Debt and Money
In a previous post, I wondered about how debt becomes the "civilized" mechanism to form the skeleton of a structure that recognizably similar to the kleptocracies documented in "Thieves of State". The theory is that over time (and a few political revolutions), "Western" societies settle into a way to suck the blood out of the poor "legally", eliminating the need for overt corruption such as bribes and kickbacks. In many of these "democracies", bribery continues to be important in the form of "dark" political contributions that constantly outweigh the desires of the general public. Money itself becomes a corrupting influence. But let's take a look at debt first - especially its connection to "capital" or "wealth" - the material goods of a society.
Especially with the appearance of cryptocurrency, we find people believing the myth of "fiat currency" - the idea that the government can print pieces of paper and convince us all that they are worth something. That's not how money is created in a capitalist system. Money is based on and backed by debt. If you get a loan of $100,000 from a bank, the bank owns a piece of you in exchange for the $100,000 that they create out of thin air. Every dollar is brought into existence by the creation of an equal but opposite debt.
The idea is that the bank will only "lend" you this money if you can convince them that you are able to repay the loan. Ideally, you will put up collateral that the bank will seize if you fail to meet your payments. So the entire system, especially the "money" is based on (a) credible assessment that the borrower can repay (b) value of the collateral. All this came unraveled in 2008, causing trillions of dollars to vanish from the system due to (a) banks creating money and fees for themselves when there was no realistic hope of the loan being repaid and (b) crash of collateral values (houses).
So, if all money is created by debt, where does the money come from to repay the debt? In the big picture, this comes from value added. The borrower somehow creates more value than what he borrowed. For this to happen, the entire economy must "grow" - causing the total value of its assets to constantly increase, or the value of the money must decrease (inflation). In effect, this means that the borrower is repaying the loan with dollars that are worth less than what he borrowed.
It's distressingly easy to game this system. For one thing, the traditional analysis ignores the role of crime, especially international crime and "money laundering". It's common for major players, especially in real estate, to use bankruptcy as part of their business plan. They never intend to repay the loans. Banks create money out of nothing and hand it to the Trumps of the world. Magically, the money slips away, another Trump business declares bankruptcy and Trump buys himself another jet. The bank actually looses only the interest on the loan. The debt vanishes and Trump keeps the jet.
It's also possible for the Trumps of the world to accept "loans" from international criminals - loans that will never be directly repaid, especially when the enterprise in question declares bankruptcy after all that now "clean" money slips away.
Another problem is that money itself becomes a commodity, resulting in what's called "finance capitalism". Money no longer stands for value in the "real economy" or even the credit worthiness of the society. It "floats free" - just numbers in computers. As we have seen, these numbers have a distressing tendency to crash for mysterious reasons. They actually behave like the mythical "fiat currency" because they are actually based on smoke and mirrors. Actually, what happens is that "trust" between the lender and borrower (who may have actually met face to face) is gradually replaced by a mathematical construct of "risk" evaluated by an opaque computer algorithm. Of course, you can't hold an algorithm accountable or toss a computer in jail.
For the "little guy" with a mortgage, car loan and a student loan, this debt is a crushing daily experience. Unlike Trump, he can't walk away from it. Unlike the banks, he is not "too big to fail". All this debt compels him to work - maybe two or three jobs. It is debt that locks him into the existing economic structure. By debt, he is "assimilated". As a citizen, society owes him nothing.
Especially during the 1930's, there were a lot of ideas about how we could solve our social issues by tinkering with the way money was created in the system. "Social Credit" was tried in Alberta but failed partly because the Province didn't have the legal right to print money (and lots of other reasons). In the American colonies, and during their civil war, various attempts were made to create a currency backed by the "goodwill" of the society (government) in general.
The perverse role that debt-based money plays in our economy is outlined from a neo-Marxist point of view in "Killing the Host".
Behind these schemes is the idea that value, like they mythical fiat currency, is created "out of thin air" by human effort. Is it possible to create money that reflects this value? It's amusing to note that many people think that this is the way things work now.
I like the idea of money being created as a byproduct of creating value. For example, a bank could create the money a farmer needs to buy seeds and pay expenses. This would look a lot like the way a loan is currently made, except it's backed by the production of value, not the "collateral" of the farm and buildings. If the farmer fails to create a crop or can't sell it for the planned amount, the loan is only partially repaid or simply written off. The bank loses nothing by not being able to collect the loan since it created the money out of thin air in the first place. If things go as planned, the money created by the loan "stands for" (part of) the value of the crop.
This concept could be applied to any situation where the value is being created, such as construction, infrastructure, and even retail. It could not be used in many situations where the value is not being created, such as real estate which only moves value from one pocket to another.
In theory, the government could simply create the money needed for infrastructure projects - even public health or education. This would eliminate the need for a lot of taxation and public debt.
There is a connection between this idea and the concept that there is an intrinsic, minimum value of human labor. In other words, there should be a living minimum wage. If a business cannot recover the cost of its labor inputs by selling its goods or services, it should not be in business.
Is there value created by simply having a pulse? There must be, after all, a consumer side to the value equation. We need not assume that every consumer creates as much value as he consumes. This is certainly very far from the case in the current system, where the top 10% consumes the lion's share of the value created by the sweat of the other 90%. There is no obvious reason why the government could not create money to cover the as healthcare and shelter, plus an allowance for incidentals. The logic for this "hand out" is that all citizens are entitled to a share of the value created by society at large, simply by virtue of being citizens. It is the same logic that permits the lowliest panhandler to use the roads, the water, public parks and the clean air.
There would be nothing stopping someone from lending money for a mortgage, except that the money could not be created in the process as it is now. (since no value is created). The lender would need to actually have the money to lend. It is obviously necessary that the old and new system must be compatible and able to run side-by-side - possibly by creating two types of loans or two types of banks. This would probably involve sweeping changes to banking regulations since it is banks that create money in the current system. Banks are incentivized to create as much money as possible since their fees and interest go to their bottom line. This incentive is perverse in the sense that the bank's assets are not at risk.
Definition of what constitutes "creation of value" would be tricky. We see a germ of the alternative banking system in what's called "microloans" in third world economies, where the loan is based on a business plan rather than collateral. Such banks are the darling of the politicians who love "small business". Anyone who has owned a small business knows that banks are not in the business of lending money to people with great ideas (don't believe the ads). They want collateral. "Value-based loans" would look a lot like the loans we see banks giving out in the TV ads but not in reality.
The other type of bank would need to operate the way most people think banks do now: lending money placed on deposit, not printing it.
The idea is that money would ultimately be based on value rather than debt. The individual's connection to society would depend on his ability to create value plus the benefits of being a citizen, not his ability to repay debt.
Intuitively, it would seem that the transition to this system would result in a dramatic reduction in consumer loans - mortgages and car loans, for example. Such loans would only be available on the basis of the "fire sale" collateral value of the asset backing the loan. Ability to repay would be a minor consideration. "Sub-prime" loans would make no sense since the lender's actual assets are being put at risk. We would see much higher down payments on houses and an end to "zero down" car loans. That would deflate the real estate bubble and bring some common sense into the auto industry. Sadly, we would see a lot less money in the system - precisely the money that tends to find its way into the pockets of the very, very rich.
Is it workable? Would it reduce corruption? Would it be more fair and just? My guess is that the idea is not original. Some research is called for. Perhaps it's best to start with a few impertinent questions:
Especially with the appearance of cryptocurrency, we find people believing the myth of "fiat currency" - the idea that the government can print pieces of paper and convince us all that they are worth something. That's not how money is created in a capitalist system. Money is based on and backed by debt. If you get a loan of $100,000 from a bank, the bank owns a piece of you in exchange for the $100,000 that they create out of thin air. Every dollar is brought into existence by the creation of an equal but opposite debt.
The idea is that the bank will only "lend" you this money if you can convince them that you are able to repay the loan. Ideally, you will put up collateral that the bank will seize if you fail to meet your payments. So the entire system, especially the "money" is based on (a) credible assessment that the borrower can repay (b) value of the collateral. All this came unraveled in 2008, causing trillions of dollars to vanish from the system due to (a) banks creating money and fees for themselves when there was no realistic hope of the loan being repaid and (b) crash of collateral values (houses).
So, if all money is created by debt, where does the money come from to repay the debt? In the big picture, this comes from value added. The borrower somehow creates more value than what he borrowed. For this to happen, the entire economy must "grow" - causing the total value of its assets to constantly increase, or the value of the money must decrease (inflation). In effect, this means that the borrower is repaying the loan with dollars that are worth less than what he borrowed.
It's distressingly easy to game this system. For one thing, the traditional analysis ignores the role of crime, especially international crime and "money laundering". It's common for major players, especially in real estate, to use bankruptcy as part of their business plan. They never intend to repay the loans. Banks create money out of nothing and hand it to the Trumps of the world. Magically, the money slips away, another Trump business declares bankruptcy and Trump buys himself another jet. The bank actually looses only the interest on the loan. The debt vanishes and Trump keeps the jet.
It's also possible for the Trumps of the world to accept "loans" from international criminals - loans that will never be directly repaid, especially when the enterprise in question declares bankruptcy after all that now "clean" money slips away.
Another problem is that money itself becomes a commodity, resulting in what's called "finance capitalism". Money no longer stands for value in the "real economy" or even the credit worthiness of the society. It "floats free" - just numbers in computers. As we have seen, these numbers have a distressing tendency to crash for mysterious reasons. They actually behave like the mythical "fiat currency" because they are actually based on smoke and mirrors. Actually, what happens is that "trust" between the lender and borrower (who may have actually met face to face) is gradually replaced by a mathematical construct of "risk" evaluated by an opaque computer algorithm. Of course, you can't hold an algorithm accountable or toss a computer in jail.
For the "little guy" with a mortgage, car loan and a student loan, this debt is a crushing daily experience. Unlike Trump, he can't walk away from it. Unlike the banks, he is not "too big to fail". All this debt compels him to work - maybe two or three jobs. It is debt that locks him into the existing economic structure. By debt, he is "assimilated". As a citizen, society owes him nothing.
Especially during the 1930's, there were a lot of ideas about how we could solve our social issues by tinkering with the way money was created in the system. "Social Credit" was tried in Alberta but failed partly because the Province didn't have the legal right to print money (and lots of other reasons). In the American colonies, and during their civil war, various attempts were made to create a currency backed by the "goodwill" of the society (government) in general.
The perverse role that debt-based money plays in our economy is outlined from a neo-Marxist point of view in "Killing the Host".
Behind these schemes is the idea that value, like they mythical fiat currency, is created "out of thin air" by human effort. Is it possible to create money that reflects this value? It's amusing to note that many people think that this is the way things work now.
I like the idea of money being created as a byproduct of creating value. For example, a bank could create the money a farmer needs to buy seeds and pay expenses. This would look a lot like the way a loan is currently made, except it's backed by the production of value, not the "collateral" of the farm and buildings. If the farmer fails to create a crop or can't sell it for the planned amount, the loan is only partially repaid or simply written off. The bank loses nothing by not being able to collect the loan since it created the money out of thin air in the first place. If things go as planned, the money created by the loan "stands for" (part of) the value of the crop.
This concept could be applied to any situation where the value is being created, such as construction, infrastructure, and even retail. It could not be used in many situations where the value is not being created, such as real estate which only moves value from one pocket to another.
In theory, the government could simply create the money needed for infrastructure projects - even public health or education. This would eliminate the need for a lot of taxation and public debt.
There is a connection between this idea and the concept that there is an intrinsic, minimum value of human labor. In other words, there should be a living minimum wage. If a business cannot recover the cost of its labor inputs by selling its goods or services, it should not be in business.
Is there value created by simply having a pulse? There must be, after all, a consumer side to the value equation. We need not assume that every consumer creates as much value as he consumes. This is certainly very far from the case in the current system, where the top 10% consumes the lion's share of the value created by the sweat of the other 90%. There is no obvious reason why the government could not create money to cover the as healthcare and shelter, plus an allowance for incidentals. The logic for this "hand out" is that all citizens are entitled to a share of the value created by society at large, simply by virtue of being citizens. It is the same logic that permits the lowliest panhandler to use the roads, the water, public parks and the clean air.
There would be nothing stopping someone from lending money for a mortgage, except that the money could not be created in the process as it is now. (since no value is created). The lender would need to actually have the money to lend. It is obviously necessary that the old and new system must be compatible and able to run side-by-side - possibly by creating two types of loans or two types of banks. This would probably involve sweeping changes to banking regulations since it is banks that create money in the current system. Banks are incentivized to create as much money as possible since their fees and interest go to their bottom line. This incentive is perverse in the sense that the bank's assets are not at risk.
Definition of what constitutes "creation of value" would be tricky. We see a germ of the alternative banking system in what's called "microloans" in third world economies, where the loan is based on a business plan rather than collateral. Such banks are the darling of the politicians who love "small business". Anyone who has owned a small business knows that banks are not in the business of lending money to people with great ideas (don't believe the ads). They want collateral. "Value-based loans" would look a lot like the loans we see banks giving out in the TV ads but not in reality.
The other type of bank would need to operate the way most people think banks do now: lending money placed on deposit, not printing it.
The idea is that money would ultimately be based on value rather than debt. The individual's connection to society would depend on his ability to create value plus the benefits of being a citizen, not his ability to repay debt.
Intuitively, it would seem that the transition to this system would result in a dramatic reduction in consumer loans - mortgages and car loans, for example. Such loans would only be available on the basis of the "fire sale" collateral value of the asset backing the loan. Ability to repay would be a minor consideration. "Sub-prime" loans would make no sense since the lender's actual assets are being put at risk. We would see much higher down payments on houses and an end to "zero down" car loans. That would deflate the real estate bubble and bring some common sense into the auto industry. Sadly, we would see a lot less money in the system - precisely the money that tends to find its way into the pockets of the very, very rich.
Is it workable? Would it reduce corruption? Would it be more fair and just? My guess is that the idea is not original. Some research is called for. Perhaps it's best to start with a few impertinent questions:
- Is there some reason why the government could not simply create the money needed to fund infrastructure and basic medical care? At present, governments tend to avoid funding their operation by taxes (especially corporate taxes or royalties), so they borrow more and more. An increasing share of revenue goes to service debt - to the banks.
- What would be the case for and against the minimum wage and a basic income?
- How would "value added" banking fit into the existing system?
- How could the central bank increase its balance sheet requirements in a way to phase out the ability of banks to create money?
- Does any of this appear in the platform of any political party?
This post returns to my long-standing concern with money versus value. I have re-posted an entry from an entire blog on this subject here. That blog was concerned with an "impertinent question": What, if any, is the relationship between money and value? After giving that question almost a two-year rest, perhaps it's time to take another look. Coming back in from the "assimilation" and corruption angle leads me to ask if there are toxic effects in society when the two ideas are confused. Coming at the question from the "Christian Skeptic" angle leads me to ask if such confusion can lead to bad personal decisions or what a Zen master would call "unhappiness".
The idea presented here: that creation of money could be tied to creation of value is new to me and, I confess, much in need of clarification.
Backing up a bit, I recall that "impertinent questions", like "imagination pumps" are an important way to shake out unexpected insight by challenging everyday ways of seeing the world.
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