Topic: Understanding the Parasite - page 2. (Read 7501 times)

I am not very familiar with Professor Keen's work. However, I know his models are based on the Hyman Minsky's financial instability hypothesis.

Minsky proposed that, in the normal life cycle of an economy speculative investment bubbles are a natural part of financial markets. Minsky argued that in prosperous times corporate cash flow rises beyond what is needed to pay off debt leading to a speculative euphoria. He argued that this euphoria soon leads to debts that exceed what borrowers can pay off from incoming revenues and this in turn produces a financial crisis.

In my opinion both Keen and Minsky make a major error. They assume fractional reserve banking is part of a natural economy. Fractional reserve is what enables the increase in debt. It facilitates the boom which leads to the inevitable crash. Some cycles would occur naturally as humans occasionally act as irrational herd animals. However, these booms would be small shadows of what we see today. Eliminate fractional reserve and the boom can only be fulled by actual savings. As the boom grows available savings would be depleted and further funding would only be possible at higher cost. It is this natural market damper that is usurped by fractional reserve. The result is massive cyclical boom and bust that impoverishes the middle class.


Fractional reserve banking is simple theft. It is an ancient and institutionalized form of theft who's perpetrators have managed to convince the masses it is a "natural part of the economy".

Edit: This post on Fractional Reserve discusses this topic in more depth.

Not to disagree entirely with your thesis, but your math is somewhat suspect.

Your PartII seems to suggest a predator-prey model instead of your Parasite-Host thesis.

Have you read any of Professor Keen's work? His models suggest that these cycles
will occur regardless of the intention of any banker actions. Of course they are in the
best position to recognise the state of the system and to maximise their take ;-)

As the scorpion said, "It's in my nature"

I have some thoughts on this also, but not yet ready for discussion.

Time will be the judge of that. Personally, I think historians of the future will speak of the barbarisms of the industrial era. Schoolchildren will be shocked to learn of bloodletting, slavery, and central banking.    

The first was vanquished with scientific progress. The second required mass death and a civil war. The third may yet be done in by cryptocurrency. To call cryptocurrency a rehashing of a failed system is in my opinion myopic and represents a failure to appreciate potential.
  
You are correct this post Is deeply related to Austrian economic theory. Austrian economic theory has the advantage of being closer to truth.

Edit (post edited 1/12/17 for clarity): I agree that the unanswered and unsolved economic issue in the west is usury.

You haven't brought up anything new, other then the typical summary of someone's Austrian economic youtube video. By the way Von Mises completely diverged away from the original father of Austrian economics Carl Menger.

Cryptocurrency's are nothing more then a digital rehashing of an already failed monetary system, the 100% Gold standard. Murray Rothbard's dream was to have his sack of gold swell in value from labor of others. The unanswered and unsolved economic issue in the west is usury. None of these "schools" even adress it, they all make up absurd theories to try and justify it. The worst thing to ever happen to economics was when it was divorced from moral philosophy and became a pseudo-science.

When historian's look back on the internet, they will find not only was it not a harbinger of innovation but worse, a total propagator of bad ideas and old errors.

Part II has been edited, finalized, and is now up (see link at bottom of first post).
Part III will probably be done next week.

Interesting and well written analysis. I look forward to parts II, III and IV.
In addition to your listed references, I highly recommend the book: The Creature From Jekyll Island, a very readable exposition of the history of money and how central banks have been sucking wealth from the U.S.A. and Europe for the past few hundred years.

  

Don't try to politicize banking.   You'll never understand it that way.   Try to look at it from view of macroeconomics.

Approach money as stock & flow rather than commodity.   Liquidity is more important to money than value

Any explanation of the monetary system must start with the basics. The parasitic aspects and their consequences will be fully explained in parts II and III.

This is well known already.   But there's nothing parastic or deceptive about this.  Its required for liquidity. 

Understanding the Parasite: Finance Part I

Modern finance leads inevitably to decimation of the middle class and eventual systemic collapse. Understanding how and why is critical to securing a future in a dangerous era. This post is the first in a three part series designed to highlight the dark machinery behind the glossy curtain of finance. Let’s take a moment to look past the propaganda. You may not like what you find.


To understand finance we must first understand the process of money creation. Economic textbooks cover this topic in great depth. Inquiring minds are spoon-feed conceptions of money multipliers and reserve requirements. The "official" version of money creation is clean, comforting, and concise. It is also false.

Banks create money by making loans, but this process is not in any way constrained by reserves, deposits or a money multiplier. Banks do not need deposits to make loans. The idea that banks somehow lend out grandma’s savings is propaganda. Instead banks simply create money via accounting wizardry. When a bank approves a loan they simultaneously create a deposit in the borrower’s bank account and voilà new money is created. Banks do not function by lending out deposits. Instead the act of lending creates more deposits. This is the reverse of the sequence taught in almost all economic textbooks. Banks create deposits at will.

Economic texts often state that banks are constrained by reserve requirements. This is not entirely honest. There exists a number called reserve requirements. However, if a bank needs more reserves these reserves are simply supplied to meet this need. Depending on the country this is done either directly by the central bank or via interbank lending at interest rates that are suppressed by the central bank. The theory of the money multiplier is false. In reality there is a reserve multiplier. Central bank reserves are increased by a percentage of the amount of money banks choose to create.


So what does limit money creation by the banking system? Primarily the banks themselves do. Individual banks have to find someone to lend to who is capable of paying them back or at least someone who has valuable assets they can seize if the loan is not paid.

The Banking Tragedy of the Commons

Modern banks are not limited by reserves. Instead, they decide how much to lend based on the profitable lending opportunities available to them. As banks have no real restraint on the creation of new money, they are prone to print excessively. Left to their own devices banks would flood the market with new dollars in a banking tragedy of the commons. In a hyperinflation scenario the supply of money increases so much that people start to spend it as quickly as possible. This supply-velocity feedback cycle left unchecked destroys the value of a fiat currency. The logical conclusion of such excess is abandonment of the fiat currency for an alternative like gold or perhaps someday cryptocurrency. Hyperinflation is thus banking armageddon. It represents the destruction of the system and must be avoided at all cost. Banks rely on a central bank to prevent this outcome.

If a bank ever finds it needs more reserves it simply gets them from another bank. This rate of interbank lending is set by the central bank. In the US this is interbank rate is called the federal funds rate. The FED sets a target for this rate and creates or destroys money via open market operations to make sure the actual interbank rate is what they want.  It is the spread between the interbank rate and the rate a bank can loan money that limits lending. Central banks thus raise and lower the interbank rate to maximize bank profits. Monetary creation from bank lending leads to inflation. When monetary creation becomes excessive the central bank will step in and raise the cost of reserves thus slowing the over-harvesting.

Newly created money travels through the system helping the early acquirers first. The purchasing power of money falls in response to an increase in the quantity of money. In the real world a hypothetical increases in the money supply by 100% does not as neoclassical economics assumes simply lead to an equal across-the-board increase of 100% in prices. The banks do not descend overnight and double everyone’s cash balance.


This results in redistribution from the late receivers to the early receivers of the new money. This occurs both during the inflation process as new money finishes working its way through the system and leads to permanent shifts in income and wealth that continue even after the money has reached a new equilibrium. The simplest example of this is fixed income groups who receive no new money in this process.

Finance Part I: Understanding the Parasite
Finance Part II: The Parasitic Cycle
Finance Part III: Divide, Conquer, Enslave


References:
McLeay M, Radia A, Thomas R. Money creation in the modern economy. Bank of England Monetary Analysis Directorate Quarterly Bulletin 2014 Q1
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf
Rothbard MN. The Foundations of Modern Austrian Economics, Edwin Dolan, ed. (Kansas City: Sheed Andrews and McMeel, 1976), pp. 160-184
http://mises.org/rothbard/money.pdf
Post Edited: 1/12/17 for brevity and clarity