Spending your way out of debt

[MacG]

I think that inflation is a pretty safe bet. Its kind of built into the system and it is extremely difficult to see how it could be avoided.

The prime source of true inflation is that the government issue more and more bonds to cover running expenses, like paying salaries and paying for heat and electricity. The government has unlimited ability to issue new bonds.

No government has been able to abstain from "deficit spending" when tax incomes dry up and costs increase. They act just like addicts and make utterances like "just this time, its an emergency - we will take care of the structural problems later when things have settled down".

By going into "deficit spending", the government issue new money which dilute the existing pool of money, causing classic inflation.

In the initial stages we will probably only see inflation in costs, and not in salaries, and that is rather painful. We actually see it right now.

That starts a terrible feedback mechanism though, where defecit must be paid for by future tax payers, who are made poorer, but have more deficit to service. So more money must be pumped into the system and you end up like our friends in Zim. We must deflate unless we want the very concept of money and state to fail.

Yeps. The big difference this time is that we have a couple of blokes behind the curtain in the form of BIS - they have really strong motivations to defend the fundamental concept of debt based currencies. They are extremely candid and shy though, and I have no idea what kind of clout they can muster when deficit-addicted politicians with severe withdrawal symptoms come for their fix. Probably not much.

[EmptyBee]

No government has been able to abstain from "deficit spending" when tax incomes dry up and costs increase. They act just like addicts and make utterances like "just this time, its an emergency - we will take care of the structural problems later when things have settled down"..

Well there is one recent counter-example; Japan in the 90s, where they had a housing bubble burst with significant deflationary fallout. Of course what's happening now is several orders of magnitude greater as a problem, but nonetheless it's possible to follow some of the same strategies as followed by the Japanese banks in dealing with the current problem. Mortgages could be renegotiated to be repaid over longer periods of time, lowering the immediate burden of repayments and avoiding foreclosures.

The consequences of rampant inflation for the stability of and faith in the system are more serious than in deflation, particularly when there's issues like defending the reserve currency status of the dollar to factor in. For that reason I suspect the deflationary trend will continue.

Also, government deficit spending may not actually be that inflationary if all the rest of the economy is pulling the other way. The New Deal (along with the very inflationary Second World War) was what pulled the US out of deflationary depression.

[emordnilap]

What will it take to get rid of the fractional reserve banking system? It seems to me that that is the root of all evil.

[SunnyJim]

Hmmm. Isn't it compound interest that is the root of all evil? Nothing wrong with fractional reserves or lending as such.... its the money made on money that requires the endless growth of money supply.

[Andy_K]

But what, really, is wrong with endless money growth? So long as the inflation figure is kept low and stable, the 'value' ascribed to any good is purely arbitrary. It makes no odds that a loaf of bread costs £100 if the average income is £2,000,000 a year.

I think the problem is less to do with growth of money in itself, and more to do with creating money from thin air...

[emordnilap]

I think the problem is less to do with growth of money in itself, and more to do with creating money from thin air...

That's what I was thinking. Compound interest I agree is evil. Interest or charges for money use is preferable. But simply creating money today based on expected growth tomorrow has to stop, surely.

[MacG]

What will it take to get rid of the fractional reserve banking system? It seems to me that that is the root of all evil.

I think it is a little more complex than that. The current system is designed for expansion and ever increasing utilization of the resources we can whip out of the ground.

I think it is very important to remember that everybody enjoyed the ride on the way up. There was NO criticism of the fundamental design of the monetary system. Well, a little, from the adherents of Silvio Gesell and the like, but very few people listened.

Even the Marxists missed the issue completely, and enjoyed themselves royally on the fringes of this absolutely spectacular period in the history of mankind.

Its only now, when net expansion is not physically possible anymore, that people start to see the inherent problems with the system design.

One way to preserve the system for another 20-30 years would be to chop off the USA from the world economy - then there would be resources for further expansion in the rest of the world for some more time.

[SunnyJim]

But what, really, is wrong with endless money growth? So long as the inflation figure is kept low and stable, the 'value' ascribed to any good is purely arbitrary. It makes no odds that a loaf of bread costs £100 if the average income is £2,000,000 a year.

I think the problem is less to do with growth of money in itself, and more to do with creating money from thin air...

Hmmmm. I'll think about that.

It's compound interest that necessitates growth in order to service the capital + interest. Its the need for growth that necessitates creating money from thin air. We wouldn't be able to stop creating money from thin air without ceasing growth, which is what we're seeing at the moment. If we continue to grow money supply while the 'real economy' is shrinking we get inflation.

I don't think the problem is absolute cost. Inflation does not measure absolute cost. It measures relative cost. It's measures cost compared to the cost a year ago for example. So inflation means prices are rising. Deflation means prices are falling.

It is the continual movement that is the problem. With inflation, if the 'real economy' shrinks while inflation of the money supply (we must have growth to service interest repayment remember) continues you very soon find yourself on a runaway train. People are encorage to borrow and spend rather than save as inflation corrodes savings, people buy today rather than save for tomorrow. Wages fail to keep up with goods etc and soon you end up carrying wheelbarrows full of money around. The currency and trust in it collapses.

[Mr. Fox]

There was NO criticism of the fundamental design of the monetary system. Well, a little, from the adherents of Silvio Gesell and the like, but very few people listened.

Even the Marxists missed the issue completely...

As perhaps they might.

Do you hold with the opinion that Gesell more or less stands alone in his identification of the fundamental systemic fault regarding 'money'?

(As in recognising the need for a currency which encompasses 'the idea that there is no incentive to store the money, as it will automatically lose its value after some time (depreciate). [Therefore] as a result, interest rates will drop to almost zero, preventing any form of Inflation.') [here]

(I'm pleasantly amazed to come across anyone else who's even heard of him! )

[Ludwig]

It's compound interest that necessitates growth in order to service the capital + interest. Its the need for growth that necessitates creating money from thin air. We wouldn't be able to stop creating money from thin air without ceasing growth, which is what we're seeing at the moment. If we continue to grow money supply while the 'real economy' is shrinking we get inflation.

I'm keen to understand this... Is this because there's too much money chasing too few goods?

[Totally_Baffled]

It's compound interest that necessitates growth in order to service the capital + interest. Its the need for growth that necessitates creating money from thin air. We wouldn't be able to stop creating money from thin air without ceasing growth, which is what we're seeing at the moment. If we continue to grow money supply while the 'real economy' is shrinking we get inflation.

I'm keen to understand this... Is this because there's too much money chasing too few goods?

http://video.google.com/videoplay?docid ... 2583451279

This explains it all!

I recommend this!

[Ludwig]

But what, really, is wrong with endless money growth? So long as the inflation figure is kept low and stable, the 'value' ascribed to any good is purely arbitrary. It makes no odds that a loaf of bread costs £100 if the average income is £2,000,000 a year.

I think the problem is less to do with growth of money in itself, and more to do with creating money from thin air...

I'm not sure I see the difference.

If you increase the money supply, even slightly, without increasing the number of things you can do with it, or the number of people doing things with it, then the result is inflation. Inflation stops when you stop increasing the money supply.

But why would you increase the money supply for no reason? The only reason the money supply is increased is for loans, which indirectly means "increasing the number of things you can do with money" (starting a business, increasing demand for flatscreen TVs) - which in turn means increasing the rate of energy use.

[Mr. Fox]

http://video.google.com/videoplay?docid ... 2583451279

This explains it all!

I recommend this!

Seconded. Well worth a watch if you have 47 mins spare and broadband - it clearly describes the basic systemic driver for 'growth'.

(BTW, is it sad that I recognised the URL without checking the link? )

[Totally_Baffled]

(BTW, is it sad that I recognised the URL without checking the link?

[/quote]

[MacG]

Do you hold with the opinion that Gesell more or less stands alone in his identification of the fundamental systemic fault regarding 'money'?

Nahh, it goes back to Aristotle, at least the written records. And all three main branches of Abrahamitic religion condemn usury. The basic problem is interest, at least compounding interest, and all of them understood it. What sets Gesell apart is that he saw it so clearly in a time when everyone else was high on that growth-drug.

Interesting to think that there might be deep unconscious cultural roots still alive in Germany, and that is why they still keep the inheritance from Silvio going there.

There are certain indications that the usury-free system started in Magdeburg in 1154 was a key factor for the high-middle ages and the cathedrals building.