I'm sorry, that's wrong. If I simply exchanged $1 with 3 people, but the money supply did not increase, there would still be $1 in circulation. At any one time, either of those people would have $1 of wealth - they'd simply be exchanging it but not increasing their savings, i.e. their asset value.

If the supply of goods and services did increase but the amount of money in circulation remained the same, the value of goods and services would decrease. If money was issued with interest repayments, given the same amount of goods and services delivered the value of money would decrease accordingly with the same amount of money in circulation. I think this all comes down to reserve requirements - both your version and mine can still create money - and yet a book on the New York Times bestseller list, where I initially remembered the information from, appears to disagree with the version you are stating.

In any case - I've quoted two reliable information sources. I quoted this information because I'd seen it more than once from more than one information source. Robert T. Kiyosaki has been top of the New York Times best-seller lists for many, many months. I don't think, despite the standard disclaimer at the beginning of the novel, that both he, a debt-free money website, and a bank manager would quote me wrong.

However, I didn't create the system myself, and therefore could still be wrong. If you could quote a book, or a reliable site quoting the same information, I'd by all means believe you. I'm not one to spread incorrect information or incorrectly interpreted fact. I'm perfectly open to any corrections in information sources so I too understand the situation better.

Mark

If you assume that money is meant to be a commodity that you hold on to, then you guys are right to a point. Inflation really sucks.

However, if you assume that people will spend the money the instant it gets into their hands, then the money is no different than air is to a syringe. It is merely a means of moving everything around, and not a way of accumulating wealth. (Did you really think those things were anything more than little green pieces of paper?)

The problem with deflation is that you simply don't have enough money moving around relative to the amount of goods. (We really don't want to get to a world where we have to work in 1/1000's of a penny.) Inflation is usually better, but some people do get crazy and hold large sums in the bank, and they get burned. So, the job of the central bank is to try to keep as many people from getting burned while making sure that there is enough pressure in the system to keep things moving.

The multiplication of money does cause inflation, but it does not require people to manufacture more goods. Worst case, you just let the money devalue. In our current case, the Japanese and the Chinese are buying up our spare dollars in the hopes that by propping up our economy, they can keep theirs growing. (I have no idea if they are fools or geniuses since they seem to be locking their resources into a box they can never really get them back out of again. On the other hand, this trend keeps our capitalist classes building factories over there, so it might be a good move on their part.)

-Viper

Nero,

When it comes to the bank, I believe from the previous website I quoted this is how it works:-

Every year, the government has a spending budget. Every year, the amount the government spends is greater than income required via taxation.

Therefore, every year, it has an outstanding amount of debt to repay, loaned from the same commercial banks that both individual persons and company entities receive loans from.

Now if it can't repay the debt loaned from commercial banks for public spending it received from commercial banks via taxation revenue, it must receive that income from some other means. So how does it do it? By issuing government guilts for sale to the public.

Typically, in the UK from which I come from, a guilt must be purchased in units of £1,000, which the government then says it will repay at a certain percentage return in a certain number of years. The investment community regards this as a secure investment, as the guarantor, the government, is perceived by the market as a reliable entity.

So, those investors seeking income from their assets rather than capital growth typically choose guilts over equities, because they offer guaranteed returns rather than speculative, although potentially greater returns on their capital.

The government like this too, because they use this money to repay excessive debt on loans taken out via licensed commercial banks who create the money.

However, in a few years time, the government needs to pay back the investment, plus percentage, in order to satisfy the guarantee given to the investor. This is, if you think about it, effectively a loan plus interest given to the government by the investor. This is great for the investor, because without a license to no other entity could the investor legally give a loan and charge interest on it.

But since the government is still overspending it's budget per year, where does it get the money to repay the investors?

Simple. It issues more grants, generally advertised in mainstream papers to investors for 'secure' investments. Therefore each year, the number of grants the government has to sell in order to repay loans issued by commercial banks effectively increases.

In theory, this means the government can go into infinite debt by issuing infinite guilts in an infinite wealth society, where investors have infinite money supply with which to buy guilts.

This information can be found at http://www.prosperityuk.com/prosperity/articles/moneymake.html.

However, if anyone interprets it differently, feel free to post!

Mark

No - I'm sorry that's also wrong. If the amount of goods/services delivered was not increased, then inflation would also ensue.

However, it would also mean that someone, somewhere along the line would have difficulties repaying interest on their existing loan(s) - and therefore bankruptcies would ensue. You appear to be missing the fact, in this admittedly complicated matter, that the economy needs to grow compoundly due to compound interest.

Again, without turning sarcky, I still might be wrong so feel free to correct!

Mark

Also, China needs dollars in order to import oil, because dollars are the reserve currency for oil barrels. Isn't this why they're buying up dollars with their increasing oil consumption?

Mark

Mark,

You keep leaving the banker out of the equation. If the banker lends out $1000 to someone at %10 interest, and same person provides banker with $1100 in services, debt is gone. The interest begins and ends with the banker, it is not a perpetual black hole.

P.S. - An addendum to my previous post, one of the differences with the dollar that does allow the US to maintain deficit spending is that the rest of the world treats the dollar as a commodity. We sell the world dollars to trade with each other, not just with us. When a person in a third world country tries to keep a stash in their matress for a better future they prefer to keep it in dollars over their own currency since they believe the US is more likely to be here tomorrow than their own government. (Case in point Iraq.)

-Viper

At risk of looking like I make too many posts, Viper - if people 'spend' money, all that means in this banking system is that money gets transferred from one account to the other. No money is created.

Therefore a sale is just transferring money from one account to the other (no net increase in global wealth), and therefore goods and services judged at the same subjective value are required to increase in value to match increasing money supply.

Again, I think I'm correct in what I've said before, but please feel free to correct me if someone of authority on the subject has said otherwise.

Mark

Viper

Yes, that's true, if I pay off a loan immediately in one year I will not incur compound interest.

However if I don't, which is almost always the case with e.g. a mortgage on a house, or a planned repayment which the bank rarely likes to restrict to merely a year (think of that lost interest!), then I will incur compound interest.

My point is, it is still only growth in the economy that can pay back the interest. And thus if the economy grows so quickly that the banker gets his money back in one year - great, no compound interest.

But the likelyhood is, given such quick economic growth, that others would have also taken out a loan to pay for consumer goods or to take out on a new rental property/business venture.

Therefore loans rarely do not incur compound interest year to year, simply because increasing rates in economy growth require increasing amounts of loaned money.

Hope that makes sense.

Mark

Obviously we agree on some things. I am not saying that you are wrong outright. (BTW, the bank does multiply the money by 10 by borrowing it from the Fed Reserve.) I just think that you are attributing WAY too much significance to this issue. When you say something like Bankruptcies ensue, bankruptcies happen all the time, people who were rich get poor, people who were poor get poorer, and occasionally someone wins the Lotto.

Mostly what gets people producing more and more all of the time is the fact that they happen to want more and more all the time. There are a few people in the system who think enough is enough. Some of them go for the simple lifestyle and wonder why the rest of the world doesn't see things their way, and the others build up capital, buy some factories, and produce real wealth. Real wealth is land, a building, a car, gold, but most of all, the ability to tell somebody what you want them to do for you and to have them do it. Money = Work = Power (Control of people, events, etc.)

-Viper

Great, but that's not what I'm really disputing. I come from the school of thought that 'you consume, you're just a sucker to pointless propaganda that makes you think of image' - and that 'people even 50 years ago weren't exposed to such propaganda, retained the same or even greater level of happiness, and didn't have such desparate desire for consumption'. Therefore consumption is just a side effect of corporate propaganda (very cleverly researched and produced advertising/marketing). I.e. consumption is merely required because of the requirement on compound growth of the economy, and new technologies and products are simply a required side effect of that that would not have sprung up would it not have been the requirement of compound growth.

I don't think I've incorrect about the 10-20X loan issue, given the information sources I've quoted?

Mark

Viper,

The point is the monetary system requires increase in energy consumption unless production efficiency increases with required growth in consumption which is a requirement if loaned, created money is to be paid back successfully, plus interest.

This is how it is related to energy. I'm not placing strong or weak emphasis on energy, I'm simply saying it is a fact.

Mark

Mark,

Thing is, that you are saying it as if there is something wrong with the system.

Fact is that money lent is value added money. Just like a chair is a value added tree. Nobody is forced to borrow money from the bank. People borrow money because there is a real value to those individuals in getting less money today in exchange for more money in the future. Saying that an interest based banking system requires more energy is like saying that a chair based living room requires more energy than a floor based one. It is a relatively moot point. When a banker lends money to someone, 1. He is giving up having that money today. 2. He is incurring risk that you might not pay the money back. 3. He is incurring the financial cost of staying in touch with you for the duration of the loan, and keeping track of all of the people he is doing business with.

If banks stoped creating money through loans, people should be much less likely to start up businesses, whether an energy intensive business like manufacturing shoes, or an energy positive business like pulling oil out of the ground. If that were the case, we would be living in a world much like the 1900's or more to the point, the type of world that most people on this site seem to be fretting falling back in to.

Also, I don't think that people need to be convinced to spend billions of dollars on cars, pron, meds, or frapachinos. I think people do a decent job of convincing themselves as it is. People like luxury. People like strange tastes, new sights, more comfortable furniture. The fact that McD's and BK spend millions of dollars trying to get you to pick the one over the other does not change the fact that the majority of us eat fast food because it is 1. convenient 2. it tastes great (gota love that grease) and 3. it is less expensive than going to a nicer restaurant.

-Viper

So theoretically if the American people would coordinate a day to withdraw all of their money out of the bank with a cashiers check, and we could bring down the house? This would happen because the financial institutions could not lean any money out, hence limit growth, so it would cause a cascade of bankruptcies?

On another note it is good to communicate with a person with a background in physics. You probably hear this all the time about alternative energy; however, I will ask it again. Do you think that it is possible to find another energy source (ie fusion ref ITER http://www.iter.org/ )? Did we really come all this way to just die off? Maybe the final days will make us realize that our current system of consumption, aka consumerism, is killing us instead of making our lives better.

If we get sensible people like you in power that actually tell it how it is maybe we could last another 100 or so years so we can create fusion. Another thing I have been hearing about nano-technology this could make us so efficient we do not have to worry about energy. However, then we would reproduce out of control and run out of food. So it stands to reason that the source of the problem is an overextended population? If we can strike a balance between our population and production rates and consumption rates I think we could pull it off. We should implement population reduction measures now before mother nature does it for us. All women and men ages 20-30 should probably get their tubes cut…..Am I wrong? As far as China goes everyone should get their tubes cut I mean 1.3 billion people I think that is a bit much!

Sorry I am just trying to shed some good news on the topic because I read all that bad stuff on lifeaftertheoilcrash.net that makes we want to buy the book. Oddly enough that can be considered consumerism, which is not helping the situation any. Also I am using up a lot of energy as I surf the net this could be much needed energy in the future. I wonder how much energy Matt wastes shipping his books we may need that energy to plant food in the near future. Stop it Matt!

There is nothing wrong with a Ponzi scheme as long as there is a never ending supply of investors. All fiat currency systems are at heart Ponzi schemes that work just fine as long as there is growth. When growth stops, the pyramid scam collapses.

At one time money did have intrinsic value. You could trade it for gold and the paper represented that gold. Now it is a mere promise. Without growth that promise can't be kept. The implications of that are very nearly as important as the implications of Peak Oil.

It would bring down the house, but it would not happen because banks would have to stop lending money. It would happen because banks have already lent out the money. They don't have your money any more. They only have 10% of it. If everybody tried to withdraw savings at the same time, the banks run out of money after paying out about 10% of us.

The bank fails.