Monday, December 19, 2011

"Money and Social Possibilities"


An interesting post I disagree with, at heteconomist.com.

Posted by The Arthurian at 10:00 AM

6 comments:

Calgacus said...

Replying to some of your heteconomist comments here, hope you don't mind. How are we to distinguish between money I earn or steal or find on the sidewalk, and money which I borrow and must repay? I call the one “money” and the other “debt”.

Be careful. Festina lente. You do not actually do what you said you do in the last sentence.

NOBODY distinguishes between money you earn/steal/find & that which you borrow. That is the whole point of having a monetary economy. No matter where your money came from, it's good money. Money has no stink.

Stealing & finding are GREAT! Just like being the King/government, or a bank (somewhat). Just one thing happening. You got money for nothing!

Earning - you gotta work, you are trading your labor for money. A trade - two things happening.

Borrowing- you get money from a guy, say a bank or a loan shark. That's the money just like all the other situations. But to get it, you had to trade something for it - your IOU - like trading your labor. Two things happening.

So you see you don't "call the one 'money' and the other 'debt' ". The first three situations you end up with money :-) (= somebody else's debt - the bank's, Uncle Sam's). The fourth, you end up with money PLUS your debt. :-(

December 20, 2011 at 7:26 PM
The Arthurian said...

Hi, Cal.

"Replying to some of your heteconomist comments here"

Yeah, that's good. Thanks.

"Earning - you gotta work, you are trading your labor for money. A trade - two things happening. "

Yes. And when I am paid for my week's work, the transaction is complete.

"Borrowing- you get money from a guy... But to get it, you had to trade something for it - your IOU - like trading your labor. Two things happening."

No. Not the same as trading my labor. Because this transaction is not complete until I make good on the IOU in the future.

"NOBODY distinguishes between money you earn/steal/find & that which you borrow. That is the whole point of having a monetary economy. No matter where your money came from, it's good money. Money has no stink."

Some money comes with the cost of interest, and some money does not. The problem is not stink, but cost.

And you are probably right: Nobody distinguishes between them. This failure to observe the balance between "money" and "credit-in-use as measured by debt" is the cause of our economic problems.

"The first three situations you end up with money :-)
The fourth, you end up with money PLUS your debt. :-("

Nice graphics. Yes this is true. But let me work it out:
If I earn a dollar, I have a dollar.
If I borrow a dollar, I have a dollar. And I have a dollar of debt.

When I spend the dollar (whichever way I got it) it goes out into the economy and either way it is just the same. The debt does not go with the money. The debt stays with me.

...either way it is just the same. As you said, "NOBODY distinguishes between money you earn/steal/find & that which you borrow." This is true, because when I spend the money there is no difference TO THE PERSON WHO RECEIVES IT. A dollar borrowed and spent BECOMES a dollar of money. But the debt stays with me. And accumulates. And eventually it hinders economic growth.

This is why I find it necessary to distinguish between money and credit.

Money that I get by earning it is money.
Money that I get by borrowing it is credit put to use.
The amount of my borrowings is debt.
Debt is the least important concept of the three. Debt is only a record of what is owed. Far more important are the borrowing, and the having without having to borrow. My "debt per dollar" graphs examine the balance between money and credit-in-use.

December 21, 2011 at 3:45 AM
jim said...

Hi Art

It seems to me the crux of your thinking is that you are focused on the money that you borrow. This is based on your personal knowledge of your own debt.

If someone pays you money for work or for something you sell, you typically have no idea whether that money given to you was borrowed. And even if you know the person paying you has no debt it is almost a certainty that you have no idea if the persons who have given him money, got the money by borrowing.

To me your position that we need to keep track of what is borrowed and what is not borrowed, is simply not feasible.

If you ask a common laborer if his paycheck is real money, he will likely say yes. However, the evidence suggests that every bit of the money that is sitting in bank accounts has been borrowed into existence. The laborer may be thinking that there is a cache of coin and currency in the vaults of banks sufficient to cover all checks and deposits, but there isn't. There is enough to cash his paycheck but if everyone decided to also convert to currency there simply is not enough.

So what would it take to purify the economy of borrowed money? If suddenly everyone refused to borrow and continued to pay off debt as it comes due, what would happen?

December 21, 2011 at 8:31 AM
The Arthurian said...

Hey, Jim.

"This is based on your personal knowledge of your own debt."

For the definitions, yes. I identify "money" "credit" and "debt" from personal experience. I think it's a rock-solid approach.

"If someone pays you money for work or for something you sell, you typically have no idea whether that money given to you was borrowed."

Absolutely true. And beyond that, as the recipient of that money, it does not matter whether the money was borrowed or printed. To the recipient, there is no difference. There is no difference to the recipient because the recipient does not pay interest on it, even if the money was borrowed.

But the borrower does pay interest on it, and this has an effect on the economy. (The size of that effect varies with the reliance on credit.)

"To me your position that we need to keep track of what is borrowed and what is not borrowed, is simply not feasible."

But you have seen my "debt per dollar" graphs! I use TCMDO and M1, but you could as easily use TCMDO and AMBSL (base money). Base money is by definition not borrowed money (I think).

For me, M1 is typically not borrowed, because if the lender deposits the loan-money into your checking account you will very soon spend it. And then the connection to debt and interest-cost is severed. Because one person did the borrowing, and a different person (the recipient) has the new money.

"...the evidence suggests that every bit of the money that is sitting in bank accounts has been borrowed into existence."

Not when you look at the debt-per-dollar graph.

"So what would it take to purify the economy of borrowed money? If suddenly everyone refused to borrow and continued to pay off debt as it comes due, what would happen?"

Again, I refer you to my DPD graph.

It is not necessary (nor possible!) to remove all debt from the economy. But it is certainly possible to reduce the DPD.. to reduce the level of debt relative to the quantity of circulating money... to reduce the reliance on credit.

December 21, 2011 at 6:20 PM
jim said...

Hi Art,
I'm not really arguing against what you say. It just isn't making much sense to me.

You write:

********************
For me, M1 is typically not borrowed, because if the lender deposits the loan-money into your checking account you will very soon spend it. And then the connection to debt and interest-cost is severed. Because one person did the borrowing, and a different person (the recipient) has the new money.

**************

In my experience people do not borrow money to hold it. They borrow to turn around spend it. Money has its connection to debt severed quickly.
I guess if you look at degrees of separation (ala Kevin Bacon degrees of separation), the M1 might be more likely to be farther removed from debt, but I would be curious how you determine that.

I don't see what DPD has to do with this. I look at that as a measure of how attitudes have changed since 2008. People now are keeping more in reserve in their checking accounts and borrowing less. I expect the ratio is going to continue to fall for many years to come.

I don't get at all how your graphing debt to dollars means that money is not borrowed into existence. If the amount of money exceeded the amount of debt then you might have an argument. But how does significantly more debt than measured amount of money say anything at all about how money is created?

December 22, 2011 at 9:48 AM
The Arthurian said...

jim: "In my experience people do not borrow money to hold it. They borrow to turn around spend it. Money has its connection to debt severed quickly."

Yes, this is exactly what I was trying to say.

So, even if I borrow a dollar and the lender puts it into my checking account (where it becomes part of M1 money) I borrowed the dollar in order to spend it. And as soon as I spend it the connection to debt is severed. The recipient receives M1 (transaction-money) and has no obligation to "pay it back".

So, M1 counts circulating money but not debt.

On the other hand, probably every dollar of debt represents a dollar of money that was created and started out its life as part of M1 money.

I started looking at DPD using the Historical Statistics (Bicentennial Edition). It covers the years 1916 through 1970. It shows me an increase comparable to the increase in our time up to 2008. And it shows a decrease beginning during the Great Depression and lasting until the start of the golden age.

One concern today is deflation. Why? Because when we pay down debt we reduce M1 money. Everybody else compares debt to income... but income is not reduced by the repayment of debt! So income has nothing to do with the deflation threat.

These are not coherent thoughts.

Don't just look at DPD using the FRED numbers. You'll miss all the good lessons.

December 22, 2011 at 7:36 PM

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