Which Monetary System? A conversation.

I ruffled a few feathers at www.chrismartenson.com (more info here) – so much so that the eponymous Chris eventually asked me to cease and desist! You can view the ‘naughty thread‘ here!

He accused me of not addressing his points. I don’t accept that, but I do intend to respond in detail to his last substantive post in due course. Since I respect virtual property rights, I shall post that response here!

A positive outcome is an ongoing discussion with Damon Vrabel, a climber, alpinist, trekker and monetary reformer (among other things!) from Seattle. You can find him at The Council on Spiritual, Psychological and Economic Renewal

He has agreed to allowing our further email exchange to be posted here. For clarity I will put Damon’s words in blue.

10/08/2010

hi, love your photography! as a climber, alpinist, trekker, I got
into amateur outdoor photography a while back. loved it. but like
most hobbies, I totally jumped in and got addicted and then it died
off. anyway, my stuff didn’t come close to yours. 🙂

so I’m very interested in picking your brain more about money. I’m
taking nuggets I learn from technicians as I try to deliver the
strategic message on videos/articles/etc…

– you say money has to be an asset/liability at the same time. but
why do you say my idea of sovereign money wouldn’t be? my only change
would be to issue the money as an asset to the people rather than an
asset to banks. it’s still a liability of the government and used to
pay taxes.

– you had me leaning toward a nationalized Fed-type bank to issue low-
cost debt money rather than Treasury issuing asset money because of
this issue, but another economist I’m working with said that would
only work AFTER we transition from our current blackhole. he said the
only way to get the math to work and save our current system is to
issue asset money into the system to start drawing down debt. and
this is true…either we draw down debt in a way that serves the
people or it’s going to happen in a way that serves the banks (Dr
Hudson says this too).

– do you agree that the current system issues money as an asset to
banks and debt to government, then the banks issue money as an asset
to themselves and debt to people? seems to me that’s the high-level
structural framework of our system. 1) that just doesn’t fit any
sense of a rational world in my mind, and 2) banks creating their own
assets is a disaster waiting to happen…of course the disaster may be
upon us now.


10/08/2010

Hi there Damon

Glad you liked the photos. Strange – this is the second discussion site I’ve been kicked off in a week, but both episodes ended with praise for my photos! Guess I should learn something from that!

Sadly, my adventuring has never reached your heights, but here in Scotland we don’t have to go far for stunning and accessible scenery.

Do you have any objection to my posting this email and my response on my website – just in case any others wish to defy the Martenson ukase?

‘my only change
would be to issue the money as an asset to the people rather than an
asset to banks.  it’s still a liability of the government and used to
pay taxes.’

I did address this idea in the discussion, and I said (with slight editing):

What I think you are suggesting is a system in which the government transfers money directly to individuals in exchange for their contribution to collective endeavour. There would be no private banking intermediaries. But this centralised banking system would find it more difficult to acquire all of the information it needed to respond accurately and flexibly to money needs in different regions, sectors and business units. It would undoubtedly be at risk of being captured by particular political interests. The forces of competition would be absent. And the costs of monitoring, administering and bearing the risk of failing to re-acquire money would remain – they would become internalised to the govt (and us all) instead of being allocated to borrowers in the form of interest and to bank shareholders in the form of profit write-downs for bad loans.

I think that on first principles it is not possible to say whether a centralised or decentralised money system is preferable. I would suggest that experience (eg of the Soviet bloc) suggests the centralised system would have considerable problems.

‘he said the
only way to get the math to work and save our current system is to
issue asset money into the system to start drawing down debt.’

I’m sure there is a lot of debt held by people and institutions that will never be able to repay it – no question. How you deal with it depends on the type of debt it is. It is big error, in my view, to lump all debt together. But even the Fed does this in their stats. I don’t know why – I suspect some idiotic political edict.

There are probably three important debt categories.

1. Money-creating bank credit. Ultimately, we are all liable through our use of money when this is done wrong. The banks will have to write down a lot of this – but there may be a limit to this if they are not to be bankrupted (see below). The govt may have to accept some of this debt and pass it on as taxes.

2. Bilateral debt between non-government parties. This debt doesn’t create money. Basically this is for these parties to sort out themselves. Some will be bankrupted, with wider effects. The banks that maintained the payment system were helped to overcome losses from bilateral asset-backed securities (and derivatives thereof), because these ‘wider effects’ were rightly or wrongly deemed unacceptable.

3. Government bond issues. This debt actually removes or ‘destroys’ money. This is a form of bilateral debt between the govt and citizens and institutions – mainly domestic ones for the UK and US. It’s obviously important to all citizens because the interest and repayment of these bonds comes in the form of tax revenue from our economic activity. I think there is a big issue here about why bonds are issued for the further enrichment of the wealthy, when these wealthy should probably be paying more tax.

I felt before you were a bit confused about the role of bonds in the system. I can send you a bit of my PhD thesis that covers this, if you wish. (It’s not particularly technical – just uses balance sheets.)

As for issuing more ‘asset money’ – I guess what you’re getting at is the idea that the government could issue the equivalent of private bank money (but on the govt’s books, not the banks’) without the issue of corresponding base money. Essentially, I think this would more or less be electronic cash. Actual cash is issued via banks but they can’t earn interest on it and have to get it from the Fed at 1:1 with base money – so I can’t see how this is much of an advantage to them. The big question would be whether banks, if and when they received the new money, would be allowed to use it as reserves for creating further loans. If not, they would try to avoid accepting it when they could get standard money. In particular, they would surely deem it as unacceptable in the repayment of loans. Inevitably this money would be less acceptable and less valuable than the standard sort. I guess the govt could mandate that it must be accepted as loan repayment – but this is effectively equivalent to mandating loan write-downs.

If private banks can use the new money as reserves, then I don’t see how the new money is effectively any different from the old.

You’ve also got the problem that issuing new money to get rid of a loan problem requires the new money to go to the right borrowers. If not, you just increase the price level. I really don’t know how you’d go about it!

‘do you agree that the current system issues money as an asset to
banks and debt to government, then the banks issue money as an asset
to themselves and debt to people?’

More or less. Although technically bank money is a liability to the bank backed by a loan asset.

‘banks creating their own
assets is a disaster waiting to happen…of course the disaster may be
upon us now.’

Given the current state of things it’s difficult to argue with this, and generally I haven’t. But I think the key word in that statement is ‘bank’. What exactly is a bank? What is its purpose? How should it be run? Who should run it? If we could get that right, I think we would see a different picture.

Hope that aids clarity!

All the best.

Diarmid

12/08/2010

if we discuss it publicly my goal is to focus on the systemic issues
that it seems to me aren’t even allowed to be addressed in econ since
neoclassical economics is a wholly-owned subsidiary of the banking
establishment:

1) banking system:  banks are not intermediaries (what depositor is
involved in the decision to loan his money, not to mention leverage it
50x, like he would be if it were an intermediated relationship?).
they are pyramidal power structures thanks to fractionalizing.  until
economists start modeling the pyramidal nature rather than just the
intermediary dynamics, the world’s population is in real trouble.
banking is not simply an issue of accounting, but rather it
centralizes control over assets, and once the guys at the top start
removing liquidity, i.e. deflation, the lower population loses
everything.  I can’t imagine anything with more destructive potential
than that, so if we’re going to allow something so powerful to exist,
it should be in the public’s hands somehow…banking should be an
asset to the commonwealth.

2) bond market:  not just an issue of accounting or the government
adding/removing money.  if that was all it was, the govt could simply
do exactly that…print/add/remove dollars rather than print/add/
remove debt instruments that funnel interest to private capital
holders behind the Fed which then adds/removes FRNs (not dollars).  so
assuming away the differences between those 2 systems basically
ignores entirely the issue of pyramid, oligarchy, systemic usury, and
the ability of concentrated financial powers to convert governments
into collection agents for them.   (checkout my latest short article
describing this…http://csper.wordpress.com/2010/08/12/monopoly-money-and-the-international-banking-cartel/)

fyi I’m going to be out of touch in the mountains for a week.

13/08/2010

Hi Damon

Hope you had a great trip – any photos?

if we discuss it publicly my goal is to focus on the systemic issues
that it seems to me aren’t even allowed to be addressed in econ since
neoclassical economics is a wholly-owned subsidiary of the banking
establishment:

Hold on there! Econ isn’t just neoclassical economics. And they do get addressed – admittedly not yet where it matters. But have you visited George Soros’s INET site at http://ineteconomics.org/? There are some flutterings there… See the paper by my former PhD supervisor, Professor Sheila Dow, for example – http://ineteconomics.org/sites/inet.civicactions.net/files/INET%20C%40K%20Paper%20Session%203%20-%20Dow.pdf

1) banking system:  banks are not intermediaries (what depositor is
involved in the decision to loan his money, not to mention leverage it
50x, like he would be if it were an intermediated relationship?).

I’m not sure that trust fund investors generally have much more control over what is done with their funds, do they? And banks are different in that the money deposited is itself created by lending, and in any case of course the deposits are insured in a way that trust fund investments are not. But if that is an issue (and I believe it is) why couldn’t mandated governance changes give depositors a say in how their bank is run?

they are pyramidal power structures thanks to fractionalizing.  until
economists start modeling the pyramidal nature rather than just the
intermediary dynamics, the world’s population is in real trouble.
banking is not simply an issue of accounting, but rather it
centralizes control over assets,

Well, indeed – but you could say that government centralises control over people. If government is necessary, then this means we have to make it democratic. If banking is necessary (and I believe it is, or certainly inevitable!) then we have to make it democratic too.

and once the guys at the top start
removing liquidity, i.e. deflation, the lower population loses
everything.  I can’t imagine anything with more destructive potential
than that, so if we’re going to allow something so powerful to exist,
it should be in the public’s hands somehow…banking should be an
asset to the commonwealth.

Of course – but that doesn’t mean that money itself can be an asset without also being a liability!

2) bond market:  not just an issue of accounting or the government
adding/removing money.  if that was all it was, the govt could simply
do exactly that…print/add/remove dollars rather than print/add/
remove debt instruments that funnel interest to private capital
holders behind the Fed which then adds/removes FRNs (not dollars).

There was a confusion before because when you referred to FRNs. I though you meant ‘Floating Rate Notes’, but I presume you mean ‘Federal Reserve Notes’ (aka Greenbacks.) Are we on the same page this time? I think there is still confusion here about the different roles of base money and bonds in the monetary system. I’ve posted the relevant bit from my thesis on the web-site at http://www.futureeconomics.org/2010/08/the-role-of-a-central-bank

And to think of a ‘dollar’ as something that has intrinsic value, is a bit like thinking of a ‘gallon’ as something that has intrinsic volume! A ‘silver dollar’ has intrinsic value, as a ‘gallon of petrol’ has intrinsic volume! A Federal Reserve Note only ‘represents’ value if ultimately it can be used to extinguish a tax liability that is due to the US govt. Unless it is a commodity money (or a 100% commodity-backed money) there is no other way to give a govt ‘dollar’ value.

so
assuming away the differences between those 2 systems basically
ignores entirely the issue of pyramid, oligarchy, systemic usury, and
the ability of concentrated financial powers to convert governments
into collection agents for them.   (checkout my latest short article
describing this…http://csper.wordpress.com/2010/08/12/monopoly-money-and-the-international-banking-cartel/)

There is, I believe, a major tendency not to enforce appropriate tax liabilities on the wealthy but instead to push the liabilities into the future by buying off the wealthy with bond interest. This is because the wealthy are allowed to control the system at every level. I say ‘allow’ because I think we could collectively do something about it, if we spent more time thinking for ourselves.

As for your article about the primary dealers – I would make two observations. Firstly, bonds are not the base of the system – Federal base money is. Bonds can only be purchased by first obtaining this base money. Secondly, it may well be true that base money is priced too cheaply for banks, and that the return on bonds for these dealers is too high. To some extent this may be because of the power of the finance sector, and to some extent it may be because of decisions made in the (supposed) interests of the real economy. Solutions: reduce the power of the finance sector to seek its own benefit, and ensure that any surplus profit of the finance sector returns to the community.

Interestingly, I have recently found an academic article claiming to show mathematically that the circulation of money ensures that ever-increasing growth is required for firms to survive. In other words a perfect proof of the Martenson exponential growth thesis! You can access it at http://mesharpe.metapress.com/media/92pnwgmxvren491hfj6u/contributions/m/0/2/5/m025558361146707.pdf

And do you know what? It’s wrong. It makes a fundamental error in one of its assumptions that is entirely responsible for driving its conclusions. I made a slight adjustment to the model to make a more realistic assumption…and zero growth turns out to be perfectly feasible.

Best wishes

Diarmid