[spam] Re: economics - Rothbergs insights and my two cents

CSGnet Archive CSG2006
1

[From Bill Powers (2006.06.24.0850 MDT)]

JIM DUNDON 06.23.06 0100EDST –

THE BANK FAILURES WERE THE MECHANISM
BY THROUGH WHICH MOST OF THE DECLINE IN THE MONEY STOCK WAS PRODUCED, AND
THIS BROUGHT ON THE GREAT DEPRESSION.

THE FEDERAL RESERVE BANK DID NOTHING
TO HELP BECAUSE IT WASN’T SET UP TO SERVE THE NATION. IT WAS SET UP
TO PROMOTE THE SHORT TERM PROFITS OF THE LARGEST BANKERS."

Whatever you blame – not enough goverment intervention, too much
government intervention – we will never know what caused the Great
Depression until we have a model that can show all the major interactions
and what their consequences are. Until that is done, everybody will still
be guessing, no matter what kind of confident front they put up.

Best,

Bill P.

2

[From Bill Powers (2006.06.24.0858 MDT)]

  [JIM DUNDON 06.23.06 0100EDST]

...an adequate money supply is needed to facilitate trade, and it wasnt there. ...

Had there been more money in circulation this would have been less severe,

You can't just stop there. Why wasn't there more money in circulation? To answer that you have to ask how money is created.

From what I have been able to learn, which may not be the whole story, money originates in bank loans (including credit), because banks are permitted to create new money through the bookkeeping device of making a deposit in someone's account and simultaneously entering an outstanding loan into the bank's ledgers. When a loan is repaid, that amount of money disappears again. So a shortage of money implies a shortage of new loans in relation to loan repayments. Of course money can also be hoarded, which effectively takes it out of circulation. And what factors go into making loans harder to get or into unusually fast repayments, or into hoarding it? Lots of other things, no doubt. In a proper model you try to track at least the major causes of such things down and then, if there is evidence for a proposed cause, put them in the model.

It's interesting that when a company or person can't repay a debt, the banks write off the loss, but the unrepaid money remains in circulation. It's been spent, so there's no way to get it back. It is possible, though I can't prove it, that a certain rate of business or personal financial failures is necessary (in the present system) to generate an increasing money supply, because all other ways of creating money are temporary -- loans are paid back, credit once extended is also eventually paid off. A certain base of circulating money is created by the delay between borrowing and repaying, but once that pipeline is full, the total amount in circulation is once again limited by the requirement for repayment of loans or credit. I suppose that while borrowing is on the increase the money supply can increase, but once that turns around, the money supply can only decrease. It's a positive feedback situation, and thus unstable. But like all fragments of a model, these relationships alone can't tell the whole story. It does seem, though, that business failures are one important contributor to the money supply. It's a variable that belongs in the model. Of course you then have to track down causes of business failure, and so on until all the important loops are closed and all important independent variables are accounted for.

In a model you can't leave any loose variables, even if you have to hypothesize values for some of them. If any variable is left unaccounted for, the model simply can't run. All explanations of the economic system that leave variables unaccounted for are empty, and that means every explanation I have ever heard.

Bill P.

3

{from JIM DUNDON [06.24.06.1206edst]}

[From Bill Powers (2006.06.24.0858 MDT)]

[JIM DUNDON 06.23.06 0100EDST]

...an adequate money supply is needed to facilitate trade, and it wasnt there. ...

Had there been more money in circulation this would have been less severe,

You can't just stop there. Why wasn't there more money in circulation? To answer that you have to ask how money is created.

A few things go into the creation of money which are always present. take away any one of these and you don't have money. The how cannot be separated from the why that ties it to human motivation. lets start with that because that is where it starts.

1. the desire of people to facilitate trade and with the least effort. That is, to reduce the action to one of "facilitate just trade". I use the word just here to refer to a blending of both meanings because they are related. Just meaning fair and warrented and just meaning simply or only. The conflation is rooted in the common elements of the word. Just as justified or finalized, and just as 'this is the only thing' refering to only function remaining in the thing, money.

2.Intent to consume. Having money is not the end of the story. It has to be spent. Spending is work. Deciding how and where and when to spend is work. When I spend my money I have begun the process of consuming, spending, dissapating that portion of the stock of wealth I helped to create.

3. The fiated thing, that is the assingment of the function , "facilitate trade", to some tangible and or conceptual thing. It can be as simple as a computer entry as long as that standard binds the participants. It cannot be two things which represent the same thing. In other words it cannot be the computer entry and the the paper currency. If I make a deposit which becomes a computer entry I forfeit the holding of the paper. I have changed the form of my money. I will give a portion of my money to the bank for the service because the bank facilitates less action than my holding the paper in my basement and worrying about it and in our case today facilitates less future action required to make up loss due to inflation. The bank is part of the inflationary story but we're getting into too complicated a picture if we continue in this vein.

4. A consumable thing and its consumer.

Remove any of the above and you don't have money. Money will not be created.

When Enron went down the tubes thousands of people lost their life's savings. Why? Because it was not in the form of real wealth or money it was in the form of stocks and bonds. Computer entries that were simply deleted.

Fractional reserve money creation, or, the illusion thereof.
Banks in America today are required to maintain a 12.5% minimum reserve. As these moneys are loaned out and redeposited in different banks the same 10,000 can be recorded as a demand deposit and reloaned. Each deposit represents a relendable amount equal to 77.5% of the deposit. This facilitates trade as long as deposits are not demanded. This is illusory money. It can function, but it requires that depositers not witdraw all their deposits. Not the best way to go. I would like to see a higher reserve.

The FEDS control of interest rates effects bank activity and thereby effects the rate of fractional reserve money creation.

One more major method of money supply creation involves the federal goernments interaction with the Federal bank which I cannot comment on because I don't remember the details. But I think it involves the issuance of bonds to the bank or the selling of the bonds and subsequent write off of the debt. I'll have to look it up again.
I'm sure Marc knows what I'm talking about if he cares to comment.

How money is created depends in part on policy. The policy influences the risk. The risk influences the creation. The best money is money created by recognition of labor, A tally of labor.

BEST

JIM D

···

From what I have been able to learn, which may not be the whole story, money originates in bank loans (including credit), because banks are permitted to create new money through the bookkeeping device of making a deposit in someone's account and simultaneously entering an outstanding loan into the bank's ledgers. When a loan is repaid, that amount of money disappears again. So a shortage of money implies a shortage of new loans in relation to loan repayments. Of course money can also be hoarded, which effectively takes it out of circulation. And what factors go into making loans harder to get or into unusually fast repayments, or into hoarding it? Lots of other things, no doubt. In a proper model you try to track at least the major causes of such things down and then, if there is evidence for a proposed cause, put them in the model.

It's interesting that when a company or person can't repay a debt, the banks write off the loss, but the unrepaid money remains in circulation. It's been spent, so there's no way to get it back. It is possible, though I can't prove it, that a certain rate of business or personal financial failures is necessary (in the present system) to generate an increasing money supply, because all other ways of creating money are temporary -- loans are paid back, credit once extended is also eventually paid off. A certain base of circulating money is created by the delay between borrowing and repaying, but once that pipeline is full, the total amount in circulation is once again limited by the requirement for repayment of loans or credit. I suppose that while borrowing is on the increase the money supply can increase, but once that turns around, the money supply can only decrease. It's a positive feedback situation, and thus unstable. But like all fragments of a model, these relationships alone can't tell the whole story. It does seem, though, that business failures are one important contributor to the money supply. It's a variable that belongs in the model. Of course you then have to track down causes of business failure, and so on until all the important loops are closed and all important independent variables are accounted for.

In a model you can't leave any loose variables, even if you have to hypothesize values for some of them. If any variable is left unaccounted for, the model simply can't run. All explanations of the economic system that leave variables unaccounted for are empty, and that means every explanation I have ever heard.

Bill P.