[Pen-l] Re: money [was: Skidelsky on Keynes

[John Vertegaal <vertegaa@xxxxxxxxx>]

Jim Devine wrote:
> John Vertegaal wrote:
> > I'm still waiting for some economist to explain how money after having been
> > created out of nothing, when someone at an issuing bank accepts a promissory
> > note to have it paid back with interest later, turns into a positive, free
> > and clear "thing", different from representing a to be repaid debt.
>
> If Bush is the "decider," I like to think of myself as the "explainer"
> (largely because I like to explain things to myself, to clarify my
> thinking). Here, I'm only referring to the case in the US.
Appreciate the effort, it's giving me a chance to butt in.


> First, in a market system, fiat money has a price above zero (that is,
> it can actually buy goods, services, and assets) because the central
> bank (as agent of the state) keeps it scarce.
This still begs the question what money actually is. Is your "scarcity" 
axiomatic or does it derive from more basic axioms?


> Then, there's the bookkeeping money that banks issue, when they lend,
> the "promissory note[s] to have it paid back with interest later."
> This is first and foremost backed by fiat money (bank reserves). It is
> also based on faith in the debtors, who are promising to pay back.
> It's also based on faith in the banks who "borrow" our deposits to
> make the loans.
Fair enough, but from my perspective, you're leaving out something 
vitally important, namely that our economic system is accounted for on 
the principles of _double_entry bookkeeping. In such a system, any 
notion of accumulating assets that exceed liabilities is inconceivable. 
In other words it is a system of _debt_ acquisition and a subsequent 
resolution, for a specific ultimate purpose; which, in order to keep the 
system itself meaningful, has to be situated outside the economic system 
as such, having lost all its economic mensuration. Marxians may 
recognize this supra-economic domain to consist of use values; and all 
of us happen to occupy it too, just supplying our vitality to the 
economic sphere and obtaining the bulk of our standard of living in 
return. I'm working on drawing a schematic representation of this. If 
the above isn't self-explanatory, I'll post it later.

A legitimate build up of free and clear funds, i.e. _net_ saving, within 
such an economic system is a contradiction in terms. What could possibly 
be its justification? As whenever growth is in the offing and the supply 
of natural resources allows it, the means to account for it all is 
created out of thin air; not to more than mention the inane destruction 
of existing means of production by acting contrariwise. So, accumulation 
loses its preeminence, being supplanted by feasible resolution instead; 
as only the latter fulfills the economy's ultimate purpose. And if not 
resolvable, all its so-called values are chimeras only, worth about as 
much as the paper they are written on. I believe my model to underpin 
coherently in theory, what most of you already knew intuitively, but had 
no way of proving why.

_Single_entry bookkeeping principles are economists' blinders. All their 
propositions are couched in terms of a single-entry bookkeeping unit. 
Single entry works fine in a planned economy and was apparently used in 
the former SU, but it is highly inadequate for a free enterprise 
economy. A couple of days ago I mentioned Keynes, what I failed to bring 
up was that the quantities he was dealing with, cannot be put in one 
proposition as if statically determinate. Krugman talks about people's 
money and debt, as if these are opposites. In terms of the system 
sketched above, they represent the same thing; identification lies in 
feasible resolvability into standard of living. Money never becomes a 
people's thing, it is an economic unit of account and is never supposed 
to leave that sphere. Another example, Bob Reich aggregates economy-wide 
demand, leading to a general conclusion that consumer demand is about 
70% of the total. Fact is, unless a company can pass on all its (demand) 
operating costs, it is not a going concern, and so his aggregation units 
do not provide a statically determinate equilibrium condition as shown; 
result, in a dynamic equilibrium, consumer demand (incl. forced 
taxation) foots 100% of the bill. And finally, Dean Baker goes on and on 
about the 10 trillion or so of lost home values, very misleading! Bought 
and paid-for homes, in whole or even in part, exist in the 
supra-economic domain and only have use values. Without causing a total 
market value collapse, only a tiny percentage of those could return back 
to the economic sphere, for a renewed resolution. Thus the value he is 
basing his 10 trillion dollar loss on, never was.

Now don't get me wrong, I greatly admire those four guys and in spite of 
their blinders they've written some superb stuff, well above my ability 
to do so. All I'm saying is, when one encounters paradoxes within one's 
theory, take it as proof that there is something seriously wrong; either 
with its axioms, or in the topology of its domain. Muddling on, because 
it seems to be so much more realistic than the other guys', is just a 
waste of time.

As far as the below is concerned, my model only has problems with your 
concepts of scarcity and the multiplier, as they would only apply to 
money as a "thing". Money as a unit of account, is a relationship 
between debtors and creditors and cannot be an economic root cause. The 
multiplier is a myth. Tell me how it's supposed to work and I'll show 
you where your assumptions are invalid.

John V


> What keeps the faith in the debtors and the banks? It's deposit
> insurance and bank regulation (examination, etc.) Regulation includes
> that by the Fed (reserve requirements, etc.) Without regulations,
> banks could expand the amount of bookkeeping money to the extreme (via
> the "money multiplier" process), undermining the scarcity of
> bank-issued money and its positive price. The regulators also prevent
> easy entry into the banking industry, reinforcing this result.
>
> The Fed should be thought of as a government-sponsored cartel of
> bankers that allows the banks to profit by borrowing deposited money
> at low interest rates and then lending it at higher rates. It allows
> them to "create" bookkeeping money (i.e., credit).
>
> In the end, the banks are able to do their deeds because they're
> allowed to do so by an agency of the US government.  It's all based on
> the coercive power of the state. However, it might be justified as
> allowing the expansion of commerce without continual price declines
> (as under the gold standard).

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