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The Bank Of England Goes Austrian?

Tyler Durden's picture


From Sean Corrigan of Diapason Commodities Management

BOE's View On Money Creation

Of late there has been much breathless wonder expressed at the Bank of England’s supposedly ground-breaking release. ‘Money in the Modern Economy’, in which it argues – shock! horror! - that banks do not lend out previously received deposits, but that they create the latter ex nihilo by first making loans. Alas, as Gunnar Myrdal waspishly observed of Keynes himself, this has been a reaction plagued with the ‘unnecessary originality’ of those who don’t know their literature.

As an example, some few months ago, I had an exchange with the disputatious George Selgin (he of the perfervid fractional free banking bent) in which I cited – after a good twenty minutes’ research – the following authorities to that very same effect:-

Roepke from a footnote (p113) to his 1936 work, ‘Crises & Cycles’:

The process [of credit creation] is now clearly explained in any text-book on economics, banking or money (especially recommendable is Hartley Withers’ Meaning of Money). A fuller treatment may be found in the following books: R. G. Hawtrey, op. cit.; J. M. Keynes, A Treatise on Money, pp. 23-49 : C. A. Philips, Bank Credit, New York, 1920; W. F. Crick, “The Genesis of Bank Deposits,” Economica, June 1927, and F. A. von Hayek, Monetary Theory and the Trade Cycle, London,1933.


Without an understanding of this process and of its limitations, no real insight into the working of our banking system and, consequently, of our entire economic system seems possible, to say nothing of the mechanism of business cycles. There may still be many people who can no more believe the story of the genesis of bank money than they can believe the genesis of the Bible, but on the whole it now seems to be generally accepted. A last but hopeless attempt at disproving it has recently been made by M. Bouniatian, Credit et conjoncture, Paris, 1933. [Emphasis mine and apparently NOT the last!]

Or as Hayek indeed noted in ‘Prices and Production’ above his own lengthy footnote (pp 81-2):

The main reason for the existing confusion with regard to the creation of deposits is to be found in the lack of any distinction between the possibilities open to a single bank and those open to the banking system as a whole.

Shall we hear from Mises?  ‘Monetary Stabilization and Cyclical Policy’ (p105) seems pretty unequivocal on the matter:-

If the banks grant circulation credit by discounting a three month bill of exchange, they exchange a future good—a claim payable in three months—for a present good that they produce out of nothing. It is not correct, therefore, to maintain that it is immaterial whether the bill of exchange is discounted by a bank of issue or whether it remains in circulation, passing from hand to hand. Whoever takes the bill of exchange in trade can do so only if he has the resources. But the bank of issue discounts by creating the necessary funds and putting them into circulation. [which, incidentally, is an almost exact paraphrase of the argument I advanced and to which you took such exception, George]

Finally, let us allow Dennis Robertson a few words on the matter from the posthumous collection ‘Essays in Money and Interest’, p25:

…bank money comes into existence mainly as the result of loans and investments made in the banking system… … Historically, there seems to me no question that the bulk of bank money in existence has come into existence in this way… If anyone retains any lingering doubts on this matter, whether these doubts arise from consideration of the multiplicity of banks or from some less rational cause, I commend to him the patient and careful article of Mr. Crick [see above]… Here time forces me to treat this particular controversy as closed. [Emphasis mine again]

Since when I have found an even more waspish dismissal of the dullards who hold the contrary view from the inimitable Fritz Machlup, from an early 70s discussion of the development of the Eurodollar market:


There is a wider significance to this long-held misapprehension. Namely, that Keynes – so enamoured of his circular flow visualisation of the economy and yet also so prone to the confusion of mere snapshot accounting identities with dynamic and causative  phenomena – also held that banks were simple, passive intermediaries in the system and could therefore safely be shorn of having any true role to play in the determination of financial variables. Having similarly insisted that saving and investment MUST be equal (accounting v causation, again), he was thus left with nothing by which to determine the rate of interest and so opted for his ludicrous ‘liquidity preference’ idea that the rate of interest is a bribe by means of which to discourage the common man’s economy-sapping fetish for hoarding money.

From there, it was but a short step to the vilification of savers as the enemies of public well being and - via the further idiocy of the ‘liquidity trap’ with which this seemed perennially to threaten us - to the evils inherent in the incessantly inflationary ravings of the likes of Paul Krugman and all the other bien pensants of his stripe. 


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Wed, 03/19/2014 - 09:48 | 4567268 Capitalist
Capitalist's picture

Apparently the monetary system is closer to the MMT model than the Austrian loanable funds model. However, MMT's model is one thing, their conclusions are absurd.

Wed, 03/19/2014 - 09:50 | 4567276 Independent
Independent's picture

Austrian???  I thought it went JEWISH Long time ago?  Or Yiddish, oy vey.

Wed, 03/19/2014 - 09:54 | 4567289 Occident Mortal
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^^What was that?

Wed, 03/19/2014 - 10:04 | 4567321 flacon
flacon's picture

Keynes created an unnatural theory that nobody (and I mean NOBODY) in their OWN PERSONAL FINANCIAL LIFE believes. (you can't get richer by accumulating more and more credit cards to pay off the old credit cards). 

Wed, 03/19/2014 - 10:10 | 4567344 Richard Chesler
Richard Chesler's picture

bien pensants or mal pisants?

Wed, 03/19/2014 - 12:59 | 4568227 koncaswatch
koncaswatch's picture

Well they're not very good thinkers; Keynesians=mal pisants

Wed, 03/19/2014 - 14:22 | 4568678 Jack Napier
Jack Napier's picture

Keynes' method to riches would have worked perfectly if we still had a jubilee every 7 years. Apparently a lot of debt slaves are betting the farm on another one.

Wed, 03/19/2014 - 10:12 | 4567355 philipat
philipat's picture

Actually, in fairness to Keynes, his theory  was that Government spending should be counter-cyclical, Governments should SAVE during good times and SPEND during hard times. The problem is that "Modern" politicians forgot the first part??

Wed, 03/19/2014 - 10:33 | 4567446 BLOTTO
BLOTTO's picture

Somehow the word 'Austrian' irks me just as much as 'Keynes' doesnt make me feel much better.


We (the masses) are fucked either which way in the end. We are ruled by bloodlines that think its their divine right to rule over us...and thats that.


'The Rothschild banking family of Austria was founded by banker Salomon Mayer von Rothschild in 1820 in Vienna in what was then the Austrian Empire'

Wed, 03/19/2014 - 10:43 | 4567524 HoofHearted
HoofHearted's picture

Keynes wasn't the first to posit such countercyclical spending. If you forgive me the idea of spending grain, Joseph was the first to come up with this, and that was through an interpretation of a dream. I've written a piece on this that appeared last year. 

Keynes was just stealing an idea from Joseph. Wait, Joseph was Hebrew. Oh crap, now some of the knee-jerk anti-Semites are going to start hating on these idea. 

Wed, 03/19/2014 - 11:47 | 4567850 flacon
flacon's picture

Forgive me for saying this, but Keynes's theory (the one you describe) happens naturally in a microeconomic level as long as interest rates aren't being tampered with. Virtually everyone knows that saving money is a good thing, but when interest rates are very low, or essentially negative (by decree, not by market forces) then it makes people NOT want to save, but to BORROW MORE. The whole system is F'd! 

Thu, 03/20/2014 - 02:10 | 4571305 kchrisc
kchrisc's picture

What Keyes was actually saying was that the governmnet--central banks--had to 'print' more to counter the collapse of the bubble created by the central bank's previous 'printing.'

The previous bubble was predicated on the back of 'loan money' to businesses. WIth its collapse and threat of taking down the ponzi and its operators, he advocated the 'printing' of more 'loan money' in the form of government debt.

All the gobtly gook surrounding that premise is just "gravy on shit," as my dad like to say.

Thu, 03/20/2014 - 15:31 | 4573947 rex-lacrymarum
rex-lacrymarum's picture

It makes just as little sense for government to 'save during good times' as it makes to 'spend during bad times'. So even if Keynes had been misinterpreted by his followers, the original idea isn't any better. 

Wed, 03/19/2014 - 09:59 | 4567298 TideFighter
TideFighter's picture

The "Creature" has grown, had offspring, they have grown, had offspring...

Wed, 03/19/2014 - 10:06 | 4567331 Oh regional Indian
Oh regional Indian's picture

Yes, it's called devolution.

Just like us humans. Less power in every successive generation.

Degeneration is the order of the day.

Is it anywonder everythign feels powerless, including most humans?

And what will it take to re-ignite?


Wed, 03/19/2014 - 12:13 | 4568006 djcando
Wed, 03/19/2014 - 10:00 | 4567302 centerline
centerline's picture

All the same bullshit that has the tail wagging proverbial dog.

Wed, 03/19/2014 - 09:50 | 4567277 LawsofPhysics
LawsofPhysics's picture

and the "business" of printing money and handing it out to your friends continues...

Wed, 03/19/2014 - 09:55 | 4567291 PlusTic
PlusTic's picture

I'd like to hit Krugman over the head with a Hayekian Triangle!

Wed, 03/19/2014 - 09:56 | 4567293 kito
Wed, 03/19/2014 - 10:00 | 4567306 fonzannoon
fonzannoon's picture

That is a must read.

Wed, 03/19/2014 - 10:06 | 4567327 centerline
centerline's picture

+1.  Furthermore, wasn't it one the fed guys (Fischer?) who indicated that in reality the banks simply make loans and seek the necessary reserves after the fact?



Wed, 03/19/2014 - 10:12 | 4567354 Serfs Up
Serfs Up's picture

This just in!!  Bank of England admits money is loaned into existence.


Only the terminally incurious could hold otherwise.  (See also: Krugman, Yellen, Pew, Obama, et al.)

Wed, 03/19/2014 - 10:13 | 4567361 kito
kito's picture

you tryin to steal my thunder serfer boy?

Wed, 03/19/2014 - 13:14 | 4568318 jaxville
jaxville's picture

  Good to see the level of understanding of credit based money on Zero Hedge. So few understand that basic mechanism of our money thus they are destined to make ill informed financial decisions as a result of that ignorance. They will be financially erased in the years ahead. Fractional reserve banking/credit based money is the greatest fraud in human history and we are going to see this abomination buried once and for all.

Wed, 03/19/2014 - 10:14 | 4567363 pods
pods's picture

Definitely going to send that out, thanks kito.  Have spent a lot of time trying to explain this to others. Most cannot believe it because it is just too outrageous to comprehend.


Wed, 03/19/2014 - 10:08 | 4567341 kito
kito's picture

read and then REVOLT!!!!!!

Wed, 03/19/2014 - 10:16 | 4567371 pods
pods's picture

That is why I have said the best way to destroy this unjust system is avoid taking out loans.

We make the noose that strangles us, and pay the banks handily for it.

Our system needs exponential expansion of debt to pay the exponentially expanding interest.

Starve the beast and start fresh after the collapse.


Wed, 03/19/2014 - 10:45 | 4567529 ebworthen
ebworthen's picture

That - or everyone take out more debt than they can possibly ever pay back - like .gov and banks - until there are so many hungry people on the streets they will have nothing better to do than storm the castles.

But yes, on an individual basis, your advice is sound.

Wed, 03/19/2014 - 10:50 | 4567573 NoDebt
NoDebt's picture

If you stop borrowing at a personal level the government will just borrow for you.  You can't stop it.

Wed, 03/19/2014 - 10:16 | 4567372 RSloane
RSloane's picture

I read it and learned nothing new! I will plan my revolution for another day.

Wed, 03/19/2014 - 10:23 | 4567417 kito
kito's picture

oh rsloane!!! you know its not about what you learned, but rather what they have revealed!!

Wed, 03/19/2014 - 10:31 | 4567457 Dr. Engali
Dr. Engali's picture

Problem is that the vast majority of people who would read that article already know that fact, and it's just falling on deaf ears. The sheep are too stupid to comprehend.

Wed, 03/19/2014 - 10:38 | 4567487 fonzannoon
fonzannoon's picture

Is it stupid? Maybe. I can't find the right word for it. Apathetic? I think it is more so that people are so mentally enslaved to the system that even shocking them with the truth can't bring them back at this point. This is like the 5th turn of the 4th turning.

Also doc, I went back and looked at our bet. I never said 6 months. I said 4 months and 12 days. I'm sure of it. So our bet is over today, okay? Please?

Wed, 03/19/2014 - 10:49 | 4567561 Dr. Engali
Dr. Engali's picture

Lol.... I'm pretty confident it was six months. Although my wife will be quick to point out that I tend to forget things :)

Wed, 03/19/2014 - 10:39 | 4567494 RSloane
RSloane's picture

They revealed a French secret which is a secret that is known by everyone but no one dares speak its name.  In terms of revolution, niet!

Wed, 03/19/2014 - 11:04 | 4567637 kito
kito's picture

most people in england dont know butter comes from a cow or eggs from a hen, and you believe they understand banking???!! come on rsloane!! the revolution needs YOU!!! remember that revolutions begin with a very small percentage of the population!!!! REVOLT!!

Wed, 03/19/2014 - 11:23 | 4567564 ebworthen
ebworthen's picture

Oh man, c'mon:  perfervid, ex nihilo, bien pensant, and disputatious?

Wed, 03/19/2014 - 13:53 | 4568497 Dugald
Dugald's picture


Ahhhh, give the man some credit....he spelt them correctly....

Wed, 03/19/2014 - 23:39 | 4570921 Radical Marijuana
Radical Marijuana's picture

As that article you linked, kito, stated, way back in the 20th Century Henry Ford is supposed to have remarked that most Americans did not know how banking really works, because, if they did, "there'd be a revolution before tomorrow morning." The overwhelming vast majority of people are too ignorant, if not too willfully stupid, to understand what that article actually means to them, their children, and their children's children. Furthermore, the established political processes are already so totally stacked in favour of the banksters that there are no practical ways to reform the monetary system.

Therefore, the established systems based on making "money" out of nothing, and destroying that "money" back to nothing, are going to continue to destroy the world, since those things are actually the result of the triumphant runaway frauds of the biggest gangsters, the banksters, who have captured control over governments, as well as social institutions such as schools and the mass media, by being able to dominate the funding of the political processes and social institutions. Since our society is controlled by legalized lies, backed by legalized violence, which have created conditions whereby civilization is dominated by attitudes which were necessary to enable fundamentally fraudulent financial accounting systems to be made and maintained, ALMOST EVERYTHING CIVILIZATION DOES IS BASED ON THOSE ATTITUDES OF EVIL DELIBERATE IGNORANCE.

Since ignorance is the source of suffering, evil deliberate ignorance is the source of the greatest suffering. The triumphant systems which were built on the basis of backing up dishonesty with violence have enabled runaway social polarization to manifest inside of the pyramid systems that were built on that foundation. MUCH MORE IMPORTANTLY, THE WAYS THAT EVIL DELIBERATE IGNORANCE DOMINATE EVERYTHING THAT OUR CIVILIZATION DOES MEANS THAT WE HAVE ALREADY ENTERED INTO VICIOUS SPIRALS OF DESTROYING LIFE IN THE NATURAL WORLD.

The longer term consequences of backing up the claims of private property with coercion are cutting the world up into privatized pieces, which, as a living whole, are being killed by those processes. The successes of the systems of lies backed by violence have driven society as a whole to become terminally sick and insane, since each incremental action based on carrying on attitudes of evil deliberate ignorance results in privatizing the profits, while socializing the greater losses. Overall, we have already crossed the event horizon into a social and environmental black hole.

There are no reasonable grounds to doubt that the ways that the monetary systems are based on frauds, which violate the basic laws of nature, are going to result in the destruction of much of the life in the natural world. However, other that wishing for some series of political miracles to cure the terminal social sickness and insanity of the established and entrenched social pyramid systems, there are no practical political ways to stop the runaway fascist plutocracy juggernaut from continuing to turn most of the world's people, and the natural world, into the road kill of that runaway system of legalized lies, backed by legalized violence.


"Corrections" to that runaway social insanity can not occur within a human world which is almost completely dominated by the long history of enforcing frauds. The only real connections between the physical world and the psychological worlds were the abilities to back up lies with violence. Since the entire political economy is controlled by runaway triumphant frauds of making "money" out of nothing, and that "money" can return to nothing, there are absolutely no ways that that social pyramid system can be reconciled with human ecology, industrial ecology, or natural ecology. Instead, the runaway fraudulence of the financial accounting system is setting up all those ecologies to go through catastrophic collapses into chaos, with the worst of those being the degree to which the evil deliberate ignorance of human beings is going to destroy the natural world, wherein things like the air we breathe, and the plankton and plants that produce that, have ZERO VALUE.

It that overall context, it is another ridiculous tempest in a teapot, tit for tat debate, between the goofy Austrians and the Keynesians. Both are mostly hermetically sealed within the human world, which is almost totally based on maintaining attitudes of evil deliberate ignorance towards the natural world. There is ZERO CHANCE of developing a better industrial ecology when the accounting system makes "money" out of nothing, and that "money" can disappear back to nothing. Therefore, all of the progress in science and technology that understands general energy systems better mainly magnifies the magnitude of the runaway social insanities developed through the history of the social pyramid systems, which were based on the history of the biggest bullies being able to back up their bullshit social stories, to the point where that bullshit totally dominates almost everything, and especially the theories of economics.

The ONLY way that that privatized fiat "money" made out of nothing as debts system really works is that it is backed up by the power of governments: MONEY IS MEASUREMENT BACKED BY MURDER, because the political economy is inside of the human ecology. However, since our murder systems evolved through warfare, where success was based upon deceits, and that became the foundation for the political economy to have it success based upon frauds, THE REAL WORLD TODAY OPERATES THROUGH THE MAXIMUM POSSIBLE DECEITS AND FRAUDS REGARDING WHAT IT IS REALLY DOING ... THE CONSEQUENCES OF WHICH WILL MORE AND MORE MANIFEST IN THE LONGER TERM, AT AN EXPONENTIALLY ACCELERATING RATE, BY THAT EVIL DELIBERATE IGNORANCE CAUSING THE MAXIMUM POSSIBLE SUFFERING FOR HUMAN BEINGS AND OTHER LIVING BEINGS.

Wed, 03/19/2014 - 10:00 | 4567303 Kantbelieveit
Kantbelieveit's picture

Krugman's predictions have been correct, and the predictions of the austerians have been wrong. Where is the roaring inflation predicted by the austerians? The Fed has been running up a huge balance sheet, which Krugman said would not spur inflation in a liquidity trap. The austerians have been predicting huge inflation for three years, and it has not appeared. They were wrong, and Krugman's model was correct. It's just that simple.

Wed, 03/19/2014 - 10:03 | 4567314 PlusTic
PlusTic's picture

The inflation was transfered from real assets to financial assets (because banks didn't lend the reserves, they levered them to trade financial assets)...take a look at the stock market chief, now that's inflation!

Wed, 03/19/2014 - 11:09 | 4567673 spacehedgie
spacehedgie's picture

This, and foreign markets as well.

I'm dragging Marc Faber back in here to once again perform his regular routine on Helo-Ben, printing, not being able to control where it all ends up - and much of it ending up outside of the US borders, propping up inflation outside the US - like in the EM, especially China.

Wed, 03/19/2014 - 10:12 | 4567334 Capitalist
Capitalist's picture

Krugman still relies on the IS-LM model which the Bank of England just disproved. What say you now?


I'll also point out there's a difference between the Austrians and the "austerians". The former wants tax cuts, while the latter wants tax increases. It appears you have confused the two.

Wed, 03/19/2014 - 11:56 | 4567914 Herd Redirectio...
Herd Redirection Committee's picture

I mentioned this to a friend who works in local gov't about 4 years ago.  I said "You have all these gov't officials, and CB heads, talking about the economy, the economy.  Don't they know cutting taxes is the most helpful thing they could do?  Have you seen any western countries contemplating tax cuts?"

So I told him it seems gov'ts want the economy to improve, but not if it comes at the expense of a smaller gov't!

Wed, 03/19/2014 - 10:15 | 4567367 Rising Sun
Rising Sun's picture

What kind of bullshit is this????


Krugman is a windbag who brags about his PhD when he gets challenged.


Oh and being wrong?  Krugman leads the pack or he generalizes bullshit so that he can play both sides.


Krugman is a paid for mainstream media bullshitter!!!!!

Wed, 03/19/2014 - 10:19 | 4567389 kito
kito's picture

where is the roaring inflation he asks!!!!!   check out fine art!!! million dollar penthouses!!! the stawk market!!!! any place that yellen's favored sons can park their money!!! 

Wed, 03/19/2014 - 10:25 | 4567430 centerline
centerline's picture

Shadow banking, consumer credit, etc.  Massive inflation already occurred.  The only way it has been continuing since 2000 is bubbles.  Essentially cramming down more debt than otherwise would be possible.  Is how the middle class gets crushed.

Wed, 03/19/2014 - 10:40 | 4567476 ebworthen
ebworthen's picture

Krugman the bearded potato is right only because it is twelve noon in his broken clock world; and because the FED and .gov have ginned the economy with un-payable debt.

The coin is still in the air; I can call heads or tails and be right.

And, it's a Gold coin, and it's mine.

You buying lunch?

Wed, 03/19/2014 - 10:01 | 4567311 chapaev's ghost
chapaev's ghost's picture

Well, I just asked Petka to read this article and tell me what he thinks.

"Sir the piece is an exposition on the futility of Keynesian economics", Petka said to me,

"Keynes?" I replied. "Well, as long as Grandpa has one, I'm all for it!"

Wed, 03/19/2014 - 10:02 | 4567312 A Lunatic
A Lunatic's picture

Makes for a nice little chat over a spot of tea; now back to reality.......

Wed, 03/19/2014 - 10:08 | 4567313 Quinvarius
Quinvarius's picture

In other words, any time you put more than one bank in a system, you achieve an unstoppable critical mass of redeposit activity which can only result in total annihilation the second a withdraw is made. 

Wed, 03/19/2014 - 10:30 | 4567451 centerline
centerline's picture

Yup.  That about sums it up.  Exponential functions are a bitch.

Wed, 03/19/2014 - 10:09 | 4567342 SWCroaker
SWCroaker's picture

Wow.   Lotta big words there.   I'm pretty sure the connotations of many were disdainful.  


  1. Pretty sure you insulted Krugman, somewhere in there.   Good on ya.
  2. I suspect you also tried to, in a very high fa-luting way, point out to plebs like me that money is created out of thin air by the banks when they lend, and that peeps like me who think bankers actually operate by lending out other customers deposits are dolts.

Well, sorry, but the banks are damned either way.   They have no *right* to do either.   Who the frick gave my piddling branch bank of podunk, run by twerpizoid ex-teens, the authority to mint money out of thin air?  Are you seriously putting that mechanism forth as the underpinning of a nation's money supply?  Or if it goes my way, then the same twerpizoids are perpetrating a fraud, lending out customer's money to other customers, but using accounting that pretends all funds are safe, accounted for, and not at risk.   Do that with the missus' jewelry and I'll be charging you with theft.

Anyway, congrats on giving your Thesaurus a workout, your nose a good staring, and Krugman a kick in the nuts.    But as for the whole "it's not theft after all" thing, that isn't floating too well with us low-brow types.

Wed, 03/19/2014 - 10:11 | 4567351 vyeung
vyeung's picture

The voodoo witchcraft is slowly being exposed, in desperation they will say that without their fiats your Mc Meals will end. BOE run the Fed and the Fed run the rest of the banking cartel. They create fiat with 0 backing. The only thing sustaining the dollar is military faith, saudi petro link. With the latter being the linchpin. That is going away, even the Saudi's know it, hence the recent ripples through Saudi/US relations. Other than that the USD has been a ponzi scheme since Nixon closed the gold window.

Wed, 03/19/2014 - 10:11 | 4567352 Hindenburg...Oh Man
Hindenburg...Oh Man's picture

what's with the intense gold smackdown? We will be below 1340 before long today.

Wed, 03/19/2014 - 10:21 | 4567400 teslaberry
teslaberry's picture

it gets to a point where a man with common sense realizes that the endless academic bickering is just smoke and mirrors. 


some academics understand this , and some don't. some academics don't know why their entire -non-profit institutional tax subsidy system known as 501c3 developed in a manner to allow ultra-high net work individual funded institutions to escape paying taxes while the proletariat cannot-----IF those individuals donate 'charity' to the non-profit insitutions they created. 


the mechanisms by which ideology and the background texture of our intellectural frameworks operate are instituitonal in nature. those insitutions cost money. academics believe their ideas exist in the vaccum of platonic reality. when in fact----their entire instituional framework is a cave built for them and for society generally by those who set up this system. 

it doesn't matter how money is created . it really doesn't. it just matters who is in charge, and what they will do when their crop yield falls, or fails altogether. their crop is the money system itself, as sure as the farmers crop grows from his field.

when in doubt, bunker in and hide your gold in multiple locations while the revolutions sweep through. 

don't worry about the academics, they will starve to death just as surely as everyone else who is not concerened about the academics of money. 


like nassim taleb said---you don't need to understand money to use it. it doens't need to be defined. everyone accepts it. until they don't. 



Wed, 03/19/2014 - 10:21 | 4567406 Son of Captain Nemo
Son of Captain Nemo's picture
"The Bank Of England Goes Austrian?"

Or a more appropriate title Whither the Bank of England?!!!

England give it up baby... 

You and your North American “progeny” are truly fucked and have been since that creation of your’s John Maynard was allowed to step into prominence! You keep offering "olive branches" with one hand and in the other you carry a stick that you no longer have the strength to use so you pass it off to your partners in-crime... You are in fact your own worst enemy and it's always been that way.

Too many opportunities to fix it since 1939 and now “the party is over”!

RIP Brother!!!

Wed, 03/19/2014 - 10:22 | 4567409 Kantbelieveit
Kantbelieveit's picture

Could the great minds on this thread please explain how an expanding industrial economy can be provided with the necessary increasing supply of money if money can not be created "out of thin air?" The controlled expansion of the money supply is essential to sound fiscal policy. It has been a proven counter-cyclical mechanism, ever since the Great Depression was ended by the deficit-fuelled massive spending of WWII.

Money HAS NO INTRINSIC VALUE. It is a tool we use, like a hammer or a saw, to accomplish constructive activities. The increase or decrease of the money supply should reflect the needs of the economy, not some crude superstition that views all fiscal policy as evil.

Wed, 03/19/2014 - 10:42 | 4567514 centerline
centerline's picture

It is not "what" is money.  That purely a confidence thing.  It is the "who" is controlling it that matters.  The supply simply has to be elastic.  And growth is not the only possible direction.

The system has been hijkacked, as has happened before many times over.  Those closest to creation of money benefit disproportionately.  This has been pointed out time and time again, even by our founding fathers.  It is why a "political class" always develops and turns on its own people.

I always like to ask people to simply look at the skyline of any major city.  Take a look at the names on top of the buildings.  Most are banks.  There is the answer in plain sight.  The politicians keep the party going by demanding the creation of money and the bankers are more than happy to oblige.  Growth is the only answer lest bankers and/or policitians might be thrown from the bus.  So, forward we go into financial oblivion.



Wed, 03/19/2014 - 10:58 | 4567595 RaceToTheBottom
RaceToTheBottom's picture

You recognize it has value by its role in growth but then you say it should have no cost?

Bring on the free lunch, baby.  Perpetual motion machines for everyone!!!!

Wed, 03/19/2014 - 11:57 | 4567924 tip e. canoe
tip e. canoe's picture

1st thought of a little mind:  it's not about stock, it's all about flow, silly.

2nd thought : and mo' betta, where dat flow go...cui bono?

3rd thought : please define constructive, especially when using in the same paragraph as WWII.

Wed, 03/19/2014 - 12:07 | 4567975 Schmuck Raker
Schmuck Raker's picture

I'm not a great mind, but I'll try.

You are confusing "capital"(Scarce) with "money"(not scarce).

To answer your question: an expanding industrial economy can be provided with the necessary increasing supply of money if money can not be created "out of thin air?"

I'll ask you one in return:

How did any economy expand before "fiat currency"(money) became prevalent?

Wed, 03/19/2014 - 12:30 | 4568089 Kantbelieveit
Kantbelieveit's picture

Before currency, there was barter, which was much less efficient. As more crops grew and more ore was mined, there was more stuff to exchange. When money was introduced, it was initially in the form of precious metals, which had an uncontrolled deflating or inflating effect when supply was out of synch with economic growth. Fiat currency allows much better control of the supply, and thus better support for the economy, but many people are obsessed by the belief that it is intrinsically evil. Do you really want to go all the way back to barter?

Wed, 03/19/2014 - 13:13 | 4568310 nixy
nixy's picture


What a stupid statement..... either we have bent banking OR we have barter.......sigh.

I've Googled "false dicotomy"for you.

Have a read... you might learn something.


Thu, 03/20/2014 - 00:18 | 4571059 Schmuck Raker
Schmuck Raker's picture

Well, I may be mistaken, but there is a huge leap between "barter" and "currency"(In the modern 'fiat' sense). Ideally(My opinion, and expressed here quite often @ZH) an appropriate currency is "Hard Money"(Backed by Gold or some other precious metal), which is to say that it is not simply an IOU(PROMISE) to pay, it is(again ideally) immediately exchangeable for some X ounces of Gold or silver.

The difference is this: you work hard to grow a crop - you exchange that crop for precious metals - you have a tradable(Dare I say fungible?) good. IF, HOWEVER, you exchange your production(crops) for "fiat currency" you have introduced a new risk - "sovereign credit*"

So your straw man:"Do you really want to go all the way back to barter?" is irrelevant.

You seem to be basically arguing that central control is better than free markets, and anyone with half a brain should be able to recognize that argument as hogwash, even  me.

*absolutely NOT the right terminology, but see my first sentence in my first comment.

Thu, 03/20/2014 - 00:22 | 4571100 Schmuck Raker
Schmuck Raker's picture

P.S. I assume you're nothing more than a troll, and probably an automated one at that, but I thank you for forcing me to focus long enough on any given issue to crystallize my thoughts, and commit them to the nether ether.

Fri, 03/21/2014 - 21:41 | 4579269 bombdog
bombdog's picture

It's intrinsically evil for one group of people to do work whilst another simply "manages the money stock" as it were. Many good points below for you to consider. Another one is that there is no need to expand the money supply, there will be a gentle decrease in prices over time in an expanding economy and everyone benefits. It is a fallacy in the first place that the money stock needs to expand. Between barter and "currency" there's a good few thousand years of international trade that you've dropped into the memory hole. Believe it or not people could function quite well without a parasitic class of state managers and bankers forcing them to use a currency. Nor did they need to feed and clothe an army of "economists" telling them about how to control the money supply.

Wed, 03/19/2014 - 12:49 | 4568172 Winston of Oceania
Winston of Oceania's picture

The death of Roosevelt and his assbackwards policies is what ended the depression. His VP gave up the socialist bullshit redistribution scheems and let people go back to work.

Wed, 03/19/2014 - 13:07 | 4568275 nixy
nixy's picture


So, as a great mind, you're suggesting an economy can ONLY expand produce weath if money is created from nothing?

You & yours most certainly DO use money as a tool, designed to elevate levels of anxiety...... "must buy now as it will cost more tomorrow". Bit like coralling sheep prior to fleecing.

You work for either a bank, government or other non wealth producing sector?

Wed, 03/19/2014 - 15:25 | 4569030 Atticus Finch
Atticus Finch's picture

Currency has no intrinsic value. Money is a different animal. Currency is claim that value exists.

Wed, 03/19/2014 - 10:31 | 4567452 ebworthen
ebworthen's picture

Thanks for the new words/phrases Mr. Corrigan.

Ladies and Gentlemen! 

I know how to turn lead into Gold. 

Send me $99 and I will tell you the secret. 

Wed, 03/19/2014 - 10:31 | 4567459 kolya111
kolya111's picture

I learned a new word today.  Thanks Tyler.  Perfervid.  Purrrfurrrviiidddd.  Perfervid!

Wed, 03/19/2014 - 10:39 | 4567495 sudzee
sudzee's picture

Western c/b fiat collapsing. Those with no wealth struggling against inflation and those with wealth pouring fiat into anything that may have value a year from now. Hundreds of trillions will find its way into even looer stocks. Dying fiat into soaring markets.

Wed, 03/19/2014 - 10:50 | 4567555 RaceToTheBottom
RaceToTheBottom's picture

The Austrian school had better allocate more time and money to de-eggheading their writers, historical or otherwise to meet the reading skills of todays public.

If their goal is to convince the public of their ideas; if not, then carry on just being right....

Wed, 03/19/2014 - 10:53 | 4567585 DR
DR's picture

What BS!


The banks were made whole and now is the time for austerity of the massses to pay the fiddler...

Wed, 03/19/2014 - 11:27 | 4567709 withglee
withglee's picture

Now I know what it must have been like for Copernicus to read scholarly articles about the Earth being the center of everything.

Hopefully some day soon a Galileo of money will come along and convince people of the obvious: Money is "a promise to complete a trade". It is created out of thin air by traders who get their trading promises certified. When the promise is delivered, the certificates are extinguished. In the mean time, the certificates circulate as items of barter.

Descriptive model: They can do this because they are "guaranteed" to only lose value at the rate of about 4% per year (the bankers and governments take). They must, by law, be accepted in trade for all debts public and private. A very small clique called bankers are the only ones who can certify these trading promises. Governments allow this because bankers will give them trading certificates without having to make a trading promise ... thus contributing to the 4% leak.

Normative model: They can do this because they are "guaranteed" to perfectly hold their value (0% INFLATION) by the relation: INFLATION = DEFAULT - INTEREST. No law is necessary to get traders to use them because they are the very best intermediate item of trade that can be conceived (0% INFLATION ... freely available to all traders making trading promises ... perfect balance between supply and demand (the nature of trade) ... INTEREST collections not arbitrary but are the method of recovering DEFAULTed certificates from broken trading promises).

I wish I could live long enough to see it ... long enough for people to realize that Keynes was an idiot ... long enough for people to realize that the Austrians are idiots too and switching back to gold puts us in a failed system (for myriad reasons beyond the fact that there is only 1oz of the stuff per person on Earth) we have already experienced ... long enough for people to realize that there can be more than two ways to look at things and one being wrong doesn't prove the other right.

But alas, I'm running out of time.

Todd Marshall
Plantersville, TX


Thu, 03/20/2014 - 00:38 | 4571032 Radical Marijuana
Radical Marijuana's picture

withglee, your wish that a Galileo of money will come along and convince people of the obvious: Money is "a promise to complete a trade" could benefit from a study of the Structure of Scientific Revolutions by Thomas Kuhn. Your superficial notions about money can not be integrated into the physical and biological worlds, because you are not approaching the understanding of "money" through the basic concepts of understanding general energy systems, which are the ways that we understand everything else these days in physics and biology.

Moreover, instead of properly understanding "money" in ways which are consistent with energy systems on a superficial level, we must go into much more profound levels of understanding human civilization as an energy system, because that explains how and why civilization ended up being controlled by the people who were the best at being dishonest, and backing that up with violence. Our real monetary system is based on the triumph of fraudulence, (creating "money" out of nothing) which is enforced by the power of governments, through "taxation" (robbery) and enforcing the "rule of law" (killing those who resist being robbed by the government.) The government enforces the fraud of making "money" out of nothing, to benefit the private banks that have the right to legally counterfeit the public money supply. The banks were able to gain that privilege by persistently applying the methods of organized crime in order to dominate the political processes.

Furthermore, withglee, consider the thought experiment of traveling way back in time, to the paleolithic era of human origins, which lasted for millions of years. Back then, an important economic activity, which left evidence behind about it, was picking up a stone, and shaping it into a useful tool. Consider that stone already existed. It belonged to nobody, or to everyone. Somebody picked it up (subtracted it from its environment). They worked upon it to shape it into a more useful tool. They then could trade that tool with other human beings. That is where your notion of money as a medium of exchange, or promise to complete a trade, enters into the picture. However, your concepts do not account for the original fundamentals, which were SUBTRACTION and ROBBERY. 

The stone, and the human energy to shape it, and then to give that to someone else (presumably in some sort of "trading" exchange) were all aspects of the whole environment. Human beings perceived and named the stone that they picked up from their environment, which they thereby subtracted from their environment. They TOOK that stone, which is the basic definition of robbery in English. That stone was already there, and belonged to everyone equally, until someone picked it up. They used their force to take that stone from the environment, and thus, began the basic notion that there was some private property, the shaped stone tool, to give to someone else.

The earliest stone tools already demonstrated the basics of subtraction and robbery. There was the beginning of staking claims upon that stone, which nobody owned before, or which belonged equally to everyone. After that particular stone was claimed, by someone picking it up, they would have backed up their claim that there was their stone by force, by coercion to keep it, except that they may have agreed to give it to someone else, in some sort of trade. Inside that context, it is far down the line of events before some "promise to complete a trade" manifests. There was already claims backed by coercion, to privatize that stone. Afterwards, there was the work to transform that stone into something with a shape that made it a more useful tool. However, the main point I am making is that the stone already existed in the environment. No human being made that stone, although they worked on it to change its shape, to make it more useful to human beings for their purposes. All of the basic economic situations were already present in paleolithic cultures, millions of years ago! As well there are now many thousands of years of anthropological history through which to study the deeper history of "money."

Anyway, withglee, your kind of superficial theory about what "money" is, or should be, is NOT the stuff of scientific revolutions. Rather, it seems mostly wishful thinking. A more useful intellectual scientific revolution regarding the understanding of human monetary systems must address the central problem of our civilization, that it is almost totally dominated by the biggest bullies' bullshit social stories, and that includes within the history of the philosophy of science, as well as obviously within the political economy, where the banksters' triumphant, government enforced, frauds dominate the public money system.

Thu, 03/20/2014 - 10:05 | 4572053 withglee
withglee's picture

Alright Radical Marijuana: I can refute what you write in your "descriptive model" sentence by sentence. Any analysis requires an accurate descriptive model. If you don't know where you are, effort to get somewhere else can be misplaced. But it's a little early to refine your descriptive model.

Let's first have a look at your "normative model". How "should" things be and how will they work? Use as much "wishful thinking" as you like. We can refine that later as well.

The final step is then to go about removing the "gaps".

If you would like to take this off line I can be reached at Put ZHDEBATE in the subject line.

Wed, 03/19/2014 - 11:50 | 4567874 joego1
joego1's picture

Oh what a stupid game humans play. It's to bad we couldn't come up with something better for ourselves.

Wed, 03/19/2014 - 12:03 | 4567953 BeerMe
BeerMe's picture

If I could save more I could invest more, but right now I'm "stuck" paying debt.  And it is just that...financially "stuck."  Putting it on a larger scale and you get .gov putting us all in chains.

Wed, 03/19/2014 - 12:08 | 4567982 kellycriterion
kellycriterion's picture

Money is an IOU? Well it isn't exactly untrue. But the incredibly myopic isn't really true either.

Money is an information system that carries multiple streams. It tells us about people's needs and wants, the relative value of things. It tells us how to allocate resources. It provides basically two types of score keeping. The accounting variety and the more flexible, fungible possession type to accommodate human relationships and desires and the thing that powers it all, imagination.

Imagination isn't just about big ideas that create new technologies and markets, it's also about small ideas that may pertain to one facet of one small family business in some obscure niche.

From this view of money what might one reasonably conclude about centralization, inputs and outputs, concentration of power? Wealth is about resource management, and the greater wealth an individual controls the more they are manager and less a consumer.

All roads lead to the people who take. Income inequality is about a lack of power. Power in it's broadest sense. Power to sustain yourself and manage your own life. But who could have guessed that centralization of power isn't really egalitarian? The people who take are just trying to save everyone from the people who make. What could go wrong?

Wed, 03/19/2014 - 12:10 | 4567993 kchrisc
kchrisc's picture

The bankster's theft is easy to visualize.

Imagine all people producing and exchanging what they produce with each other--they trade their production for the production of others. Now imagine that they start to use something as a medium of exchange, money, to better facilitate their trade. Now imagine some people that don't produce anything counterfeiting that medium of exchange and then using it to procure and consume goods and services. They would be taking the production of others without first producing themselves, which is theft.

Fraudulent-reserve banking and the banksters are nothing more than thieves.


"The guillotine is my 'printer.'"

Wed, 03/19/2014 - 13:00 | 4568239 withglee
withglee's picture

They would be taking the production of others without first producing themselves, which is theft.

If we all went through life having to produce before we can consume, it would be a very short and uncomfortable life. Just before we die we would have saved enough for our house. Just before we are able to produce we would save enough for our mode of transportation needed to be able to produce. Just before we starve we would save enough to go to the super market.

Since we know money is "a promise to complete a trade", that allows us to make trades into the future which allow us to consume before we produce and thereby deliver on our trading promise. It's more efficient than requiring that production come before consumption.

Take the simple example of a person who wants to go into farming. To be competitive today he needs a good ag education (consumption before production). Then he needs land and equipment (consumption before production). Then he needs feed, fertilizer, fuel, ergs (consumption and production). Finally he harvests, sells, and completes his trading promise (production, delivery, and savings).

That's "not" theft.

Wed, 03/19/2014 - 14:03 | 4568549 RaceToTheBottom
RaceToTheBottom's picture

If he pays for that "consumption before production" by paying interest, fine. 

Creating money from nothing in the hopes that someone will ask for it is the tail waging the dog and is theft.

Wed, 03/19/2014 - 14:59 | 4568907 withglee
withglee's picture

I have bought and sold several houses over my career. I have never defaulted. I have never even been late on a payment. And I now own my houses "free and clear".

Reviewing the payments (including requirements of the "lender" to absolutely protect his interest), I have paid for these houses nearly three times.

With a properly managed Medium of Exchange, I would be an exemplary trader and enjoy zero interest. I should have only had to pay for the houses once.

I have always created my trading promises from "nothing". I have always delivered on my trading promises (never "DEFAULTed"). How has the marketplace treated me? INFLATION averaging 4% per year. INTEREST collections averaging over 6% per year.

It's not right. It's how the 1% become the 1%.

You don't pay for consumption before production by paying "interest". But how could you know? We have been taught exactly what you write ... and it's flat out wrong.

I have a old friend who is now president of a large bank in Ft. Worth. I discussed the proper management of any MOE with him. In the process I asked, what should interest rates be? His answer: whatever the market will bear.

I talked to him about capital in our capitalist system. The capital forming a bank gets taken out in the first two to four years of a banks operation. It does this by leveraging that capital at least 10 times and charging 3% to over 10% interest on the "leveraged" amount ... i.e. 10 times the actual capital meaning they're getting 30% to 100% on their capital.

Run the numbers. The capital is returned in 2 to 4 years or less, even if they make lots of bad loans. From then on the bank is running on zero of its own capital. He got pretty quiet when I asked him if this wasn't so.


Wed, 03/19/2014 - 16:20 | 4569315 RaceToTheBottom
RaceToTheBottom's picture

Most of what you wrote makes sense with the one problem that the world does not work that way.  You cannot get 0 % interest.

It may in the future with a disruptive technology like the internet and or pier to pier banking, but now it does not.

Also money has to be more than a "Medium of Exchange" , it has to be a "store of value" as well.

Wed, 03/19/2014 - 19:08 | 4569905 withglee
withglee's picture

Even in our current world, the portion of the INTEREST that we pay that goes to actual cost of printing money and of moving accounting numbers around is infinitesimal compared to the total INTEREST that is collected.

And as I have described, a properly managed MOE that guarantees zero INFLATION is a "perfect" store of value. That's what zero INFLATION means. If we had a properly managed MOE back when I started my career 50 years ago, I could still buy a gallon of gas for $0.25 rather than the $3.25 I pay now. That's what a 4%/year leak called INFLATION will bring you.

And yet, the INTEREST that is collected still doesn't cover the DEFAULTs we have experienced in those 50 years. It's not because you and I are DEFAULTing. It's because governments at all levels are DEFAULTing. They just keep rolling over their debt, and that is DEFAULT.

While everyone can easily provide me with a time series of INTEREST or INFLATION, I defy anyone to produce a time series of DEFAULTs. They can't. Thus, there has never been a chance to properly manage the MOE because knowing DEFAULTs precisely is crucial to MOE management.

So step (1): Monitor DEFAULTs.

Fri, 03/21/2014 - 21:17 | 4579225 bombdog
bombdog's picture

"And as I have described, a properly managed MOE that guarantees zero INFLATION is a "perfect" store of value."

The problem with your theory is that it's entirely confined inside your head and cannot work in the real world.  There is no such thing as a "properly managed MOE" and your statement is entirely contradictory since people issuing promissory notes do so in a completely spontaneous and therefore unmanged way.

Say, are you that Mike Montagne guy that promotes the "Mathematically Perfected Economy"? You sound just like that fruitcake.

Wed, 03/19/2014 - 15:14 | 4568984 Atticus Finch
Atticus Finch's picture

It's the debt peonage that you describe that is the theft.

Wed, 03/19/2014 - 18:48 | 4569856 withglee
withglee's picture

"Debt peonage"? You call making a trading promise "debt peonage"? You call making a "trading promise" theft? I call breaking a trading promise theft. And I call being forced into a trading promise to be peonage. The first case is mitigated by INTEREST collections equal to DEFAULTS (beforehand for extreme deadbeats). The last is an oxymoron. No promise can be considered a promise if it is forced. We're talking "free" trade here.

Fri, 03/21/2014 - 21:03 | 4579190 bombdog
bombdog's picture

You're right it's not theft it's called "growing up". Characterised by depending on ones parents for money, not writing worthless negotiable instruments to all and sundry.

Wed, 03/19/2014 - 12:29 | 4568080 squid427
squid427's picture

It was not the debt of WWII but the PRODUCTION that turned things around. Now money is being created without an increase in products and services to go along with it. And about the inflation question you asked earlier, money is not money untill it leaves a bank and enters the economy. The QE money has been placed in stocks, exported to developing countries via the carry trade as well as the fed holding excess reserves. If this money were to leave the banks and really enter the economy then we will see serious inflationary issues.

Wed, 03/19/2014 - 13:07 | 4568277 withglee
withglee's picture

money is not money untill it leaves a bank and enters the economy.

Money is not money until a trader makes a promise to deliver some time in the future. That promise is certified and that certificate is money which circulates in barter. Properly managed (i.e. certificates are reclaimed and extinguished on delivery ... interest collections equal defaults ... INFLATION = DEFAULT - INTEREST = zero) the certificates represent pure non-changing, universally accepted value. This is all obvious when you inspect trade: (1) Negotiation; (2) Promise to deliver; (3) Delivery. With simple barter, (2) and (3) happen on the spot simultaneously. Money allows (3) to happen over time and space. Requires no capital. Requires no backing commodity. Only requires proper scrutiny.

Wed, 03/19/2014 - 15:11 | 4568978 Atticus Finch
Atticus Finch's picture

It's the proper scrutiny that is missing. You assume lawfulness, but if law enforcement is missing, e.g., today's environment? In that case, exchange must be backed by an acceptable commodity of equal value. The only value of currency is so that you don't have to lug around a pig in your pocket so that you can barter a cow. I make a distinction between currency and money, which has intrinsic value. Currency has no intrinsic value and consequently depends on lawful scrutiny. It is fair to say that today in the US there is no lawful scrutiny.

Wed, 03/19/2014 - 18:41 | 4569827 withglee
withglee's picture

Currency and money and pieces of eight and pork bellies are all items of barter. The more cheating you have (and tolerate), the more each item of barter must be directly useful to you.

Currency has more value than just ease of transport. It has the ability to extend trades into the future and into different spaces. This is what makes it differ from simple items of barter.

You have a better chance of getting lawful scrutiny if you have a Medium of Exchange that is not corrupt on its face. The MOE management we have now allows open government and elitist corruption. That allows them to "buy" their own law.

Proper transparent management of the MOE is crucial to an efficiently operating marketplace. "Todays environment" can be greatly improved by simply replacing the Fed with a properly managed MOE. This will remove a huge funding source from run away government and elite patronage that undermines equal application of law.

Fri, 03/21/2014 - 20:58 | 4579180 bombdog
bombdog's picture

Barter is the double coincidence of wants. Money solves the problem of barter. Anyone confusing money with barter just hasn't done their homework.

Wed, 03/19/2014 - 14:05 | 4568558 squid427
squid427's picture

Very detailed thank you. If there is no commodity backing the money then when transaciton is compleated and the debt is paid the the money ceases to exist, causing flucuations in the money supplly. If there is commodity backing the currency then the money supply remains the same and no fluctuations right? If you see this I would love to hear your thoughts, thanks again.

Wed, 03/19/2014 - 14:36 | 4568765 withglee
withglee's picture

Since money is "a promise to complete a trade", we know that fluctuation in the money supply is normal and expected. We know that the more trading activity we have, the more money we need. Knowing that money is "certified" trading promises, we know the supply and demand for it is always in perfect balance ... it's the nature of trade.

If money is tied to a commodity, then trading activity can be constrained by the supply of the commodity (and in fact has historically been constrained by the money changers). It's central to the international banker's farming operation. Further, retained money value (savings) also varies with the supply and demand for the commodity. This is why it is just flat wrong to have money tied to a commodity.

Money is about trade. It is directly linked to trading promises. Trading promises need to be accepted freely and easily to have a vibrant and fair marketplace. And deadbeat traders need to be immediately identified and throttled back (by way of higher INTEREST collections). This automatic negative feedback system gives responsible traders (those who don't DEFAULT) a trading  advantage over deadbeats and upgrades the general integrity and robustness of the whole marketplace.

Further ... INFLATION (of the Medium of Exchange) is "guaranteed" to be zero at all times by the relation INFLATION = DEFAULT - INTEREST.

What more could you want?


Wed, 03/19/2014 - 14:59 | 4568905 squid427
squid427's picture

The problem I see is more debt than than there is money to pay it off, so we have to constantly increase the amount of debt to pay off old obligations. Interest rates being in percentages means that the new debt creation is not in a stright line but a curved exponential line if it were to be drawn on a graph. Which means the debt creation will eventually get out of hand, Zimbawee or vie mar style.

Wed, 03/19/2014 - 15:43 | 4569045 withglee
withglee's picture

That's the story Ellen Brown has been trying to sell in her "Web of Debt" book. It's abject nonsense ... but what would you expect from someone who now wants to be Treasurer of California and wants the U.S. Post Office to be our bank?

Knowing that money is "a promise to complete a trade"; knowing that if you promise something and have yet to deliver you are in debt; money as debt  should not hit you as something bad. Rather, it is just a promise in the process of being delivered.

In a properly managed Medium of Exchange (MOE) there will always be exactly enough money. This is because all trading promises will be freely certified ... these certificates being new money. The certificates become items of barter because they hold their value perfectly (0 % inflation of the MOE guaranteed). On delivery, the debt is paid, the money returned and extinguished.

You speak of interest rates being percentages. You have been taught this. INTEREST collections, in actuality, are just a method of recovering DEFAULTed money certificates from circulation, thereby guaranteeing zero INFLATION. The relation is INFLATION = DEFAULT - INTEREST.

The whole failure of the scenario you illustrate is failure to acknowledge the obvious: Money is "a promise to complete a trade". This is obvious from inspecting trade: (1) Negotiation; (2) Promise to deliver; (3) Delivery. In simple barter, (2) and (3) happen simultaneously on the spot. Money allows (3) to happen over time and space.

A trading promise is certified (money is created). The money circulates as an object of simple barter. When the trading promise is delivered, the money is returned and extinguished. If the delivery fails, the DEFAULT is recovered through an equal amount of INTEREST collection (immediately on recognizing the DEFAULT). Thus, INFLATION is guaranteed to be zero and no attempt to measure it is needed.

If you want to know why we have ever increasing debt (i.e. money supply), it is for three reasons. (1) We have ever increasing trade; (2) We have DEFAULTs that exceed INTEREST collections; (3) We have governments counterfeiting money (i.e. getting certificates without making a trading promise and never returning the certificates ... just rolling them over ... which is DEFAULT ... actually another type of(2)).

If we properly manage the MOE, (1) is no problem; We can immediately correct (2) by monitoring DEFAULTs and collecting INTEREST accordingly; and treating government like any other deadbeat trader or counterfeiter banishing them from the marketplace makes (3) go away.

Pretty simple.

Wed, 03/19/2014 - 16:08 | 4569277 squid427
squid427's picture

You make it sound so simple and tidy for lack of a better word. But why is this not what I see going on in the real world and how do you think it could be made to function as you have described? Or do you not see debt as problem as I do?

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