually scarcer in many ways than they want to believe.” at the beginning of my last post, didn’t work. How do you quote from someone’s msg in your post, I can’t figure it out. I hit reply on that person’s post but that didnt work.
you are assuming that inflation is automatically bad.
Inflation is not any more bad than a bird crapping on your head is bad. It just is. Whereas, theft and fraud are bad. A lot of the inflation we experience is directly attributable to theft and fraud.
In a truly free market, there can be inflation and if it comes about through completely voluntary transactions, be they risky or not, then there is no reason to point it out as something that we libertarians must stop.
We should be stopping taxation and legal tender laws. It just logically follows that most inflation would also disappear as a result.
you are assuming that the money markets will operate the same way in anarchy as they do now. That is not likely to be the case.
In a truly free market, people will probably have no choice but to research and closely examine the practices of their banks.
Temporarily, yes, there would have to be a dramatic reduction in standard-of-living as credit contracts and businesses, households and, yes, even the government, are forced to balance their budgets. This will lead to a cascade of bankruptcies, defaults, etc. We actually agree with the Keynesians on this. Where we disagree is on their claim to be able to indefinitely defer the Day of Reckoning. It’s coming sooner or later and the sooner the better. The longer we defer it, the more out-of-balance the system will become.
Well, it is all about confidence … because it’s a con game. One of FDR’s most famous quotes, “The only thing we have to fear is fear itself”, is a reference precisely to this fact. If the public loses confidence in the fractional reserve system, it will collapse. The FRB system can withstand a run on one or even a handful of banks. But if everybody loses confidence in the whole damn thing, the gig is up. The value of the dollar will begin to collapse to zero and the entire house of cards comes crashing down.
Austrians consider a precipitous loss of confidence every bit as much of a nightmare scenario as Keynesians do… it’s something that we should not allow to happen. However, following the Keynesian prescriptions for the economy is a kind of brinkmanship with the confidence of the public. These bailouts and quantitative easings have significantly eroded public confidence in the dollar far more than any speech or book by Ron Paul ever could have. The correct solution is to end the legal tender monopoly and repeal the capital gains tax on monetary commodities (gold, silver, platinum, etc.) This will force the Federal Reserve to compete with private money producers.
This would strengthen confidence in the US dollar even as the public is given the option to move out of the dollar to something else… the reason is taht the Fed would have no choice but to rein in the inflation in order to compete with private money producers. In the long run, we believe that this would result in a gradual shift away from fiat money and back to sound money but it wouldn’t happen overnight.
“Temporarily, yes, there would have to be a dramatic reduction in standard-of-living as credit contracts and businesses, households and, yes, even the government, are forced to balance their budgets. This will lead to a cascade of bankruptcies, defaults, etc. We actually agree with the Keynesians on this. Where we disagree is on their claim to be able to indefinitely defer the Day of Reckoning. It’s coming sooner or later and the sooner the better. The longer we defer it, the more out-of-balance the system will become.”
But here you are referring to a scenario where we suddenly switched to a system of only sound money, right? Whereas if we repealed the legal tender laws and legalized competition, then the transition could take place more gradually and peacefully?
That’s a large part of it. It’s not unlike the global warming industry. When your paycheck is signed by an organization that not only has a preferred conclusion for you to reach, but also has the power of force behind it, it’s a lot easier to just fall in line.
But another large part of the resistance is where their knowledge is coming from. Someone once said: “When government controls the schools, don’t be surprised when everyone comes out thinking the government is the solution to everything.” So of course there is an ever-present perpetuation of the idea that government is not only proper, but necessary. And when you’re forced — children are compelled to go to school, remember…and everyone is already paying considerable taxes to support the government schools, so few parents can afford to homeschool them or send them to non-government schools — into institutions at an early age, and forced to remain there not only through your formative years, but for a good deal of your life, it’s not surprising that most people become indoctrinated.
After a while, it becomes difficult to even wrap your head around the idea of a world without the government being involved in so many things. I actually had a conversation with a grown man, who served in the Navy and has children of his own, about how people would be educated without government-run schools. He literally could not get it. He’s not retarded (or at least, I don’t think he is). But his question kept going back to “how the fuck do you expect private schools to provide education to every single child? There aren’t near enough private schools! How do you expect America to compete in an international marketplace without educating our children?”
I’m not kidding. I’m not exaggerating. That was literally his question, and he was not joking. I tried multiple times, multiple ways to explain that all the school buildings are there, all the teachers are there, all the books are there…it just wouldn’t be run by government. And he literally could not get it. The closest he got was claiming that he couldn’t afford private school, so where would his kids go? Never underestimate the power of indoctrination.
And of course, that leads to a different reason people don’t get it…inertia. When people become so indoctrinated that they can’t even begin to understand how something as simple schooling would exist if the government didn’t put a gun to everyone’s head and force them to pay for it and send their children to it, obviously they’re not going to be able to teach children anything else either…so people grow up in a world where not only the lie is taught, but it’s taught from people who don’t even know it’s a lie. Multiply that out a few generations and these are the people we’re dealing with now. These are the people running government and running our institutions and winning Nobel Prizes.
And you may have heard the phrase “One has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool.” That was George Orwell. Ironically it was Bertrand Russell (of all people) who said something simliar: “This is one of those views which are so absurd that only very learned men could possibly adopt them.”
They were both touching on a very important point about how insane ideas even get considered. It’s very counterintuitive, and most people don’t realize it, but you really do have to be quite smart to deeply believe things that are really stupid. I think it has to do with needing to have the mental capacity to be able to perform the gymnastics necessary to make things work…in your head. Most people can’t do that. The problem is most people are so dumb that they just defer to “their betters” in academia and government and go along with whatever they say…which is obviously incredibly stupid in its own right, and quite dangerous. But remember, when you’re indoctrinated to believe the government is there to “take care of you”, and that officials are to be revered and respected and praised, and that they are smarter and wiser than you, and they have armies of people who are even smarter and wiser than they are advising them, it’s quite easy to not only believe what they say, but stand behind it and actually attack those who would question it.
It’s tough to see here in the U.S., since you’re used to it…and since you can’t really recognize it, it’s a little hard to believe…but just watch a documentary or two on North Korea. See indoctrination existing and operating in one of its purest forms, here, now, in 2011. That will really help. And possibly scare the crap out of you.
I honestly don’t even think it goes that far. I wish it were that thought out, but I really get the impression that they think sound money is just “an old idea” and that “this is the 21st century” and “today’s economy” is just too advanced, and that we need something more sophisticated. Like one Yale Professor recently said “money can’t manage itself”. People just see so many things around them that have changed, that they naturally believe everything else has to change too…even laws of economics. It would be nice if they actually realized the truth but simply didn’t want to admit it like Autolykos suggests, but I’m doubtful it’s that advanced. I’m really led to believe a lot (if not most) of these guys truly don’t get it.
And again, it certainly doesn’t help that everyone around you, from teachers, to media personnel, to academics, to your all-knowing government, are saying the same thing. Like this idiot who thinks that economic growth is determined and dependent upon the size of the money supply (i.e. if the money supply doesn’t grow, economic advancement cannot occur. Seriously. Watch it. O’Reilly the host is even too ignorant to even begin to argue with him.)
And most people aren’t even exposed to other ideas. People have never even heard of anything else. It’s all just assumed as a given. And you have to remember, most people are pretty dumb, as well as not very knowledgeable…about anything. They don’t take the time to study or look into anything on their own. So the only things they might know is something they heard in their government school. But that’s not everyone. There are smart people who do look into things and study. People who get doctoral degrees specifically in the field, for crying out loud. And it was tough for me to understand for a while, how people who were so smart, and spend all their time studying these things could believe such nonsense…but you come to realize all their time is spent in dark, dank computer labs running regressions and working complex models buried in high level math, which — according to one of the most recent economic Nobel Laureates — “are abstractions that make very simple assumptions that aren’t realistic.” And all the time they’re not doing that, they’re either being indoctrinated or reminded how smart they are.
I talked a little about this here, and relayed a story about someone in this forum who gave one of F.A. Hayek’s works to an economics PhD graduate who ended up coming back and saying “I wish they had taught us some of this stuff.” (Hayek was also a Nobel Laureate, by the way, and in his day was, along with John Maynard Keynes, one of the two most prominent economists in the world. So it’s a little tough to say he’s “too obscure.”) But the fact is, they aren’t taught anything about capital theory or a realistic time structure of interest rates. When your entire higher level education, (and after that, your entire career) is essentially nothing more than the mathematization of government regulation, it’s quite easy to get so lost in the maze of trying to figure out exactly how much regulation should be in how many sectors, and how it should be implemented, and when, and where, and how each tweak affects what…that you never even think to consider whether there should be the regulation in the first place. Again, it’s just a given. Not only that, but you’ve just spent 8 years of your life, and literally tens of thousands of dollars learning this crap…so it’s a lot harder to consider the idea that it was all essentially for nothing. The system couldn’t be that screwed up, could it?
And finally, there’s also a small presence, (even if subconscious), of knowing where your paychecks come from. Not like the “remember who you’re working for” kind of thing mentioned earlier, but more of a self-preservation instinct. Like the accountant who, on some level realizes that if the tax code gets any simpler, his skills are no longer necessary…so he argues against something like a flat tax or a Fair Tax. And it’s not like he’s even necessarily thinking about himself consciously…It’s possible he completely believes the current system is better because it gives people like his clients (who are smart enough to hire him) the ability to avoid a lot of taxes that others have to pay. But of course in reality, in the grand scheme, the world is poorer in both situations…from the horrific policies that these economists advocate, and from the system of theft that makes “tax professionals” necessary.
At the risk of also sounding like an idiot… isn’t it true that in terms of pure numbers (GDP), there actually would be less growth in a sound money system, because of the lack of easy credit. The problem is that people are conditioned to think of economic health only in terms of GDP. So as long as the numbers rise, they are satisfied.
