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I got about 20 minutes into that "Money as Debt" video -- that's when he starts departing from, let's say, generally accepted theories of money. I don't have ti

by neilk 18y ago

I got about 20 minutes into that "Money as Debt" video -- that's when he starts departing from, let's say, generally accepted theories of money. I don't have time to watch the whole thing, but I gather from other descriptions of the video that he advocates a policy of fiat money and repayment of debt via deliberate inflation, which is exactly the theory of the old Social Credit movement in Western Canada. That self-destructed. He's correct that banks create money through loans. He's totally wrong when he says that money represents servitude. He's ignoring that the purpose of debt is to create value, specifically to be able to do things today that make us all wealthier in the future. Yes, banks create money from nothing. That's because things of value - real wealth - are being created all the time, "from nothing", or at least, from nothing that is represented in the economy. They're mined out of the ground or grown from the sun, soil, and rain, or some complex permutation of all the above. Which is why we allow banks to grow the amount of money to represent it. When we take out a loan, we are saying something like "I'm pretty sure I can mine some copper out of that hill. So give me some capital now because I need to get a shovel." Rather than say money is debt you might as well say that money is certitude of present or future wealth. By the way, this is the hidden truism of Paul Graham's mantra, "make something people want". Because "something people want" is another name for "wealth", and "wealth" is, under normal circumstances, easy to turn into money. So someone who says "make something people want and you'll make money" is expressing a near-tautology. (One that escapes most people, so it is good that he says it.) I'm not totally in favor of our current systems, but that's another topic. And you have to know how the system works now to change it.

sgharms 18y ago
I agree, and I should have said this, “Money as Debt” takes a conspiracy turn at about halfway. I'm a reminded of Adam Savage's "Do you mean Tesla the inventor of AC power, the genius or Tesla the nut-job?". I very much liked your explanation in the third paragraph, but under this model what does interest represent? If I step through your logic here..... 1. I believe there is copper in that hill which has a value ( say of 60K ). 2. I ask the bank for 10K to get started 3. Thus 10K has been added to the economy, recognizing that raw materials will be brought to the economy and growing the pie of wealth 4. I go into them thar hills, mine out the copper for 60K. 5. I pay back the bank, who now has 10K actual cash in their reserves, against which they may lend. I have also put 50K of my sale of this copper in their bank, giving them 60K against which to lend. 6. At this point, I think we're balanced in terms of what's been added to the value pie. 7. OK, so what does interest represent? The opportunity cost on the hope that I would find the copper? And, alternatively, say I found nothing in those hills, what happens to that 10K that was created? Shouldn't that be destroyed? I'm not disagreeing, but I'm trying to understand your model better.
- neilk 18y ago
  I'm not much of an economist, but I think interest basically represents risk. So it's insurance against being wrong. If we average it out over all the loans made by everybody, I don't think this is necessarily inflationary. Even if the miner doesn't find copper, he's still obligated to pay back his loans. Maybe the bank seizes his property or he pays it off slowly from some regular job where he generates some other value. Either way it will work out in the end, although perhaps the effect is slightly inflationary until he pays off his loan. And you have to take into consideration all the other loans made. If there is some other miner whose enterprise works out, then, if risk estimation techniques are good, it balances the one that failed. When the techniques that everyone is using to estimate risk are totally wrong, you get the USA in 2009. Again: not an economist.

by neilk 18y ago

sgharms 18y ago

I agree, and I should have said this, “Money as Debt” takes a conspiracy turn at about halfway. I'm a reminded of Adam Savage's "Do you mean Tesla the inventor of AC power, the genius or Tesla the nut-job?". I very much liked your explanation in the third paragraph, but under this model what does interest represent? If I step through your logic here..... 1. I believe there is copper in that hill which has a value ( say of 60K ). 2. I ask the bank for 10K to get started 3. Thus 10K has been added to the economy, recognizing that raw materials will be brought to the economy and growing the pie of wealth 4. I go into them thar hills, mine out the copper for 60K. 5. I pay back the bank, who now has 10K actual cash in their reserves, against which they may lend. I have also put 50K of my sale of this copper in their bank, giving them 60K against which to lend. 6. At this point, I think we're balanced in terms of what's been added to the value pie. 7. OK, so what does interest represent? The opportunity cost on the hope that I would find the copper? And, alternatively, say I found nothing in those hills, what happens to that 10K that was created? Shouldn't that be destroyed? I'm not disagreeing, but I'm trying to understand your model better.

neilk 18y ago
I'm not much of an economist, but I think interest basically represents risk. So it's insurance against being wrong. If we average it out over all the loans made by everybody, I don't think this is necessarily inflationary. Even if the miner doesn't find copper, he's still obligated to pay back his loans. Maybe the bank seizes his property or he pays it off slowly from some regular job where he generates some other value. Either way it will work out in the end, although perhaps the effect is slightly inflationary until he pays off his loan. And you have to take into consideration all the other loans made. If there is some other miner whose enterprise works out, then, if risk estimation techniques are good, it balances the one that failed. When the techniques that everyone is using to estimate risk are totally wrong, you get the USA in 2009. Again: not an economist.