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Just issue the required ammount of currency to pay for public works. This would be especially appropriate when the government is trying to pay for infrastructure development, and it would be subject to legislative oversight. After all, debt must be repaid using future tax revenue so bonds are just a way to spread out tax increases over time. And if issuing currency is inflationary, so is creating money through bank credit or debt issues.

Bush is a symptom, not the disease.
by Migeru (migeru at eurotrib dot com) on Fri May 11th, 2007 at 06:02:14 AM EST
[ Parent ]
Well, bonds can be repaid from the increased tax revenue resulting from the benefits of the public works being undertaken?
by Colman (colman at eurotrib.com) on Fri May 11th, 2007 at 06:03:41 AM EST
[ Parent ]
I don't understand why the State, which is the guarantor of the money in the first place, has to borrow it in order to undertake public works.

Bush is a symptom, not the disease.
by Migeru (migeru at eurotrib dot com) on Fri May 11th, 2007 at 06:10:09 AM EST
[ Parent ]
Borrowing is an accounting act: on someone balance sheet you have a pile of currency going out and on the other side the promise someone has made to pay back over a period of time is in.

The power to do this accounting magic is privatized in the current "independant" central bank system in that only private banks can do it.

Even within this banking system there are things states and people can do if they don't like what's going on.

I'll be writing a diary on it shortly.

by Laurent GUERBY on Fri May 11th, 2007 at 02:30:40 PM EST
[ Parent ]
Issuing bonds in the period in which the pound is strong relative to the dollar and euro in an interest rate environment in which a guaranteed low return from a bond is very attractive to investors is the 'no brainer' thing to do. It must be approved through referendum in which the voter will vote, knowing the amount of bonds and their specific purposes(education, health etc.) By having a referendum will mot only guarantee their passage but give cover to the politicians who must propose it.

The public is used to borrowing long term mortgages on their homes and will recognize easily the benefits of masive bond financing as long as the society will be improved. The bonds issued must guarantee the investments in public services will improve the society significantly. In order to achieve this the financing in the UK nust be done on a programmed, massive basis over many years. Unfortunately without a referendum; it will never be done on the scale needed because the Bank of England was made 'independent' and the banks' governors and benefactors won't approve.  A referendum may be able to negate any pressure coming from the Bank of England but it would have been much easier to issue the necessary bonds if the Bank of England had remained answerable to a political party, in this case-Labour.

Your ideas of how to finance are noble but not 'realpolitik'. Massive focused bond financing of the 'state' is what built the infrastructure of the state of California through the massively financed university education system which is the most dynamic in the world having created or contributed to most of the improvements in our societies.

by An American in London on Fri May 11th, 2007 at 06:24:12 AM EST
[ Parent ]
the massively financed university education system which is the most dynamic in the world having created or contributed to most of the improvements in our societies.

Really?

by Colman (colman at eurotrib.com) on Fri May 11th, 2007 at 06:26:15 AM EST
[ Parent ]
It has contributed to a lot of research, and the University of California system is one of the best research universities in the world (as well as the biggest producer of weapons of mass destruction). Having seen the University from the inside, my opinion is that as far as undergraduate education goes (and the UC is written into the Constitution of the State of California) the UC is the biggest fraud in the State of California.

Bush is a symptom, not the disease.
by Migeru (migeru at eurotrib dot com) on Fri May 11th, 2007 at 06:37:45 AM EST
[ Parent ]
Doesn't matter if you think the undergraduate is a fraud. It attracts enough intelligent people from all over the world in both the undergraduate and graduate schools that both the graduates and the dropouts have started most of the dynamic industries of the latter part of the 20th century-computer, biosciences, etc. etc. Unfortunately the bi product of tens of thousands of engineers and scientists being from the University System was aerospace and defense.
by An American in London on Fri May 11th, 2007 at 06:51:44 AM EST
[ Parent ]
Aerospace and Defense was not a byproduct, it has been the major Keynesian driver of the US economy since WWII, and the fact that the UC has managed most of the Department of Energy National Laboratories was a cause, not an effect, of its growth as a University.

Bush is a symptom, not the disease.
by Migeru (migeru at eurotrib dot com) on Fri May 11th, 2007 at 06:54:53 AM EST
[ Parent ]
I agree, mostly.
Your ideas of how to finance are noble but not 'realpolitik'. Massive focused bond financing of the 'state' is what built the infrastructure of the state of California through the massively financed university education system which is the most dynamic in the world having created or contributed to most of the improvements in our societies.
And then Prop 13 effectively eliminated property taxes, gutting pre-university education and after-school programs. In addition, the habit of raising taxes through propositions earmarking the funds for specific purposes has shrunk the general fund to such an extent that the Governor has no flexibility left. Then the State legislature decided to give people a rebate on their Car tax as long as the budgetary situation allowed it, and when Davis they tried to reverse the situation because education and health care were going through the dogs through underfunding, Arnie replaced him on a platform to repeal the car tax "increase" and expand after-school programs (see above), and immediately went on to call a budget emergency. Gah.

Bush is a symptom, not the disease.
by Migeru (migeru at eurotrib dot com) on Fri May 11th, 2007 at 06:34:33 AM EST
[ Parent ]
California got bad when Reagan was Governor and the electorate became the 'me generation'. But the integral part of what Gov. Pat Brown( Jerry Brown's father) did in building the state's infrastructuure through bond financing remains in tact.

Bond financing does give the Governor the flexibility to have projects financed as long as he curtails the 'pork'. W3ithout bond financing, California would have been stuck in the 1950's with 10 people running the entire state-seethe film 'Chinatown' and John Huston's character is theepitome of the people who ran California as their own fiefdom.

by An American in London on Fri May 11th, 2007 at 06:56:41 AM EST
[ Parent ]
No wonder we're both in London...

Bush is a symptom, not the disease.
by Migeru (migeru at eurotrib dot com) on Fri May 11th, 2007 at 06:58:48 AM EST
[ Parent ]
Exactly. The UK should have massive bond financing through referendum because if focused correctly; it would improve its society a great deal.
by An American in London on Fri May 11th, 2007 at 07:06:02 AM EST
[ Parent ]
Getting an established political system to accept a greater role of referendums can also be coined unrealistic.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Fri May 11th, 2007 at 11:56:01 AM EST
[ Parent ]
I believe in the case of California an dother states, the "initiatives and ballot measures" originates in the Progressive movement of the early 20th century. One can debate to what extent the US political system was "established" back then.

Bush is a symptom, not the disease.
by Migeru (migeru at eurotrib dot com) on Fri May 11th, 2007 at 12:01:53 PM EST
[ Parent ]
"Established" might have been the wrong term, "settled" might have better described what I was searching for.

When politics is a pretty safe career - either in opposition or power - why mess it up with giving the unpredictable people more power?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri May 11th, 2007 at 12:28:20 PM EST
[ Parent ]
There is another way of doing it...

http://www.eurotrib.com/?op=displaystory;sid=2007/5/11/4047/06568

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri May 11th, 2007 at 06:57:20 AM EST
[ Parent ]
Yes, if they made you king but having people invest in their own societies is the only realistic alternative to raising taxes which can't be done or even if taxes are raised; it would never be significant enough when compared to massive bond financing.
by An American in London on Fri May 11th, 2007 at 07:09:04 AM EST
[ Parent ]
I'm pointing out that the process of "Napsterisation" inevitably leads this way because these models actually "work" without banks aka credit intermediaries.

The fact that the number of UK LLP's doubled in two years (and no-one knows what is being done with them) is nothing to do with me (well maybe a TINY bit).

What will lead to the widespread adoption of this mechanism is:
(a)it's the best Equity Release mechanism there is, bar none;
(b)it allows entities without share capital eg charities, social enterprises, governments, national and local, to invest without borrowing and MASSIVELY cut their financing costs.

It will happen for sure,because it works better than the alternative: a classic "emergent" phenomenon.

But you can appoint me King as well if you like.;-)

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri May 11th, 2007 at 08:04:42 AM EST
[ Parent ]

Just issue the required ammount of currency to pay for public works.

You just re-invented the flat tax (as this devalues everybody's currency in the same proportion)

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri May 11th, 2007 at 07:47:25 AM EST
[ Parent ]
Just like creating money through bank lending devalues everyone's currency in the same proportion.

Bush is a symptom, not the disease.
by Migeru (migeru at eurotrib dot com) on Fri May 11th, 2007 at 07:49:04 AM EST
[ Parent ]
Does it, or does the increase in economic activity make up for that? Is that not true of government issued money.

What's the difference in theory?

by Colman (colman at eurotrib.com) on Fri May 11th, 2007 at 07:51:19 AM EST
[ Parent ]
What's the difference in theory?

Government Bad! Banks Good!

Bush is a symptom, not the disease.

by Migeru (migeru at eurotrib dot com) on Fri May 11th, 2007 at 08:13:16 AM EST
[ Parent ]
We have government issued money (via the Central Bank and Mint as agents): it's called cash. In around 1960 the proportion of cash in the UK economy was around 30 % of money in issue. Now it's less than 3% and falling.

This government money comes without the interest burden and governments get the benfit of "seignorage".

It's not inflationary, unless you print too much of it: bank money has to be MORE inflationary then government money, all things being equal, because of the additional "rent" to the shareholders with the monetary monopoly.

ie cutting out "super profits" to bank shareholders could not possibly be inflationary.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri May 11th, 2007 at 08:13:47 AM EST
[ Parent ]
Cash could be electronic, not necessarily printed or minted, right?

Bush is a symptom, not the disease.
by Migeru (migeru at eurotrib dot com) on Fri May 11th, 2007 at 08:15:47 AM EST
[ Parent ]
I think Chris point is that most money are created outside of government Prints, Mints and electronic mints.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Fri May 11th, 2007 at 12:17:14 PM EST
[ Parent ]
Incidentially, these are questions one isn't meant to ask. So if the whole of civilisation collapses overnight it'll be your fault.
by Colman (colman at eurotrib.com) on Fri May 11th, 2007 at 07:51:57 AM EST
[ Parent ]
Migeru's Apprentice Wizard™ technology


Bush is a symptom, not the disease.
by Migeru (migeru at eurotrib dot com) on Fri May 11th, 2007 at 08:10:01 AM EST
[ Parent ]
With bank lending, the effect is temporary, as the lmoan is paid back, and money destroyed then.

In a steady state (constant amount of loans outstanding as new loans replace repayments), there is no money creation even though there is normal bank lending activity.

It's only growth in aggregate lending that cuases devaluation, so the effect of an individual loan is an order of magnitude less than printing money.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri May 11th, 2007 at 08:18:13 AM EST
[ Parent ]
In a steady state with banks lending money at interest, the share of wealth in the hands of the banks grows logistically until they own everything.

Bush is a symptom, not the disease.
by Migeru (migeru at eurotrib dot com) on Fri May 11th, 2007 at 08:21:31 AM EST
[ Parent ]
You guys wouldn't want to break this out into a new thread, would you? With obligation to explain and be informative so we can all follow?

It's a really important subject and views differ considerably.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri May 11th, 2007 at 08:26:36 AM EST
[ Parent ]
No, can't do.

Bush is a symptom, not the disease.
by Migeru (migeru at eurotrib dot com) on Fri May 11th, 2007 at 08:29:03 AM EST
[ Parent ]
With bank lending, the effect is temporary, as the loan is paid back, and money destroyed then.
That is the cincher. I believe Chris recently posted alink to a film makign the following claims:
  • money is created by loaning and destroyed by repayment
  • therefore: no debt => no money
  • but, in addition, in order to repay the loan with interest, more money needs to be in circulation at any given time than existed previously, or failing that a fraction of the loans need to be defaulted on
  • therefore, the total amount of debt must continually increase, or there must be a continual stream of defaults in your "steady state"


Bush is a symptom, not the disease.
by Migeru (migeru at eurotrib dot com) on Fri May 11th, 2007 at 08:27:56 AM EST
[ Parent ]
Principal and interest are two totally different kinds of money.

You have to look at lending like you look at rental activities. When you rent a car, the car and the rental payments are different things. Same here.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri May 11th, 2007 at 08:43:12 AM EST
[ Parent ]
The principal doesn't exist and costs nothing to create, so what is it that's being rented? After all, when it is returned, it gets destroyed. When you rent a car, you return the car and pay rental, but the car isn't destroyed by returning it, nor is it created by letting it. The car rental company has had to buy the car and finances that through the rental it charges.

Bush is a symptom, not the disease.
by Migeru (migeru at eurotrib dot com) on Fri May 11th, 2007 at 08:46:46 AM EST
[ Parent ]
In the old days, it required actual money. Then it requires the trust of the public, plus enough reserves to  be able to react to unexpected cash movements.

Nowadays, with regulatory oversight, it requires a capital allocation (8% or less, depending on the risk).

Not that different from a car, which only really requires the leasing payments or whatever scheme the rental company is using to have access to it.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri May 11th, 2007 at 09:16:43 AM EST
[ Parent ]
If we complete the analogy with the car, cars being money, the lender wants (say) 10% more car to be returned, but since you are not allowed to build cars (that would be counterfeinting) you have to get some 0.1 car to return as interest and these 0.1 cars has to come from a car lender.

Right?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri May 11th, 2007 at 12:15:11 PM EST
[ Parent ]
interest and principal are as different as rental payments and cars are different, thus bringing back payment in fractions of cars makes no sense.

When you borrow money, you rent "Capital" (à la ChrisCook) - you may money for that rental, and what you pay is a substantially different animal than what you use to repay the Capital.

Just consider Capital to be a more liquid form of machinery. Or consider the car you rent as a narrower form of Capital (which you use for a while for a speicfic purpose and then give back).

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri May 11th, 2007 at 12:51:55 PM EST
[ Parent ]
"Secured credit" ie "deficit-based" but "asset-backed" finance is indeed a very different beast from unsecured credit.

"Ownership" of "Productive assets" requires the legal concept of "Property" and the conventional mechanism requires two conflicting legal claims over the same assets.

(a) the claim of the Financier;
(b) the claim of the user of the Finance.

These claims are irreconcilable in our current defict Money "paradigm" and it is the conflict between "Debt" and "Equity" forms of "Financial Capital" which is the faultline in our current system.

I believe the "Capital Partnership" transcends thisthrough giving rise to a single continuous "open capital" asset class of proportional "equity shares" in GROSS revenues

When you think about it, both the financier, and the user of finance are sharing the output (or the revenues from the sale of the output) from the productive asset, and the legal protocols of the  contract of Debt and the Joint Stock Limited Liability Company each give rise to imperfect sharing of risk and reward.

The problem is that the "Principal" provided by Banks is not based upon pre-existing "wealth" or "money's worth, but upon future "Money's worth" to be created by the asset.

Banks are literally providing nothing (other than a Guarantee) for something.

Renting an asset "owned" by someone is a very different thing to renting a guarantee.

The "value" that Banks provide is their Guarantee - backed by 8% of Capital. And there is no reason at all why that Guarantee should not be provided mutually, with bilateral "trade" credit managed by banks instead.

The "fair" or "natural" rate of "Interest" in respect of unsecured credit is the shared cost of administration and of defaults. Anything more is IMHO de facto inflationary.

A fair "Capital Rental" on the other hand is the proportion of production or revenues from sale of production, bearing in mind the certainty of that level of production being achieved.

If this return is based upon equitable sharing of risk and reward, the result is IMHO an optimal outcome for all stakeholders.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri May 11th, 2007 at 02:09:22 PM EST
[ Parent ]
Principal and interest are two totally different kinds of money.

The money used to repay the principal comes from the loan. Where does the money used to repay the interest? From another loan's principal.

Bush is a symptom, not the disease.

by Migeru (migeru at eurotrib dot com) on Fri May 11th, 2007 at 08:49:44 AM EST
[ Parent ]
is the payment for a service. It's like buying bread.
Where does the money to buy bread come from?

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri May 11th, 2007 at 09:17:47 AM EST
[ Parent ]
From a loan, apparently.

Bush is a symptom, not the disease.
by Migeru (migeru at eurotrib dot com) on Fri May 11th, 2007 at 09:24:37 AM EST
[ Parent ]
If all loans were repaid, how much money would be left, and in whose hands?

Bush is a symptom, not the disease.
by Migeru (migeru at eurotrib dot com) on Fri May 11th, 2007 at 09:35:12 AM EST
[ Parent ]
What's money?

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri May 11th, 2007 at 10:49:39 AM EST
[ Parent ]
Something that costs banks a lot of effort to create ex nihilo, justifying the charging of interest for its use.

Now seriously, money is the ability to mobilize economic resources, including mobilising oneself. Banks, by being given the ability to create money and award credit, get to decide who gets to do what they want, and who doesn't.

Bush is a symptom, not the disease.

by Migeru (migeru at eurotrib dot com) on Fri May 11th, 2007 at 10:53:17 AM EST
[ Parent ]
Money in fact is "Dynamic" Value which exists only in the transitory instant of exchange by reference to an abstract "Value Unit" - Keynes' "Bancor".

Capital is "Static", or "potential", Value consisting of "Money's Worth" in:
(a) "Property" ("fixed capital"); and
(b) obligations = credit ("working capital").

That's what Money SHOULD be and COULD be in a rational moneatry system based upon a "Clearing Union" approach and backed by "Guarantee Societies".

The toxic form of deficit-based Money currently in use is an interest-bearing "Claim over Value" issued - as Migeru puts it - "ex nihilo".

In essence it's the Bank taking my credit (promise to provide future value) and reflecting it back to me with their "guarantee". A Bank's "claim on a claim over Value" is a "double negative" giving a "false positive".

It is an illusion of Value or, in an analogy to anti-matter: "anti-Value".

Note that the whole business of "credit derivatives" is to all intents and purpose Banks outsourcing their "Guarantee".

My proposal of a partnership-based "Guarantee Society" achieves the same result, but without the costs and complexity.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri May 11th, 2007 at 11:21:42 AM EST
[ Parent ]
Jerome: It does not cost nothing [to create the principal of a loan] Nowadays, with regulatory oversight, it requires a capital allocation (8% or less, depending on the risk)."

Chris: Note that the whole business of "credit derivatives" is to all intents and purpose Banks outsourcing their "Guarantee".

Does this mean that "credit derivatives" allow banks to get around the "8% capital allocation" imposed by regulatory oversight?

Also, what regulatory oversight are we talking about? Basel II?

Bush is a symptom, not the disease.

by Migeru (migeru at eurotrib dot com) on Fri May 11th, 2007 at 11:32:11 AM EST
[ Parent ]
But it's not a steady state. You've got a continuous positive input as Central Banks pumps up the money supply.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Fri May 11th, 2007 at 07:55:50 PM EST
[ Parent ]
Every Money Supply curve you'll ever see (with occasional blips at a Depression -when vast numbers of loans are defaulted on and Money destroyed) goes only one way.

And that upward curve is exactly the same as the Economic Growth measured in deficit-based Money.

That Irresistible Force is now running up against the Immovable Object of sufficient oil to fuel continued Growth.

Whether its Dollar-denominated debt or Euro-denominated debt providing the necessary Money makes no more than a few years' difference.

The only viable monetary system in the long term is an "asset-based" system.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat May 12th, 2007 at 04:44:36 AM EST
[ Parent ]

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