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Money as Debt
November 24, 2007 10:26 AM   Subscribe

Money as Debt. Paul Grignon's 47-minute animated presentation of "Money as Debt" tells in very simple graphic terms what money is and how it is created.
posted by psmealey (61 comments total) 26 users marked this as a favorite

 
Before I spend 47 minutes of my life watching this, is there any chance I could be told:
  1. Is this mainstream economics or a new alternative theory?
  2. If mainstream, which school of economics is it?
  3. Is this going to be another "we must return to the gold standard without addressing the problems that caused us to abandon it" thing?
posted by TheophileEscargot at 11:01 AM on November 24, 2007 [1 favorite]


I make my own money, which I call zombollars, and are painted on strips of birch bark. People accept that in trade, because I use it to buy things that don't really exist. But I am finding no mention of any of this in the video.
posted by Astro Zombie at 11:03 AM on November 24, 2007 [2 favorites]


Oh, wait. There it is. I just hadn't watched far enough.
posted by Astro Zombie at 11:04 AM on November 24, 2007 [3 favorites]


A production in part by Lifeboat News, Investigations by William Thomas, 9-11, Chemtrails, US Military, Protective Health.

...

Can I get a transcript to skim through? Rather not waste 40 odd minutes on the odds this actually makes a non-crazy point.
posted by zabuni at 11:10 AM on November 24, 2007


Is this more crazy Ron-Paulite conspiracy theory shit?
posted by empath at 11:11 AM on November 24, 2007


TheophileEscargot: Not in any sense mainstream, and I think it advocates the direct creation of money by the government. More importantly, skipping through it a bit, I found it starts off fairly tame and makes a gradual transition into the "bankers control the world" conspiracy theory. I could tell it was going to do that from the chintzy opening graphics on.
posted by abcde at 11:17 AM on November 24, 2007


Would anyone care to summarize the counter-argument? That is, why is it beneficial for governments to borrow their own fiat currency with interest rather than just create and spend?
posted by fatllama at 11:20 AM on November 24, 2007


I've watched the first 10 minutes or so.

Summary so far: OMG fractional reserve banking is a terrible and duplicitous mechanism for bankers to get rich!

Reality: fractional reserve banking is an excellent system, which has been one of the foundations of our economies for hundreds of years. It hasn't caused the end of the world yet, and it isn't going to anytime soon.

T learn what money is, and how it works, ten minutes with a decent basic economics textbook will be far more informative (and accurate) than this video.

If you want to know about acrylic painting, you wouldn't ask an economist; if you want to know about monetary economics, don't expect an acrylic painter to have a worthwhile opinion.
posted by matthewr at 11:20 AM on November 24, 2007


The narrator's voice freaks me out...I can't watch it.
posted by The Light Fantastic at 11:22 AM on November 24, 2007


I think there is an interesting parallel to be made between money in economics and fundamental particles in physics.

Neither one of them, when you examine them closely, seem to be 'real' in any way that matches common sense. At the most basic level, matter and dollars are just numbers.

This seems to be profoundly disturbing to people when they first discover this. For whatever reason, it seems like large numbers of people are actually thinking about money for the first time in their lives, instead of simply taking it for granted.

When they come to the realization that something that seemed as natural as breathing is, in fact, profoundly weird and unexplainable they run to something that feels 'solid' -- and nothing feels more solid than gold.

But why should gold have any value? It's essentially useless as a material, aside from the fact of its relative rarity. As a store of value, it's as arbitrary as dollar bills, or bits stored in a computer. The only conceivable 'advantage' it has over 'money' as a store of value is that it's rarity is somewhat out of the control of human beings. And that's not even the case, because governments can manipulate gold availability as easily as the federal reserve can manipulate dollar availability.

People just have to come to terms with the fact that any currency is arbitrary, and only has value because we, as a culture, have agreed that it does. If we switched to the gold standard tomorrow, you could make the same statement about gold-- it's just useless metal. Gold is only valuable because of what you can exchange it FOR, not because of any inherent value it posesses.
posted by empath at 11:24 AM on November 24, 2007 [6 favorites]


empath: yes and no. . . similar complaints, but different proposed rememdy.

What I'm still trying to figure out is ~exactly~ how much money creation has been going on via fractional reserve lending this decade.

It's not as simple as this film portrays, given the trillions (?) in mortgage-backed-securities that the banks have used to actually fund up these loans to homebuyers.

Also, I'd like to know what happens to the debt when one of these "fractional reserve" loans goes bad. Theoretically, money created from nothing can return to nothing, just like one of Hawking's virtual particle pairs, though I do understand there is some sort of ledger entry the bank has with the Fed for any dollars the bank does introduce into the economy.
posted by Heywood Mogroot at 11:25 AM on November 24, 2007


fatllama, there's no such thing as a free lunch. If you just print money instead of borrowing it, it just means the money is worth less.

Why not just eliminate taxes and start printing off million dollar bills? The answer should be fairly obvious.
posted by empath at 11:28 AM on November 24, 2007


fatllama: governments already create and destroy money by declaring it to exist or not exist. See open market operation:
Newly created money is used by the central bank to buy in the open market a financial asset, such as government bonds, foreign currency, or gold. If the central bank sells these assets in the open market, the amount of money that the purchasing bank holds decreases, effectively destroying money.
You can't base your whole spending programme on doing that because of inflation. If you increase the amount of money around, but the amount of goods and services stays the same, everyone just charges higher numbers of money for their goods and services. This means the money is devalued to the same extent you created it.
posted by TheophileEscargot at 11:28 AM on November 24, 2007


interesting parallel ... between money in economics and fundamental particles in physics... Neither one of them, when you examine them closely, seem to be 'real' in any way that matches common sense.

As a physicist, I can tell you that this makes absolutely no sense. Unless you count pair creation, but really, not even then. Maybe an economist will disagree.

[Gold is] essentially useless as a material, aside from the fact of its relative rarity.

So false. And even if true, that isn't the point. There is always some finite commodity that would meet your criterion of useful. Substitute that for gold and it's back to the same argument.
posted by fatllama at 11:29 AM on November 24, 2007


Hey cool- is this because I posted it in a comment? Even if not, it's nice to see this as a FPP and open to discussion. Thanks, psmealey.

Is this more crazy Ron-Paulite conspiracy theory shit?

No.

abcde, rather than "skipping through it", you might want to watch the whole thing. Having done that myself, it seems to be entirely grounded in very basic, easily found historical fact. If anyone can refute any of it I'd be happy to know.

matthewr,
fractional reserve banking ... has been one of the foundations of our economies for hundreds of years

Point taken, but so has deforestation and slavery.
So I'm not sure that such a fact does that much to recommend the system.

zabuni, just because people associated with something have ridiculous beliefs about something else doesn't mean that the original thing is ridiculous itself. 9/11 conspiracists tend to think both that (a) the government lied about the pretense for the Iraq invasion and (b) the WTC was attacked by GWBs Martian friends, or whatever... Note that the absurdity of (b) has no impact on the truth of (a). (All the same, I think I'm glad I didn't know anything about Lifeboat News before I watched the vid).

Given that the heights of the economy and political system tend to be populated by a very, very small number of people with specific vested interests, even nutty conspiracy theorists are occasionally, thanks to sheer probability, going to latch on to something that's actually happening.
posted by regicide is good for you at 11:35 AM on November 24, 2007 [3 favorites]


TheophileEscargot, yes. I've been conscious of, interested in, and reading daily about the Fed open market operations since this past August. However, taking the present as an example, the government is in truth being forced to take bad debt as collateral for their overnight loans. And on top of this service to the banking system, they choose to borrow at interest a federal budget rather than creating money through inflation.

Now, w.r.t inflation, the video argues that it can be kept in check with taxes and political pressure. In summary: if the governmental spending actually spurred new trade, then there is no real inflation. If not, they spent poorly and must take in more taxes (which is what inflation amounts to for real people anyway, a tax). And, a government that spends poorly can be voted out of office. The above is the argument proposed in the film.
posted by fatllama at 11:35 AM on November 24, 2007


Fractional reserve banking has been going on for centuries (millennia, really). Every once in a while, a bank gets over extended, it fails, and the world manages to survive.

Money is just a means of keeping score between transactions. As long as it's relatively stable in value (ie, what a dollar bought yesterday is roughly equivilent to what a dollar buys today) it doesn't matter how much is out there or where it came from.

The dollar is headed for a fall because we've printed way too much of it and too many banks have been holding it in reserve. As long as it's a controlled fall, though, it shouldn't affect anyone in the US overly negatively. In fact, it'll mostly mean more manufacturing jobs and tourism coming to the US, and less outsourcing.
posted by empath at 11:37 AM on November 24, 2007


I couldn't help but notice a few flaws in the logic of the movie, of which I've watched the first 1/3rd so far:

The video is correct in saying a bank only needs to hold 1/9th of the money that people put away in the bank. However, it then tries to equate that with the same thing as saying the bank only needs 1/9th money to lend to people and then just "magics" the other 8/9ths. This is simply not true. Money lent by a bank still comes from real assets or is borrowed from other means (e.g. the bank may borrow at a lower rate then loan it at a higher rate).

Or let me put it another way: In the video they say that the new Bank starts with $1111.12, and with that is able to offer a $100,000 loan. This is simply not true. With $1111.12 the bank would be able to make a loan of no more than 90% of that amount, which is $1000 (10%), and not $100,000. There is no magic here.

The film then misleads again saying that the bank can then lend out 8/9 of the $90,000 (it would actually be $1,000) to the next person, and so on. That's not true either. The person who borrowed the money, if he were to put it into another bank, then that bank would be able to lend out 8/9 of the money, and so on... this is a well known phenomenon known as a money multiplier, and is the main way of generating cash outside of a central bank injecting cash. The first bank that had the $1,111.12 still has to keep at least $111.12 on hand, and if they make a second loan, has to keep 10% IN ADDITION to the $111,12 on hand... so technically they wouldn't be able to make another loan until they got some more money (perhaps in payments from the first loan).

Going back to the money multiplier thing, lending money and keeping 10% and then the next person lending money and keeping 10% and so on is called a money multiplier. It's actually something that gets taught in high school economics class, it's not an ugly secret. It's also a theoretical potential that is never met 100%, since money gets drained from this system by things such as the clearing house drain, (cost of handling money from one bank to another), currency drain (people keeping cash instead of putting it into the bank), or even by banks that hold onto more than just the 1/9 that is necessary (although it is in a bank's interest to stay as close to the 1/9 as possible so that they can make money with the other 8/9). But it's true that if, in a perfect example, you worked out the 1/9 all the way to it's logical end that yes, ten times the wealth is created from the original amount, but then even that is not true, because loans have to be pain back... so although the wealth is created, and in a hypothetically near instantaneous manner, it is paid back (with interest!) over time ... the video (so far) makes it look like people never have to pay back their loans! It also doesn't mention that a (federal) bank can also do the opposite by "selling treasury securities it holds as assets to primary dealers", which takes money out of circulation and reduces the money supply.

I haven't watched the rest of the movie yet, but I have to say I'm a bit dismayed by that first bit.
posted by furtive at 11:39 AM on November 24, 2007 [4 favorites]


why is it beneficial for governments to borrow their own fiat currency with interest rather than just create and spend

The Fed is supposed to be a buffering checks-and-balances agent to keep the Congress less dishonest.

The actual process of Congress issuing debt is quite technical and fascinating. The Fed itself doesn't hold all of the total "privately-held" treasury debt ($800B according to wikipedia).

Total debt "held by the public" is over $5T at the moment. it was $3.4T on 10/1/2001. Why the Fed has $800B of treasury debt on its books is an interesting question that I don't know the answer to.
posted by Heywood Mogroot at 11:40 AM on November 24, 2007


...so has deforestation and slavery.

A fatuous comparison.
posted by matthewr at 11:40 AM on November 24, 2007


By the way, for those interested in this topic and haven't decided yet that they know everything about it somehow, there is a fascinating discussion going on here among some amateur and one or two professional investors.

The signal/noise is actually pretty high, all things considered.
posted by fatllama at 11:49 AM on November 24, 2007


the government is in truth being forced to take bad debt as collateral for their overnight loans.

From what I've read this is rather small (in the low tens of billions), with most of the loans being rolled over.
posted by Heywood Mogroot at 11:52 AM on November 24, 2007


zabuni, just because people associated with something have ridiculous beliefs about something else doesn't mean that the original thing is ridiculous itself. 9/11 conspiracists tend to think both that (a) the government lied about the pretense for the Iraq invasion and (b) the WTC was attacked by GWBs Martian friends, or whatever... Note that the absurdity of (b) has no impact on the truth of (a). (All the same, I think I'm glad I didn't know anything about Lifeboat News before I watched the vid).

True, but my time is limited, and I need a way to shift the wheat from the chaff. Measuring a person's other works is an easy way to determine whether or not to continue.

As far as the Iraq invasion, although people like Lifeboat were right about the Iraq war, so was a large portion of other, not as marginalized groups. We had many many sources saying the above, not just random wing nuts. A broken clock is still right twice a day, but I'm not going to use it to tell the time.
posted by zabuni at 11:54 AM on November 24, 2007


Or let me put it another way: In the video they say that the new Bank starts with $1111.12, and with that is able to offer a $100,000 loan. This is simply not true. With $1111.12 the bank would be able to make a loan of no more than 90% of that amount, which is $1000 (10%), and not $100,000. There is no magic here.

I think you've misunderstood the film here. That entire segment is just meant to demonstrate the quantity of money "created" by a given loan, not the amount that the originating bank could lend. It's simply an explanation of the money multiplier, as you noted. It's for this reason that the narrator explicitly mentions the money being deposited in different banks at each iteration of the process.


... so although the wealth is created, and in a hypothetically near instantaneous manner, it is paid back (with interest!) over time ... the video (so far) makes it look like people never have to pay back their loans!

On this point I agree with you. The rhetoric of the film is made lame by the obvious one-sidedness of its considerations.
posted by voltairemodern at 12:01 PM on November 24, 2007


fatllama:
Now, w.r.t inflation, the video argues that it can be kept in check with taxes and political pressure. In summary: if the governmental spending actually spurred new trade, then there is no real inflation. If not, they spent poorly and must take in more taxes (which is what inflation amounts to for real people anyway, a tax).

You certainly can use taxes and spending to control inflation. If you do that you're using fiscal policy. If you do it by using interest rates and money creation/destruction, you're using monetary policy. Each has its own advantages and disadvantages: I think the chief problem of using fiscal policy alone is that it has more of a time lag.

Whether you use mainly fiscal or mainly monetary policy is basically the Keynsians versus Monetarists debate.

Using political pressure, I think the time lag problems would be even greater. National economies are big and it takes a while to screw them up: by the time the problems are obvious and you've called an election, you're probably really screwed.

My personal opinion: using either fiscal or monetary policy alone to control inflation is like fighting with one hand tied behind your back. You may be able to do it, but you probably shouldn't unless you've got a really good reason...
posted by TheophileEscargot at 12:01 PM on November 24, 2007 [2 favorites]


I'll take a stab at your question, fatllama.

"That is, why is it beneficial for governments to borrow their own fiat currency with interest rather than just create and spend?"

Because economics is really almost all about expectations, it is better to borrow one's own fiat money at interest rather than simply create more because the expectation is that the value of the bond will grow -- that being a good thing for the bondholder.

If a government simply creates more cash, that creates an expectation not that your money will be more valuable in the future, but less, because simply throwing more money into the market increases inflation and decreases the value of an individual dollar (or yen or pound).

I'm sure it's far more complicated than that, but I think that's the gist of it.
posted by chimaera at 12:05 PM on November 24, 2007


Slight derail.

matthewr,
...so has deforestation and slavery.

A fatuous comparison.


I really don't think so.

I'm not comparing fractional reserve banking to deforestation and slavery, I'm questioning your logic in saying that since FRB has been the basis of our economy, it's therfore a good thing.

If I edit your statement slightly...
Reality: deforestation and slavery... has been one of the foundations of our economies for hundreds of years. It hasn't caused the end of the world yet, and it isn't going to anytime soon.
...it still parses just fine, and is factual, but doesn't read like a convincing argument for deforestation and slavery.
posted by regicide is good for you at 12:06 PM on November 24, 2007


From what I've read this is rather small (in the low tens of billions), with most of the loans being rolled over.

All true, so far. Though this isn't really topical, I think the fear is that if the market bid for a lot of MBS remains zero, the government will act like a SIV and just carry the debt as collateral until a market appears (years?), to say nothing of what might happen if the commercial credit market disappears like the subprime mortgage market has.

If the Fed becomes an investment vehicle for banks, then this is real inflation for no useful purpose other than to keep banks solvent. Maybe that is useful, in and of itself, but at least the video presents the idea of the government only risking inflation for the betterment of the commons. I'm seeking views to the contrary.
posted by fatllama at 12:07 PM on November 24, 2007


regicide: It's fairly in touch with historical fact, yeah. But what it builds up from there is a series of specific interpretations of world economics that together imply a cabal. It admits as much at the end, then closes with a comically apocryphal quote from David Rockefeller, thanking the media for staying silent and letting the bankers take over the world. All that doesn't quite discredit it on its own, but it does mean it's not just the friendly primer on the nature of money that it may seem at first. I'm not enough of an economist to refute it specifically without doing deep research, but I can look at context to see if it's something worth looking into.

So, let's invest another 2 minutes on this with some heuristic checks for hackery, as if any more were needed. Here's this guy's other site. Space art background? Check. New Age spirituality section? Check. 9/11 conspiracy, Chemtrails, and NWO? Check.

So, yes, while I don't know enough to say why its wrong, that's true of every one of these things. You have to use some other criteria to decide whether to look into them, and this one isn't looking good.
posted by abcde at 12:09 PM on November 24, 2007


TheophileEscargot, that's really a nice summary, thanks.

chimaera, also very interesting, thank you.
posted by fatllama at 12:11 PM on November 24, 2007


Two Crowns in wooden nickels
posted by hortense at 12:18 PM on November 24, 2007


By the way, for those interested in this topic and haven't decided yet that they know everything about it somehow, there is a fascinating discussion going on here among some amateur and one or two professional investors.

Investors, lol. In the context of the airplane-on-conveyor-belt thread, EB recently commented that pilots often have a very poor understanding of physics, although they believe otherwise. The same is often true of investors and economics, particularly those investors who frequent internet investment forums.

For instance, the first commenter in that thread praises Bretton Woods for creating 'balance' and excoriates the current system. It is at best stupid, and at worst utterly disingenuous, to discuss BW without mentioning its collapse in the 1970s amid vast imbalances, yet this commenter completely ignores that, and merely says it "ended in 1971" and moves on to his next hobbyhorse.
posted by matthewr at 12:19 PM on November 24, 2007 [1 favorite]


matthewr, agreed on all counts. Still fairly interesting to me, but I'm very new at it. Thought I'd share.
posted by fatllama at 12:21 PM on November 24, 2007


Regicide, unless you're making a moral argument against fractional reserve banking, comparing it to slavery is absurd.

Deforestation isn't a valid comparison either because deforestation, by definition, is inherently unsustainable.

It is entirely relevant to point out that fractional reserve banking is not a new innovation and has been, in fact, the basis of our economic system since money was invented.
posted by empath at 12:47 PM on November 24, 2007


Hmm... this bankers conspiracy stuff sounds a bit familiar, is this why the STormfront guys are so crazy for Ron Paul?
posted by Artw at 12:52 PM on November 24, 2007


Here's some lectures on money by another expert on the subject.
posted by scalefree at 12:54 PM on November 24, 2007


What empath said (except that fractional reserve banking, although centuries old, is not as old as money itself).
posted by matthewr at 12:58 PM on November 24, 2007


In the video they say that the new Bank starts with $1111.12, and with that is able to offer a $100,000 loan. This is simply not true.

That's not at all what the video says. The new bank starts with the 1111.12, and is able to lend a guy 10,000 for a car. That guy buys the car, and the lady who sold the car puts that money into a different bank, but a bank that is still part of the original system.

It's really not an LOLCABAL type film. It seems like a perfectly reasonable explanation for the way our system works. Why is this controversial at all?
posted by odinsdream at 1:05 PM on November 24, 2007 [1 favorite]


From what I know, this appears to be somewhat accurate; they hit the big points correctly, but get some of the details wrong.

One difference is in the underfunded bank; with an original capital of $1,112, the bank could indeed make $10K worth of initial loans in the first wave, but none of them would be larger than the bank's total assets. What would really happen would be something like 200 $50 loans. No bank would ever make a loan that would instantly bankrupt it if the balance was converted to cash. If the seller of the car walked in and wanted $10,000 in cash, the bank would instantly fold, so they simply wouldn't make that loan.

One of the fundamental foulups is where they show the bank loan 'turning into' hard currency. That doesn't happen. The money multiplication only happens until someone actually asks for cash. That is, if the bank has $1,112 in actual reserves, they can have many many $50 checks floating around. They trade just like money, and can be earning interest like money, but if they're actually turned INTO money with a cash withdrawal, that comes out of the reserves, not out of the magically-created part. If I go and get $50, that comes out of reserves. After my withdrawal, the bank only has $1062 in reserves, and their other lending has to shrink as well to maintain their reserve requirements.

Actual cash that the bank has on hand earns them no interest, so they try to carry as little as they possibly can. 'Demand deposits', like checking accounts, are usable as reserves, but at fairly low multipliers, because there's a high chance that you'll want cash out of a checking account. (Savings and money market accounts are treated differently, because the chances you'll want physical cash are much lower.) Banks do things like swapping the money out overnight to earn interest during periods when you would have no access to it. During business hours, they maintain their reserve requirements, but when those doors close, your money moves elsewhere, where it earns a tiny amount before being repaid in time for opening next morning.

But this stuff is all pretty well understood, and pretty well-managed. This isn't really the problem. There are two fundamental problems with the system as it is:

1) New 'real' money, from the Fed, can be created at will in unlimited supply. This means that anytime the economy gets into a bad spot, instead of dealing with the problem, the Fed can simply paper it over by providing more cash. This has been egregiously misused, particularly since about 1995, and the deflation we should be in from the competition from China and India has, instead, been turned into strong inflation (which has then been hidden with statistical skullduggery and India and China importing hundreds of billions of dollars by printing their own currency... in essence, importing inflation.) Every time the economy has signaled pain, the Fed has soothed it with instant liquidity injections to keep it happy... which means it hasn't adjusted to the reality of cheap foreign labor at all.

2) Derivatives. The growth of derivatives is a terrible problem. I don't understand them very well, and I don't think very many people do; the few that are smart enough to really get them are mostly DOING them and getting fabulously rich in the process.

Basically, derivatives appear to be bets on outcomes. They're selling/trading RISK, instead of just dollars, but the contracts are denominated in dollars and can be securitized, meaning that they can be held as assets. Derivatives can cover things like loan defaults or temperatures. As an example, utilities like to buy temperature derivatives, so that if there's a bad weather spike, they can partially or wholly offset their increased cost of operation, where normally they would just take the loss in the shorts. (the marginal electricity supply is generally very expensive to bring online.) They pay for this privilege, so that if the weather stays normal, they lose money, but if it spikes, they win. It's a form of gambling -- a transfer of risk.

One of the most common uses of derivatives is to take on SOME risk, but to transfer the riskiest parts to other entities. You might, for instance, write mortgage insurance covering $100 million, but then write other contracts with other entities that cover all the ways you can foresee that the loans might fail. (interest rate rises, unemployment rises, inflation rises, that sort of thing.) If you can cover all your risk factors for less than you make for writing the insurance, then it looks like a good bet, and you'll write it.

But the fundamental idea is always that a small part of the market is hedging against a much larger part of the rest of it, but the whole derivatives scene has gotten so enormous that there's no larger entities to transfer much of this risk to. Rather, we get to the old maxim, 'those who have, want to keep, and those who don't have, want to get.' Often, the riskiest derivatives are written by entities that don't really have the ability to pay them. The truly deep pockets don't get into the riskiest stuff... it's the marginal operators that take on the dumb contracts. But because the big entities can offset their risk to smaller, stupider entities, they'll take on bets they otherwise wouldn't take.

Worse still, because many derivatives can be traded as securities, they can be held as 'assets' against which loans are made...and since derivative-writing is basically unregulated, banks now have a system of creating and injecting unlimited supplies of 'money' without the Fed's intervention or control. The Fed just covers up problems they're causing, but doesn't directly control a lot of the money creation that's happening.

Derivatives, by transferring risk, appear to actually increase it, because they convince otherwise perfectly sane businesses to take on very stupid positions. You can see this most clearly in the mortgage market, but there will be many other failures; I believe the subprime problems will spread into other forms of derivatives, given another year or two.

So we're really dealing with multiple problems at once. I do not believe the gigantic derivative industry would be possible with a commodity money standard, because the weird pressures that are exerted by those enormous contracts would have caused gold flows to start acting in strange ways long, long ago. But with a fiat system, if the currency flows get odd, and too much physical currency is ending up in Japan and China.... the Fed can just make more, all it wants. It can let the economy completely ignore the problems being heaped on top of it, and continue to let those ridiculously complex structures get built, until they get so unstable and exert so much pressure on the economy that simple money-injection won't hide the problems anymore.

The argument against fractional-reserve banking is an interesting one, but I don't personally have a strong opinion there, as it's not unambiguously bad. I do believe, however, that fiat currency is clearly terrible, and derivatives with no supervision are a freaking disaster.

The Fed should be on top of this, and they are totally out of touch. Instead of figuring out why stock values went to 100 and then were (more correctly) valued at 40 two years later, they're focused completely on getting those asset values back up to 100 again. We are in deep, deep trouble because of it.

Managed economies are a bad idea, whether it's the Politburo or the Fed doing the management.
posted by Malor at 1:30 PM on November 24, 2007 [27 favorites]


Excellent comment, Malor.
posted by fatllama at 1:35 PM on November 24, 2007


If the derivatives are working as you describe, doesn't that mean they are achieving their intended consequences? Positions which formerly would have been untenable because of risk are now perfectly acceptable, and because derivatives have spread out the risk, instead of one risky industry (sub-prime loans) being hit with devastating losses, the losses are being distributed at a lower level throughout the market as a whole.

As long as another LTCM doesn't crop up, I don't see the problem.
posted by empath at 1:43 PM on November 24, 2007


Empath, for every derivative seller, there is a derivative buyer. They can't both be right, and they can't all be working under the same assumptions, hedging against the same risks. One of the theses is wrong. A key problem with derivatives is that one suffers more quickly and more severely when proved wrong than when making traditional investments. Proven-wrong derivatives become either worthless or illiquid.

In a word or two, there is always counter-party risk. If the buyer of some derivative loses big, everyone that buyer owes is also in deep trouble.
posted by fatllama at 1:48 PM on November 24, 2007


@ TheophileEscargot

"Before I spend 47 minutes of my life watching this, is there any"
You could waste your time with things worse.
Disclaimer: I did not watch it, I just assume it is about "Debitism".

"1. Is this mainstream economics or a new alternative theory?"
It is not mainstream economics.
While not mentioned, THESE guys came up with it - in German :-( .
The phrase "money as debt" (Debitism) was first used, AFAIK, in this book
- in German :-(

"2. If mainstream, which school of economics is it?"
None.

"3. Is this going to be another "we must return to the gold standard"

While I am not a big fan of the gold standard I assume we will sooner or later go back to a commodity backed currency. Why not listen to Hayek and let different kinds of privately issued money (backed by gold, silver or pig-halves) compete on the market?

"without addressing the problems that caused us to abandon it" thing?"
What were the problems? That the US was bankrupt?
posted by yoyo_nyc at 2:11 PM on November 24, 2007


There's a decent article on the problems of the gold standard here. The major problem is deflation, but also:
The gold standard cannot do what a well-run fiat currency can do, which is tailor the money supply to the economy's demand for money. The supply of gold grows--or not--depending on how much of the stuff is mined. Demand also fluctuates for non-economic reasons; gold has uses besides being money, like industrial components and jewelry.

The lone advantage of a gold standard--and it is a real advantage--is that it prevents governments from inflating the currency. The problem is, this is only moderately true. The government, after all, can always modify its gold standard. Yes, you say, but it will pay a price in the markets, and this is true, but this is the same price it pays when it prints more fiat currency. Such practices do not go unnoticed for long.

As James Hamilton has pointed out, gold-backed currencies, like all money with a fixed exchange rate, are subject to speculative attacks whenever the government's financial position looks weak. Such speculative attacks often require punitive economic measures to fight off, which is one of the reasons that America suffered so nastily from the Great Depression--it raised interest rates in the middle of a recession in order to defend the credibility of its currency.

Also, since devaluations tend to produce sharp changes in the values of currencies, rather than smooth appreciations or declines, the economic dislocations are magnified. Imagine you're a company with a contract denominated in dollars. If the value of the dollar gradually declines, you lose a little, but not too much, since you periodically renew the contract, giving you time to adjust the amounts. If, on the other hand, the devaluation pressure builds up over a period of years, and then all at once the government has to devalue by 20%, you end up badly hurt. You might go out of business. Now multiply that all across the country, and you can see why recessions used to last for years.

In short, you don't get anything out of a gold standard that you didn't bring with you. If your government is a credible steward of the money supply, you don't need it; and if it isn't, it won't be able to stay on it long anyway. (See Argentina's dollar peg). Meanwhile, the limitations on the government's ability to respond to fiscal crises, the necessity of defending against speculative attacks in times of crises, and the possibility of independent changes in the relative price of gold, make your economy more unstable. It's a terrible idea, which is why there are so few economists willing to raise their voices in support of it.
posted by TheophileEscargot at 2:34 PM on November 24, 2007 [1 favorite]


Conspiracy theories aside, it seems to me that the central point of the video is that if the only money that exists (or 95% of it, which is what the video says) is just debt on loans, then all of the money in circulation (I'll ignore the other 5% fiat currency) equals the *principal* on those loans. However, those loans must be paid back as principal plus *interest*, and so there will always be debt, and the only way that the economy can sustain is to continually grow, because there is *inherently* not enough money to pay back those loans.

Because the economy must grow or the entire house of cards falls around our head, it is impossible for us to reach a sustainable economy where, say, we only cut down the number of trees that grows every year, or use the amount of energy that we can acquire only from renewable resources every year. Or not have the population expand.

Because we must grow, and use more natural resources, and they showed that this growth is *exponential*, then someday we won't be able to grow any more and the entire economy will collapse.

That is what my take away from the video was, and it's thought provoking.
posted by MythMaker at 2:37 PM on November 24, 2007 [7 favorites]


Just watched it. It's fascinating for a good portion of it. It does not advocate a return to the gold standard.

I'm skeptical of some of the quotes he provides. Self-incriminating quotes of dubious provenance and/or taken out of context are a favorite tactic of this new generation of conspiracy theory documentarians.

The one I particularly raised an eyebrow at is the one from Josiah Stamp about banking being conceived in sin, etc. I can find it being attributed to him lots of places, but not a single mention of a source.
posted by empath at 2:39 PM on November 24, 2007


If the derivatives are working as you describe, doesn't that mean they are achieving their intended consequences? Positions which formerly would have been untenable because of risk are now perfectly acceptable, and because derivatives have spread out the risk, instead of one risky industry (sub-prime loans) being hit with devastating losses, the losses are being distributed at a lower level throughout the market as a whole.

Well, on a local level, sure they're having their intended consequences. You, the seller of the derivative, have reduced your risk and spread it onto a second party, and they in turn may push it out to more entities.

The problem is that this encourages you to take more risks. If you know you can hedge your position, you'll be more willing to take risks you otherwise wouldn't. This means that, while individual risk goes down on individual contracts, overall systemic risk goes way, way up, because a lot of contracts get written that shouldn't be.

You can see this clearly in the mortgage market, where obviously a very great deal of very bad paper has been issued. But the problems aren't just confined there; the whole system is rotten with stupid risk, and I suspect things are going to get Very Bad Indeed before they get better.

I have an intuitive model that I use for derivatives... I believe that, over the short term, they act as a stabilizing force on the economy, because people tend to take bets on both sides of the current projections... in essence, acting as a force holding it on the straight and narrow. But when they get to the sheer size and potence that they are now (hundreds of trillions of notional dollars in leverage), if something bad does happen to the economy, they become a profound destabilizing influence... the force they project onto the economy will make it spin wildly out of control. In exchange for short-term stability, we give up long-term stability and the ability to adjust to changing circumstances quickly.

This is unproven and entirely intuitive, but I'm sure it's right on some level.
posted by Malor at 2:42 PM on November 24, 2007


I will pay you tomorrow for a hamburger today. And by pay, I mean, not pay. And by hamburger I mean "your soul". And by soul, I mean "a tasty sandwich". That is all.
posted by blue_beetle at 2:44 PM on November 24, 2007


"3. Is this going to be another "we must return to the gold standard"

No. The proposal is to have the government print money on demand and not borrow at interest, leaving useless banks out of the loop altogether, converting tax to inflation. This supply of money can ebb and flow as needed, with the best argument for it being that the government is accountable for it, by elections, from the knowledge that the government is actually doing it. This is not a new proposal by the way. And the counter-arguments that the status quo is working are pretty dishonest considering that very few people understand how it works while debt grows. The main of the film is that the debt must grow under the current system, and resources must be consumed exponentially, which is unsustainable.
posted by Brian B. at 3:56 PM on November 24, 2007


Globally we should switch to the "Calorie Standard" That is, currency is to be backed by some actual unit of energy.

Then you should see things trade for their true value.
posted by sourwookie at 4:16 PM on November 24, 2007


I would like to have this quote embossed and framed. In Gold.

"Anyone who believes that exponential growth can go on forever in a finite world is either a madman or an economist."
- Kenneth Boulding, economist
posted by jb at 4:20 PM on November 24, 2007 [3 favorites]


To the claim that bank loans create wealth out of thin air, I will point out that, from my limited experience, banks will only lend you money against collateral. They are a glorified pawn shop, where you agree to give them title to goods that are worth approximately as much cash as you're asking them to loan you. The main difference from a pawn shop is that you get to continue enjoying whatever it is you put in hock while you are repaying the loan. But the wealth remains more-or-less constant. When you buy a house, the bank loans you the value of the house, which you give to the seller. The seller assigns the deed to the bank. Assuming the house could be sold again for about the same amount, the bank's net worth is the same as it was before the transaction.

Now, if a business borrows capital to build a factory or other wealth-creation device, the use of that device is where new wealth is created out of thin air. The bank holds title to the device until the loan against it is paid, but the new wealth created by the device belongs to the business, and it is this new wealth that causes more than twice as much wealth to exist once the loan is repaid.

From the bank's perspective, when they originate a loan, they are simply converting some of their assets into some other more-or-less fungible form which they continue to own. The fact that such assets are contractually tied up by the loan agreement would ordinarily prevent those assets from being loaned out again until the original loan is repaid. But that doesn't make sense, since the bank really does have all those assets in its name and should be able to loan that value out again. And so we let them originate another loan, backed by the bank's net worth, which includes the title they hold to the previous house.

But we can't let the bank do this endlessly. That could be dangerous. So we tell them they have to retain a certain percentage of their assets in cash. That limits their leverage. No big deal. Well, unless all the people who borrowed money from the bank cannot repay their loans, and it also turns out that all the houses the bank holds title to cannot be sold for the original amount the bank lent. But that can't happen, right? I mean, that's two disasters hitting the bank simultaneously, and that'd be like lightning striking twice in the same place. So nothing to worry about.
posted by gregor-e at 6:31 PM on November 24, 2007 [2 favorites]


...and not borrow at interest, leaving useless banks out of the loop...

Because if there's anyone who will do better at allocating funds efficiently than banks, it's government.
posted by ~ at 6:57 PM on November 24, 2007 [1 favorite]


Because if there's anyone who will do better at allocating funds efficiently than banks, it's government.

In my recollection, it only takes 3 months of listening to Rush Limbaugh to believe that government is trying to do what banks do for a living.
posted by Brian B. at 7:46 PM on November 24, 2007


To the claim that bank loans create wealth out of thin air, I will point out that, from my limited experience, banks will only lend you money against collateral.

Consider very carefully what a homeowners' loan is, these days. You, more or less, are the collateral.
posted by fatllama at 4:47 AM on November 25, 2007 [1 favorite]


MythMaker - I would say that's just about spot on!
posted by Duug at 4:56 AM on November 25, 2007


empath wrote: If the derivatives are working as you describe, doesn't that mean they are achieving their intended consequences? Positions which formerly would have been untenable because of risk are now perfectly acceptable, and because derivatives have spread out the risk, instead of one risky industry (sub-prime loans) being hit with devastating losses, the losses are being distributed at a lower level throughout the market as a whole.

Exactly! For example, it means people with money in the stock market in unrelated industries still get punished when millions of irresponsible idiots are unable to make good on the suicide loans they took out during the housing bubble. Awesome!
posted by Potsy at 8:19 AM on November 25, 2007


To the claim that bank loans create wealth out of thin air, I will point out that, from my limited experience, banks will only lend you money against collateral.

This is evident in the presentation. The collateral on a purchase however would be something you didn't really own yet. So debt money is backed by goods that people sign up to adopt. It's the interest that is the sticking point, related to inflation and foreclosure, essentially forcing growth to cover the past loans. The presentation left open the possibility that government could bypass this entirely and avoid disaster, driving growth directly by funding infrastructure as needed. In part, they do this already with military spending, but it mainly benefits the contractor since we don't fly the planes commercially in peacetime.
posted by Brian B. at 8:58 AM on November 25, 2007


governments already create and destroy money by declaring it to exist or not exist
The head of the Fed Reserve does this.
He stands in the tower of a castle,
arms upraised before the fiscal cauldron,
in a green cape covered with cifrão.
With a flourish, he proclaims:
"Money, I call you into being!  APPEAR!"
And there is the whir of paper and coins.

posted by JHarris at 12:46 PM on November 25, 2007 [1 favorite]


Potsy, but those people with stocks in unrelated industries had their own risks hedged by other investors. The sub-prime market turned out to be a disaster in this case, but it could have been some other market that went sour.
posted by empath at 12:56 PM on November 25, 2007


This covers much the same material as G. Edward Griffin's The Creature from Jekyll Island which is all about the history of money, fiat currency and the founding of the Federal Reserve System.

The book is 600 very well-documented pages. The video is concise and more fun. If this video leaves you wanting to know more, the book is a fascinating read.

Griffin differs in how he would fix the problem, however.
posted by MonkeyC at 9:22 PM on November 25, 2007


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