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Money: the zero-sum game

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Thu, 2014-07-17 09:51

Lorsa

Money: the zero-sum game

With the upcoming election to the Swedish parliment I've started to think about politics again (not that I ever stopped). This lead me into economy in general and trying to understand money. A lot of talk in the political arena seem to be about money here or money there, but very few (none) adress the core economic system we use, the actual purpose of money and how it is used. I find this to be a great failing as you can't really devise any useful polities without knowing the basis you stand on. It's like trying to decide if you want stawberries or blueberries on your cake before you've decided if you want cake at all! So, I've started thinking a bit about money and would like some input if I have made any glaring mistakes. To me, the purpose of money is to be a resource distribution system pure and simple. Today money itself seems to be a resource and this is one of the things I think is wrong with our current system. I think it is fairly evident that at any given point in time, there is a fixed amount of money. It's also fairly obvious that this amount cannot really change but rather remain the same. Yes, it is certainly so that you can increase the amount of dollars, or kronor or yen or whatever else you have, but that only causes inflation where the value of each individual piece of money decreases. So rather than saying there's a fixed amount of money, perhaps I should say that there's a fixed amount of monetary value. For simplicity's sake let's assume that whenever I refer to there being a fixed amount of money, I really refer to monetary value. This has some implications; namely that for every fraction of money you want, someone else need to have less. There's a community pool which we all draw from (and this pool is separated from the actual resources which are then later distributed). It is impossible for all corporations to go + for example, some have to go - or else the zero-sum game isn't being maintained (which it has to be). So everytime you ask for a raise, another person has to get a salaray reduction. This doesn't have to be a bad thing necessarily, but it is an important thing to keep in mind. In the game of money, every increase you get have to be balanced by an equal decrease somewhere else. Now we get into the idea of loans. When I grew up I was told that I can put my money at the bank and in exchange of them having the possibility of lending it to others I get some interest when I want it back. Somehow I feel that many people still work under this assumption, that banks only lends money that actually exists; either being owned by the bank itself or by people placing it in them. This is completely false of course, banks have the power to create money out of nothing to loan to people (the amounts are regulated by law and differ by country). At first glance this doesn't seem like such a bad thing. As long as the temporary increase in money (which leads to a temporary decrease in monetary value and thus harms everyone who [i]didn't[/i] get the loan) eventually is repaid and destroyed things are fine. Right? But banks usually require interest on their loans, extra money for the service they provide in creating money out of nothing. Again this doesn't seem like such a bad thing, but what happens when so much non-existing money is created that the total interest on all loans exceed the amount of [i]actual[/i] money? Suddenly it is impossible to repay all the loans. Isn't this a bit of a problem? What bothers me most about money today is that there seem to be very little democratic control over it. This seems to me to be the [b]most important[/b] thing any government should do, as without having control over money it can't really have any useful control over anything else. What also bothers me is that we've given power to individual, non-elected people to decide how much money there is. Every time someone else takes a loan, it means the pool gets larger and they get a bigger share of it. This has the nasty effect of making MY money less valuable. While there may be laws in place to cover how much temporary money can be created, there seem to be few laws that state who this can be done to. That such immense control over our resource distribution is in the hands of individuals rather than democratically elected parties is beyond my comprehension. Why do we even bother calling ourselves a "democracy" when so much of the power is undemocratic? Just take the fact that I can't really find any easy-accessible information on how much money there actually is (in Sweden). There are some estimates on the number of bills and vague esitamates on the loans and such but this really should be known. It is a zero-sum resource distribution system, so we should know how large the pool is. Going to the webpage of "Riksbanken" that really should be the first thing you see in large bold letters. So, is there any reason why money isn't being counted in percent? That really seems to me to be the best system and will much more easily give a good idea of your share. By measuring money this way, you'd both get a better idea of how much you [i]actually[/i] have, and understand that every bit extra for you is one bit less for another. Why do let private individuals decide when someone should temporarily get a higher percent? Shouldn't all banks really be government controlled in all democracies? The one who controls money controls resources distribution and thus really have most of the power. While there certainly could be people who prefer to live in a country controlled by non-elected individuals, and I'm not really here to discuss what the best system is, I really think that in order for something to be a [i]democracy[/i], money needs to be in the hands of the government. Ok ok, sorry for getting a bit carried away. It's just you hear just about nothing on the issues of our core economic system in public debate and it gets to me. Money is sort of the most important thing in our society today and the fact that we don't really know or get informed about how it works is a great shame. So, regardless of if you agree with me or not that banks should be government controlled in a democracy, did I make any mistakes in my analysis of money in itself? Is there any reason why we don't count it in %? Does it have other values than as a resource distribution system?

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Thu, 2014-07-17 12:32

Urthdigger Urthdigger's picture

So, I'd like to preface this

So, I'd like to preface this by saying I'm not a skilled economics guy, so I could be wrong. I do not believe it's true in the slightest that monetary value is fixed. You hit it on the head when you said that money is a resource distribution system, but didn't really account for the resources themselves. The value of a given bill is not just a matter of how many bills there are, but also the type and quantity of resources on the market. Anytime something is made, that increases supply. Any time something is consumed, supply goes down. Assuming demand remains more or less constant, this means making more of something will make it cheaper, going by the laws of supply and demand. Ergo, by making something, the value of money goes up in terms of how much of that item it can purchase. On a larger scale, a more productive society has more value from their money. Another way to look at it is from an individual level. Say you have some spare parts nobody wants. You tinker with them, and make a useful machine. You've essentially created value, and this applies to monetary value as well. Work is all about turning less valuable things into more valuable things, so in a way all workers create value. Oh, and to clarify, artists are workers too, and creative works have value.

Thu, 2014-07-17 13:26

MAD Crab

I once read an interesting

I once read an interesting little economic game. Call it the nut game. Place a dozen nuts in a bowl, and have your players sit around it at arms length. Tell them the goal of the game is to gather as many nuts as possible. After thirty seconds, the number of nuts left in the bowl will be doubled. Then shout "go!" Guess what happens? Bet you you don't have to refil the bowl a single time. Economics is not a zero sum game, but it always gets treated like one.

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Thu, 2014-07-17 14:45

Smokeskin

You're mostly right, Lorsa,

You're mostly right, Lorsa, but there's some details I'd like to elaborate on. Zero sum The transaction of money is not zero sum, and if I get a raise there doesn't have to be anyone who has to take a paycut. For example, imagine that you and I are both providing services - I clean your house, you mow my lawn. You used to pay me $100 a month for 10 hours of work, and I used to pay you the same. Then I demand a raise, so I get $110 per month, and in return you demand the same so you also get $110 per month. We both got raises, yay! You can add in more people, taxes and with government spending and government employees also getting raises, and it still works out the same way. Central bank The central bank prints money. It is the only entity allowed to print money. Commercial bank created money But what about bank created money? Well, the banks don't create them as such. They're created through circulation. It works like this. Let's imagine there is only 1 bank in the country, and this bank borrows $100 from the central bank. You then borrow the $100 from the bank to buy a widget from me. What happens? The bank gives you the money, you give them to me in return for the money, and I deposit them in the bank. So now the bank again has $100. You want another widget, so you borrow another $100 from the bank, so now the bank has $100 actual money (but my account still says I have $100). You pay me, I deposit the money, so now my account says I have $200, you owe the bank $200, and the bank again has $100. Voila, through circulation $100 has appeared magically - and the bank is ready to do it again! You can expand this example to cover many banks and many people, and it works out the same way (the banks lend eachother money to balance it when one bank gets more deposits than loans) Fractional reserve banking However, there are laws that require the banks to have a certain reserve. For example they have to always have 3% of the amount they've loaned out on hand as cash. In the example above, the bank couldn't actually give you a loan of $100 if it only had $100 - it could only loan you $97. And the next round, it would be 3% less again, and so on. If you do the math on that, it ends up at $100/3%=$3,333.33 of bank created money at maximum if the reserve requirement is 3%. Democratic control The fractional reserve rate is democratically controlled, and this limits the amount of money. The central bank charter is also democratically controlled. In Europe, the central bank charter says that it should keep inflation at or below 2%. The US central bank has a charter that says it must strike a balance between inflation, job creation and economic growth. The bank sets the rate on its loan and its printing of money based on this charter. It is widely recognized that the printing of money should not be under direct democratic control. The democratic system is simply not responsible enough to handle the temptation to just print money to give gifts to the voters. Inflation When you mention that the creation of money makes your money less worth, you are generally correct. However, both your pay and most of your assets should increase by the same amount. Some assets like cash and bonds do not increase in value with inflation (though they may have interest rates that balance it). But your house, stocks and such should on average increase in value with inflation. If you have significant funds, don't keep them as cash unless you get solid interest rates. Loans also don't increase with inflation, so that's a good thing! Alternative models to fractional reserve banking You could go with full reserve banking that requires banks to keep 100% reserves. You can google the Chicago Plan for a possible implementation and transition. In a nutshell, the central bank prints all the money that the banks would need to go from 3-6% (depending on country) to 100% reserves and then loan them to the banks.

Thu, 2014-07-17 17:45

Lorsa

Urthdigger wrote:So, I'd like

Urthdigger wrote:
So, I'd like to preface this by saying I'm not a skilled economics guy, so I could be wrong. I do not believe it's true in the slightest that monetary value is fixed. You hit it on the head when you said that money is a resource distribution system, but didn't really account for the resources themselves. The value of a given bill is not just a matter of how many bills there are, but also the type and quantity of resources on the market. Anytime something is made, that increases supply. Any time something is consumed, supply goes down. Assuming demand remains more or less constant, this means making more of something will make it cheaper, going by the laws of supply and demand. Ergo, by making something, the value of money goes up in terms of how much of that item it can purchase. On a larger scale, a more productive society has more value from their money. Another way to look at it is from an individual level. Say you have some spare parts nobody wants. You tinker with them, and make a useful machine. You've essentially created value, and this applies to monetary value as well. Work is all about turning less valuable things into more valuable things, so in a way all workers create value. Oh, and to clarify, artists are workers too, and creative works have value.

You can see in my original post that I avoided talking about resources. It is indeed 100% correct that an increase in resources will increase the value you get out of your money. In fact, it is the [i]only[/i] thing that will do so. However, as money represents only how resources are to be distributed, increasing the amount of money doesn't give anyone more resources. It only changes the total at which your money is a fraction of. Thus money in itself remains a zero-sum game as it represents how many % of resources each person gets. Nothing in what you say contradics my original post, it just adds another dimension that I was thinking of getting to later. To say it again, the value of your money is in direct proportion to the total amount of money in existence. The amount of resources you can get for that money is obviously in proportion to the amount of resources availible.

MAD Crab wrote:
I once read an interesting little economic game. Call it the nut game. Place a dozen nuts in a bowl, and have your players sit around it at arms length. Tell them the goal of the game is to gather as many nuts as possible. After thirty seconds, the number of nuts left in the bowl will be doubled. Then shout "go!" Guess what happens? Bet you you don't have to refil the bowl a single time. Economics is not a zero sum game, but it always gets treated like one.

Maybe I am just stupid but I don't really understand how this example relates to the function or value of money. This seems more like a psychological experiment meant to show that certain people are motivated more by others not having anything rather than everyone having an abudance. Yes, it is very important in understaning why our economy functions (or not functions as it were) today but doesn't really shed any light on understanding money and its purpose.

Smokeskin wrote:
Lots of stuff

I'm sorry but I'm really tired and it's getting late. I'll have to reply to you tomorrow!

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Lorsa is a Forum moderator [color=red]Red text is for moderator stuff[/color]

Fri, 2014-07-18 04:43

Lorsa

Smokeskin wrote:Zero sum

Smokeskin wrote:
Zero sum The transaction of money is not zero sum, and if I get a raise there doesn't have to be anyone who has to take a paycut. For example, imagine that you and I are both providing services - I clean your house, you mow my lawn. You used to pay me $100 a month for 10 hours of work, and I used to pay you the same. Then I demand a raise, so I get $110 per month, and in return you demand the same so you also get $110 per month. We both got raises, yay! You can add in more people, taxes and with government spending and government employees also getting raises, and it still works out the same way.

I think you just managed to prove what I was saying all along. In your example, there are only two resources, cleaning a hosue and mowing a lawn. At the start there is only $200 in the system, of which we have $100 each that we use to distribute the two resources equally. You then say that for some strange reason, we decide to create another $20, divide it equally and then pay each other $110 instead. It is a clear-cut explanation of what I was getting at. Money is a percentage game. In this example, we both have 50% of the money, thus access to 50% of the resources and even if we increase the [i]amount[/i] of money it matters little as we still have only 50% of it. So none of us [i]actually[/i] got a raise in the system. We're still both at 50%! Let's say instead that you demand $110 from me for your 10 hours of work, but still only pay ME $100 for your 10 hours of work. What happens then? Well, as there's only $200 in the system (using an example where we [i]don't[/i] just magically create new money), I need to first work for you so I have all the $200 on hand. Then you work for me and I now have $90 whereas you have $110. It's a clear raise for you, and a clear loss for me. So you see, it IS impossible to get a meaningful raise without taking it from someone else.

Smokeskin wrote:
Central bank The central bank prints money. It is the only entity allowed to print money.

And what does this have to do with anything in society today?

Smokeskin wrote:
Commercial bank created money But what about bank created money? Well, the banks don't create them as such. They're created through circulation. It works like this. Let's imagine there is only 1 bank in the country, and this bank borrows $100 from the central bank. You then borrow the $100 from the bank to buy a widget from me. What happens? The bank gives you the money, you give them to me in return for the money, and I deposit them in the bank. So now the bank again has $100. You want another widget, so you borrow another $100 from the bank, so now the bank has $100 actual money (but my account still says I have $100). You pay me, I deposit the money, so now my account says I have $200, you owe the bank $200, and the bank again has $100. Voila, through circulation $100 has appeared magically - and the bank is ready to do it again! You can expand this example to cover many banks and many people, and it works out the same way (the banks lend eachother money to balance it when one bank gets more deposits than loans).

I am fairly certain that the banks actually DO create them. That is, they don't actually have to borrow them from the central bank like in your example. But anyway, regardless if it comes from the central bank or not, you do illustrate a bit of a problem with money lending. In your example above, there is only a total of $100 in the system. Yet I owe the bank $200 and the bank owes you $200. If you went to the bank to demand your $200 it couldn't actually give it to you (unless they went on to increase the money total by 100%), potentially leaving you furious. Similarly, I couldn't repay my loan without first getting some money by either performing services to the bank or to you. Basically, by taking this loan I have placed myself in a position of indentured servitude and am at the mercy of both you and the bank that could decide to pay me a tiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiny amount (like 1 cent) for each service I provide. If I don't agree to this, you could simply decide that I've now defaulted on my loan and imprison me. So anyway, let's continue this example with how it [i]actually[/i] works. The bank lends me $100 and in return it wants some interest. Let's say 10% so it wants $110 back. After my second widget bought I'm at a $220 debt to the bank, your account says $200 and there is only $100 in circulation. So even if I provide services for you for $200, so your bank account drops to 0 and I repay my original loan, I still have $20 left that I need to pay the bank. Where will this money come from? Either I could perform services for the bank, for which it will pay me and I can use that money to repay to the loan. OR you could take a loan from the bank for $100, use that to pay me for a service, I will deposit the money on the bank and now the accounts say: Me: $80 (since I owed the bank 20) You: -$110 (since you owe the bank 100 + interest) And the bank has $100 which is the only money in existence. As you can see, it is impossible for me to withdraw enough funds from the bank to pay you for a widget or two in order for you to repay your loan to the bank without me ALSO taking a loan. So I'll have to withdraw $110, paying you and now the accoutns look like: Me: -$33 You: 0 If I want to pay my money back by taking a loan from you it will read: Me: 0 You: -$36.3 And after another transaction: Me: -$39.93 You: 0 We can continue this example on indefinitely, or at the very least until we reach a position where one of us will owe the bank $100, which is all the money in existence and now we're fully indentured to the bank for the total value of money. But it doesn't have to stop [b]there[/b]! The bank could continue to lend us money until we're indebted to a value that is effectively HIGHER than the total sum of all the money that exist (which is $100). It is the most devious scheme for indentured servitude ever invented. Given enough time, the banks will have ALL the power in the world, as everyone will effectively be indebted to them and forced to provide services for a value the bank can decide or be imprisoned. And this is even BEFORE we take into account fractional reserve banking.

Smokeskin wrote:
Fractional reserve banking However, there are laws that require the banks to have a certain reserve. For example they have to always have 3% of the amount they've loaned out on hand as cash. In the example above, the bank couldn't actually give you a loan of $100 if it only had $100 - it could only loan you $97. And the next round, it would be 3% less again, and so on. If you do the math on that, it ends up at $100/3%=$3,333.33 of bank created money at maximum if the reserve requirement is 3%.

I think you've completely misunderstood fractional reserve banking (or I have). The misunderstanding, I think, comes from your assumption that the bank needs to have cash on hand in order to lend it. This simply isn't true and they can create money at will (unless you demand to get cash, but who does that anyway?). What the law means is that in order to lend you $100, they need to have a reserve of $3. However, this reserve could come from deposits from other people which leads us to the following scenario: Let's say bank 1 has a $3, so they can give you a loan for $100. You deposit this money into bank 2 which now has a reserve of $100 (let's assume it was 0 to start with) so it can give me a loan of $3333. I then move on to deposit this money into bank 1 which will now have a reserve of $3336, enough to grant you a larger loan to a total of $111200 (so $111100 new money). If you deposit this money into bank 2 it now has a total of $111200 on hand so it can increase MY loan to $3706667. This can continue in infinity until both you and me owe the banks an ungodly amount of money which we will then later have to work to repay. So fractional reserve banking means that the indentured servitude for ungodly sums of money will happen [i]that much quicker[/i] than it does with "normal" money lending. Both situations still leads to indentured servitude towards the banks, but fractional reserve banking will lead there much more quickly and is kind of an insane system to begin with in the hands of private individuals.

Smokeskin wrote:
Democratic control The fractional reserve rate is democratically controlled, and this limits the amount of money. The central bank charter is also democratically controlled. In Europe, the central bank charter says that it should keep inflation at or below 2%. The US central bank has a charter that says it must strike a balance between inflation, job creation and economic growth. The bank sets the rate on its loan and its printing of money based on this charter. It is widely recognized that the printing of money should not be under direct democratic control. The democratic system is simply not responsible enough to handle the temptation to just print money to give gifts to the voters.

It is widely recognized? Really? Where? That argument seems to me to be the exact same one that was used to speak for the old monarchies. The common people isn't "responsible" enough to handle true leadership, so it [i]obviously[/i] has to be in the hands of a non-elected individual that transfters their power hereditary. I think the argument is about as valid now as it was then. I don't want the power over society to be in the hands of a dictator that I can't touch. Unless it's the most moral and enlightened dictator ever. But I think it's fairly obvious that's not the case right now.

Smokeskin wrote:
Inflation When you mention that the creation of money makes your money less worth, you are generally correct. However, both your pay and most of your assets should increase by the same amount. Some assets like cash and bonds do not increase in value with inflation (though they may have interest rates that balance it). But your house, stocks and such should on average increase in value with inflation. If you have significant funds, don't keep them as cash unless you get solid interest rates. Loans also don't increase with inflation, so that's a good thing!

As you can see, I left assets out of this picture. The focus here is (as much as possible) only one money. So increase in total amount of money leads to inflation, which is a decrease in money worth. If the total amount of resources in society increases as well, it can give the [i]illusion[/i] of money holding their value even when the total value increase, but it is only that; an illusion. Let's say that there's some inflation and a corresponding pay increase. Before there was $100, I had a salary of $40 and you one of $60. The total amount of increases by $10 so if we are to follow the same distribution I would now have $44 in salary and you'd have $66. Everything seems fine. We still both have the exact same percentages we did before, which would be a 40% and a 60% salary but the value of money have decreased. But what happens when someone does NOT get a salary increase during inflation? It effectively reduces it. Let's say another $10 is being created but for some reason it all goes to you. You now have $70 in salary and I have $40. Or to be more precise, 64% vs. 36%. Clearly you have gotten a salary increase on behalf of a decrease for me (leading us back to the beginning). However, inflation usually refers to how much goods (in absolute) you can get for your money. This means that as long as the amount of resources increase at a rate equal to that of the total money increase you won't necessarily "see" the diminished returns with your increase in money. So let's say that we produced 100 goods, which according to the first distribution will be 40 to me and 60 to you. Let's say the total money gets increased to 110, you get your pay increase and I get nothing so now we're at 70 and 40. However, if the total amount of resources ALSO gets increased to 110, I might not really notice anything as there's no (comonly defined) inflation. I still get my 40 resources but you instead get 70. This extra increase all goes to you but I have the [i]illusion[/i] of everything being fine and dandy. THIS is the danger of not knowing the total amount of money in existence and why it really should be measured in %. If our total resources gets increased, it can be difficult for me to know how much it has increased, how much the total amount of money has increased and thus how much more salary I deserve. Under the current system, we can increase the total amount of resources BUT the new distribution can be extremely unequal unless everyone gets exactly the same percent increase in salary (which again is completely redundant). If I get a 2% increase of my salary and you get a 4% and inflation is at 2% it means that while the total productivity of society has increased, I see nothing of this in my resources as they'll all go to you. Simple math really.

Smokeskin wrote:
Alternative models to fractional reserve banking You could go with full reserve banking that requires banks to keep 100% reserves. You can google the Chicago Plan for a possible implementation and transition. In a nutshell, the central bank prints all the money that the banks would need to go from 3-6% (depending on country) to 100% reserves and then loan them to the banks.

OR the central bank could be the one that lends money to the citizens. This means that we all loan money from each other (if the government is in control of the central bank), which is usually what's happening anyway. If you take a loan, especially under fractional reserve banking, the total amount of money gets increased which diminishes the value of MY money. The fact that I didn't get a say in this seems very unfair to me.

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Lorsa is a Forum moderator [color=red]Red text is for moderator stuff[/color]

Fri, 2014-07-18 05:38

Smokeskin

Lorsa wrote:Smokeskin wrote

Lorsa wrote:
Smokeskin wrote:
Zero sum The transaction of money is not zero sum, and if I get a raise there doesn't have to be anyone who has to take a paycut. For example, imagine that you and I are both providing services - I clean your house, you mow my lawn. You used to pay me $100 a month for 10 hours of work, and I used to pay you the same. Then I demand a raise, so I get $110 per month, and in return you demand the same so you also get $110 per month. We both got raises, yay! You can add in more people, taxes and with government spending and government employees also getting raises, and it still works out the same way.
I think you just managed to prove what I was saying all along. In your example, there are only two resources, cleaning a hosue and mowing a lawn. At the start there is only $200 in the system, of which we have $100 each that we use to distribute the two resources equally. You then say that for some strange reason, we decide to create another $20, divide it equally and then pay each other $110 instead. It is a clear-cut explanation of what I was getting at. Money is a percentage game. In this example, we both have 50% of the money, thus access to 50% of the resources and even if we increase the [i]amount[/i] of money it matters little as we still have only 50% of it. So none of us [i]actually[/i] got a raise in the system. We're still both at 50%! Let's say instead that you demand $110 from me for your 10 hours of work, but still only pay ME $100 for your 10 hours of work. What happens then? Well, as there's only $200 in the system (using an example where we [i]don't[/i] just magically create new money), I need to first work for you so I have all the $200 on hand. Then you work for me and I now have $90 whereas you have $110. It's a clear raise for you, and a clear loss for me. So you see, it IS impossible to get a meaningful raise without taking it from someone else.

I'm going to reply piecemal to your post - I'm not sure I have the time to do it all at once, and it gets easier to read and reply to too imo. I agree with you on this (as I opened my post with, I mostly agree with what you wrote, but some things deserved to be elaborated on). What I didn't agree with was that you wrote that a raise would have to be taken from someone else. That's generally not true. But I completely agree that everyone getting raises doesn't really raise anyone's purchasing power as everything just gets more expensive. Even when there are productivity gains and people's purchasing power is raised so on average everyone is better off, your point about the relative distribution of the wealth remains - even if the pie gets bigger, it's still a limited pie that has to be shared.

Fri, 2014-07-18 05:50

Smokeskin

Lorsa wrote:Smokeskin wrote

Lorsa wrote:

Smokeskin wrote:
Fractional reserve banking However, there are laws that require the banks to have a certain reserve. For example they have to always have 3% of the amount they've loaned out on hand as cash. In the example above, the bank couldn't actually give you a loan of $100 if it only had $100 - it could only loan you $97. And the next round, it would be 3% less again, and so on. If you do the math on that, it ends up at $100/3%=$3,333.33 of bank created money at maximum if the reserve requirement is 3%.
I think you've completely misunderstood fractional reserve banking (or I have). The misunderstanding, I think, comes from your assumption that the bank needs to have cash on hand in order to lend it. This simply isn't true and they can create money at will (unless you demand to get cash, but who does that anyway?). What the law means is that in order to lend you $100, they need to have a reserve of $3.

I'm absolutely certain that I have understood it correctly. The bank needs to both have the $100 and $3 as a reserve after they paid out the loan. They can't just create money at will. However, at the end of the day, the banks will have created the money through circulation. If you require a 3% reserve, when the central bank prints $100 and loans it to a private bank, those $100 will eventually turn into up to $3,333 because of bank created money. We agree on the end result - the private banks create the majority of money in our society - but the mechanism is different from what was outlined.

Fri, 2014-07-18 06:08

Smokeskin

Lorsa wrote:

Lorsa wrote:
In your example above, there is only a total of $100 in the system. Yet I owe the bank $200 and the bank owes you $200. If you went to the bank to demand your $200 it couldn't actually give it to you (unless they went on to increase the money total by 100%), potentially leaving you furious. Similarly, I couldn't repay my loan without first getting some money by either performing services to the bank or to you.

I agree. That's normally not an issue, but it is the problem with bank runs where the customers fear that the bank is about to fold. Typically the government steps in and guarantees people's deposits to prevent it from happening. This one of the major problems with modern banking in my opinion, the moral hazard problem. It doesn't just apply to bank runs, it applies to banks failing in general. The government always moves in to save the banks. The banks know this, so they are willing to run too high risks. The customers know this, so they don't care if the bank is engaged in high risk behavior.

Lorsa wrote:
Basically, by taking this loan I have placed myself in a position of indentured servitude and am at the mercy of both you and the bank that could decide to pay me a tiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiny amount (like 1 cent) for each service I provide. If I don't agree to this, you could simply decide that I've now defaulted on my loan and imprison me.

We don't normally throw people in jail for defaulting on their loans. And we have a competitive labor market. You should be able to find someone who will pay a fair wage for your services.

Lorsa wrote:
We can continue this example on indefinitely, or at the very least until we reach a position where one of us will owe the bank $100, which is all the money in existence and now we're fully indentured to the bank for the total value of money. But it doesn't have to stop [b]there[/b]! The bank could continue to lend us money until we're indebted to a value that is effectively HIGHER than the total sum of all the money that exist (which is $100). It is the most devious scheme for indentured servitude ever invented. Given enough time, the banks will have ALL the power in the world, as everyone will effectively be indebted to them and forced to provide services for a value the bank can decide or be imprisoned.

We've been living with this system for a long time without everyone being enslaved to the banks, so that is a counterfactual statement imo. One reason is that value creation tends to be significantly higher than the bank interest rates. The bank interest rates are effectively competing with the expected gains and risks of possible investments. Imagine that the cost of renting was lower than the cost of owning a house after you factor in interest and the expected increase in property value over time - only very few people would buy then.

Fri, 2014-07-18 06:55

#10

Smokeskin

Lorsa wrote:Smokeskin wrote

Lorsa wrote:

Smokeskin wrote:
Democratic control The fractional reserve rate is democratically controlled, and this limits the amount of money. The central bank charter is also democratically controlled. In Europe, the central bank charter says that it should keep inflation at or below 2%. The US central bank has a charter that says it must strike a balance between inflation, job creation and economic growth. The bank sets the rate on its loan and its printing of money based on this charter. It is widely recognized that the printing of money should not be under direct democratic control. The democratic system is simply not responsible enough to handle the temptation to just print money to give gifts to the voters.
It is widely recognized? Really? Where? That argument seems to me to be the exact same one that was used to speak for the old monarchies. The common people isn't "responsible" enough to handle true leadership, so it [i]obviously[/i] has to be in the hands of a non-elected individual that transfters their power hereditary. I think the argument is about as valid now as it was then. I don't want the power over society to be in the hands of a dictator that I can't touch. Unless it's the most moral and enlightened dictator ever. But I think it's fairly obvious that's not the case right now.

The problem with democratic control isn't that people aren't responsible as such. If you look at Public Choice Theory (the field of economics that deal with these things), it assumes that the voters and politicians all act rationally - but the incentive structure in a democracy are such that the system as a whole often behaves irresponsibly and many political decisions are made that are obviously not beneficial for the citizens. A monarchy is obviously worse (unless perhaps you assume a benevolent, fair and competent monarch, but as you correctly point out it seems to rarely play out that way) in this regard. But let us imagine that the government could just print money. You're up for election and it isn't looking good - so you cut taxes and give other gifts to the voters and run the money press instead. And bam, you have inflation. That problem you had with your money losing value, that's exactly going to happen in this system while it doesn't happen in the current one. And it gets even worse. Investors realize that this is a risk - the politicians can at any time drastically change the monetary policy resulting in huge deviations in the currency value (and most likely making the currency worth less). Investors will then be looking at a much higher risk of political decisions that will reduce the value of their investments drastically, and that will greatly reduce the amount of investment in the country - foreign investors won't come, and local investors will seek abroad. It's the sure way to kill growth and employment. An independent central bank with a publicly known charter and credible management is greatly preferred.

Fri, 2014-07-18 07:12

#11

Smokeskin

Lorsa wrote:

Lorsa wrote:
As you can see, I left assets out of this picture. The focus here is (as much as possible) only one money. So increase in total amount of money leads to inflation, which is a decrease in money worth. If the total amount of resources in society increases as well, it can give the [i]illusion[/i] of money holding their value even when the total value increase, but it is only that; an illusion. Let's say that there's some inflation and a corresponding pay increase. Before there was $100, I had a salary of $40 and you one of $60. The total amount of increases by $10 so if we are to follow the same distribution I would now have $44 in salary and you'd have $66. Everything seems fine. We still both have the exact same percentages we did before, which would be a 40% and a 60% salary but the value of money have decreased. But what happens when someone does NOT get a salary increase during inflation? It effectively reduces it. Let's say another $10 is being created but for some reason it all goes to you. You now have $70 in salary and I have $40. Or to be more precise, 64% vs. 36%. Clearly you have gotten a salary increase on behalf of a decrease for me (leading us back to the beginning). However, inflation usually refers to how much goods (in absolute) you can get for your money. This means that as long as the amount of resources increase at a rate equal to that of the total money increase you won't necessarily "see" the diminished returns with your increase in money. So let's say that we produced 100 goods, which according to the first distribution will be 40 to me and 60 to you. Let's say the total money gets increased to 110, you get your pay increase and I get nothing so now we're at 70 and 40. However, if the total amount of resources ALSO gets increased to 110, I might not really notice anything as there's no (comonly defined) inflation. I still get my 40 resources but you instead get 70. This extra increase all goes to you but I have the [i]illusion[/i] of everything being fine and dandy. THIS is the danger of not knowing the total amount of money in existence and why it really should be measured in %. If our total resources gets increased, it can be difficult for me to know how much it has increased, how much the total amount of money has increased and thus how much more salary I deserve. Under the current system, we can increase the total amount of resources BUT the new distribution can be extremely unequal unless everyone gets exactly the same percent increase in salary (which again is completely redundant). If I get a 2% increase of my salary and you get a 4% and inflation is at 2% it means that while the total productivity of society has increased, I see nothing of this in my resources as they'll all go to you.

No one should operate under the assumption that money retains its value. Inflation indexes are publicly available, and here in the EU we aim for a bit under 2% and typically that target is hit very nicely. Anything less than a 2% annual raise is a reduction in purchasing power. In this way, you do know what the value of money is and how it changes, and the central bank has pretty nice lock on this by controlling money production and interest rates and it aims for a stable inflation level. In general, that's what you want? A stagnant or even increasing value of money (and since productivity rises, a fixed amount of money would mean a rising value) is utter poison to an economy. We want an incentive for people and investors to spend money. We want investments in new businesses and jobs, we want people to buy houses and cars and flatscreens (they're built by people in jobs). We don't want everyone to go "yeah I'm waiting 6 months to buy anything because my money will be worth more then". People would borrow less money, because paying them back in the future would be harder, compared to the current situation where inflation makes it easier to pay back the loan. It is very hard to get employees to accept pay cuts, but if you don't cut their pay as the value of money increases, your products will remain at a constant price, ie. getting too expensive.

Fri, 2014-07-18 08:23

#12

Lorsa

Smokeskin wrote:What I didn't

Smokeskin wrote:
What I didn't agree with was that you wrote that a raise would have to be taken from someone else. That's generally not true.

I'm glad we agree on many points, but can you give an example of this? I don't see how a raise for you can happen without a dminished return from someone else.

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Fri, 2014-07-18 08:26

#13

Lorsa

Smokeskin wrote:I'm

Smokeskin wrote:
I'm absolutely certain that I have understood it correctly. The bank needs to both have the $100 and $3 as a reserve after they paid out the loan. They can't just create money at will. However, at the end of the day, the banks will have created the money through circulation. If you require a 3% reserve, when the central bank prints $100 and loans it to a private bank, those $100 will eventually turn into up to $3,333 because of bank created money. We agree on the end result - the private banks create the majority of money in our society - but the mechanism is different from what was outlined.

Yes indeed, it turns out my example was wrong. There is an upper limit to the amount of commercially created bank money from a certain central bank fund. I still means a continouus increase in total money, one that I as an individual and we as a democractic society has very little say in when it happens or whom it benefits.

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Fri, 2014-07-18 08:36

#14

Lorsa

Smokeskin wrote:Lorsa wrote:

Smokeskin wrote:
Lorsa wrote:
In your example above, there is only a total of $100 in the system. Yet I owe the bank $200 and the bank owes you $200. If you went to the bank to demand your $200 it couldn't actually give it to you (unless they went on to increase the money total by 100%), potentially leaving you furious. Similarly, I couldn't repay my loan without first getting some money by either performing services to the bank or to you.
I agree. That's normally not an issue, but it is the problem with bank runs where the customers fear that the bank is about to fold. Typically the government steps in and guarantees people's deposits to prevent it from happening. This one of the major problems with modern banking in my opinion, the moral hazard problem. It doesn't just apply to bank runs, it applies to banks failing in general. The government always moves in to save the banks. The banks know this, so they are willing to run too high risks. The customers know this, so they don't care if the bank is engaged in high risk behavior.

Indeed. I don't see why the government should make such guarantees for commercial banks. It feels like a set up for disaster to me. The ones that suffer are those that were catious and [i]didn't[/i] engage in high-risk behavior. This is why I would prefer to only have a government controlled bank. If my state is going to guarantee deposits it should also be the one granting loans.

Smokeskin wrote:
We don't normally throw people in jail for defaulting on their loans. And we have a competitive labor market. You should be able to find someone who will pay a fair wage for your services.

I'm not actually sure what the punishment for defaulting on a loan is. I reckon there should be one? This is a thought experiment, so here there is only you, me and the bank. Since both you and the bank is well aware that the less you pay me for my services the longer I will be in debt there is great incentive for you to offer me as little as possible. By expanding this to a larger scale, while there may be a competitive labor market, any individual in debt has a less strong starting point for salary negotiation. This is a fact that everyone else can use to their advantage.

Smokeskin wrote:
We've been living with this system for a long time without everyone being enslaved to the banks, so that is a counterfactual statement imo. One reason is that value creation tends to be significantly higher than the bank interest rates. The bank interest rates are effectively competing with the expected gains and risks of possible investments. Imagine that the cost of renting was lower than the cost of owning a house after you factor in interest and the expected increase in property value over time - only very few people would buy then.

Maybe the banks haven't realised quite how sweet the system really is yet?

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Fri, 2014-07-18 08:45

#15

Lorsa

Smokeskin wrote:Lorsa wrote

Smokeskin wrote:
The problem with democratic control isn't that people aren't responsible as such. If you look at Public Choice Theory (the field of economics that deal with these things), it assumes that the voters and politicians all act rationally - but the incentive structure in a democracy are such that the system as a whole often behaves irresponsibly and many political decisions are made that are obviously not beneficial for the citizens. A monarchy is obviously worse (unless perhaps you assume a benevolent, fair and competent monarch, but as you correctly point out it seems to rarely play out that way) in this regard. But let us imagine that the government could just print money. You're up for election and it isn't looking good - so you cut taxes and give other gifts to the voters and run the money press instead. And bam, you have inflation. That problem you had with your money losing value, that's exactly going to happen in this system while it doesn't happen in the current one. And it gets even worse. Investors realize that this is a risk - the politicians can at any time drastically change the monetary policy resulting in huge deviations in the currency value (and most likely making the currency worth less). Investors will then be looking at a much higher risk of political decisions that will reduce the value of their investments drastically, and that will greatly reduce the amount of investment in the country - foreign investors won't come, and local investors will seek abroad. It's the sure way to kill growth and employment. An independent central bank with a publicly known charter and credible management is greatly preferred.

A government that prints extra money to give to voters didn't actually give anything. So I don't really see the incentive in doing that. Basically it seems like you are saying that an independant controlled central bank actually [i]is[/i] a benevolent dictator. I don't agree with this; or rather I don't believe you can have any factual democracy without control over the economy. Which includes the total amount of money (which is always constant). I feel it is very dangerous for a society to give this immense control to individuals and fail to understand how a government can make any useful policies lacking such a core power.

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Fri, 2014-07-18 09:32

#16

Smokeskin

Lorsa wrote:Smokeskin wrote

Lorsa wrote:
Smokeskin wrote:
What I didn't agree with was that you wrote that a raise would have to be taken from someone else. That's generally not true.
I'm glad we agree on many points, but can you give an example of this? I don't see how a raise for you can happen without a dminished return from someone else.

I agree that in the most literal sense, of course if you get a $10 raise, that's $10 less for the employer that it could have given to someone else (the owners or other employees, or customers in the form of cheaper services). If we're looking at the bigger picture of raises in society (which is how I understood your mention of it) the example where you and I are trading services and we both go from $100 to $110 per month illustrates what I mean. Typically everyone gets a raise that is in part linked to inflation, and in part to gaining seniority (the latter part has no net effect as senior high-pay people leave in one end and are replaced with fresh hires at entry level pay in the other).

Fri, 2014-07-18 10:29

#17

DivineWrath DivineWrath's picture

Well, a problem to realize is

Well, a problem to realize is, if you aren't making money, you are losing it. Its very difficult to find a way to be making exactly $0. Its not just the banks that are able to get rich, it is also corporations, gambling institutions, corrupt governments, good old ripping people off, and other things. Don't forget that banks are in the business of money, in that they do require some money to do business. Because of their strong association with money, they are often heavily regulated by governments with the intent to prevent them from going rampant. The recent problems that the US has had recently is largely due to failure to regulate things. Governments aren't something that should be blindly trusted with money. They seem to be compelled to spend it, spend it all, and often spend money it doesn't have. Check out the US. http://www.usdebtclock.org/ ---- Regarding money as a resource. Yes, money isn't supposed to be a resource, but it practically is. Money, by design, is very liquid. It can be exchange for any good or service without the need to barter for exchange of goods and services. You know, the kind of bartering where you have corn and the other guy has burgers, but the other guy doesn't want corn, so you have to find some third person who might want corn and has something the burger guy wants... Another perk of money being very liquid, it is allows economies to shift to fill gaps in demand. Imagine that there were few burger joints in a city, but there was a large demand for burgers. The burger joints could charge more for burgers and still have customers lining up. In time, people would realize that burgers are good business in the city and some will start opening up their own burger joints. The competition will reduce demand and will give customers more options of getting a better deal. If enough burger joints opened up, then no one will need to line up any more to get burgers. At that point, competition is possible, such as reducing prices to draw customers in. If there were too many burger joints, then some will have to close down as they can't make enough money to remain in business. This opening and closing of burger joints should then happen until a good balance is achieved where it isn't necessary to close down any more burger joints, but it isn't profitable enough to warrant building any more. Unfortunately, this liquid quality of money means that money is worth stealing or ripping a person off for. It can literally buy anything that money can buy. If you steal money, you are effectively stealing what it is you want (assuming you could buy it).

Fri, 2014-07-18 10:36

#18

Smokeskin

Lorsa wrote:

Lorsa wrote:
smokeskin wrote:
This one of the major problems with modern banking in my opinion, the moral hazard problem. It doesn't just apply to bank runs, it applies to banks failing in general. The government always moves in to save the banks. The banks know this, so they are willing to run too high risks. The customers know this, so they don't care if the bank is engaged in high risk behavior.
Indeed. I don't see why the government should make such guarantees for commercial banks. It feels like a set up for disaster to me. The ones that suffer are those that were catious and [i]didn't[/i] engage in high-risk behavior. This is why I would prefer to only have a government controlled bank. If my state is going to guarantee deposits it should also be the one granting loans.

It is a setup for disaster. And everyone knows it - the moral hazard isn't a secret or something only fringe economists talk about. But still, the government is letting the financial sector make one-sided bets with tax money covering the costs. I don't know about the rest of the world, but even before the financial the crisis the US banks have never actually turned a profit if you remove government bail out money. I don't really like the idea only having a government controlled bank. Monopolies tend to suck. Without an incentive to generate profit and operate in a competitive banking market, it wouldn't be anywhere near the efficiency of the current banking system. That means higher interest rates, less growth, less wealth, fewer jobs. I think a better idea would just be to get rid off the moral hazard problem. It's a bit difficult, since the banks are going to assume too much risk again and then the government has to choose between banking collapse or bailing them out. Maybe make a change to the constitution that prevented the government from bailing out, that's very hard to change back. But of course that isn't going to happen, there's too much money involved for the bail out tap to get turned off.

Lorsa wrote:

Smokeskin wrote:
We don't normally throw people in jail for defaulting on their loans. And we have a competitive labor market. You should be able to find someone who will pay a fair wage for your services.
I'm not actually sure what the punishment for defaulting on a loan is. I reckon there should be one?

Nah, punishment is a bad idea, you don't want people to be afraid of assuming risk. That kills growth. If people make individual arrangements, that's what it is, but a law would be really bad. Some non-Western countries have you thrown in jail for it. Lots of people fled Dubai when the financial crisis hit for that reason. Others didn't make it out - if the banks think you're at risk of defaulting they can get you barred from leaving the country. In the US, you can more or less file for bankruptcy, hand over everything you own, and you're free from the debt after that. Most house mortgages you can even just give the house back to the bank and you're free from the debt. This was particularly crazy back before the crisis when you could get subprime mortgages above 100% financing and no interest payments during the first years. With 110% financing you could buy a house, get 10% of its value in cash (thanks!), and then sell it if prices went up or just return the house if it didn't. I wonder why that turned out badly.... In Europe, your debt will generally follow you. They take you to bailiff's court and take most of what you own, and they can do that as often as they want until you've paid back your debt plus interest. The UK moved to a US-like bankruptcy system some years ago, and there's indication that a lot of countries are going to follow in the coming years (along with actual punishment for people who actually abuse the system and are dishonest to their creditors).

Lorsa wrote:
Maybe the banks haven't realised quite how sweet the system really is yet?

The basic system of debt and interest isn't that sweet for the banks though. The sweet deals they get are the bail outs, the use of government mandated rating agencies, that sort of stuff. This financial crisis got so deep because of the US, and the root cause is US politics where lobbyists are literally buying influence by bribing politicians. The problems were no where near as bad in Europe because we have much better systems for keeping money out of politics.

Fri, 2014-07-18 10:44

#19

Smokeskin

Lorsa wrote:

Lorsa wrote:
Basically it seems like you are saying that an independant controlled central bank actually [i]is[/i] a benevolent dictator. I don't agree with this; or rather I don't believe you can have any factual democracy without control over the economy. Which includes the total amount of money (which is always constant). I feel it is very dangerous for a society to give this immense control to individuals and fail to understand how a government can make any useful policies lacking such a core power.

Well, there is democratic control with the central banks, because their charter is dictated by the politicians (often constitutionally so it takes a large majority to change it). It is a way to create a "benevolent dictator" - everyone knows what the central banks goals are and that they're not going to change suddenly. If it was under direct and immediate political control, then politicians could misuse it, and the uncertainty that creates would give massive problems, for example in attracting investments to the country. You need to adress this issue if you want to change the system: how do you get the central bank under direct democratic control and make sure that the politicians can't abuse it and change the monetary policy? The current system of letting politicians define the charter for the central bank seems like a good solution to me.

Fri, 2014-07-18 10:50

#20

Smokeskin

DivineWrath wrote:

DivineWrath wrote:
Don't forget that banks are in the business of money, in that they do require some money to do business. Because of their strong association with money, they are often heavily regulated by governments with the intent to prevent them from going rampant. The recent problems that the US has had recently is largely due to failure to regulate things.

It's way worse than that. They got regulation that made things even more rampant, like the mandatory use of rating agencies that let them put triple A ratings on institutions and assets that in reality had a ton of risk.

Fri, 2014-07-18 10:53

#21

Lorsa

Smokeskin wrote:No one should

Smokeskin wrote:
No one should operate under the assumption that money retains its value. Inflation indexes are publicly available, and here in the EU we aim for a bit under 2% and typically that target is hit very nicely. Anything less than a 2% annual raise is a reduction in purchasing power.

I don't think anyone does operate under that assumption. Or well, some might. They don't really teach much of economic theory in the first 9 years of school.

Smokeskin wrote:
In this way, you do know what the value of money is and how it changes, and the central bank has pretty nice lock on this by controlling money production and interest rates and it aims for a stable inflation level. In general, that's what you want?

In general that is what I want. But I don't know the total amount of money so I can't really tell how large part I possess. By measuring money in percentage instead, everyone would more easily know how large fraction of the resources they're eligible to. Since money is a percentage game [i]anyway[/i] I don't see how that will change anything.

Smokeskin wrote:
A stagnant or even increasing value of money (and since productivity rises, a fixed amount of money would mean a rising value) is utter poison to an economy. We want an incentive for people and investors to spend money. We want investments in new businesses and jobs, we want people to buy houses and cars and flatscreens (they're built by people in jobs). We don't want everyone to go "yeah I'm waiting 6 months to buy anything because my money will be worth more then". People would borrow less money, because paying them back in the future would be harder, compared to the current situation where inflation makes it easier to pay back the loan. It is very hard to get employees to accept pay cuts, but if you don't cut their pay as the value of money increases, your products will remain at a constant price, ie. getting too expensive.

I'll have to think a bit more about this before I can give a good answer. I think this has moved away from the prupose or function of money and into core economic system which is a whole other debate.

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Sat, 2014-07-19 05:23

#22

Smokeskin

Lorsa wrote:But I don't know

Lorsa wrote:
But I don't know the total amount of money so I can't really tell how large part I possess. By measuring money in percentage instead, everyone would more easily know how large fraction of the resources they're eligible to. Since money is a percentage game [i]anyway[/i] I don't see how that will change anything.

The current system relies on continuously printing new money (and banks then creating additional money of up to a law-regulated multiplier of that). If you want to go percentage but keep all the benefits of the current system, we'd have to continously reduce the percentage of all the money in circulation. Problematic for electronic accounts, impossible for notes. It seems to me that we should know (or could know) how much money there is. There's a very limited number of banks, iirc a maximum of a few hundred per country and most countries much less, and they're the only ones allowed to create money with demand deposit accounts, and they're under total financial oversight.

Sat, 2014-07-19 05:36

#23

Smokeskin

Found it, Sweden M1 money

Found it, Sweden M1 money stock: https://ycharts.com/indicators/sweden_m1_money_stock There's also M2 and M3 money.

Sat, 2014-07-19 06:04

#24

Lorsa

Smokeskin wrote:A stagnant or

Smokeskin wrote:
A stagnant or even increasing value of money (and since productivity rises, a fixed amount of money would mean a rising value) is utter poison to an economy. We want an incentive for people and investors to spend money. We want investments in new businesses and jobs, we want people to buy houses and cars and flatscreens (they're built by people in jobs). We don't want everyone to go "yeah I'm waiting 6 months to buy anything because my money will be worth more then". People would borrow less money, because paying them back in the future would be harder, compared to the current situation where inflation makes it easier to pay back the loan. It is very hard to get employees to accept pay cuts, but if you don't cut their pay as the value of money increases, your products will remain at a constant price, ie. getting too expensive.

I think I understand what you are saying here. In essence this is claiming that money isn't actually a resource distribution system anymore, but rather a resrouce producing system. I think that's the wrong way to look at money and if we do we're operating under a faulty understanding. The only thing that creates resources is work. People spending time doing stuff, whether it be producing goods, services or inventing technology that will do it for us creates resources. Money in itself can't do that. If we let it be something other than the way we distribute the resources we create then we end up in a situation where people use arguments like "the economy doesn't allow that" or "there isn't enough money for this". If we can't be in control of the economy then we might as well quit democracy. Saying that there isn't enough money translates to me into "this resource isn't valuable enough to society that we can devote an amount of resources to the people performing the work that they would find acceptable for doing it". Most of the "issues" you state wouldn't really be an issue even if we stay with a percentage money system. You could let people take loans and only repay 80% of it. People can learn to accept pay cuts (and if productivity of YOUR resource increase as well, there's no need to have pay cuts even if the price drops as more people will buy it giving a similar amount to pay your employees). Besides, people buy things because they want them NOW and not later. So loans would still happen even if we don't fix them by having only a faction repaid. It's a really simple fix though.

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Sat, 2014-07-19 06:18

#25

Lorsa

DivineWrath wrote:Well, a

DivineWrath wrote:
Well, a problem to realize is, if you aren't making money, you are losing it. Its very difficult to find a way to be making exactly $0.

It shouldn't be. All it really requires is to take everything you make above $0 and give it to those who make less? Or give your employers a raise or decrease the price of your good or what-have-you.

DivineWrath wrote:
Don't forget that banks are in the business of money, in that they do require some money to do business. Because of their strong association with money, they are often heavily regulated by governments with the intent to prevent them from going rampant. The recent problems that the US has had recently is largely due to failure to regulate things.

Yes, banks are in the business of money. This means that private individuals have control over our resource distribution system. I think this is a bit of a problem for any democratic soeciety.

DivineWrath wrote:
Governments aren't something that should be blindly trusted with money. They seem to be compelled to spend it, spend it all, and often spend money it doesn't have. Check out the US.

Who should be trusted with the nation's money then? The "government" is basically all individuals living in the country (in a democratic society) so it is in the best interest of its people to handle money in a manner that would be best for its population.

DivineWrath wrote:
Regarding money as a resource. Yes, money isn't supposed to be a resource, but it practically is. Money, by design, is very liquid. It can be exchange for any good or service without the need to barter for exchange of goods and services. You know, the kind of bartering where you have corn and the other guy has burgers, but the other guy doesn't want corn, so you have to find some third person who might want corn and has something the burger guy wants... Another perk of money being very liquid, it is allows economies to shift to fill gaps in demand. Imagine that there were few burger joints in a city, but there was a large demand for burgers. The burger joints could charge more for burgers and still have customers lining up. In time, people would realize that burgers are good business in the city and some will start opening up their own burger joints. The competition will reduce demand and will give customers more options of getting a better deal. If enough burger joints opened up, then no one will need to line up any more to get burgers. At that point, competition is possible, such as reducing prices to draw customers in. If there were too many burger joints, then some will have to close down as they can't make enough money to remain in business. This opening and closing of burger joints should then happen until a good balance is achieved where it isn't necessary to close down any more burger joints, but it isn't profitable enough to warrant building any more. Unfortunately, this liquid quality of money means that money is worth stealing or ripping a person off for. It can literally buy anything that money can buy. If you steal money, you are effectively stealing what it is you want (assuming you could buy it).

Yes, we started using money for easier trade and our society IS all the better for it. There is no doubt in that. However, why does this mean we can't measure money in percent instead of this value which we don't really know (since we aren't aware of the total)? There is no reason why a fixed-value, percentage-based monetary system couldn't also have a self-regulating market such as that you describe with the burger joints.

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Sat, 2014-07-19 06:23

#26

Lorsa

Smokeskin wrote:Found it,

Smokeskin wrote:
Found it, Sweden M1 money stock: https://ycharts.com/indicators/sweden_m1_money_stock There's also M2 and M3 money.

Nice. Why isn't this more easily accessible?

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Sat, 2014-07-19 07:05

#27

Lorsa

Smokeskin wrote:I'm glad we

Smokeskin wrote:
I agree that in the most literal sense, of course if you get a $10 raise, that's $10 less for the employer that it could have given to someone else (the owners or other employees, or customers in the form of cheaper services). If we're looking at the bigger picture of raises in society (which is how I understood your mention of it) the example where you and I are trading services and we both go from $100 to $110 per month illustrates what I mean. Typically everyone gets a raise that is in part linked to inflation, and in part to gaining seniority (the latter part has no net effect as senior high-pay people leave in one end and are replaced with fresh hires at entry level pay in the other).

But as illustrated, a percentage raise in salary equal to the inflation isn't a raise a all. It's just an increase of the numerical value of your salary, whereas your percentage of the total money (i.e. your designated amount of resources) stays the same. That's why any real, de-facto salary incrase HAS to be made at someone else's expense.

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Sat, 2014-07-19 07:25

#28

Lorsa

Smokeskin wrote:It is a setup

Smokeskin wrote:
It is a setup for disaster. And everyone knows it - the moral hazard isn't a secret or something only fringe economists talk about. But still, the government is letting the financial sector make one-sided bets with tax money covering the costs. I don't know about the rest of the world, but even before the financial the crisis the US banks have never actually turned a profit if you remove government bail out money. I don't really like the idea only having a government controlled bank. Monopolies tend to suck. Without an incentive to generate profit and operate in a competitive banking market, it wouldn't be anywhere near the efficiency of the current banking system. That means higher interest rates, less growth, less wealth, fewer jobs. I think a better idea would just be to get rid off the moral hazard problem. It's a bit difficult, since the banks are going to assume too much risk again and then the government has to choose between banking collapse or bailing them out. Maybe make a change to the constitution that prevented the government from bailing out, that's very hard to change back. But of course that isn't going to happen, there's too much money involved for the bail out tap to get turned off.

Everyone doesn't actually know it. There are tons of people who doesn't and it isn't an issue that is being brought up in political discussion. To me this feels like one of the most important issues and should always be up there in fhe forefront of debate (it's 10 times more important than the age of grading people in school for example). Why would banking collapse be such a horrible thing? If we are going to have privately owned corporations that handle our resource distribution system and people choose to invest their money into that bank then it should be their problem if it fails! Just like any other privately owned endevour. So yeah, I don't see any reason why the government should bail out private banks. As for government banks - like I said it's about control over the money flow. Seems like you can't really have any useful democracy without it (I know you aren't in favour of democracy though and in a way neither am I, but if we ARE to have it, at least it should be real and not fake?). Also, there's nothing cheaper than a product being sold for non-profit. It's kind of impossible to get any cheaper/more efficient than that. A government controlled bank could work with a 0 interest rate as it doesn't need to generate profit [i]at all[/i]. Or if it DID generate profit, all the profit could be spent in health care, education, infrastructure etc. Right now we've given up our power to control our own economy and in exchange for these services a few individuals has taken a VERY large portion of our resources. Then when they fail the government goes in to bail them out but they still get to keep their expensive houses and luxury cars. How's that in any way a good policy?

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Sat, 2014-07-19 07:30

#29

Smokeskin

Lorsa wrote:Smokeskin wrote

Lorsa wrote:
Smokeskin wrote:
Found it, Sweden M1 money stock: https://ycharts.com/indicators/sweden_m1_money_stock There's also M2 and M3 money.
Nice. Why isn't this more easily accessible?

From what I read while searching for it, the amount of money has been considered unimportant for decades. The central banks used to regulate it along with inflation but know they just look at inflation and the amount of money is regulated by supply and demand. I guess that inflation is relevant as this ties into your purchasing power and the changes in value of money, while the amount of money isn't directly relevant. I also saw a mention of "financial innovation" which could be understood like the central banks simply couldn't control the amount of money so they gave up.

Sat, 2014-07-19 07:34

#30

Lorsa

Smokeskin wrote:Nah,

Smokeskin wrote:
Nah, punishment is a bad idea, you don't want people to be afraid of assuming risk. That kills growth. If people make individual arrangements, that's what it is, but a law would be really bad. Some non-Western countries have you thrown in jail for it. Lots of people fled Dubai when the financial crisis hit for that reason. Others didn't make it out - if the banks think you're at risk of defaulting they can get you barred from leaving the country. In the US, you can more or less file for bankruptcy, hand over everything you own, and you're free from the debt after that. Most house mortgages you can even just give the house back to the bank and you're free from the debt. This was particularly crazy back before the crisis when you could get subprime mortgages above 100% financing and no interest payments during the first years. With 110% financing you could buy a house, get 10% of its value in cash (thanks!), and then sell it if prices went up or just return the house if it didn't. I wonder why that turned out badly.... In Europe, your debt will generally follow you. They take you to bailiff's court and take most of what you own, and they can do that as often as they want until you've paid back your debt plus interest. The UK moved to a US-like bankruptcy system some years ago, and there's indication that a lot of countries are going to follow in the coming years (along with actual punishment for people who actually abuse the system and are dishonest to their creditors).

But abuse of money is basically equivalent to stealing and we have a punishment for that! If you take a loan to get yourself resources, you are effectively taking them from someone else, and if you then fail to pay it back you've actually stolen money from everyone in society. Stealing is usually considered bad. The bankruptcy thing seems like a set-up for disaster. If handing over everyhting I own effectively clears me of all debt then I could simply take huge loans, buy loads of resources, give them to my brother, file for bankruptcy and then live in his mansion and drive around with his ferrari for the rest of my life. No risk and 100% guaranteed gain! By having no punishment for loan defaulting, you're essentially encouraging people to engage in frivolous high-risk behavior that ends up damaging the rest of society. Can't really see any other way than equating it with theft.

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Sat, 2014-07-19 11:37

#31

Smokeskin

Lorsa wrote:Smokeskin wrote

Lorsa wrote:
Smokeskin wrote:
Nah, punishment is a bad idea, you don't want people to be afraid of assuming risk. That kills growth. If people make individual arrangements, that's what it is, but a law would be really bad. Some non-Western countries have you thrown in jail for it. Lots of people fled Dubai when the financial crisis hit for that reason. Others didn't make it out - if the banks think you're at risk of defaulting they can get you barred from leaving the country. In the US, you can more or less file for bankruptcy, hand over everything you own, and you're free from the debt after that. Most house mortgages you can even just give the house back to the bank and you're free from the debt. This was particularly crazy back before the crisis when you could get subprime mortgages above 100% financing and no interest payments during the first years. With 110% financing you could buy a house, get 10% of its value in cash (thanks!), and then sell it if prices went up or just return the house if it didn't. I wonder why that turned out badly.... In Europe, your debt will generally follow you. They take you to bailiff's court and take most of what you own, and they can do that as often as they want until you've paid back your debt plus interest. The UK moved to a US-like bankruptcy system some years ago, and there's indication that a lot of countries are going to follow in the coming years (along with actual punishment for people who actually abuse the system and are dishonest to their creditors).
But abuse of money is basically equivalent to stealing and we have a punishment for that! If you take a loan to get yourself resources, you are effectively taking them from someone else, and if you then fail to pay it back you've actually stolen money from everyone in society. Stealing is usually considered bad. The bankruptcy thing seems like a set-up for disaster. If handing over everyhting I own effectively clears me of all debt then I could simply take huge loans, buy loads of resources, give them to my brother, file for bankruptcy and then live in his mansion and drive around with his ferrari for the rest of my life. No risk and 100% guaranteed gain! By having no punishment for loan defaulting, you're essentially encouraging people to engage in frivolous high-risk behavior that ends up damaging the rest of society. Can't really see any other way than equating it with theft.

If you knowingly transfer funds away from the reach of your creditors, then that is fraud and punishable. Bankruptcy estates can also make claims against third parties that assist in it (say you bought a Ferrari and sold it cheaply to your brother, the estate can then charge him for the difference to the fair market value of the car). However, consider that you bought a house with a loan and fell on bad times and had to sell the house and you end up with a lot of debt. It keeps on accumulating interest and you have little chance of ever paying it back. So what do you do? You don't have any incentive to work hard and save up because your creditors will take any cash or assets you accumulate. You'll be poor no matter what you do, so you might as well relax and never pay back anything. Who is that good for? Not you, not the creditors, you're not a productive member of society. The same goes for entrepeneurs. We want people to take risks and try to start new businesses. If the consequences of failing are too hard, fewer will do so. And if they do try anyway and fail, then they will set up companies in other people's name next time - there's a waste of resources and opportunities in handling the more complex setup, and again the creditors don't see any money. So clearing people's debt after a bankruptcy is generally considered beneficial. Actually punishing them for defaulting would be even worse than not clearing the debt - making people less willing to take risk and making it even harder to pay back debt. If you take the Dubai example, when the crisis hit people fled the country instead of staying back and trying to save their business. Those that didn't make it out went to jail (the epitome of an unproductive citizen), leaving families behind perhaps with no income to sustain them. Fraudulent behavior should be punishable, that we agree on. But in general when you lend out money you should accept the risk of the borrower defaulting without being able to throw the borrower in prison for it, and I also believe that once you've seized all the borrower's assets he should be free from further liabilities.

Sat, 2014-07-19 13:34

#32

DivineWrath DivineWrath's picture

When you go to a bank to get

When you go to a bank to get a loan, you (should) have to convince them that you are going to be able to pay them back. This requires that you are able to prove to them that you have a business plan to make money. Likewise, it is common practice for them to ask for collateral, something that they can take (that will cover some or all of the loan) if you fail to pay them back. They don't blindly hand you money without the expectation or means to get the money back, they very much try to ensure that the person they give money to is able and willing to pay them back (with interest). ----

Lorsa wrote:
DivineWrath wrote:
Well, a problem to realize is, if you aren't making money, you are losing it. Its very difficult to find a way to be making exactly $0.
It shouldn't be. All it really requires is to take everything you make above $0 and give it to those who make less? Or give your employers a raise or decrease the price of your good or what-have-you.

I hadn't considered that. Following that train of thought, I suppose charities would work too. I don't expect to realistically work. Its not rational to do so. It would be super rational to do so, but such people don't fare well against rational people. I think it has a lot to do with why there are super rich people. Not only are there people who will avoid acting altruistically, there are those will go so far as to try to rip people off. I think this is one reason why laws exist. To enforce better behavior.

Lorsa wrote:
DivineWrath wrote:
Governments aren't something that should be blindly trusted with money. They seem to be compelled to spend it, spend it all, and often spend money it doesn't have. Check out the US.
Who should be trusted with the nation's money then? The "government" is basically all individuals living in the country (in a democratic society) so it is in the best interest of its people to handle money in a manner that would be best for its population.

This is a problem that hasn't been solved unfortunately. Generally, governments exist to deal with a certain kind of problem, people. Unfortunately, governments are managed by people, who in turn need to be managed... Its a paradox.

Lorsa wrote:
However, why does this mean we can't measure money in percent instead of this value which we don't really know (since we aren't aware of the total)?

Then let me ask how exactly this would work then? With money having a set value (like a $10 bill), it is easy to go out and buy something with it. Stores and businesses can put a price on their services. How would things work with a percentage system? Would bills be labeled something like 0.0000000001% ? That would put a cap on the number of bills that could be used. Inflation might further wreck the system. *Maybe I'm too distracted to give this proper thought right now.

Sat, 2014-07-19 15:20

#33

Smokeskin

Lorsa wrote:Smokeskin wrote

Lorsa wrote:
Smokeskin wrote:
It is a setup for disaster. And everyone knows it - the moral hazard isn't a secret or something only fringe economists talk about.
Everyone doesn't actually know it. There are tons of people who doesn't and it isn't an issue that is being brought up in political discussion. To me this feels like one of the most important issues and should always be up there in fhe forefront of debate (it's 10 times more important than the age of grading people in school for example).

Ok, it might not be common knowledge, but it is one of the top issues considered whenever there's talks of bailouts. No politician ever voted for a bailout without knowing about moral hazard.

Quote:
Why would banking collapse be such a horrible thing? If we are going to have privately owned corporations that handle our resource distribution system and people choose to invest their money into that bank then it should be their problem if it fails! Just like any other privately owned endevour. So yeah, I don't see any reason why the government should bail out private banks.

Banking collapses are horribly costly, and cascade effects are enormous. When you have a banking system that has set itself up and assumed risk based on the knowledge that they will get bailed out, then not bailing them out could prove disastrous. Some economists say it would be survivable and the recovery afterwards would be fast because all the toxic assets would ne cleared out, but that's not the majority view (for whatever that's worth). I'm just not sure I'm willing to bear the cost of making the banks think they'll get bailed out and then going "Surprise! You're on your own!" Tbh my opinion is that Lehmann Brothers should have been bailed out too... But what we should do is get rid off the moral hazard problem. Ban bailouts constitutionally or something like that, tie the hands of the politicians so effectively so that the banks will know that there won't be a bailout next time. Then they'll assume risk responsibly. But what does our politicians do? In the EU they're setting up a bailout fund so the banks know the governments won't have a problem finding the money next time!

Quote:
As for government banks - like I said it's about control over the money flow. Seems like you can't really have any useful democracy without it (I know you aren't in favour of democracy though and in a way neither am I, but if we ARE to have it, at least it should be real and not fake?).

The thing is, I think it is pretty clear that no government can control much in regards to something as complex as the economy. When they try, they skew incentives and get unintented consequences. Like in Venezuela, they want people to get cheaper toilet paper so they implement a max price on toilet paper. But then everyone stops producing toilet paper (or selling it to Venezuela at least) because there's higher profits to be made elsewhere.

Quote:
Also, there's nothing cheaper than a product being sold for non-profit. It's kind of impossible to get any cheaper/more efficient than that. A government controlled bank could work with a 0 interest rate as it doesn't need to generate profit [i]at all[/i]. Or if it DID generate profit, all the profit could be spent in health care, education, infrastructure etc.

A competitive market will make products much cheaper even after the profit margin. In general, people are terrible at predicting the future. The smart thing about markets is that all the people who get it wrong, they can't sell their product or service and they find something else to do. Everyone who falls behind the competitors on the price/quality curve, they go out of business. Monopolies on the other hand, just like everyone else, they get it wrong most of the time. But with no competitors, they just keep on producing their most likely expensive, low quality crap.

Quote:
Right now we've given up our power to control our own economy and in exchange for these services a few individuals has taken a VERY large portion of our resources. Then when they fail the government goes in to bail them out but they still get to keep their expensive houses and luxury cars. How's that in any way a good policy?

That some people make a lot of money, that doesn't really bother me. Market economies are the only system we've ever seen that produces enough wealth for the common people to get a good quality of life - it's ok that a few people get to live like kings too. That the financial elite has managed to get the politicians to force money from the common people and hand it over to them, now that really bugs me. What bugs me even more is when this financial elite gets the politicians to shield them from liability so they can sell people crap and make a ton of money doing so, and that expensive crap then crashes the world economy. The "problem" these investment bankers had was that when they sold financial products to investors, they had to rate the products according to risk, and if they were neglient in their rating, they'd be liable - if they knowingly lied, they'd go to jail for fraud. So they get Mr. Lobbyist to pitch this idea: "Mr. Senator, the risk ratings are the wild west, everyone is it doing it their own way and investors are confused. We think it would be a most excellent idea to have mandatory ratings on such products, and that they by law be calculated in the same way. May we recommend the gaussian copula function, it is most elegant and allows for the correlation of risk to ensure the highest degree of transparency and security for investors. Would you by the way need $10 million dollars for your next campaign and $1 million for consultants to advice you on the issue?" And next thing you know, the investment banks have their wet dream - they can give house mortgages to Joe Hobo, then take thousands of these junk loans and divide them into tranches and slice and dice them until the copula functions says "correlated risk is now worth a triple A rating" and then sell them to investors at a premium and when the shit blows up, just go "but we assigned ratings just like the government required of us". I really have very little faith in democratic control, regulation or policy solving anything. Give me a free market where the banks compete for selling the best product at the lowest price, and if they trick us along the way that we get to sue them or jail them without the politicians shielding them, and I'd be happy.

Sat, 2014-07-19 17:37

#34

Smokeskin

Lorsa wrote:

Lorsa wrote:
Yes, banks are in the business of money. This means that private individuals have control over our resource distribution system. I think this is a bit of a problem for any democratic soeciety.

Private individuals control the vast majority of the production capacity, and supply and demand handles that quite well, and far better than we've ever seen any government manage it - government track records for managing the means of production is abysmal, to put it mildly. I think the same goes for money, it is much better handled by the market. As I understand the history of banking, we switched to the system we're using now because governments were so bad at handling it.

Quote:
The "government" is basically all individuals living in the country (in a democratic society) so it is in the best interest of its people to handle money in a manner that would be best for its population.

All analysis of government behavior that I've seen unfortunately point in am entirely different direction. Government does not handle much to the benefit of the people, neither in concrete action nor in theoretical models - if you assume that politicians and officials are rational, they would generally not serve the interests of the citizens. The area of economics that deals with this is called Public Choice Theory and I strongly recommend you check it out. Iirc the field has received 5 Nobel Prizes in the last 30 years, this is a part of mainstream economics. It's not exactly uplifting reading, but if you want some insight into how government failures arise and from there what can be done to fix such problems, this is the place to go. One thing I think we can both agree on is that corruption, politicians making false promises, lobbyists buying political influence, and things like that aren't good for anyone, and this is the science behind how and why those things happen.

Sat, 2014-07-19 18:06

#35

Smokeskin

Lorsa wrote:Smokeskin wrote:A

Lorsa wrote:
Smokeskin wrote:
A stagnant or even increasing value of money (and since productivity rises, a fixed amount of money would mean a rising value) is utter poison to an economy. We want an incentive for people and investors to spend money. We want investments in new businesses and jobs, we want people to buy houses and cars and flatscreens (they're built by people in jobs). We don't want everyone to go "yeah I'm waiting 6 months to buy anything because my money will be worth more then". People would borrow less money, because paying them back in the future would be harder, compared to the current situation where inflation makes it easier to pay back the loan. It is very hard to get employees to accept pay cuts, but if you don't cut their pay as the value of money increases, your products will remain at a constant price, ie. getting too expensive.
I think I understand what you are saying here. In essence this is claiming that money isn't actually a resource distribution system anymore, but rather a resrouce producing system. I think that's the wrong way to look at money and if we do we're operating under a faulty understanding.

No, I agree with you. I'm not trying to say that money produces value, but that inflation has a wide range of positive incentives for people that stimulate the economy. Stagflation and deflation (constant or increasing value of money) on the other hand provide incentives that have a negative effect on the economy. I see that as a problem with a fixed-money-amount scheme like the percentage system you're suggesting.

Quote:
If we can't be in control of the economy then we might as well quit democracy.

Nobody has any idea of how to actually control the economy. The communists tried it, and it didn't work at all. Even nudging it a bit seems difficult. We can slow it down with taxes and regulation. Stimulating the economy is often very difficult, and even pumping money into the economy often doesn't work, especially long term - the only reliable known methods are deregulation and lowering taxes.

Quote:
Saying that there isn't enough money translates to me into "this resource isn't valuable enough to society that we can devote an amount of resources to the people performing the work that they would find acceptable for doing it".

I agree.

Sun, 2014-07-20 23:35

#36

Erulastant Erulastant's picture

Quote:

Quote:
Nobody has any idea of how to actually control the economy. The communists tried it, and it didn't work at all.

I'd just like to point out here that Capitalism literally [i]went to war[/i] to make sure Communism failed. We can't really talk about historical precedent for communism failing, because we have only ever seen communism being implemented by fledgling governments under intense external pressure. Every attempt was made to smother communism in its cradle, the fact that the system could not survive that does not speak to it being ineffective in a less hostile environment.

—

You, too, were made by humans. The methods used were just cruder, imprecise. I guess that explains a lot.

Mon, 2014-07-21 01:48

#37

Smokeskin

Well, the communists with

Well, the communists with USSR, China and the rest of the Eastern Bloc had more land, people and resources, so the idea that they failed so completely through no fault of their own seems counterfactual. Then there's all the theoretical reasons for why communism wouldn't work (or at least be far worse for the citizens). It's not like we have to rely on history to count it out. If you want to discuss this, we should start a new thread for it though.

Mon, 2014-07-21 05:45

#38

Lorsa

I'll have to get back to

I'll have to get back to Smokeskin later.

DivineWrath wrote:
I hadn't considered that. Following that train of thought, I suppose charities would work too. I don't expect to realistically work. Its not rational to do so. It would be super rational to do so, but such people don't fare well against rational people. I think it has a lot to do with why there are super rich people. Not only are there people who will avoid acting altruistically, there are those will go so far as to try to rip people off. I think this is one reason why laws exist. To enforce better behavior.

And yet there are lots of people who are upset with laws that encourage better behavior.

DivineWrath wrote:
This is a problem that hasn't been solved unfortunately. Generally, governments exist to deal with a certain kind of problem, people. Unfortunately, governments are managed by people, who in turn need to be managed... Its a paradox.

Ideally the government is governed by its voters. Or at least that's how I understood it.

DivineWrath wrote:
Then let me ask how exactly this would work then? With money having a set value (like a $10 bill), it is easy to go out and buy something with it. Stores and businesses can put a price on their services. How would things work with a percentage system? Would bills be labeled something like 0.0000000001% ? That would put a cap on the number of bills that could be used. Inflation might further wreck the system. *Maybe I'm too distracted to give this proper thought right now.

Sure! I'll try to explain! First off I think I've already explained that we [i]already[/i] have a percentage system, we just pretend that we don't. The system will be a lot easier to manage without paper money, those are so last century anyway. There is no reason we can't use a fully electronic monetary system. If we want to use paper money, they can be in the form of bank notes of old, or cheques, where you give someone else permission to remove money from your accoutn and place it in theirs. All it requires is that you never create more money. Effectively putting a stop to inflation. The "problems" that have been proposed where money loosing value is good could be solved by having loans that are repaid in less than full value and put diminished returns on saving. The advantage of this system is that people would more easily see that every piece of money more they want have to be taken from someone else. Now there's this faulty assumption that you can someone "make money" without it hurting someone else. It would also be easier for people to judge if they feel they have a fair share. In a totally even split, everyone would have an income equal to a fraction based on the population. Population is something that is usually more easy to keep track of as well. The value of goods would simply be expressed in other units so very little would actually change. All that happens is that system becomes a more honest reflection of how it actually works. ------------up to here nothing would change, but if we move further I could propose other changes-------- I would argue though that it would be much better to move away from this "fixed price for goods" system and into a more fluid one, where ALL resources are being distributed and used rather than just a small fraction (unused resources is a waste). For example, what if everything was effectively being "auctioned off" and if there are still goods remaining when everyone that wants to bid for them has gotten theirs, they're simply given away for free? Don't we want all resources to be distributed and used? Loans would be taken and repaid to the rest of the population. There could a pool of money the government holds for loans that people can apply for and then when they "repay it", the repayments are split and given to everyone else in the nation. If noone takes a loan that month, the pool is split and distributed equally in the population.

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Mon, 2014-07-21 13:08

#39

Decimator

Lorsa, what's different about

Lorsa, what's different about your proposed system as compared to a precious metal standard? Beyond the "We wouldn't be mining more dollars out of the ground" part.

Mon, 2014-07-21 16:28

#40

Lorsa

Decimator wrote:Lorsa, what's

Decimator wrote:
Lorsa, what's different about your proposed system as compared to a precious metal standard? Beyond the "We wouldn't be mining more dollars out of the ground" part.

Well, linking money to the value of a precious metal is just another way of limiting inflation. Such a system would still have an increase in total money when new precious metal is being mined (which is the exact problem you brought up). Also, unless you somehow fix the value of the precious metal, the value of your money will fluctuate a lot (which won't be linked to overall resource productivity as in my system). Having a precious metal standard usually comes with the idea that this metal has to be held at a reserve for the possibility that individuals want to trade in their money for it. I find this to be rather stupid as most precious metals (especially gold) are far too valuable a resource to be used for simple hoarding. I really can't understand why we make jewelry out of what is more or less the best electric conductor we have. Gold has an extremely low chemical reactivity and a very high conductivity, making it excellent for many engineering applications. Precious metals should be a resource, not the basis of our resource distribution system.

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Tue, 2014-07-22 16:53

#41

Lorsa

Smokeskin wrote:Ok, it might

Smokeskin wrote:
Ok, it might not be common knowledge, but it is one of the top issues considered whenever there's talks of bailouts. No politician ever voted for a bailout without knowing about moral hazard.

It's quite possible the politicians knew about it, but the people voting for them certainly doesn't.

Smokeskin wrote:
But what we should do is get rid off the moral hazard problem. Ban bailouts constitutionally or something like that, tie the hands of the politicians so effectively so that the banks will know that there won't be a bailout next time. Then they'll assume risk responsibly.

Even though we might have very different preferred government, at least we agree on some things. Like this.

Smokeskin wrote:
The thing is, I think it is pretty clear that no government can control much in regards to something as complex as the economy. When they try, they skew incentives and get unintented consequences. Like in Venezuela, they want people to get cheaper toilet paper so they implement a max price on toilet paper. But then everyone stops producing toilet paper (or selling it to Venezuela at least) because there's higher profits to be made elsewhere.

Well, I think that we can all agree that's a pretty stupid way to go about things. Hardly difficult to predict that outcome. Still, I refuse to accept that we, as people, are unable to control the economy. The basis of all economies is the production and distribution of goods. That is and always will be, in the hands of people.

Smokeskin wrote:
A competitive market will make products much cheaper even after the profit margin. In general, people are terrible at predicting the future. The smart thing about markets is that all the people who get it wrong, they can't sell their product or service and they find something else to do. Everyone who falls behind the competitors on the price/quality curve, they go out of business. Monopolies on the other hand, just like everyone else, they get it wrong most of the time. But with no competitors, they just keep on producing their most likely expensive, low quality crap.

I refuse to believe that a competitive market making products much cheaper to be a universal truth. I will agree that it is very common that this is the case; but it doesn't have to be. Furthermore, just because something is owned by the government, it doesn't have to be a monopoly. There's plenty of corporations today that are owned by the same person/group that is competing within the same market. Also, banking is something that we wil [i]always[/i] need (unless we abolish money altogether), so I hardly see any problem with predicting wrong and there not being any need for it.

Smokeskin wrote:
That some people make a lot of money, that doesn't really bother me. Market economies are the only system we've ever seen that produces enough wealth for the common people to get a good quality of life - it's ok that a few people get to live like kings too.

Heh. I like that word, "common people". Reminds me of the old nobility/commoner distinction. Even if it doesn't bug you, it bugs me that some people get to live like kings and I don't see how that is necessary to maintain a market economy. There could be encouragements to instead of cashing high millions in profit to lower the product price or raise the salary of the employees. That way, if a resource is very popular it will benefit those that make it and not only those that happaned to have enough money to begin with that they could start a business.

Smokeskin wrote:
That the financial elite has managed to get the politicians to force money from the common people and hand it over to them, now that really bugs me.

Again we are in agreement! I could probably live with many of the inequalities in our current system if this didn't happen.

Smokeskin wrote:
What bugs me even more is when this financial elite gets the politicians to shield them from liability so they can sell people crap and make a ton of money doing so, and that expensive crap then crashes the world economy.

This again leads me back to my first point. People should be more aware of this so they can vote for other politicians.

Smokeskin wrote:
The "problem" these investment bankers had was that when they sold financial products to investors, they had to rate the products according to risk, and if they were neglient in their rating, they'd be liable - if they knowingly lied, they'd go to jail for fraud. So they get Mr. Lobbyist to pitch this idea: "Mr. Senator, the risk ratings are the wild west, everyone is it doing it their own way and investors are confused. We think it would be a most excellent idea to have mandatory ratings on such products, and that they by law be calculated in the same way. May we recommend the gaussian copula function, it is most elegant and allows for the correlation of risk to ensure the highest degree of transparency and security for investors. Would you by the way need $10 million dollars for your next campaign and $1 million for consultants to advice you on the issue?" And next thing you know, the investment banks have their wet dream - they can give house mortgages to Joe Hobo, then take thousands of these junk loans and divide them into tranches and slice and dice them until the copula functions says "correlated risk is now worth a triple A rating" and then sell them to investors at a premium and when the shit blows up, just go "but we assigned ratings just like the government required of us". I really have very little faith in democratic control, regulation or policy solving anything. Give me a free market where the banks compete for selling the best product at the lowest price, and if they trick us along the way that we get to sue them or jail them without the politicians shielding them, and I'd be happy.

I guess I have more faith in the democratic system than yoiu do. I think it simply needs more people to be educate in these matters so they can make better decisions when voting. There could even be laws in place that forces politicians to follow through with promises they make when campaigning. That would certainly be interesting at least...

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Wed, 2014-07-23 12:29

#42

Erulastant Erulastant's picture

Lorsa wrote:

Lorsa wrote:
I guess I have more faith in the democratic system than yoiu do. I think it simply needs more people to be educate in these matters so they can make better decisions when voting. There could even be laws in place that forces politicians to follow through with promises they make when campaigning. That would certainly be interesting at least...

My personal preference is criminalizing lobbying and mandating that every public official's finances (Both personal and political) be completely transparent. The democratic process doesn't work when the populace doesn't have all the information they need.

—

You, too, were made by humans. The methods used were just cruder, imprecise. I guess that explains a lot.

Wed, 2014-07-23 12:52

#43

Lorsa

Erulastant wrote:My personal

Erulastant wrote:
My personal preference is criminalizing lobbying and mandating that every public official's finances (Both personal and political) be completely transparent. The democratic process doesn't work when the populace doesn't have all the information they need.

I was just thinking today that ALL finances should be transparent. There is really no reason why they shouldn't be in a democratic society. It is definitely true for public officials though.

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Wed, 2014-07-23 13:30

#44

Decimator

Lorsa wrote:I was just

Lorsa wrote:
I was just thinking today that ALL finances should be transparent. There is really no reason why they shouldn't be in a democratic society.

That opens up political donators to harassment and coercion. Same reason we have secret ballots.

Wed, 2014-07-23 16:31

#45

Lorsa

Decimator wrote:Lorsa wrote:I

Decimator wrote:
Lorsa wrote:
I was just thinking today that ALL finances should be transparent. There is really no reason why they shouldn't be in a democratic society.
That opens up political donators to harassment and coercion. Same reason we have secret ballots.

Ehrm... wait, what? I'm not sure it compares as one is directly related to the democratic process, whereas the other is more related to where political parties get their money from (which is important knowledge for educated voter decision). But even so, the benefits of knowing every individuals' income, and their sources, at least to me outweights the drawbacks. Unless you can provide more compelling drawbacks.

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Wed, 2014-07-23 16:41

#46

Smokeskin

Lorsa wrote:Smokeskin wrote

Lorsa wrote:

Smokeskin wrote:
But what we should do is get rid off the moral hazard problem. Ban bailouts constitutionally or something like that, tie the hands of the politicians so effectively so that the banks will know that there won't be a bailout next time. Then they'll assume risk responsibly.
Even though we might have very different preferred government, at least we agree on some things. Like this.

I'm pretty sure that on our ultimate goals, we agree on a lot of things. We are offended at many of the same injustices in the current system. One of those injustices is the undue access that the elite has to the political system. We obviously have different answers to questions like "how well do markets work" and "how well can governments/democracy work". This means we see different solutions: You believe that government can be fixed, and I believe that concentrating so much power in so few hands will almost invariably result in most of us getting shafted. But if for example it is a given that the government is staying, I think we'll often arrive at the same conclusions. I'm in favor of free markets, not of wealthy people bribing or coercing politicians. Both the wealthy people and the politicians are necessary to screw us over, and ultimately, you might prefer to get rid off the wealthy people and I'd prefer to get rid off the politicians. But if we're stuck with them, it's natural that we agree that we need to ban that shit.

Lorsa wrote:
I guess I have more faith in the democratic system than you do. I think it simply needs more people to be educate in these matters so they can make better decisions when voting.

The problems are too deep to be solved with more education. The democratic system itself is inherently so that if the actors in it are rational, some actors can cooperate to screw over the rest. On a free market, if I make a deal with someone, it is win-win - otherwise, one of us would say no. We’re always choosing what we think is best for us, and we do it individually, billions of people and corporations are doing win-win trades to optimize their situation. (EDIT: there can still be externalities like pollution or risks for other people of course) Democracy doesn’t work that way. First off, the effects on people are rarely individually tailored like the trades people do on free markets. It is one size fits all - everyone must obey their decisions. Second, democratic decision processes are not win-win. You have deals between politicians, officials, interest groups, lobbyists, the majority, swing voters or whoever is party to a given decision, and for them it is win-win. But they can (and they do) force a “lose” on everyone else. Democracy is win-win-lose. There’s no getting around it. You can’t educate the voters out of it. It’s not an education problem. It’s a problem with people being rational.

Quote:
There could even be laws in place that forces politicians to follow through with promises they make when campaigning. That would certainly be interesting at least...

Have you ever thought about how this works in the private sector? Products have to do what the advertisements claim. How does that work for politicians? And there's a bonus pater rule for the Board of Directors. The bonus pater is the abstract idea of the reasonably aware board member. Any loss that the company suffered that would have been prevented by a bonus pater on the board, the Board of Directors are personally liable for! The creditors and shareholders can sue the board members personally for the losses! They don't have to cheat or be grossly neglient. They don't even have to be aware of any problem - it's enough that a bonus pater would have suspected that something could be a risk and would have asked for it to be looked into. Now think of the various scandals and mistakes of governments, officials and politicians, and all the hand-washing and "I don't remember" and "I didn't know" excuses they come up with, and at worst they lose their job. The advertisement laws and board liability laws work all over the world. This isn't some unreasonable suggestion cooked up by a crazy civil rights extremist. This is what the politicians in every western country has decided that corporations must obey because it is reasonable and needed to protect the interests of customers and shareholders. Now, why do the politicians think that such rules shouldn't apply to the politicians and government officials? Aside from the fact that they're the ones making the rules, of course...

Wed, 2014-07-23 17:38

#47

Decimator

Lorsa wrote:Ehrm... wait,

Lorsa wrote:
Ehrm... wait, what? I'm not sure it compares as one is directly related to the democratic process, whereas the other is more related to where political parties get their money from (which is important knowledge for educated voter decision). But even so, the benefits of knowing every individuals' income, and their sources, at least to me outweights the drawbacks. Unless you can provide more compelling drawbacks.

Remember [url=http://news.yahoo.com/mozilla-says-ceo-resigns-amid-gay-marriage-controv... Eich[/url]? Now imagine if it had been the opposite, and he was forced out of Chik-Fil-A or somesuch for donating in support of gay marriage.

Thu, 2014-07-24 13:54

#48

Erulastant Erulastant's picture

Decimator wrote:Lorsa wrote

Decimator wrote:
Lorsa wrote:
Ehrm... wait, what? I'm not sure it compares as one is directly related to the democratic process, whereas the other is more related to where political parties get their money from (which is important knowledge for educated voter decision). But even so, the benefits of knowing every individuals' income, and their sources, at least to me outweights the drawbacks. Unless you can provide more compelling drawbacks.
Remember [url=http://news.yahoo.com/mozilla-says-ceo-resigns-amid-gay-marriage-controv... Eich[/url]? Now imagine if it had been the opposite, and he was forced out of Chik-Fil-A or somesuch for donating in support of gay marriage.

A person of means who uses their wealth to advance a political agenda should not be able to hide their contributions to that agenda. I do have concerns about total financial transparency, though, but they largely concern lack of privacy for personal purchases and companies potentially using information about political donations to discriminate against wage employees or non-executive salaried employees.

—

You, too, were made by humans. The methods used were just cruder, imprecise. I guess that explains a lot.

Thu, 2014-07-24 13:58

#49

Pyrite

Lorsa wrote:

Lorsa wrote:
Ehrm... wait, what? I'm not sure it compares as one is directly related to the democratic process, whereas the other is more related to where political parties get their money from (which is important knowledge for educated voter decision). But even so, the benefits of knowing every individuals' income, and their sources, at least to me outweights the drawbacks. Unless you can provide more compelling drawbacks.

The biggest issue is that it enables people to be targeted, whether for being fired from their jobs or for random violence and harassment.

—

'No language is justly studied merely as an aid to other purposes. It will in fact better serve other purposes, philological or historical, when it is studied for love, for itself.' --J.R.R. Tolkien

Thu, 2014-07-24 14:12

#50

Erulastant Erulastant's picture

Pyrite wrote:Lorsa wrote:

Pyrite wrote:
Lorsa wrote:
Ehrm... wait, what? I'm not sure it compares as one is directly related to the democratic process, whereas the other is more related to where political parties get their money from (which is important knowledge for educated voter decision). But even so, the benefits of knowing every individuals' income, and their sources, at least to me outweights the drawbacks. Unless you can provide more compelling drawbacks.
The biggest issue is that it enables people to be targeted, whether for being fired from their jobs or for random violence and harassment.

Which is why I think it should only be applied to politicians. Individuals who donate below a certain threshold could be anonymous in the public record. (So if I gave $500 to the campaign of a candidate I supported, no one would know. If a lobbyist gives $10,000 to the same cause, it would be public knowledge.)

—

You, too, were made by humans. The methods used were just cruder, imprecise. I guess that explains a lot.

Sun, 2014-07-27 07:08

#51

Lorsa

I'm sorry for not replying in

I'm sorry for not replying in a long time, other topics have been distracting me. I do feel that this is moving away from my question about money, and into a longer political debate. Such a discussion would certainly be interesting to have, but not here. I still haven't gotten a satisfactory answer to if money should be treated as anything other than a zero-sum game. So unless someone can convince me that it isn't so, I'm going to proceed with that assumption. There was one thing I wanted to comment on however (as much of the rest is for a discussion about capitalism).

Smokeskin wrote:
The problems are too deep to be solved with more education. The democratic system itself is inherently so that if the actors in it are rational, some actors can cooperate to screw over the rest. On a free market, if I make a deal with someone, it is win-win - otherwise, one of us would say no. We’re always choosing what we think is best for us, and we do it individually, billions of people and corporations are doing win-win trades to optimize their situation. (EDIT: there can still be externalities like pollution or risks for other people of course) Democracy doesn’t work that way. First off, the effects on people are rarely individually tailored like the trades people do on free markets. It is one size fits all - everyone must obey their decisions. Second, democratic decision processes are not win-win. You have deals between politicians, officials, interest groups, lobbyists, the majority, swing voters or whoever is party to a given decision, and for them it is win-win. But they can (and they do) force a “lose” on everyone else. Democracy is win-win-lose. There’s no getting around it. You can’t educate the voters out of it. It’s not an education problem. It’s a problem with people being rational.

You are making the mistake of assuming that the only rational choice is to be short-term self-serving. I disagree with that. There are many other, much more rational viewpoints, to base political decisions on. I would argue that it is much more rational to base decisions on what would benefit society as a whole the most, or what would provide optimal fairness and equality, etc. There isn't an equal sign between personal greed and rationality. In the strictest of sense, you are correct that a free market provides win-win deals. However, as you yourself pointed out with your "externalities", it doesn't turn out that way in practice. There are plenty of win-win-lose trades going on, where the loosing part is someone who wasn't part of the deal at all. Furthermore, while I do understand that the coercion factor is usually included as a "win" in free market theory, it is, in my opinion, a horrible consequence of a totally free market, and a consequence which we can diminish by regulation. But now I am getting sidetracked. This wasn't a thread about the pros and cons of a free market society. Let's discuss that somewhere else.

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Eclipse Phase

Money: the zero-sum game

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