Wednesday, January 11, 2012

The King's Treasure

When the money of a country is issued from the treasury of a king, the riches of the nation grow on the king's schedule.

As the king's treasury empties, treasure accumulates among his people. There comes a time when the king has expenses he cannot meet, and the wealthiest of his subjects come to him with a plan to create a bank that will lend the king money.

Eventually, the king's treasury holds so little, and his people hold so much, that the concept of "a king and his country" changes to "a nation". And the wealth of nations is no longer thought to be in the king's treasury, but in the busyness of his subjects.

The king gives up his treasure; his creditors lend theirs at interest. Both methods increase the wealth of the people. The one comes at a cost to the treasury; the other at a cost to the people.

There comes a time when the king can no longer freely dispense wealth from his treasury; at this point the money of the nation can no longer be backed by the king's treasure.

There comes a time when so little of the people's money comes from the king, and so much from the banks, that the cost of money becomes an obstacle to the progress of wealth.

The source of my understanding, the DPD graph, informs me that we must maintain a balance between the king's money and the bank's issue. The story above suggests that the cost of money -- the factor cost of money -- is the primary problem.

You might disagree, saying the problem is concentration of wealth. Yes, this is part of the imbalance today; there is no reason for us to disagree. Financial wealth, lent out at interest, is the bank issue that creates the cost that is our problem.

Still, the same problem could arise even if wealth were equally distributed. Financial wealth is "wealth" because it generates income. The income it generates is, for society as a whole, the factor cost of money -- a cost that competes with income arising from productive activity.

The problem is the cost that arises from excessive reliance on bank issue. It turns out, this time, that concentration of wealth leads this cost to become concentrated income for the wealthy. As far as I know, it turns out every time that way. But the problem is not the concentration; the problem is the cost.

I point out a cost that competes with wages and prices, interferes with the vigor of economic growth, and applies continuous upward pressure to prices.


nanute said...

Have you been reading Hudson? Sounds like it. I think the lenders would be wise to extinguish some of the debt.

The Arthurian said...

Hi Nanute,
Actually I prefer to avoid reading the people I might most agree with (Steve Keen, Michael Hudson, Minsky) so as not to confuse my thoughts with theirs. It is much easier for me to see the differences between me and economists (Krugman) who are not on the same page as me.

Jazzbumpa said...

Actually, I don't think that is quite the way Hudson tells the story.

For one thing, the flow of money is not (I almost said never, but must learn to shy away from absolutes) generally from the King to the people. Pretty much the whole point of being King is to collect rents.

Also, the King's debts are typically to foreign banks, since a monarchy is not such a great home for the banking business. (Hence the great bank in the free city of Braavos.)

I'm not at all sure how this relates to DPD. But now that you aren't in agreement with Hudson, you can go back to reading him, and I think that is quite a good idea.


The Arthurian said...

JzB: "For one thing, the flow of money is not ... generally from the King to the people."

Depends where you are on the Cycle of Civilization, doesn't it. The point I was making in the post. Did you miss the point again??

JzB: "Also, the King's debts are typically to foreign banks..."

KRUGMAN: "First, instead of a hypothetical example, let’s talk about a real case: US debt after World War II. The government emerged from the war with debt exceeding 100 percent of GDP; because there was almost no international capital movement at the time, essentially all that debt was owned by domestic residents..."

And of course KRUGMAN: "If your image is of a nation that’s already deep in hock to the Chinese, you’ve been misinformed."

JzB: "...since a monarchy is not such a great home for the banking business."

The Bank of England was founded in 1694, and then this happened.

The Arthurian said...

Oh I guess I WAS reading Hudson.

The Arthurian said...

jzb "But now that you aren't in agreement with Hudson, you can go back to reading him, and I think that is quite a good idea."

just some notes:

Hudson's post opens with a summary of "the eternal transition" of "democracy, within which an oligarchy emerges once again, followed by aristocracy, democracy, and so on..."

I have this.

Hudson says: "Debt has been the main dynamic driving these shifts"

I say: THANK YOU Michael Hudson.

Hudson says: "Since the Renaissance, ... bankers have shifted their political support to democracies. ... But the recent debt protests from Iceland to Greece and Spain suggest that creditors are shifting their support away from democracies."

I say: A big, sweeping trend. Part of the Cycle of Civilization, which "arises from the accumulation of financial cost and the accumulation of financial wealth."

Hudson says: "Rome’s creditor oligarchy wins the Social War, enserfs the population and brings on a Dark Age"

I say: Cycle of Civilization.

Hudson says: "Aristotle did not mention empire building as part of his political schema..."

I say: But Toynbee did.

need i go on?

nanute said...

I told you! (You never take me seriously.)LOL
Jazz is talking about Hudson, you're talking about Hudson, and I'm reading Hudson. I go back to my original point: it would be wise for the financier/rentier class to extinguish some of the private debt. The alternative won't be pleasant.

The Arthurian said...

Hudson refers us to Leviticus 25...

And if thy brother be waxen poor, and fallen in decay with thee; then thou shalt relieve him...

nanute said...

Not a religious type, but still, Can I get an Amen?

Jazzbumpa said...

Art -

Yeah, I missed the point. You're talking about the flow of civilization, and somehow I got the crazy idea you were talking about monarchy.

But I don't know where the idea of the King emptying his coffers to the people's enrichment comes from. Kings went broke fighting wars.

Anyway, the Krugman quotes relate to here not there.

By 1694 the intense power struggle between the British Kings and Parliament was well over 100 yrs old, and the Monarchy was not what it had been in medieval times. Which is why there was no bank of England in, say, 1494.

It was rather different in Italy, where the independent city states grew up early in the millennium. Coincidentally, that's where the great banking centers were.

Per Hudson, Aristotle had it as oligarchy --> hereditary aristocracy –-> instability --> tyranny --> democracy --> oligarchy, etc, etc.

I don't think tyrant meant quite the same thing to A as it does to us, though. And here's nothing about timing. The last oligarchy in western civilization lasted well over 1000 years.

Yes, debt peonage - literal or figurative - is a primary mechanism for repressions. And we are headed that way.

I am even more convinced now that the oligarchs have had effective control of government since at least Reagan, and the Rethug party is firmly committed to the new feudalism.


The Arthurian said...

Jazz: "I don't know where the idea of the King emptying his coffers to the people's enrichment comes from. Kings went broke fighting wars."

okay, but they didn't shoot the money, right? they spent it.

I'll cede the rest. I never was very good at history.

I was thinkin about that. TWICE I kinda beat around the bush rather than clearly agreeing with you. So:

Yes, I too think it would be wise for lenders to write down the debt owed to them.

It's what the economy needs in order to grow again. And yes, the alternative -- Jazz's WASF -- won't be pleasant.

2012 - 2008 = 4 years.

It would be the easiest thing (for debtors and for policymakers) if lenders would extinguish maybe half of our debt. But how long can we wait?

Then again, how long can we wait for the policymakers to take action and make it happen?

The Arthurian said...

sheesh, I still didn't do it.


nanute said...

You said: okay, but they didn't shoot the money, right? they spent it. This is all true. The more important point, I think, is that the monarchies not only spent it, the borrowed more than they had, and then decided not to repay the debt. Repudiation or death could extinguish the obligation. Once the private financiers realized this, nation states, and the shifting of the debt burden to the public was born. Thus the vicious cycle that we've been engaged in since. "Will The Circle Be Unbroken"?