Topic: Representational Monetary Identity - page 2. (Read 6224 times)

Why would that be? Why would it make no sense to trade a pair of shoes for a knife and make up for the difference in price with a gram of gold?


Not in my example, in which we exchange only a pair of shoes, a knife, and a gram of gold.


Are you saying my pair of shoes is a debt claim? Or perhaps it is the knife?


Absolutely correct, provided you are talking about money as created by commercial or central banks, and not about money in general.

Your example makes no sense,  all that happens is that goods, gold or IOUs are traded. Its not because I trade one debt claim against another or one debt claim against some gold, that it stops being a debt claim.  Our fiat money is created as a debt, and therefore remains the representation of someone's debt  no matter how often it changes hands, no matter what its traded against, until the debt is repaid and the money destroyed.

In this thread, these two opposite views of money showed up:

1) Money can only be an IOU.

2) Money cannot be an IOU.

These are precisely the two possible views of the phenomenon of money becoming debt, taken unilaterally. When a commercial bank makes a loan:

1) The new money created must be different from the money from which it borrowed so it can still belong to its original depositor. By taking this view unilaterally, we conclude: money can only be that loan itself.

2) The new money created must be identical to the money from which it borrowed so it can remain a loan from that original money. By taking this view unilaterally, we conclude: money cannot be that loan itself.

Although both views have a legitimate motivation, they are both wrong:

1) Money can be an IOU as the continuous expansion of our money supply as a debt overwhelmingly shows. The resulting debt-money supply is as much real as the resulting monetary crisis.

2) Money must not be and in itself is not an IOU, as this example shows:

If I have an ounce of gold and a pair of shoes worth two ounces of gold and you have two ounces of gold and a knife worth an ounce of gold, I can give you my pair of shoes while you give me an ounce of gold and your knife. In the end, we still own three ounces of gold each, both in monetary (golden) and commodity form, and nobody owes anybody anything.

I propose an explanation of how can money be an IOU without being in itself an IOU at http://omniequivalence.com/fractional-reserve-banking/.

Sorry, I forgot you were just talking about the weather.

Where did I say any of that? 

So you think you can have fractional-reserve banking without ever having central banking, right? And that you can have central-banking without sooner or later having the deregulation of banking and the merge between commercial and investment banks, right? And that you can have that merge without the explosion of derivatives, right?

Well, good luck with your dam.

No.  Lets say that flood was caused by a dam breach.  The dam failed due to neglect on the part of its owner.  In this case, I would focus on the owner's negligence which was the primary cause of the flood.  It would be rather stupid to focus on evaporation.

THAT is what I'm saying.

What about both? What about something that is of first rank, importance, or value because it is first in order of time or development, or primitive?

By making these two senses exclusive you are condemning yourself to fight just imminent problems and only recognize immediate causes.


So according to your logic, even if floods are caused by rain, and rain is caused by evaporation, floods are not caused by evaporation. Amazing.


Sorry to interrupt your worrying about that giant Tsunami with my little-quibble monetary theory, but I really don't see how a decent monetary theory can be of no use in avoiding future Tsunamis (the present giant wave is not the first, as you probably know). As for the present monetary Tsunami, do you really think you can avoid it? (And if not, then who's efforts are misplaced?)

So why don't you stop worrying for a moment and try to understand things for a change?

That depends on which definition of the word primary you are using.  In your case you are using the definition:


While I am talking about:


Bear Stearns, AIG, and a near systemic financial collapse in 2007-2008 was not caused by fractional reserve banking.  It was caused by a run on the Shadow Banking System.  

You can continue your little quibble but your efforts are misplaced.  To use an analogy, we're both standing on the beach, you're focused on the moon and its effects on tide patterns.  I'm worried about the giant Tsunami right in front of us.

Today, most money is debt, and the primary mechanism for debt becoming money (of which the first "derivative" is called central banking) is this: when a commercial bank makes a loan, it creates new money that, if deposited into another bank account in the same or any other bank, enables the latter bank to loan it again, creating even more money. This continuous creation of debt expands the money supply that we use to buy cars, houses, and cell phones, creating inflation---so this credit money is as much an illusion as the cars, houses, and cell phones it buys, or as the inflation it causes. As some of us know, if everyone were to withdrawal their money from all banks, there would be no money left for most of us to withdrawal. However, this is no longer because there are only 10% reserves, but rather because now less than half of that percentage exists in physical form---a percentage that continues to shrink.

The crux of all this is that each loan replicates the money from which it borrows, so the same loan must be:

• The money from which it borrows to still be a loan from it.
• Brand new money for the money from which it borrows to still belong to its original depositor.

What we must explain is: what makes this ambiguity possible? I propose an answer to this question at http://omniequivalence.com/fractional-reserve-banking/ and http://omniequivalence.com/representational-monetary-identity/.

The primary problem is not necessarily the biggest in size.


So all this has nothing to do with money, right?


Don't get so impressed with these quantities: if you do not understand what money is, then it will make little difference whether you can figure out what a trillion is (I confess I cannot).


Likewise, derivatives are not called this way for no reason: they derive from something. So unless you can figure out what they derive from, which is the process of debt becoming money, you will not have found the "primary problem" (it is a bit funny to look for something primary in something primarily characterized as derivative, don't you think?).

Fractional reserve banking isn't the primary problem we face.  This back and forth over what is money largely misses the bigger problem. 

The main reason the economy as we know it is in jeopardy is due to the shadow banking system and the use of synthetic credit default swaps and other derivatives.  The shadow banking industry is north of $65 TRILLION.  It's essentially a giant casino where the spiderweb of derivatives is so entangled that they are impossible to unwind.  It's not about debtor and creditor.  It's about debtor, creditor, and 5 other players that have no position in the transaction but are making side bets as to the outcome.  Buffet didn't call derivatives "financial weapons of mass destruction" for no reason.

Let me just quote myself a few posts ago (https://bitcointalksearch.org/topic/m.1538255) in answering to hazek:


As you can see, I haven't missed that money "today is almost universally credit money." It is you that are missing that money being debt today is no proof that it has always been or must always be debt (what about Bitcoin?).


What you are describing is the birth of fractional-reserve banking. Try to conceive of money in a different monetary system. This is not as hard as you think: money is much older than fractional-reserve banking.


Again, I am not missing that today's money is debt: it is you that insist in putting all money in a fractional-reserve banking context (what about Bitcoin?).

Try to frame my example with sheer gold acting as money, and you will see there is no longer any place for debt left in it:

If I have an ounce of gold and a pair of shoes worth two ounces of gold and you have two ounces of gold and a knife worth an ounce of gold, I can give you my pair of shoes while you give me an ounce of gold and your knife. In the end, we still own three ounces of gold each, both in monetary (golden) and commodity form, and nobody owes anybody anything.

Mirelo, you really dont understand. Money today is almost universally credit money, its created based on debt, its literally created out of thin air by banks based on your or my pledge to repay it later and money therefore represents a debt itself.  This is true for your bank account which is created by the bank, its true for notes which are created by the central bank, usually based on government bonds (ie debt). Our money  used to represent a debt by the issuer expressed in gold, which made it easier to understand (the money was redeemable for a fixed amount of gold, and therefore a 'good for gold' note, which really is just a tradeable  debt certificate). Now its value is no longer pegged against gold or anything, but it still works the exact same way.


What you completely miss is that these banknotes already are a tradeable form of someone else's debt. We exchange debt all the time and since its fungible, we have no idea who's debt it represents, but money is debt of and by itself.  your "monetary debt" is therefore a bit of an oxymoron, and btw, you can not redeem such debt or any debt by giving me anything of value. You have that backwards. Im not forced to accept any goods as payment of any kind of debt, I am however forced (by law) to accept fiat money to redeem any sort of debt. That money however, is nothing else than a bank or government sanctioned debt of someone else. Fundamentally, our money works no different than if you wrote "good for $100" on a cheque book, or on a piece of toilet paper,  and used that is if it was $100. The only difference is that we use trusted institutions called banks to verify creditworthiness, and guarantee the debt.

So the money for us must represent a diamond. However, a certain amount of money does not represent a diamond: it represents the exchange value not only of this diamond, but of anything having the same exchange value. If money meant "I owe you a diamond," then it could not buy anything other than a diamond, which means it could not buy anything---since by definition money does not care what it buys, provided it has the same exchange value it has.


We want money because we want to be able to buy things, mostly not yet knowing which ones. Money does not represent what we want to buy: it rather represents its exchange value.

No amount of money makes any decision about what we can buy with it: that is precisely the point of money: the capacity to represent exchange value, giving us absolute freedom about its concrete form.

If I have U$ 100,00 and a pair of shoes worth U$ 200,00 and you have U$ 200,00 and a knife worth U$ 100,00, I can give you my pair of shoes while you give me U$ 100,00 and your knife. In the end, we still own U$ 300,00 each, both in monetary and commodity form, and nobody owes anybody anything.


Here you are close to defining money, except for the word "abstract": money is a generic exchange value denominated in something concrete.


A monetary debt consists in owing not an object, but rather its exchange value. If I owe you U$ 100,00, I can pay you with anything worth U$ 100,00 (although I suspect you will prefer money so you don't have to sell whatever I give you to get what you want). So any monetary debt requires an independent representation of exchange value. If a monetary debt were itself the owed exchange value, then it would become an infinite regression of the form: someone owes the circumstance of someone owing the circumstance of someone owing the circumstance... to someone else.

No, the money is what I give you instantly, if Im lacking something of actual value you want to barter for the car. In my example you wanted a diamond ring for the car, that is what you will get at a later date, by trading my IOU (money) either with me or someone else for a diamond. Nobody actually wants money, we want what we can buy with the money, ie, collect the debt it represents. If the money doesnt represent a debt, its quite worthless.


We just agree on a value denominated in something abstract, that used to be gold and now we call it dollar or euro, thereby making debt fungible and the IOUs more versatile than a "good for a x carat diamond" or "good for 10 ounces of gold" note. But fundamentally its still the exact same thing and its definitely a IOU.


IOU
n
a written promise or reminder to pay a debt

In the above example, the debt is what i owe you for the car. The money you get serves as proof of what you are owed by the issuer of the IOU, be it me or a bank. The money itself has no value, other than the debt it represents.

What would be that something you will give me "at a later date"? That something is the money. Otherwise, you would have to have a different "tradable representation of debt" for each transaction, each one referencing the particular commodities involved in its represented transaction.

Money is not an IOU: it is what IOU.

Money is a tradable representation of debt. You have a car, I want to have it. We could barter if I had something you wanted, say a diamond, but as it happens, I dont. So I write you a IOU to give you something in return for the car at a later date. That IOU is money, and it represents nothing else then the debt created when you gave me your car. It seizes to exist the moment I repay my debt. For instance when some time later I give you a diamond  for the car. You hand me back the IOU and I shred it. Paying for something with money is just an exchange of debt.

Now you may not know or trust me or my credit worthiness, so in practice we will use a bank we both trust to issue the IOU. I apply for a loan, bank creates the IOU (money) based on my pledge to repay it, I trade that IOU for your car. Then later you trade that IOU back to me  for the diamond, I give it to the bank to repay my loan and the IOU no longer exists. Its exactly the same principle.

Then stop wasting your time explaning me something I already know.


Don't you know that almost all of our society's money is debt? Since you are so fond of the facts, I expected you to know this one. In our society, debt and money are the same. So far, there is no escape from that, which is precisely what Bitcoin is all about.


No one reads the fine print. This is another fact I expected you to know---the banks certainly know it.

I explained it to you that if every demand deposit account holder went and did the same the bank couldn't repay all of their IOUs and would go bust unless bailed out.

If you can't face facts I'm simply going to stop wasting my time explaining them to you.


False. You can use cash + a savings account.


Says who? Certainly not your contract with the bank. Have you read the fine print?