Topic: A Resource Based Economy - page 90. (Read 288348 times)

I mostly agree with you. I think that business that can't sustain themselves should go bankrupt or change their management. But they don't really need profits. If they can pay all their costs with their inputs, it's all fine, even if they don't produce profit.
The bold sentence is key for my claim. Even when the money supply is fixed, the supply of credit is not finite. Think of systems like LETS, for example, they're trading directly with credit instead of money. IOUs can be used for trade and debts are sold as if they were capital. Price inflation can appear with a fixed money supply, because the credit instruments are also biding for products.
I still haven't proved that credit must necessarily grow with time, but I proved that if a single lender with enough time wants to, he can make make the debts to him grow exponentially through interest.  
If the total credit in the system grows faster than the economy, price inflation appears. Price inflation also rises interest rates, ruining the plans of some investors.
If the total credit in the system grows slower than the economy, price deflation appears. Price deflation progressively devalues capital and discourages borrowing and investing.
Deflation stops growth, but interest needs growth or inflation. It actually requires growth, because inflation will be factored in the nominal interest, so it's like a temporal patch what capital-money really needs, which is growth.
And when the capital yields of certain type (say housing) equal the interest rates, further growth in that sector is not possible. The sector stops growing or becomes a bubble.
 
It's either real growth, unsustainable credit growth with inflation or money is slows its circulation and you have deflation. The destruction caused by deflation will enable later growth for another cycle.

I'm not sure if all this serves you. Feel free to ask or deny whatever you want so I can focus in that point.
 

I'm no economist, but that's always bothered me, too.  Especially since then what sense does it make to take the time derivative of the product (and use the product rule)?  This whole business is the basis for the quantity theory of money.

And if you can't do this seemingly arbitrary and bogus aggregation, then you can't take time derivatives at all, since the sets of P_i and Q_i are just discrete collections of numbers for given time intervals, and for the next time interval, the elements of the set are completely unrelated to those from the initial one.  Thus, there can be no theory derived from the equation of exchange that has any predictive power.

In my limited knowledge of it, it seems like while the quantity theory of money has some value in predicting long-term trends, it's dangerous when used for making short-term predictions.

Reply to jtimon, not quoting for obvious reasons.

One thing that I don't like about that equation is that it is too simple.  If we ignore other currencies, the left side is fine.  But the right side is nonsense, it should really be:  (P₁*Q₁+P₂*Q₂+...+P_N*Q_N)  You can create the quantity P*Q which has the same value, but you are making a huge mistake if you then think of P or Q as having independent meaning outside the product.

I don't use time-preference as defined in a textbook, I just mean "preference for one time over another".  If you are quoting a formal definition widely understood by economists, then the misunderstanding is my fault for not brushing up on the lingo.  Also, if that is the case, economists are even nuttier than I thought.

I gather now the cause of my misunderstanding on the island story.  You did say "money with demurrage", and I totally missed the "with demurrage" part.  The idea of money with rot built in isn't natural to me.  The history of money is a cycle where humanity tries to make money as nearly indestructible as possible, then politicians invent inflation which first rots money, then replaces it with junk, then rots the junk.  Then there is a great unhappiness, and the survivors start the cycle over.

In the baker example, I'm saying that a baker might be better off by letting the bread rot rather than lending it out, whether for interest or not.  Giving it away wasn't even a consideration.

That last two bits tie together very nicely.  I was going to say that a rational lender and a rational borrower would strike the exact same deal under demurrage as they do under inflation, or even deflation.  Then I went off and read the link that you posted again, and I got the same feeling that I had at the end of my previous post:  Once again, you are so close that you could reach out and touch it, but you still don't see it.

Inflation and deflation are neutral concepts.  Neither one has any meaning at all.  If someone added a zero to all physical currency, multiplied all bank accounts by 10, and multiplied all prices by 10, we would hardly notice.  The same would work if they divided everything by 10.  The same works if it happens every night, or every hour, or continuously.

The distortion in the world is clearly not inflation, it is with the specific way that inflation is implemented, first in one place and then flowing out to the rest of the world unevenly.

You clearly dislike inflation, but you are putting all of your efforts into replacing it with inflation-by-another-name (aka, demurrage) when you should instead be thinking about how to change the political structure that hands out favor in one place at the expense of the rest of the world.

My argument shows that systematic bankruptcies aren't an inevitable result of compounding interest with a fixed base money supply, not that they aren't ever ensured, even in the most absurdly unrealistic cases.

That businesses which can't turn enough of a profit to finance their debts get new management or go bankrupt is a good thing, as the supply of credit is finite, and this process optimizes its allocation for economic efficiency.  But it's not as though there must exist indebted businesses in the economy that aren't profitable enough to finance their debts.

Yes, you can create such examples. If the profits are greater than the interests, the debt doesn't have to grow. But when there's losses, someone will eventually buy the failing business with its debts. Well, or it can go bankrupt. It is hard to prove.

Just think this. If a single family would have saved an ounce of gold and lent it with 5% compounding interest (the father gives the gains to the son, etc) since the year 0, their wealth would be right now 4.08959621 * (10 ^ 42) ounces =  1.15938102 * (10 ^ 41)  kilograms.
The total mass of the earth is 5.9742 * (10 ^ 24) kilograms.
So their wealth would be (1.15938102 * (10^41)) / (5.9742 * (10^24)) = 1.94064648 * (10 ^ 16) times the total mass of the earth in gold. Obviously there's not that quantity of gold, so their compounding loan would be eventually unsustainable. Note that the borrowers could have payed back their loans and then the family lent to other people, but the total level of debt to the family would be always increasing.

I don't think that prices are supposed to be fixed and the concept also exist in my head.
Although price inflation has a cause and it's usually monetary inflation, it is a useful concept when discussing monetary matters.
In the equation of exchange (M * V = P * Q), dM (if greater than zero) is monetary inflation and dP (if greater than zero) is price inflation.


I think we agree in this part then. When I criticize interest I mean basic interest, I have nothing against risk premium.


Correct me if I'm wrong with time-preference. But from what I know it claims:

"
1) When you own something, you have the ability to use it now or use it later.
2) When you borrow something you own, you are able to use it later but not now.
That's why no one will lend at zero interest."

1 is not true for all goods. If money is everlasting, that's true for money. But perfect durability is not a requirement for the medium of exchange. In fact it is an obstacle for a medium of exchange, since money can ask for interest to be involved in commerce and don't suffer if "the wares don't want to pay". Everlasting money ask for its tribute as exchange enabler just as a fee can be asked for crossing a bridge.  


I answered it to you.



I said give it to their usual customers for credit at no interest, not giving it away.


Yes demurrage is taken into account reducing basic interest instead of just increasing the nominal interest like inflation does.
I explain the differences between demurrage and inflation with more detail in this post:
https://bitcointalksearch.org/topic/m.469848


Sorry, I don't understand.
What eureka was I close to?
What neutral concepts? I don't think interest is a neutral concept.
The fact that economic cycles are worse now than in earlier times due to our "peculiar policies" doesn't mean that there weren't monetary problems with gold.

This is the one I was probing for, since I hear it occasionally, and it doesn't seem valid to me.

If you play around with toy model closed economies of only a few participants, you can create all kinds of scenarios where the base money supply is constant, and there is prolonged, stable lending going on between participants, without the need for any inevitable bankruptcies.  I.e. you can come up with counterexamples to your assumption that "the compounding nature of interest pushes a quasi-exponential growth of the debt/credit."

The concept of price inflation as a thing only exists for people that think prices are supposed to be fixed.  For everyone else, it is just a consequence of something else, usually (monetary) inflation.


I said higher interest rate, as in the difference between the interest rate with the insurance and the interest rate without it.


I keep saying time-preference.  Why do you keep acting as if I had said "now-preference"?  Also, the utility of a liter of milk in a year doesn't include your ability to trade it now.


I said no such thing (see above).  I also said explicitly that rot doesn't apply here because you were talking about money..  Oh, and yes, bakers might very well be better off letting their bread rot, because you might be willing to pay more for (different) bread tomorrow when you are hungrier than you are today.


So, lenders won't include demurrage in their calculations when deciding what interest rate to charge?  How do you expect to make this happen?

Also, read your post from July again.  In it, you are very close to the Eureka! moment.  You understand that we use peculiar mechanisms for economic policy, but then you direct your criticisms towards neutral concepts rather than the implementation.

Although they're related, I like to distinguish between monetary inflation (money printing) and price inflation (rising prices) to avoid misunderstandings. Monetary inflation is taken into account in my later explanation. Price inflation was already in the first analysis.


But there's a basic interest that doesn't disappear with perfect secure lending. I guess you attribute it to the time preference.


No. Why should I prefer everything now instead of later? Things rot and capital depreciates with its deterioration.
The utility of a liter of milk today doesn't include the utility of a liter of milk in a year, because you won't be able to safely drink it in a year.
With demurrage you could prefer 100 coins next year rather than 100 coins today. Money, an artificial good, a symbol of value can have the qualities that its users decide it to have. Their users will chose a currency with demurrage if it has advantages, for example, cheaper trades and loans.   


I don't understand how are you still convinced that is always better to have a loaf of bread today than tomorrow. It is so clear to me that it depends on the concrete circumstances of the owner of the bread...
Why bakers sell on credit (without interest) then? Wouldn't they be better keeping the bread although they can't sell it tomorrow?


I don't think so, but it is a common claim.

There is only one kind of inflation.  If you want to call it monetary inflation, feel free.

A moment's thought should convince you that an insurance premium is exactly the same as a higher interest rate.

Time preference is indeed applicable to all things.  The only way it couldn't is if you assume it only goes in one direction at all times and for all things.

The island story doesn't remove prejudices, it just tries to replace them.  Also, it doesn't apply here, because you were talking about money.

I suppose I should also point out that inflation is indistinguishable from currency demurrage, in practice.

You mean monetary inflation?
When central banks issue more currency to fight deflation, the liquidation process is postponed but not avoided. Some of the new investments not based on real loanable funds but in inflation are made and the unavoidable collapse of credit becomes even worse.

When I said interest, I meant basic interest, excluding risk premium. If the lending is risky, the borrower acquires at the same time a loan and an insurance. While the basic interest can be suppressed through demurrage (freigeld) or money abundance (LETS), the risk premium has to stay.

Time-preference is not applicable to all goods and services. It wouldn't be applicable to money with demurrage. No one would prefer to save fish forever instead of lending it because fish decays. Time-preference belongs to the "abstinence theories" by the terminology of Boehm-Bawerk, but I don't think the austrian school is correct in this particular point.
To remove your prejudices regarding interest and time preference, I recommend you this short story.

Excellent analysis.  Now add in inflation, risk, and time-preference.

1) They impede capital yields to drop to zero by competition (as other sustained profits do). This means that the demand for a given type of capital is not fulfilled. I the case of factories, the unemployed are the ones demanding more factories. You can read more here

2) The compounding nature of interest pushes a quasi-exponential growth of the debt/credit. Since the credit participates as an effective part of the money supply, it produces inflation. When the growth of the debt becomes unsustainable, a process of liquidation (shrinking credit) begins, which causes deflation, which accelerates the liquidation in a positive feedback. The liquidation periods are known as recessions or depressions.

3) Interest makes the financial market prefer the short term investments.


This fact disrupts our relations with nature and threatens the long run survival of human beings.

Could you briefly describe here what these are?

LOL.,
You assume that civilisation can run on creativity alone!
You extrapolate the shift from manual labour to thought labour without realizing there will always be a lot of manual work in this world that for the comming time cannot be done by robots.
You also think that innovation is the bestest goal we can have.
But there are a lot of things that have very little practical use of innovation.
Take the humble shoe-lace.
Why would anyone want to innovate this (except for a novelty value)?

Innovation is needed, but in some sectors more than others.
Innovation without a clear path to a goal is just a marketing term.
Automation in and of itself does not increase or decrease innovation.
It is a technology, like all other technologies, that is free of moral implications.
It is our *use* of automation that can modulate innovation.
So the question is much more sociological.
How will we use this technology?
What are the pro's and con's of applying this technology to parts of society?

You can't look up to the problems of the world and just shout:'Innovate!'
You will need to look at each problem separately and apply innovation when needed.
But then you will find that sometime less innovation is more efficient.
Which is an innovation by itself.

I'll read what he says. I've been reading much anarcho-capitalism lately. Although austrian economists don't see the problems of interest, I like it.


Keynes liked Gesell but didn't understand him. He thought he could achieve the same using inflation instead of demurrage, but the results are different.
Also, watch these funny videos:
http://www.youtube.com/watch?v=d0nERTFo-Sk
http://www.youtube.com/watch?v=GTQnarzmTOc


Yes, it's like super-LETS.

I choose him because he contrast different types of moneys and states that some of them promote collaboration rather than competition. Yin and yang currencies, I know, too much for a scholar too.
I've repeating the name Silvio Gesell many times since I joined the forum, trying to explain the freigeld concept, a cash-money free of interest.
I haven't read much literature about mutual credit systems (with Ryan Fugger's Ripple as the best of them) and I thought it was a relatively new concept, but it seems that LETS-like system are even more ancient than precious metal cash.

I don't like at all:
Lenin, Keynes, Marx, Stalin
I don't know the economic theories of:
Hobson, Max Weber, Amartya Sen, James M. Buchanan, Charles Raymond Plott, Vernon L. Smith.

There's any fallacies and lies in the video, starting with the religion part. Not that I'm religious, but there's no need to lie to refute dogmas.
Here's a good critique of the video, although I haven't read the full blog.

http://natsufan.wordpress.com/indice-de-articulos/

Sorry, it's in Spanish. Google translator? That will remember you that machines are still too dumb to do certain things.

But wait, is the terra more than a proposal?

While religion is irrelevant to the implementation of an RBE, you should know that the first section of the first Zeitgeist documentary explores comparative theology and why religion no longer serves any meaningful purpose.

www.zeitgeistmovie.com