Topic: Very nice story about John Law - page 2. (Read 10214 times)

Following your reasoning, many more strange things will happen, each step you try to make one logic right, the more loophole will pop up, but I'm not going further down this route just debate to prove that I'm right

I have a relative, his father had a bank many years ago. I'm quite sure he can't create money by just issue some loan, actually private banking is a very risky business, require huge start capital and robust backoffice infrastructure

That article has a very good point about why the economy books are telling people all those twisted concepts about the most simple money creation, because otherwise their scheme will be brought to light and everyone will understand how federal reserve banks claim people's work through printing money (notice that the money created by FED do not corresponding to any debt, it directly becomes the belonging of FED).

Now they say that money is backed by debt and they are for the good of economy, they will welcome economy theories that proves that money is created from some complex lending operations at private banks, more the better. You know that Swedish Riksbank even created the Nobel price of economy to specially promote those theories that suit their taste

This is a fairly original take in fairness, I'd not considered that saving could take the form of stockpiling other goods. Shifts the focus of economic interactions further to a medium of exchange only, and not to store value long term. And there is a logic to that when you consider that, historically, gold/silver had little practical purpose as metals for tools, it was only really the advent of chemistry, manufacturing and electronics that found out their practical purposes. And now that we have the next development in abstraction of money in cryptocurrencies, thinking through the true purpose of money from first principles seems to have led you to this model. The only trouble I see is convincing others of this curious balance of motivating factors, just Bitcoin can be a tough sell as it is. 


Perhaps the only significant problem in the logic is that it would encourage positive hoarding of physical goods as the only means to becoming "rich", but even still, it's a different quality of "rich" to anything we understand it to mean today. Perhaps you might be thinking that people would regard natural resources differently in such a different environment, and foster their natural equilibrium more so than the inherently selfish incentives that having near-perfect long term value monies engender. But I don't think human nature would change so drastically, people would still want to be higher up the social ladder, and if that means using their wealth to buy huge storage facilities for their hoard, then that's what the Freicoin fat cats would do. Still, it's actually rather more interesting than I'd thought.

I'm really not interested in Bretton Woods as I don't consider it to be very relevant to Freicoin.  The current Freicoin software is designed to recycle all demurrage to miners to maintain a stable monetary supply.  But we are hopeful that a Proof-of-Stake voting system can be implemented that will allow the user base to direct some or all of the demurrage towards charities of their choice.   It dose encourage spending but we feel that this is merely canceling the artificial encouragement to save that interest causes.  If savings are desired then people should save the actually physical goods that they wish to consume in the future, no amount of stockpiled money can provide us with consumption if their are no goods to consume.

Your analogy to foodstuffs as currency is in fact spot on, before precious metal currency people used the normal consumable necessities as money, principally grains (as these are very fungible, did not have an excessive decay rate and was universally desirable).  In such a system no one earns interest on money and it circulates rapidly.  In a demurrage currency we try to recreate this kind of monetary system as we believe it reduces unemployment, wealth disparity and over-exploitation of natural resources.

No, I do appreciate what Bretton Woods was, and how it was eventually reneged on by Nixon. My suggestion would be to read between the lines a little more. What if Nixon's decision had been made by Lyndon Johnson, or even Harry Truman? To only repeat the propaganda of the 1940's in 2013 in a sterile and uncritical manner does not do your credibility any favours. You delineate the problem rather well when you say "the dollar was back by gold and all other currencies were backed by dollars", making the US the sole arbiters of the most significant amount of the gold supply, gifted to the Federal Reserve as part of the agreement made in New Hampshire. Some nations continually agitated to have their gold repatriated, and it was this pressure that, less than 30 years later, forced Nixon's hand. It can only really be interpreted as a carefully timed power grab, a consolidation of influence, and nothing like the dry reasoning that was made publicly about the system.

Re: Freicoin, there is admittedly one aspect I didn't gather from what I've read, namely what the systemic fate of the demurred currency is: reallocated for mining, or permanently removed from the money supply? It still seems an odd approach to me, and encourages the same poor behaviour that our incumbent system does (designed obsolescence, artificial propensity to spend, unnecessarily hyper-competitive business environment). Freicoin seems somewhat analogous to people attempting to create a consensus around using fast corroding metals or foodstuffs as currency. And in history, no such currency was ever popular. Sorry again.

I still don't see why you find my original statement illogical, Freicoin is anti-hard-money anti-deflation and anti-savings-of-the-medium-of-exchange (savings should be done in physical goods only).  You may not agree with that position but that dose not make me internally contradictory. 

Also I think you are a bit confused about the Bretton Woods system, as it was effectively a gold standard in which the dollar was back by gold and all other currencies were backed by dollars.  You may be thinking of the truly fiat dollar post Nixon when the USD ceased to be back by gold.

This is not true. There are counterexamples from both sides, there are both claims that do not act as a part of the money supply (e.g. liquid credit that is not issued by banks), as well as components of the money supply that are not redeemable in the base money (e.g. some complementary currencies such as mutual credit). The substitutiveness does not lie in redeemability, but in the behaviour of market participants with respect to it (whether they use it as a medium of exchange and a final means of payment).

It is true that too much withdrawals cause problems. But that does not address the question of the money supply.

It seems that you have what is essentially a non-economic theory.

This is a matter of interpretation, it is up to the courts to determine whether some act is counterfeiting or not, and they decide based on historical context rather then deductive reasoning. Theft is illegal for example, yet courts do not oppose taxation, they just interpret it differently.

As I already explained, commercial bank loans are not accepted by the market as settlement of their own debt. This is simply an empirical issue, not all components of the money supply are accepted by all market participants in all situations. Just like google nexus is typically accepted on market as a tablet, but if you need an app that does not run on android, you will demand an ipad.

Currently, people mostly prefer to store large amounts in bank accounts rather than cash due to transaction costs. They do not redeem it just because they can. Redeeming would increase their transaction costs. But when they, for example, lose confidence in banks, they risk of insolvency might outweigh the potential savings in transaction costs, and their preferences with respect to the individual components can change. This causes a bank run and liquidity problem at a bank. This is an empirical issue, and an example when the composition of the money supply changes: market participants stop viewing a component as a close substitute to money, it ceases to be a part of money supply. If there are not enough reserves to cover the withdrawals, the money supply shrinks by the uncovered amount.

As I already wrote, the debit component of the loan does not act as a part of the money supply, whereas the credit component does. This is again an empirical issue, people accept the credit as equivalent to money.

Your approach fails to explain the concept of the money supply, to you it is merely an arbitrary legal and accounting concept with no practical application. But this is irrelevant for an economic analysis. The economic concept of the money supply reflects the actions of market participants, what they use as a medium of exchange and final means of payment, not what a judge or an accountant thinks about it. Furthermore, the components of the money supply are not perfect substitutes, which confuses you, because it leads to not all of them being usable in all contexts as money.

TLDR:

• money supply is an economic, not a legal or accounting concept
• composition of money supply can change over time as a reaction to changed user preferences
• the components of money supply are typically not perfect substitutes, just close enough

Sadly not. All the above stated is of course true, but it's expressed in a biased way. Deflation was invoked as an economic boogeyman during the 1930's as a pretence to force a paper money system on a world population that knew better. The paper money system of Bretton Woods was not introduced for the benefit of the economy or those acting in it. There lies your confusion. Are all statements either written or commonly believed, the truth? I think you'll find the answer is: no. And the deflationary boogeyman is precisely in that category. Sorry.

It's entirely consistent, the paradox of thrift is that savings decrease monetary velocity, cause deflation and the deflation discourages economic activity.  Demurrage discourages savings, increases velocity and increases economic activity.

The claims (e.g. the bitcoin balance for each client account) is accepted by bitcoin users as a substitute to bitcoin, because when any single client withdraw bitcoins to pay others, they will get bitcoins corresponding to their account balance, so they think that their bitcoins are safe in my storage service, those claims are real

But, if more than half of them (or some big clients) withdraw at the same time, that claim will show its fake nature: I don't have that amount of bitcoin to pay them all. Anyway through maintain loaned ratio, I can make sure 99.99% of time there will not be a liquidity problem, that is the nature of FRB, more like insurance, has nothing to do with money creation, I don't need to create any bitcoin to do  FRB

Seems that you still have the impression that private banks create money, but if you have read that article I mentioned before carefully, it listed many strange illogical things if that is the case:

1. They will be counterfeiting money (US constitution Article I, Section 8 prohibit any entity other than congress to create money)

2. They will create money and lend to each other to solve their own liquidity problem thus there will never be bank failure

3. Since all the digital money is convertible to paper notes, there will be huge amount of printing activities in treasury when they create new money, since part of those money will surely be converted to paper notes

4. They will fail to pass double entry book keeping

Historically under a gold standard, private commercial banks indeed create paper money based on their reserve of gold/silver, but since the establish of Federal Reserve in 1913, especially after the Monetary Control Act in 1980, all U.S. deposit institutions were brought under the Federal Reserve.

"Creation of money has ever since been by the Federal Reserve and wildcat banking—an extension of goldsmith banking, private banks creating money through loaning a multiple of their gold or silver reserves, which had not been practiced for decades—was officially relegated to history."

This only increases the money supply of Bitcoin if Bitcoin users typically accept the balance the storage service shows as a near substitute to Bitcoin itself.

The sum of the claims will only affect M1 if the claims are typically accepted by Bitcoin users as a substitute to Bitcoin itself, i.e. if people use it as a medium of exchange and a final means of payment. With traditional banking, this happens because the claims the bank issue decrease transaction costs over the monetary base. With Bitcoin, it's much less likely to happen this way.

Just like, say, if people start viewing ebooks as near substitute of paper books, then the production of ebooks will increase the supply of books. Or if android tablets are viewed as a substitute to ipad, then the production of google nexi increases the supply of tablets.

It is the behaviour of the end users that determines the composition of the money supply, not the accounting and lending practices of a bank.

That makes zero sense coming from a freicoin proponent.

I'm not following you, dose "so am I" sounds like your agreeing with my statement about conservative business/finance elements promoting Austrian Economics, but you don't think that's propaganda?  I think your confused over the definition of Propaganda, so lets clear that up.  Here's a very complete definition I pulled off Wikipedia

 "Propaganda is neutrally defined as a systematic form of purposeful persuasion that attempts to influence the emotions, attitudes, opinions, and actions of specified target audiences for ideological, political or commercial purposes through the controlled transmission of one-sided messages (which may or may not be factual) via mass and direct media channels. A propaganda organization employs propagandists who engage in propagandism—the applied creation and distribution of such forms of persuasion."

I don't think anyone can argue that the pro-Austrian groups engage in this kind of activity, the goal is to persuade people as to political and ideological positions and even actions, and that they present a one sided argument.  Nothing more is required to demonstrate propaganda, though I personally think that much of what is said is so distorted and incomplete as to pass into the realm of falsehood too.  johnj is a classic example of the kind of hopelessly muddled and dogmatic thinking that is produced by this kind of propaganda.

If you yourself can understand the paradox of thrift then you really have all you need to see why Hard money and Austrian econ is flawed.

If you think FRB need paper money, consider such a FRB scheme on bitcoin:

I open a bitcoin storage service at my city, I lend 100 bitcoins to A in my city, and he in turn spend those coins and B in the city received those coins. Since my service is the only bitcoin storage service in the city, B will deposit his 100 coins to my storage service, and then I can keep 10 bitcoin as reserve and lend rest 90 coins to C. C will spend them and D will receive those 90 coins and deposit them to me... By doing so, I will lend the same 100 bitcoins again and again, each time keep a little bit more as reserve, thus B, D, F, H... more and more people will have bitcoin deposit at my place

Then if I add all those people's deposit numbers together, I will get a much larger number than 100 bitcoins, possibly 500 bitcoins, that will be the M1 in my city's bitcoin money supply(based on M1 definition). Notice that I never hand out "claims for bitcoin", I send real bitcoin to my clients wallet and record their debt seperately in my own checkbook, every transaction will be recorded in blockchain

This scheme will not work if B, D, F, H have their own bitcoin adress at my storage service, because they will through blockchain discover that their money being lended out by me. Therefore I will provide a single adress for all of them to deposit, so that all their bitcoin deposits are mixed together. By this way they can only see that single adress having lots of deposit and payout activities, but they won't be able to tell what's really happened with their bitcoins. As long as they don't come to me at the same time demand bitcoin withdraw, I won't have any problem

If you look at how localbitcoins.com or bitcoin exchanges operate, it is a similar fashion. Although you have one personal bitcoin adress for you to deposit at localbitcoins.com, as soon as you send coins to that adress, it will be immediately moved to their adress, while at the same time you get a number to show your balance

I can't imagine where this idea would come from.  I have posted several times saying the exact opposite.  The stuff that people use as money, is money.  And the model that explains where it comes from is very simple, banks create it.  By an amazing stroke of luck, my model just happens to be what really happens every day, all around the world.


You can suppose what you want, but gold is nowhere used as money, and the rules governing gold very explicitly do not apply any more.


When goldsmiths invented FRB, they didn't do so by physically handing out gold, they did so by handing out claims for gold.  These claims circulated as money, and thus, in my view, they were money.  Not that it matters a whole lot any more.  The stuff we use as money isn't a claim on anything in particular, it is just a claim in general.


His scheme is indeed useful as a warning.

Based on kjj's description, he defines money as being a peculiar thing (M1) that no one actually encounters in real life, and has constructed a model to explain how it can be used to explain money creation

M1 is not a good indicator of money supply since you can't even see all of it in real life, what you can see at any time is always part of M1, which is liquid and payable money. Only banks see M1 from their perspective, it is checkbook money recorded on their book

Some times ago we had this debate about money creation, if you think this page is all non-sense then just go ahead and modify it with your understanding
http://en.wikipedia.org/wiki/Money_creation

Actually the debate on this topic just showed how many different understandings there are when it comes to money creation. Due to lacking of authoritive and definitive answer on this topic, almost no one have the whole picture. But I suggest starting with a gold based monetary system, because things are much easier to understand in such a system. And since there was no dramatic change in society when we changed from a gold standard into fiat standard, I suppose the basic rules still hold

Under a gold standard, you create money by mining gold, and gold is the only valid medium of payment, a gold smith can't just write some numbers and lend it to customer as money, he must provide them with real gold. He can still practice FRB by lend out the same gold again and again, but the maximum amount of gold that he can lend out will decrease over time if his do not add some new mined gold

Isn't this much easier to understand than those M0 or M1 things? Mx is just a definition, but normally you don't want a definition that is made from higher layer to blind your view of how things going on fundamentally

Your logic is more like: Without a understanding of C++ language, you can't understand how a computer works. In fact, when computer was invented, there was no C++ language

There was no M0 or M1 definition when banks were oprated hundreds of years ago. Can't you forget about all those terms that banks invented? Just imagine that you are a central banker for a country and how you are going to organize the whole thing, that is what John Law's story about

I still have to catch up as this tread seems to have gotten a little longer since your post.  

My goal on the forum is not to debate but understand what and how other people think and reason, obviously debate ensues but being encumbered by a keyboard and the English language this isn't my communication method of choice.  (TL;DR  the joy is in engaging / enlightening not obstinance)  

While the likes of johnyj are just waking up to the fact that our monetary system is usury by another name, that doesn't negate his insight or invalidate his opinion because there is more to learn.

To your point in bold, "so am I", and to that point, I believe there are those who are not in with the GS crowd who feel they could XYZ if the playing field was levelled and as such promote the Austrian / Libertarian camp.  But that doesn't make Austrian's economic theory propaganda.  

I haven't yet seen empirically tested Austrian's economic model, and look forward to seeing one. While I have my concerns with Bitcoin, and have moved on from my Keynesian ideas, I can see for the first time the paradox of thrift in relation to adopting Bitcoin as the only obstacle to such an experiment.

I think you're right, this is the core issue.

You just arbitrarily declare your conclusion, without any discernible reasoning behind it.

Yes, this is correct. The withdrawal decreases M1 (assuming the bank has fractional reserves).

Now you're just arbitrarily declaring your conclusion again. There is no discernible coherent foundation for your position.

If you look at the wikipedia article about money supply, you'll notice it says that M0 is "Notes and coins in circulation (outside Federal Reserve Banks and the vaults of depository institutions)". You probably mean MB (Monetary Base). That does include digital components, the credit central banks grant to commercial banks. But normal people are not permitted to own this, only commercial banks.

This is again just arbitrary declaration. That commercial bank loans are not usable for settling bank debt does not affect the question of the money supply. Analogously to your position I could argue that if an online shop refuses cash payments, it means cash is not a part of the money supply.

As I explained, the components of the money supply are not full substitutes of each other, they are just near substitutes. Some of the components are not usable for some types of transactions, for example cash is not usable for online payments, and commercial bank credit is not usable for settling inter-bank debt. And when there's a bank run, demand deposits are not usable for end-user payments and stop being a part of the money supply. The question of the composition of the money supply is an empirical issue specific to a particular scenario and cannot be deduced. It is the behaviour of the end users, not the accounting practices of a bank, that determine the composition of the money supply.

Hey Peter, long time no see.

You are wasting your time here.  I'll do my best to be charitable towards johnyj and attempt to describe the point of impasse in the most neutral terms possible.  I look at it like the fork in linguistics.  On one side, you have descriptive linguists that attempt to describe how language is actually used by real humans.  On the other side, you have proscriptive linguists that try to write rules about how language should be used.

In the same way, you and I are descriptive.  We view money as being that which is used as money and try to understand where it comes from and where it goes.*

Johnyj seems to be proscriptive.  He defines money as being a peculiar thing that no one actually encounters in real life, and has constructed a model to explain how it can appear to be in several places at once.  When money does things other than what he thinks it should do, he sees theft and fraud.

I have attempted to explain several times how the narrow view of money is simply not useful for understanding reality.  In short, even if it were true that there was "one true money", the world does not act as if it were true.  If I sell the same property twice, I'm committing fraud, but the second buyer is just shit out of luck, he doesn't have any claim to it because it isn't mine to sell after the first sale.  Money doesn't act this way (in reality).  Courts do not trace money back to the original title and tell everyone else to fuck off.**

As a side note, johnyj seems to be very heavily invested in the fiction that banks are constrained by reserves.  I made an error by posting the M1 chart before, when it would have been wiser to post the MB chart.  I remedy that error here, and this is just a bonus.  Sadly, I don't think they will help.  Understanding these charts requires an understanding of the mechanics of banking as it really works, but I do look forward to hearing what epicycles have been invented to shoehorn them into the proscriptive view.

*  I hope that I'm not oversimplifying your view here.  I know that you are an actual trained economist, and have a more nuanced view of money than what I'm describing.  But, based on our conversations at and around the conference, I feel fairly confident which side of this particular spectrum you are on.

**  If courts did this, the entire system would collapse into a puff of smoke the first time it happened.

I said many times M1 is NOT money supply, commercial banks do not create money by lend it out again and again, although many people will have an illusion that their money stay in the bank, in fact it is lended out almost the same moment they deposited into a bank account. Move the same money between your left hand to right hand 10 times did not create 10 times more money, it just created a serial of transaction and bank add the number from those transactions together and call it M1, this is just a count

It's like, adding your income from last 10 years together and claim that your networth now is 10 times of your annual income


As I decribed before, if a large part of user withdraw from their demand deposits, banks will have no money, since most of these money are just some numbers on banks checkbook, the real liquid money never goes above M0. Cash is only a small part of M0, most part of M0 today is in digital form, and typically when large clients withdraw, they don't withdraw paper money, they withdraw digital money to be transferred to an account in another bank/country


Correct, because a commercial bank loan can not create new money, it just moves existing money around

In reality, they turn to FED asking for more loans to support the payment of their own debt. That's why we call FED "Lender of last resort". Only FED can create new money and lend to them. Otherwise any bank could just create some money (which is backed by a long term loan) for themselves and payback their short term debt, no liquidity problem forever