Modeling the economy

CSGnet Archive CSG2011
1

( Gavin
Ritz 2011.07.21.11.01NZT)

[ Shannon
Williams (2011.18.2200)]

(Gavin Ritz 2011.19.16.51NZT)

There is of course a problem with your scenarios
if Rick can only
cover his cost exactly each and >every time he has no surpluses, and
therefore can never do anything but pay board and rent. So he >can’t
do the last scenario ever, as he will never get the funds to do that.

OK. I will change
the scenarios to say: Rick ‘spends as much as he makes’.
Your analysis is focusing on Rick and Rick’s business options. Your
are focusing on understanding where Rick is getting his money and where he is
putting it. Maybe you are automatically considering how he can ‘grow’.

It doesn’t matter where for this scenario
where Rick gets his money; your point was what comes in goes and out. I assume
rental is monthly or weekly so then his funds would come in and go out.

My focus is on the flow
of money through society. My focus is on the economy of the society.
I am trying to point out that if Bill loans the money, and
he does not spend it when it is paid back, then the money stops flowing.

That’s only true if he’s using
notes and puts it under the mattress. If he puts it in the bank the money may
be loaned out.

Cash surpluses
are the engine of economic growth.

Only if they are used.

Again this is not correct; surpluses are
kept for many reasons. If you have no surpluses then contingently one can never
do anything at all. Like in this case of Rick. This is how our economy works if there are energetic gains (as
shown by profits) then the system works. If there are energetic losses (like
the sub prime effect) the systems stops. It’s really just an asymmetrical
relationship between lenders and borrowers, debtors and creditors.

If you want to cut it to the bone, money
is only made by interest, profits and rents that’s it.

Obviously, if there is a
computer glitch and the money disappears then they will not stimulate
economic growth. Likewise, if you just don’t use it then they will not stimulate
economic growth. Out of work bankers who cannot find people to lend to
means that money sitting in bank accounts is not getting used for loans.

Yes and that’s a big problem for our
economy.

This is an awesome
diagram. Thank you! You may be the one who will be able eventually
draw the model that we are looking for. Can you make this diagram equally
focused on Bill, the landlord, work, groceries, and Rick? This is a diagram
of Rick’s business opportunities. We are looking for a diagram of the
economy in a society. Perhaps you can start with a society of four or
five members.

Just read normal economics books its all
there. I’m doing nothing special, really.

Seriously Gavin, your
familiarity with diagraming the flow of money is quite evident in your diagram
and in your remarks. Right now your ‘game’ has been to focus on one
person and understand his resources.

I only did this because you asked, I
though you were going to show me something about this.

Can you focus on five
people simultaneously (or maybe 20 not sure how many you would need).

This is really outside my interest, my interest
lies in describing Reality using mathematics. (Category theory).

These people would form a
closed society (no influences from anyone outside of your diagram). When
you are done we would be able to model your diagram in a computer program and
simulate spending and simulate loaning and the general transfer of goods and
services throughout the society.

We would be able to
produce the Giffen effect too,

Why bother with the Giffen effect it’s
nonsense.

as well as predict what
will get the economy stopping or moving.

It’s easy to predict when the economy
will stop moving. The asymmetrical relationship between lenders and borrowers becomes
un-skewed. And that shows every night when the Reserve bank checks the deposits
and withdrawals in all the banks and there’s a massive shortfall of funds
and no-none can lend the banks any shortfall funds. Then there’s a big
problem.

The real issue is to ensure that this relationship
between lenders and borrowers are built on trust and ability to repay, which is
a whole different issue.

Regards

Gavin

···
2

[From Rick Marken (2011.02.20.2050)]

Gavin
Ritz (2011.07.21.11.01NZT)–

GR" If you want to cut it to the bone, money
is only made by interest, profits and rents that’s it.

It depends on what you mean by “made”. Money itself is made on printing presses and in mints. So money is “made” by the government. It’s really just a chit – a claim on goods and services – that individuals use as the basis for exchanging what they produce for what others produce.

Interest, profits, rents (and wages) are just payments for goods or services provided. Interest is a payment for a loan (a service); profits are part of the payment for the goods or services provided by a corporation (wages are the other part); rents are a payment for the use of land or real property ( a service) .

If there were no inflation (a result of changing – for various reasons-- the number of chits demanded for the same good or service) and the amount of money in circulation stayed constant, there would be no need to make more money as long as the amount of goods and services represented by this money stayed constant as well. But the amount of goods and services produced by an economy generally increases, if for no other reason than that populations generally increase. In this case, the amount of money used to exchange these goods and services has to increase as well. So governments have various means to increase the amount of money in circulation. So all other things equal, money is “made” (increased) because the goods and services represented by the money increases.

GR: It’s easy to predict when the economy
will stop moving. The asymmetrical relationship between lenders and borrowers becomes
un-skewed. And that shows every night when the Reserve bank checks the deposits
and withdrawals in all the banks and there’s a massive shortfall of funds
and no-none can lend the banks any shortfall funds. Then there’s a big
problem.

If by Reserve banks you are talking about are banks like the Federal Reserve in the US, then this is not how it works. In the US, the Fed loans the banks the reserve requirement. So if a regular (retail) bank has $1M in deposits and it is required to keep a reserve of 10% then the Fed will loan the bank $100,000 at the “Fed Rate”. Then the bank can loan out the whole $1M at it’s loan rate. This benefits the banks whose loan rates (say 4%) are typically higher than the Fed rate (say 2%). The Fed encourages loans by lowering it’s rate so that the banks can lower their rates, making the loans more attractive.

The kind of shortfall you are talking about would result in a bank failure (the bank would go bankrupt) except that a bunch of liberals got together back in the 30s and created the FDIC, which insures deposits. A bank shortfall is not a daily problem; it’s something that only happens when bankers are allowed to go haywire, as they typically are under Retpublican administrations (the worst bank failures in the US occurred under Hoover, Reagan and Bush the Small; coincidence? I don’t think so.). So liberals always have to come in and clean up the mess after the supposed grown-ups screwed things up royally. Unfortunately, this clean-up is not going to happen this time because liberals have been so marginalized and demonized by the right-wing media (which is the “mainstream media” now in the US) that they are not taken seriously. So it looks like we’re f**led.

Best

Rick

···

–
Richard S. Marken PhD
rsmarken@gmail.com
www.mindreadings.com

3

(Gavin Ritz 2011.02.21.16.16)

[From
Rick Marken (2011.02.20.2050)]

Gavin
Ritz (2011.07.21.11.01NZT)–

GR"
If you want to cut it to the bone, money is only made by interest, profits and
rents that’s it.

It depends on what you mean by “made”. Money itself is made on
printing presses and in mints.

You have a very different picture of money
than I have. Money is not made on the printing presses unless you hark
back to the 80’s and further back. In NZ only 1-2% of all money in
circulation is notes and coins. The rest is in balances in bank accounts.

So money is
“made” by the government.

Well it’s sort of made by government,
in reality by the banks and other financial institutions.

It’s really just a chit
– a claim on goods and services – that individuals use as the basis for
exchanging what they produce for what others produce.

Yes sure but it is much more than this.

Interest, profits, rents (and wages) are just payments for goods or services
provided. Interest is a payment for a loan (a service); profits are part of the
payment for the goods or services provided by a corporation (wages are the
other part); rents are a payment for the use of land or real property ( a
service) .

Yes and that is how money is made. Interests
rents and profits. Take this away and there is no economy. Nothing. No banks,
no businesses, no property. A profit in a business is making money.

If there were no inflation (a result of changing – for various reasons–
the number of chits demanded for the same good or service) and the amount of
money in circulation stayed constant, there would be no need to make more money
as long as the amount of goods and services represented by this money stayed
constant as well. But the amount of goods and services produced by an economy
generally increases, if for no other reason than that populations generally
increase. In this case, the amount of money used to exchange these goods and
services has to increase as well. So governments have various means to increase
the amount of money in circulation. So all other things equal, money is
“made” (increased) because the goods and services represented by the
money increases.

That’s the simple answer Rick, money is much more than
this. It’s a quality-quantity converter par excellence.

GR:
It’s easy to predict when the economy will stop moving. The asymmetrical
relationship between lenders and borrowers becomes un-skewed. And that shows
every night when the Reserve bank checks the deposits and withdrawals in all
the banks and there’s a massive shortfall of funds and no-none can lend
the banks any shortfall funds. Then there’s a big problem.

If by Reserve banks you
are talking about are banks like the Federal Reserve in the US,
then this is not how it works.

It sure is. The banks borrow from each
other or the Reserve when there are shortfalls. Maybe you guys do something different
in US, but in NZ this is how the Reserve keeps daily tabs on the money supply.

In the US,
the Fed loans the banks the reserve requirement. So if a regular (retail) bank
has $1M in deposits and it is required to keep a reserve of 10% then the Fed
will loan the bank $100,000 at the “Fed Rate”. Then the bank can loan
out the whole $1M at it’s loan rate. This benefits the banks whose loan rates
(say 4%) are typically higher than the Fed rate (say 2%). The Fed
encourages loans by lowering it’s rate so that the banks can lower their rates,
making the loans more attractive.

The kind of shortfall you are talking about would result in a bank failure (the
bank would go bankrupt) except that a bunch of liberals got together back in
the 30s and created the FDIC, which insures deposits. A bank shortfall is not
a daily problem;

In NZ it sure is, the withdrawals and deposits
in the entire economy must balance each day. I’m sure that is what happens
in the US or
close to it. Go check out the daily mechanics of the Federal Reserve, I’d
be surprised if it was any different to the NZ banking system.

it’s something that only
happens when bankers are allowed to go haywire, as they typically are under
Retpublican administrations (the worst bank failures in the US
occurred under Hoover, Reagan and Bush the Small; coincidence? I don’t think
so.). So liberals always have to come in and clean up the mess after the
supposed grown-ups screwed things up royally. Unfortunately, this clean-up is
not going to happen this time because liberals have been so marginalized and
demonized by the right-wing media (which is the “mainstream media”
now in the US) that they are not taken seriously. So it looks like we’re
f**led.

You guys fight with each other like the
other side is the devil. I have never seen such positioning, elevating and
protecting tactics in my entire life. One fine day the whole caboodle is going to
come crashing down. God bless America and us all.

Regards

Gavin

4

[From Rick Marken (2011.07.20.2240)]

Gavin Ritz (2011.02.21.16.16)–

GR: You have a very different picture of money
than I have. Money is not made on the printing presses unless you hark
back to the 80’s and further back. In NZ only 1-2% of all money in
circulation is notes and coins. The rest is in balances in bank accounts.

Yes, I count that as money too. I should have included digital bits.

GR: Yes and that is how money is made. Interests
rents and profits. Take this away and there is no economy. Nothing. No banks,
no businesses, no property. A profit in a business is making money.

So barter economies are not economies?

RM: If by Reserve banks you
are talking about are banks like the Federal Reserve in the US,
then this is not how it works.

GR: It sure is. The banks borrow from each
other or the Reserve when there are shortfalls. Maybe you guys do something different
in US, but in NZ this is how the Reserve keeps daily tabs on the money supply.

Actually, you are correct. The banks do borrow from each other and from the Fed to make up for short term liquidity shortfalls. I was wrong.

RM: A bank shortfall is not
a daily problem;

GR: In NZ it sure is, the withdrawals and deposits
in the entire economy must balance each day. I’m sure that is what happens
in the US or
close to it. Go check out the daily mechanics of the Federal Reserve, I’d
be surprised if it was any different to the NZ banking system.

I consulted with my wife, who was a vice-president at the LA branch of the Fed (and had the misfortune of having her picture taken with that gargoyle Greenspan) and she confirms that you are correct; the banks do borrow from each other – and from the Fed – to make up for daily liquidity shortfalls. She also confirmed that I had it right the first time; the banks do have to set aside a reserve requirement – they can’t borrow it – and it is stored (digitally) with the Fed. So the reserve requirement is unquestionably money taken out of circulation (sitting on the books at the Fed). So my original formulation of leakage is basically correct; leakage = reserve requirement x the amount on deposit + loss due to bankruptcies and defaults. This number will unquestionably grow as people park more of their money in the bank, which is what happens as wealth discrepancy increases.

GR: You guys fight with each other like the
other side is the devil.

It turns out that the other side _is_the devil; from my perspective, of course. People who will fight tooth and nail to balance the budget by cutting benefits to the elderly while protesting any increase in revenue through taxes on the wealthy is just plain evil. There is just no other way for me to see it. But maybe you can open my eyes to the wonderful new morality that is the current Republican party in America.

GR: I have never seen such positioning, elevating and
protecting tactics in my entire life. One fine day the whole caboodle is going to
come crashing down. God bless America and us all.

It will indeed, if the devil wins. And he’s currently way ahead.

Best

Rick

···

–
Richard S. Marken PhD
rsmarken@gmail.com

www.mindreadings.com

5

(Gavin Ritz 2011.07.21.23.35NZT)

[From
Rick Marken (2011.07.20.2240)]

Gavin Ritz (2011.02.21.16.16)–

GR: You
have a very different picture of money than I have. Money is not made on
the printing presses unless you hark back to the 80’s and further back.
In NZ only 1-2% of all money in circulation is notes and coins. The rest is in
balances in bank accounts.

Yes, I count that as money too. I should have included digital bits.

GR: Yes
and that is how money is made. Interests rents and profits. Take this away and
there is no economy. Nothing. No banks, no businesses, no property. A profit in
a business is making money.

So barter economies are not economies?

They are economies very poor in efficiency,
but the principle accounting of profits is not in money but rather obligation (a
mental asymmetry) so in actual fact in a modern economy money has taken that
role. Obligation and duty is like an ancient form of money. That’s why I
say modern money is a quality converter. It converts any quality to a quantity.
In ancient times the quality always converted to another quality. That is the reason
why money initially was minted in the temple of Moneta.

RM: If by Reserve banks
you are talking about are banks like the Federal Reserve in the US,
then this is not how it works.

GR: It
sure is. The banks borrow from each other or the Reserve when there are
shortfalls. Maybe you guys do something different in US, but in NZ this is how
the Reserve keeps daily tabs on the money supply.

Actually, you are correct. The banks do borrow from each other and from the Fed
to make up for short term liquidity shortfalls. I was wrong.

RM: A bank shortfall is not a daily problem;

GR: In
NZ it sure is, the withdrawals and deposits in the entire economy must balance
each day. I’m sure that is what happens in the US or close to it. Go check
out the daily mechanics of the Federal Reserve, I’d be surprised if it
was any different to the NZ banking system.

I consulted with my wife, who was a vice-president at the LA branch of the
Fed (and had the misfortune of having her picture taken with that
gargoyle Greenspan)

Your
actually very funny, is he a gargoyle because he’s not pretty or because he’s
a Republican

and
she confirms that you are correct; the banks do borrow from each other – and
from the Fed – to make up for daily liquidity shortfalls. She also confirmed
that I had it right the first time; the banks do have to set
aside a reserve requirement – they can’t borrow it – and it is stored
(digitally) with the Fed.

That’s
correct.

So
the reserve requirement is unquestionably money taken out of circulation
(sitting on the books at the Fed). So my original formulation of leakage is
basically correct; leakage = reserve requirement x the amount on deposit

  • loss due to bankruptcies and defaults. This number will unquestionably grow
    as people park more of their money in the bank, which is what happens as wealth
    discrepancy increases.

Well the
actual reserve requirement is so small that it’s hardly a stop gap when
the shit hits the fan, as it did with the US and European banks.
Actually it was touch and go that the US economy would even survive. If the bank of England (and the British
Treasury) did not call all the heads of the British banks in on that fateful
night and tell them what they were going to do and thus forced Paulson into
getting Congress to agree to a bailout we would all be f………d.

It’s
actually very hard to explain how fine the line is of success using leverage. Only
when one uses leverage and spends up big on projects does it become painfully
clear. Lending has its limits and believe me it’s a very fine line. I call
it the Goldilocks zone.

GR: You
guys fight with each other like the other side is the devil.

It turns out that the other side _is_the devil; from my perspective, of course.

You’re
guys are really funny. My sister and brother in law are very successful Arizona (Phoenix) Property Developers and
they hate Democrats as much as you hate Republicans. I find it hilarious.

People
who will fight tooth and nail to balance the budget by cutting benefits to the
elderly while protesting any increase in revenue through taxes on the wealthy
is just plain evil. There is just no other way for me to see it. But maybe you
can open my eyes to the wonderful new morality that is the current Republican
party in America.

I know
nothing of America politics I find it boring, but the watching of the people on
either side of the divide is actually amusing. But I don’t think you guys
find it amusing.

GR: I
have never seen such positioning, elevating and protecting tactics in my entire
life. One fine day the whole caboodle is going to come crashing down. God bless
America and us
all.

It will indeed, if the devil wins. And he’s currently way ahead.

God Bless America. What do they say if you
see the four horsemen (not cowboys) of the Apocalypse it’s too late?

Regards

Gavin

···
6

[From Rick Marken (2011.07.21.2140)]

Gavin Ritz 2011.07.21.23.35NZT)

GR: Yes
and that is how money is made. Interests rents and profits. Take this away and
there is no economy. Nothing. No banks, no businesses, no property. A profit in
a business is making money.

RM: So barter economies are not economies?

GR: They are economies very poor in efficiency,
but the principle accounting of profits is not in money but rather obligation (a
mental asymmetry) so in actual fact in a modern economy money has taken that
role.

I don’t believe that an obligation is profit. It’s more like a contract. In money based economies money is an “obligation”; a claim on goods and/or services. In barter economies, some good (cattle) is a claim on goods. Profit is the difference between the revenues and expenses of a fictional entity called a corporation (now declared a human being by the five mindless members of our Surpeme Court). Individuals don’t make a profit; they just make a living (if revenues are sufficiently above expenses).

GR: Your
actually very funny, is he [Greenspan] a gargoyle because he’s not pretty or because he’s
a Republican

Neither. Greenspan was a Republican at the time Republicans were actually decent people (like Eisenhower). Greenspan is a gargoyle because he let his ridiculous ideology blind him to the economic catastrophe that was sure to ensue (and did) as a result of the bubble he was encouraging.

GR: Well the
actual reserve requirement is so small that it’s hardly a stop gap when
the shit hits the fan, as it did with the US and European banks.

That may be true. But it is irrelevant to the point I was making about the reserve requirement, which is that it takes money out of circulation; it’s leakage.

Rick

···

–
Richard S. Marken PhD
rsmarken@gmail.com
www.mindreadings.com

7

(Gavin Ritz 2011.07.22.17.32NZT)

[From Rick Marken
(2011.07.21.2140)]

Gavin Ritz
2011.07.21.23.35NZT)

GR: Yes
and that is how money is made. Interests rents and profits. Take this away and there
is no economy. Nothing. No banks, no businesses, no property. A profit in a
business is making money.

RM: So barter economies
are not economies?

GR: They
are economies very poor in efficiency, but the principle accounting of profits
is not in money but rather obligation (a mental asymmetry) so in actual fact in
a modern economy money has taken that role.

I don’t believe that an obligation is profit. It’s more like a contract.

What’s the difference; it’s always
a relationship of some sort where accountability is required to be balanced in
some way, either by gifts, exchange, sex, swaps.

In money based economies
money is an “obligation”; a claim on goods and/or services.

My point exactly, money has become the quality-quantity
converter, but in barter economies obligation or accountability is the real
quality, by gifts, dancing, chanting, swaps, women etc.

In barter economies, some
good (cattle) is a claim on goods.

Same thing different accounting.

Profit is the difference
between the revenues and expenses of a fictional entity called a corporation

Or any business that is conducted, doctor,
plumber, lawyer, makes no difference.

(now declared a human
being by the five mindless members of our Surpeme Court).

That’s another issue.

Individuals don’t
make a profit; they just make a living (if revenues are sufficiently above
expenses).

They may if they are a sole trader. That’s
what sole trader means, trading as an individual, then if there are more that
one individual it becomes a partnership.

Very common individual businesses,
doctors, lawyers, psychologist, electricians, plumbers, builders, carpenters,
joiners, roofers, midwives, gas fitters, appliance repair men, astrologer, beautician
etc.

Neither of which are corporations these types
of organisations make up millions of businesses in the US. And they make profits,
if they don’t they cease to be viable and stop trading.

And then there are the not for profit
agencies that make millions in surpluses they are not corporations either.

Then there are co-ops very common in the agricultural
sector that are owned by individual’s farmers who also make millions in
profits. In New Zealand our biggest business is a co-op “Fonterra” the largest
dairy business in the world. That makes billions.

If individuals don’t have surpluses
they are in big trouble. They spend more than they have they land up broke. This
is another issue altogether.

Crikey are you a laborite Luddite??? You
seem to hate business. Unless it’s just your writing style.

GR: Your actually very funny, is he [Greenspan] a gargoyle because
he’s not pretty or because he’s a Republican

Neither. Greenspan was a Republican at the time Republicans were actually
decent people (like Eisenhower). Greenspan is a gargoyle because
he let his ridiculous ideology blind him to the economic catastrophe that was
sure to ensue (and did) as a result of the bubble he was encouraging.

I don’t
think that Greenspan was the cause of the bubble, that was done by greedy,
blind and arrogant individuals (and often very clever) who believe that cheating
is the best way to make a living.

GR: Well
the actual reserve requirement is so small that it’s hardly a stop gap
when the shit hits the fan, as it did with the US and European banks.

That may be true. But it is irrelevant to the point I was making about the
reserve requirement, which is that it takes money out of circulation; it’s
leakage.

I still don’t get your point on this
leakage stuff.

Gavin

···
8

[Martin Lewitt 2011 July 22 0052 MDT]

[From Rick Marken (2011.07.21.2140)]

Gavin Ritz
2011.07.21.23.35NZT)

                                GR:

Yes
and that is how money is made.
Interests rents and profits. Take
this away and
there is no economy. Nothing. No
banks, no businesses, no property. A
profit in
a business is making money.

                                RM:

So barter economies are not
economies?

                    GR: They are

economies very poor in efficiency,
but the principle accounting of profits is not
in money but rather obligation (a
mental asymmetry) so in actual fact in a modern
economy money has taken that
role.

      I don't believe that an obligation is profit. It's more like a

contract. In money based economies money is an “obligation”; a
claim on goods and/or services. In barter economies, some good
(cattle) is a claim on goods. Profit is the difference between
the revenues and expenses of a fictional entity called a
corporation (now declared a human being by the five mindless
members of our Surpeme Court). Individuals don’t make a
profit; they just make a living (if revenues are sufficiently
above expenses).

GR: Your
actually very funny, is he [Greenspan] a gargoyle
because he’s not pretty or because he’s
a Republican

      Neither. Greenspan was a Republican at the time Republicans

were actually decent people (like Eisenhower). Greenspan is a
gargoyle because he let his ridiculous ideology blind him to
the economic catastrophe that was sure to ensue (and did) as a
result of the bubble he was encouraging.

                  GR: Well the

actual reserve requirement is so small that it’s
hardly a stop gap when
the shit hits the fan, as it did with the US and European
banks.

      That may be true. But it is irrelevant to the point I was

making about the reserve requirement, which is that it takes
money out of circulation; it’s leakage.

Not in fractional reserve banking, if there is a 10% reserve

requirement for instance, the bank system gets to lend out 9 times
the amount of deposits that it has. So, it has increased the money
supply by a factor of 10, or at least that part represented by its
deposits to the extent that it keeps the money loaned out. The
reason it works is that the money loaned out comes back as a
deposit.

-- Martin L
···

http://en.wikipedia.org/wiki/Fractional-reserve_banking#How_it_works

      Rick

  --

  Richard S. Marken PhD

  rsmarken@gmail.com

  [www.mindreadings.com](http://www.mindreadings.com)
9

[Martin Lewitt 2011 July 22 0052 MDT]

[From Rick Marken (2011.07.21.2140)]

Gavin Ritz
2011.07.21.23.35NZT)

                                  GR:

Yes and that is how money is made.
Interests rents and profits. Take
this away and there is no economy.
Nothing. No banks, no businesses,
no property. A profit in a
business is making money.

                                  RM: So barter economies are

not economies?

                      GR: They are

economies very poor in efficiency, but the
principle accounting of profits is not in
money but rather obligation (a mental
asymmetry) so in actual fact in a modern
economy money has taken that role.

        I don't believe that an obligation is profit. It's more like

a contract. In money based economies money is an
“obligation”; a claim on goods and/or services. In barter
economies, some good (cattle) is a claim on goods. Profit is
the difference between the revenues and expenses of a
fictional entity called a corporation (now declared a human
being by the five mindless members of our Surpeme Court).
Individuals don’t make a profit; they just make a living (if
revenues are sufficiently above expenses).

GR: Your actually very funny, is he
[Greenspan] a gargoyle because he’s not pretty
or because he’s a Republican

        Neither. Greenspan was a Republican at the time Republicans

were actually decent people (like Eisenhower). Greenspan is
a gargoyle because he let his ridiculous ideology blind him
to the economic catastrophe that was sure to ensue (and did)
as a result of the bubble he was encouraging.

                    GR: Well the actual reserve

requirement is so small that it’s hardly a stop
gap when the shit hits the fan, as it did with
the US and European banks.

        That may be true. But it is irrelevant to the point I was

making about the reserve requirement, which is that it takes
money out of circulation; it’s leakage.

  Not in fractional reserve banking, if there is a 10% reserve

requirement for instance, the bank system gets to lend out 9 times
the amount of deposits that it has. So, it has increased the
money supply by a factor of 10, or at least that part represented
by its deposits to the extent that it keeps the money loaned out.
The reason it works is that the money loaned out comes back as a
deposit.

The effective supply of money is also increased by the monetary

velocity, the money gets used multiple times per time period. These
class notes might help you;

···

http://en.wikipedia.org/wiki/Fractional-reserve_banking#How_it_works
http://www-rohan.sdsu.edu/~hfoad/e111su08/Ch19.ppt

10

[Shannon Williams (2011.07.22 0800 CST)]

[Martin Lewitt 2011 July 22 0052 MDT]

The effective supply of money is also increased by the monetary velocity,
the money gets used multiple times per time period.

That is a function of Money. That same monetary velocity would be
seen if the money were given away instead of loaned.

Look at it this way, if the money were 'given' (or spent somehow)
instead of 'loaned', then by what channels, would the money return to
you? What has to happen for loaned money to return to you?

Shannon
https://donate.barackobama.com/page/outreach/view/2012/openthespillways

11

[Shannon Williams (2011.07.22.0800 CST)]

(Gavin Ritz 2011.07.22.17.32NZT)

If individuals don�t have surpluses they are in big trouble. They spend more
than they have they land up broke.

Yes. The need for surpluses and the need for savings accounts is a
separate issue from understanding how these things affect the economy.
  For example, we need places to put waste and ways of generating heat
but that does not mean that we dump it on the street or cut down the
cities trees. We figure out a system for doing it that does not break
other controlled variables.

Shannon
https://donate.barackobama.com/page/outreach/view/2012/openthespillways

12

[Shannon Williams (2011.07.22.0800 CST)]

Look at it this way, if the money were 'given' (or spent somehow)
instead of 'loaned', then by what channels, would the money return to
you? �What has to happen for loaned money to return to you?

If you give money away then it returns via a series of trades which
places in back into your income source.

If you loan money then it returns to you via the withholding of trade.
In other words, instead of spending it Rick gives it to you. (Now if
you went an spent it there would be no problem)

···

Shannon
https://donate.barackobama.com/page/outreach/view/2012/openthespillways

13

[From Rick Marken (2011.07.22.0920)]

Gavin Ritz (2011.07.22.17.32NZT)–

GR: Very common individual businesses,
doctors, lawyers, psychologist, electricians, plumbers, builders, carpenters,
joiners, roofers, midwives, gas fitters, appliance repair men, astrologer, beautician
etc.

Neither of which are corporations these types
of organisations make up millions of businesses in the US. And they make profits,
if they don’t they cease to be viable and stop trading.

I think I see. What you mean by profit is simply revenue less expenses. For an individual, “expenses” are often just the time and effort involved in doing labor. So your “profit” is really what I am calling “profit and wages”. So, yes, this kind of profit is essential to an economy where there is specialized production of goods and services. Profit in this sense has to be >=0 so that one can exchange the money (or barter) received in payment for the goods or services (labor) they produced for desired/ needed goods and services produced by others.

GR: And then there are the not for profit
agencies that make millions in surpluses they are not corporations either.

Now you are talking about profit in the formal accounting sense that I was thinking of originally. Non-profits still have to make a profit (in your sense) in order to pay their expenses (salaries, etc). They just don’t book a “profit” for shareholders; there are no shareholders in a non-profit.

GR: Crikey are you a laborite Luddite??? You
seem to hate business. Unless it’s just your writing style.

I am a labor progressive (I respect labor and love technology). I also like business; I just don’t like a lot of business people, particularly those who think of themselves as being the most important element of the business. I think I’m more in tune with what I have seen of the Japanese approach to business. The Japanese seem to treat business as a cooperative venture with managers/owners as the coordinators and labor as the implementers. There are very wealthy Japanese business people but they don’t seem to have made their wealth by paying their workers jack. Workers are paid quite fairly and, because of that, there is a very strong middle class in Japan and very little poverty. I don’t think there are even unions. You don’t need unions when managers are mensches.

GR: I don’t
think that Greenspan was the cause of the bubble, that was done by greedy,
blind and arrogant individuals (and often very clever) who believe that cheating
is the best way to make a living.

Greenspan was part of the cause because he endorsed the creation of bundled mortgage securities (credit default swaps) and the liberalization of banking regulations that allowed their creation. There was no cheating involved in the creation (and explosion) of the housing bubble; but there was plenty of arrogance and greed, both of which are strongly endorsed by free market maniacs like Greenspan (who is apparently back to being his old asshole self after a brief mea culpa).

Rick

···

–
Richard S. Marken PhD
rsmarken@gmail.com
www.mindreadings.com

14

[From Rick Marken (2011.07.22.1050)]

Martin Lewitt (2011 July 22 0052 MDT)–

      RM: That may be true. But it is irrelevant to the point I was

making about the reserve requirement, which is that it takes
money out of circulation; it’s leakage.

ML: Not in fractional reserve banking, if there is a 10% reserve

requirement for instance, the bank system gets to lend out 9 times
the amount of deposits that it has.

This can’t be right. If the bank’s deposits are D then, with a 10% reserve requirement, the bank can lend .9 * D, not 9* D. So .1* D remains in reserve. As D increases, the absolute amount in reserve (which is the absolute amount of money taken out of the circular flow) increases.

ML: So, it has increased the money

supply by a factor of 10,

I can’t believe it works that way (and neither can my wife, the accountant). Sounds like just a recipe for inflation.

The

reason it works is that the money loaned out comes back as a
deposit.

And that’s a recipe for hyperinflation.

Rick

···

–
Richard S. Marken PhD
rsmarken@gmail.com

www.mindreadings.com

15

[Martin Lewitt 2011 July 22 1455 MDT]

[From Rick Marken (2011.07.22.1050)]

        Martin Lewitt (2011

July 22 0052 MDT)–

                  RM: That may be true. But it is irrelevant to

the point I was making about the reserve
requirement, which is that it takes money out of
circulation; it’s leakage.

        ML: Not in fractional reserve banking, if there is a 10%

reserve requirement for instance, the bank system gets to
lend out 9 times the amount of deposits that it has.

      This can't be right.  If the bank's deposits are D then, with

a 10% reserve requirement, the bank can lend .9 * D, not 9* D.
So .1* D remains in reserve. As D increases, the absolute
amount in reserve (which is the absolute amount of money taken
out of the circular flow) increases.

        ML: So, it has

increased the money supply by a factor of 10,

      I can't believe it works that way (and neither can my wife,

the accountant). Sounds like just a recipe for inflation.

        The reason it works is

that the money loaned out comes back as a deposit.

      And that's a recipe for hyperinflation.

It is a recipe for a money supply built upon a pyramid of debt, and

when that debt gets shakey or collapses, or people just pay back
loans, you get deflation. In the recent crisis, estimates of the
amount of money supply that disappeared in the financial collapses
was $7 to 15 trillion. It is also why the stimulus checks everyone
received before the failures started happening ended up being
deflationary. The government borrowed the money, and the consumers
ended up paying down debt, for a net decrease in the money supply
once the fractional reserve adjustments took place. It is also why
I have been advocating the debit card account way for the federal
reserve to print money directly to consumers.

The whole economy would be much less riskily leveraged if the money

supply were increased more directly rather than depending on a
pyramid of credit. Consumers who pay down debt with printed money,
just reduce the risk of inflation allowing more money to be
printed. If the tax bias against equity financing were eliminated
or even reversed to be against debt financing, the leverage in the
commercial part of the economy could be reduced as well. The whole
system would be more stable. Printed money in consumers hands could
have prevented the crisis from moving from wall street to main
street, it would also allow enough flexibility to let financial
institutions fail, restoring market discipline.

-- Martin L
···

On 7/22/2011 11:50 AM, Richard Marken wrote:

      Rick

–

  Richard S. Marken PhD

  rsmarken@gmail.com

  [www.mindreadings.com](http://www.mindreadings.com)
16

[From Bill Powers (2011.07.22.1310 MDT)]

Rick Marken (2011.07.22.1050) ET. AL.

One thing that might help clear up some points is to realize that money, in whatever form it exists, belongs to only one person (or "person") at a time. Bookkeepers are finicky; the books always have to balance. If I have X dollars, nobody else has it. I may owe Y dollars, but that doesn't affect where the money is until I start paying off the debt. Then some money is transferred out of my X dollars and into someone else's account. Whether the money is in the form of golden pieces of eight or imaginary bits of magnetism makes no difference.

The banks have to maintain a reserve of 10% of their assets. Loans are assets, so lending money doesn't reduce their assets. It doesn't increase them, either, so they can't lend more. However, when they get repaid, they are repaid a lot more than what they lent (especially for those nice juicy 30-year mortgages in which 90% of your payments, for quite a while, go for interest), so their total assets increase. That allows them to lend more. Also, when one bank lends somebody money, that money, when spent, goes into the same or different bank accounts and counts as an asset, so all but 10% of it can be lent out. That's where the multiplier effect comes from, I think. The last time I saw anything on this, I think the total multiplier effect was about a factor of 5. But that depends on interest rates and the size of the reserve requirement.

Clearly, this is a system based on magic, because it says that the total amount of money in existence must continually increase -- otherwise, interest wouldn't work. I think it's supported mainly by a continual increase in outstanding debt of all kinds that involve legally creating new money. This is probably where that motto of desperation comes from: expand or die. We can't stop the merry-go-round because if we do everything will collapse.

If all debts were repaid, would all money disappear? The lenders would subtract repayments from their records of amount due (which is an asset) and eventually that asset would go to zero. Then nobody would have any assets worth any money, though there could still be other kinds of promises that would have to be repaid in goods or services. But what about the interest payments? Wouldn't that money still be there in some kind of account or in mattresses or sugar canisters or pockets? Where did it come from? If new money is created via borrowing, paying the interest always requires somebody, somewhere, to borrow more. Printing your own money is not allowed. But if all debts were repaid, shouldn't the total amount of money go to zero?

There's something here that doesn't add up. Voodoo economics.

Best,

Bill P.

17

(Gavin Ritz 2011.07.23.14.12NZT)

[From
Rick Marken (2011.07.22.0920)]

Gavin Ritz
(2011.07.22.17.32NZT)–

GR: Very
common individual businesses, doctors, lawyers, psychologist, electricians,
plumbers, builders, carpenters, joiners, roofers, midwives, gas fitters,
appliance repair men, astrologer, beautician etc.

Neither
of which are corporations these types of organisations make up millions of
businesses in the US. And they make profits, if they don’t they cease to be viable
and stop trading.

I think I see. What you mean by profit is simply revenue less expenses. For an
individual, “expenses” are often just the time and effort involved in
doing labor.

Not so,
with sole traders they may have premises, raw materials, vehicle costs, etc (e.g.
a plumber, beautician, (this is a big industry), electrician), labour is one
part of the costs involved.

So
your “profit” is really what I am calling “profit and
wages”.

That’s
just semantics in the end; they are required to make surpluses.

So,
yes, this kind of profit is essential to an economy where there is specialized
production of goods and services.

What do
you mean by specialized production of goods?

Profit
in this sense has to be >=0

That’s
correct but more than likely larger than.

so
that one can exchange the money (or barter) received in payment for the goods
or services (labor) they produced for desired/ needed goods and services
produced by others.

GR: And
then there are the not for profit agencies that make millions in surpluses they
are not corporations either.

Now you are talking about profit in the formal accounting sense that I was
thinking of originally.

Not at all, in the end a surplus is required
no matter what and who is trading. In NZ one of the biggest retail businesses is
the Salvation Army they have few hundred outlets where they sell second
hand clothes (they got free) at very good prices. All profits (surpluses) are distributed
to help the needy.

Non-profits still have to
make a profit (in your sense) in order to pay their expenses (salaries, etc).
They just don’t book a “profit” for shareholders; there are no
shareholders in a non-profit.

That’s right surpluses are imperative
under all conditions. It’s like an energetic balance. Well it is a real energetic
representative balance.

GR:
Crikey are you a laborite Luddite??? You seem to hate business. Unless
it’s just your writing style.

I am a labor progressive (I respect labor and love technology). I also like
business; I just don’t like a lot of business people,

This sounds terrible.

particularly those who
think of themselves as being the most important element of the business.

Well people are one of the most important elements
of business. There are 5 important elements in business wreck any one and the
profits (surpluses) will surely reverse. Without people there is no economy,
there is no business.

I think I’m more in tune
with what I have seen of the Japanese approach to business. The Japanese seem
to treat business as a cooperative venture with managers/owners as the
coordinators and labor as the implementers. There are very wealthy Japanese
business people but they don’t seem to have made their wealth by paying their
workers jack. Workers are paid quite fairly and, because of that, there
is a very strong middle class in Japan and very little poverty. I don’t think
there are even unions.

Don’t be too enamored with Japanese business
they have plenty of problems too. They have huge poverty problems in Japan.
They just don’t talk about it. U see what I mean in this article. http://www.nytimes.com/2010/04/22/world/asia/22poverty.html

You don’t need unions
when managers are mensches.

It works in both directions, businesses need
managers as much as they need labour. I think one needs unions because it’s
a countervailing power in society, which has little to do with business but the
nature of energetic accountability. Unions also have a long way to go before
they act in a moral fashion too. Neither side can pull the moral ethical act.

GR: I don’t think that Greenspan was the cause of the bubble, that
was done by greedy, blind and arrogant individuals (and often very clever) who
believe that cheating is the best way to make a living.

Greenspan was part of the cause because he endorsed the creation of bundled
mortgage securities (credit default swaps) and the liberalization of banking
regulations that allowed their creation. There was no cheating involved in the
creation (and explosion) of the housing bubble;

It’s
all cheating. The housing bubble (sub prime) was one big cheat, from the banks
to the valuers, real estate people, and inter banks. One big amoral cheating exercise.
The whole Freddie Mack, fanny May debacle.

but
there was plenty of arrogance and greed, both of which are strongly endorsed by
free market maniacs like Greenspan (who is apparently back to being his old
asshole self after a brief mea culpa).

Don’t
blame Greenspan he’s only a very small part of the problem, the complicity
was endemic. It’s easy to blame one old guy but it’s really not
that simple.

Regards

Gavin

···