No hope for the planet unless we reform economy

I've asked it before, and I'm asking it again: can we ever hope to achieve a truly sustainable civilisation while our economy depends on endlessly recycling money as debt - and on constant growth, to repay the interest?

As this film (embedded) spells out, it's almost impossible for us to make a significant difference to environmental problems by installing solar panels or growing our own vegetables as long as we leave the debt-based money system unreformed.

While lending at interest was for centuries regarded as an evil, we take it so much for granted today that we actually pity people "unable" to burden themselves with vast debt. Consider much of the reporting of the ongoing decline in the housing market, and yesterday's government interference in it. Some media coverage seems to suggest that the government's initiative is designed to help individuals step onto the housing ladder. But are such individuals - anyway few in number - really so horribly deprived by being unable to tie themselves to an asset that, in all likelihood, will lose value?

The truth is that the government is interfering because if people stop borrowing money through mortgages the amount of money in circulation to pay off the vast amount of money we all owe already will shrink, with ghastly effects on the wider economy.

Other reports suggest that banks have become "unwilling" to lend money to buy houses. This, again, is nonsense: mortgages are a no-risk bet for banks. Under the terms of a typical home loan, householders pay interest at whatever rate the bank sets, and if they stop doing so, the bank takes the house.

The reality is that first-time buyers can easily get a mortgage if they want, so long as they put up a deposit (providing the bank with at least a tiny amount in the virtual safe to offset against their vast loan books).

Banks create loans out of thin air, by pressing a few keys on a computer. They do no work, and incur no risk. Borrowers, on the other hand, agree to work for years to repay the interest - effectively rendering themselves slaves to the bank for a certain time. (I've done it myself.) For these reasons, lending at interest - or usury - was for centuries reviled by every major religion and by great philosophers such as Plato and Aristotle. It's still forbidden by Islam and when Rowan Williams, the Archbishop of Canterbury, talked recently about Britain learning from sharia law, there's evidence to suggest that debt-free money was one of the things he had in mind.

What mystifies me is why the government doesn't simply create more debt-free money instead of borrowing from banks itself, with the result that taxpayers must meet the interest payments - more than all defence spending put together and not much less than the total amount spent on the NHS.

Gratifyingly, it turns out that a (still rather small) cross-bench group of MPs has put down a motion calling on the government to do exactly that - to issue "green credit for green growth". Among other things, they recommend "that the Treasury should use its powers to create non-interest bearing money so as to fund activities to combat climate change along the lines developed by the submission of the Forum for Stable Currencies."

By the way, I'm not going to pretend that the film is short. It's 47 minutes long. But perhaps that's how long it needs to be, to explain the many questions that are thrown up by this complex topic. I very strongly recommend that you download it and watch it when you can. I'd be delighted to hear what you think - but please do watch the film first!

Comments

[Stephen Hilder]

Mr. Flintoff,

It seems you are back to your old tricks again. OK, I'll take the bait.

Let's start with this passage:

"Other reports suggest that banks have become "unwilling" to lend money to buy houses. This, again, is nonsense... The reality is that first-time buyers can easily get a mortgage if they want, so long as they put up a deposit."

This is a strawman. Life is not black and white, yes and no. There are these magic things discovered some time back which are called "numbers". Numbers make all the difference between meaningless rhetoric and actual content. Obviously, "unwilling to lend" does not mean, literally, unwilling to lend. Obviously, people are still buying houses, despite the banks being "unwilling to lend". "Unwilling to lend" simply means, that relatively, it is harder to get a loan compared with previously. So, this simply means that the deposits that are being requested, "down payments" as they are sometimes called, are larger than they were previously. This prices some people out of the mortgage market, since they don't have the required cash, resulting in fewer loans being made overall. The net effect is that the banks are, in a way of speaking, "unwilling to lend".

Incidentally, a mortgage loan is not risk free for the bank. Or did you mean "risk free" also in a manner of speaking? The risk is that the borrower will default, and the collateral (the house) won't bring as high a price on the open market as was lent. This is largely the reason a down payment is required in the first place, to cover unpredictable short term volatility in the real estate market. If it really were risk free, why don't you just collect up your friends' and families' money and start your own bank?

Secondly, in terms of "What mystifies me is why the government doesn't simply create more debt-free money". Well, it's very simple. This would be a stupid thing to do. It all comes down to the question of why some people have a burr up their arse relating to the invention of "interest rates". Why not have a burr up the arse against the invention of "money", which allows those who control the mint to steal from those who do the work? Why not? Because it's stupid. Anyone who is really against interest, should just not borrow money (to his own disadvantage). Anyone who is against money, should just stick to barter (to his own massive disadvantage). People don't do this because it's stupid. The modern economy is a balanced mathematical dance, where money is traded from one party to another for a simple promise to repay (with interest). This forces the borrower to spend the borrowed funds wisely on whatever means of production he can most use to his advantage to add value to the world, be it a house, a tractor, a CNC milling machine, a math book, whatever. That added value he uses to repay the loan, the interest, and given wise decision making, he will build up a nest egg which he can then lend or give to his children as he chooses, continuing the cycle. All the rates and amounts in question, are floating to whatever the market, which is simply all the individuals which compose it, find most pleasing to their collective eye. So what's the problem, got no math?

[Stephen]

What mystifies me is why the government doesn't simply create more debt-free money instead of borrowing from banks itself

Ah, the so-called "printing money" procedure. As anyone with half a brain knows, this causes inflation, because you have more money but no increase in assets; so the price of assets increases. Thus there is no net gain to doing this. "There ain't no such thing as a free lunch". If anyone wants more money than they are earning, they need to borrow it, government or individual alike. And no amount of wishful thinking will make un-economic ideas, like most eco-lunacy, economic. Instead of trying to reform a financial system which has worked well for thousands of years, try questioning your assumptions behind the need for radical environmental change. There's nothing unsustainable about our current financial system, as the US, with the cleanest environment as well as the most free economy, shows.

[Stephen Hilder]

And you get out of here fake Stephen...

[Stephen]

Get out of here yourself. Do you think you are the only Stephen in the world?

[Stephen Hilder]

Them's fighting words. Pistols at dawn it is.

[Sabine K McNeill]

Mr Hilder,

I am a mathematician and used to diagnose software problems at CERN where the web was born. I know numbers and especially their exponential growth when it comes to compounding interest on interest. See http://tinyurl.com/5pfulu

Can you imagine that there is maybe a big difference between you and me borrowing money for a house, the government borrowing money to fight a war (that was the reason for the first national debt) and banks borrowing money from each other?

The real difference is that only governments are accountable. Banks are self-regulating. And they never lose, if you saw Dispatches on August 25th.

How come there is always enough money for wars but never enough for health, education and the environment?

How come money is scarce in the first place? Join a professional barter company and you will enjoy 'unlimited' money as 'mutual credit'. Join a local LETS group and you have the same experience.

If you think you know it all, think again or click and google at least!

Yours sincerely,
Sabine
Organiser, Forum for Stable Currencies
http://forumnews.wordpress.com

[Stephen]

Ha, banks never lose! Tell that to Northern Rock!

Economic flat-earther.

[Stephen Hilder]

Ms. McNeill,

I am not particularly impressed with your credentials. I find it ironic that you claim mathematical competence, but, not in any of your comments on this or related articles have you volunteered any actual math, or addressed any of the plain and simple questions that I and others have posed. Here is one:

So you know exponents? You must then understand that any lending free of arbitrage is inherently exponential in nature. I've demonstrated why, in terms a child could understand, with numbers, in a comment on one of the other articles you were participating in. Please tell me why you think this is somehow "bad". Do you think there should be no rate of return on loans at all? If so, please lend to me since I would like to buy a new car. You won't do it? Why not?

"Can you imagine that there is maybe a big difference between you and me borrowing money for a house, the government borrowing money to fight a war (that was the reason for the first national debt) and banks borrowing money from each other?"

OK, let's suppose that there is. In what way do you mean, and what are the implications? Suppose that one modeled all of these borrowers with a probability of default, possibly a function of the size and other terms of the loan. Is this insufficient for you to make your personal lending decisions? If not, what additional features would you like to see in the model? If you respond materially, there can be an actual discussion with content.

"The real difference is that only governments are accountable. Banks are self-regulating. And they never lose, if you saw Dispatches on August 25th."

Only governments are accountable? Really? In what way do you mean? What stops the mint of any nation from arbitrarily printing more money? To first order, I would have to say the answer is "nothing". But, then again there is no real reason to do this anyway, which is why it doesn't happen. What stops a bank from making arbitrary loans? They run out of liquidity and fail. Do you not think banks fail? From this perspective, it seems that banks are inherently limited by real considerations and the government, not so. What's your perspective?

"How come there is always enough money for wars but never enough for health, education and the environment?"

The reason is because, for whatever reason, people like war and are willing to pay for it. Fancy military hardware and big explosions are really cool. That's why movies are full of them, that people pay to watch. Also, there is the small matter of maintaining safe and secure borders, which keeps interest rates low! Isn't that good? How is this relevant anyway? Let me ask you a question, why is there so much money for potato chips and ice cream and never enough for health, education, and the environment? Let's ban interest, that will solve the problem and everyone will lose weight at the same time. The total irrelevancy of your comments is absolutely mind-boggling.

"How come money is scarce in the first place? Join a professional barter company and you will enjoy 'unlimited' money as 'mutual credit'. Join a local LETS group and you have the same experience."

Again, please, join for me and send me a car. You say you can borrow arbitrarily. I really don't know to what extent you believe what you write, but let's put it this way, I won't be holding by breath waiting for the car.

"If you think you know it all, think again or click and google at least!"

I humbly suggest that you distance yourself from this organization you've gotten caught up in. It doesn't matter how much personal investment you've made in it. In economics, there is this concept called "sunk cost".

[Paul Grignon]

As the creator of the embedded movie "Money as Debt" I feel I must weigh in on this column on three important points. The first is the columnist's misunderstanding that "mortgages are no-risk".

While it is true that banks simply create brand new promise-to-pay "chequebook money" when they create a "loan", that chequebook money is still a liability of the bank. As long as the bank takes in chequebook promises to pay from other banks equal to its own promises to pay deposited elsewhere, no existing money is needed to make loans. If the bank extends more credit than it takes in it has to pay the difference from its own resources. Thus the competition for deposits between banks can result in there being winners and losers.

When the LOAN is NOT REPAID banks lose because the bank is essentially the guarantor of the credit the borrower issued themselves when they signed for the "loan". If the borrower defaults on the "loan", then the bank has to write the loss off of its balance sheet.

In normal times, sale of the collateral will often cover or at least minimize these losses and a very low percentage of borrowers default.

In a collapsing real estate market, defaults become epidemic. The value of the collateral sinks below the book value of the "loan" and quite often does not cover all of this loss. As a result, the bank really does lose its own money. As irresponsible "promise to pay" creation creates these asset bubbles in the first place, I'm not crying for the banks.

But the depositors may lose and the entire economy can implode as a result, driving the gov't to step in and prop up the whole collapsing edifice with even more debt!

The second point is in regard to the comments to the effect that if government simply spent interest-free money into the economy it would cause inflation.

Did you watch the movie?

No one is suggesting that gov't just spend new money without a means of taxing it out of existence as well.

What disappears is government debt and interest charges on that debt. Without interest payments on gov't expenditures, taxes would be much much lower. Much of Canada's post-War infrastructure was paid for with such interest-free money until about 1976.

What results, if the money is spent by gov't would be that every new dollar, euro or pound could be first spent on infrastructure, by which I mean roads, bridges, public transport, communications etc, education and health care, debt-free and in the public interest. These are the true pillars of a nation's productivity.

After that it circulates in the economy doing what money does, and is eventually re-captured as taxes or service fees.

What we have now is banks freely creating huge amounts of brand-new debt-money for private borrowers that drives up prices, creates asset bubbles and allows stock market speculation which serve the needs of the foolish, the greedy and the parasitic at the expense of the careful, the thrifty and the productive.

As every bubble must eventually burst, as with any Ponzi scheme, those who took their winnings early come out ahead and everyone else loses.

If all new money were first SPENT into existence by government, money would have the debt & interest-free nature of being a RECEIPT for goods and services delivered in the public interest, instead of representing a money DEBT that must be repaid or else the wheels fall off the economic wagon.

Lastly there is the issue of interest... usury. Some commentators seem to think that if one borrows money and puts it to constructive use, that the interest can be paid from newly created value.

If only that were true!

But today, almost all new money is created as debt. New value in real goods and services only creates new money if it causes new borrowing. And as new borrowing adds new interest charges it doesn't solve the problem.

The only way that charging interest is sustainable is if every dollar charged as interest is made available to the borrowers to EARN (not borrow) again and again. This happens to a considerable extent because banks pay employees, shareholders, rents, buy equipment etc. thus recycling their interest earnings.

However this recycling is never 100% because bank profits get invested in the gambling economy of high finance, out of reach of most borrowers, and there are secondary lenders rolling over principal that was created as someone else's debt making that money unavailable to be earned to pay off the principal of the loan that created it. Thus, overall, we must have an exponentially expanding money supply to prevent mass default.

As an ever-expanding money supply causes inflation, the economy must keep pace with the mounting levels of total debt, which is ultimately impossible on a finite planet.

Thus my conclusion that the arithmetic design of our money system makes successful adaptation to our current environmental crises quite impossible.

And that is why I made Money as Debt.

I am nearing completion of the sequel that explains all this and more... again as easily grasped animated cartoons.

Watch for it at moneyasdebt.net

[Brien Comerford]

Vegetarianism is the panacea for saving the planet. The meat, pork, poultry and fishing industries cause massive global warming, pollution, deforestation and the decimation of marine and terrestrial ecosystems. The inordinate tons of grain and water used to raise and inhumanely slaughter animals for food actually deprives millions of people from having grains and water needed to stay alive. Human carnivores are literally destroying the planet.

[Stephen Hilder]

Mr. Grignon,

I am very happy to hear some coherent comments for a change. Let me also say that I did in fact watch the film and enjoyed watching it. I genuinely think that it is educational and entertaining, and that if it were without all the ominous undertones, it would be great for teaching purposes. However, I also think that it is a masterful piece of propaganda, extremely skillfully executed to present simple, well known fact in a way that produces a powerful emotional response. The intellectual concept I would compare to the dihydrogen monoxide parody at "http://www.dhmo.org", which is also, to a lesser extent, well done.

None of what you present in the film is hidden in any way by any institution of the western world. In fact, these underlying mechanisms behind our economy are a large part of our national discourse. Just pick up a newspaper and turn to the finance section. Obviously the film will shoch certain oblivious members of society. Still you should not take advantage of them and mislead them, it's not in the public interest. How about using your talent for good instead of evil? (In a manner of speaking.)

In terms of the points you raise in your comments and in the film, yes, I did pick up on your suggestion that money creation be directly a result of spending on public works. Fine, this at least theoretically might not be a bad idea. However,

1. Without market mechanisms, how do you even decide on the optimal cost of any public work? By setting an essentially arbitrary price on, say, a bridge, the government is essentially making a policy decision on relative prices in the marketplace, where it doesn't inherently have the interest or wisdom to do so correctly. If you suggest to use market mechanisms to determine the price, I don't think that works because simply in deciding on what and where to spend perturbs the market in a significant way. You certaintly can't have omniscient government agents running around everywhere trading everything else under the sun to compensate. Certainly the government does and should implement policy on national infrastructure, but why should these decisions be inherently tied to monetary policy? It's an orthogonal arena.

2. You suggestion is essentially what happens anyway, modulo the interest which you are unhappy about. Rather than tying the money supply directly to specific spending, by borrowing from the economy in general the effect of the borrowing does not influence the market. On the spend side, policy decisions are made. So what if interest is simply not a problem? I would be very curious if you would produce a toy model, with numbers, to illustrate the specific gripe you seem to have with the mere existence of interest bearing instruments. Why do you think that interest is a problem, but taxes are not? You ask the question as to where the money comes from to pay interest. What about taxes? What if there were taxes but no interest? Why don't you think that taxes would make such an economy unsustainable, since eventually there would "not be money lying around to pay them"?

Heck, tell me what you think is wrong with this:

Consider a closed economy (except for the import of one tractor, which we will get to in a bit), with two parties "A" and "B", a bushel of corn kernels owned by "A", and $205 dollars owned by "B". "A" can't grow corn, being missing a tractor. "B" can't grow corn, being missing the seeds. They're getting hungry. "B" puys a perpetuity from "A", $100 face value at 5%. "B" also buys a price guarantee on the future price of corn from "A", at $5 per bushel (or whatever corn is sold by), for $100. At this point, "B" has:

1. $5
2. a cap on corn futures

"A" now has:

1. $200
2. a bushel of corn

"A" imports a tractor for $200 (from externally), and now grows corn, yielding 4 bushels per year. He eats one bushel per year, he sells one to "B" every year for $5 (which "B" eats), saves 1 bushel for seed corn, and has 1 left over. Every year, he takes the $5 he received from "B" in exchange for the corn, and uses it to make his interest payment to "B", of $5. "B" lives in subsistence on a gruel diet, having traded away his means of production. On the other hand, his investment allows him to be entirely in leisure for the rest of his days. "A" learns to make vodka and throws wild parties and gets all the girls. On the other hand, he wakes up every day at 6am to plow. Everyone happy in his own way.

So please explain where in all of that, there is a problem of expanding economy, natural resources, whatever your beef is, and what does it have to do with the equitable 5% agreement "A" and "B" entered into? Hint: nothing. Interest is not the issue at all. Which is not to say that there aren't issues, just that interest, being a tool of finance and trade, is merely a tool that can be used for good or evil. So how about fighting evil instead of declaring war on a screwdriver?

[Stephen Hilder]

Incidentally, I think everyone agrees that there should be no mercy for foolish banks that make bad loans and manage to fail. "Trading Places" all the way for those bozos.

However, as I mention earlier, all those bleeding heart liberals keep getting all teary eyed when some 70 year old lady decides to eat a bullet because she lost her house. Why bail anyone out, other than out of sympathy?

Well, apparently people abuse other people's sympathies. There's evil for you.

[Freemon Sandlewould]

You are chicken little incarnate. Get over it. Just because YOUR religion is nature does not mean the rest of the world is going to hew to your demented beliefs.

[Paul Grignon]

Dear Mr. Hilder,

Thank you, I'm glad you enjoyed the movie.

Given the reviews and feedback my movie has received, I would say that the conceptual basis of our debt-money system is quite obscure, even to many people employed in banking. To those who have never given the source of money a single thought, which is most people, the movie has been likened to discovering the truth about sex or Santa Claus. Many people who are aware of how banks create money consider it both criminal and unsustainable. I am not alone in this opinion by any means. Just because the "science of economics" has normalized this economic pathology doesn't change the truth of the matter.

http://paulgrignon.netfirms.com/MoneyasDebt/reviews.htm

In your commentary on government simply spending money into existence to, say, build a bridge, (1.) you claim this would result in setting "arbitrary prices" because there would be no market mechanism. Why? The government would tender the contract and pick the best bid just as is done now, always mindful that every dollar it creates to build the bridge has to be recovered in taxes from the electorate in order prevent inflation.

If the cost of the bridge is 100M then 100M must be recovered in taxes, tolls or what have you. If the bridge expands the economy raising the demand for money, the gov't could collect less than it spent and no inflation would result. Once the 100M (or maybe just 80M) is collected in taxes, the bridge has been paid for with no inflation as a result. If insufficient taxes are collected, inflation results. Inflation in this case is just a flat tax on everyone's money. That flat tax was used to build the bridge. Either way the taxpayers paid for the bridge interest-free. Canada did this for over 30 years, building the St. Lawrence Seaway, veterans housing, and other infrastructure with little National Debt incurred. After 1976 the Canadian government began borrowing from the commercial banks and the National Debt skyrocketed.

See Crime of the Canadian Banking System at: http://paulgrignon.netfirms.com/CAP-PAC_Flash/Money_DVDmovies.html

Compare that with what happens now. The government borrows the money from a bank that simply creates it, and then levies taxes to pay both principal and interest, or more commonly just the interest.

The 100M created to pay for the bridge is recovered in taxes but almost all of it is used to pay interest leaving the the 100M of principal as a perpetual debt burden for future generations. If the bank spends all of the 100M taken in as interest, that 100M can be endlessly re-earned by taxpayers and paid in taxes to "service the debt". Thus the taxpayer debt becomes permanent as does the income stream to the bank which created the money from nothing, is not deprived of its use, and bears little risk in lending to government. If the bank does not spend 100% of the interest money so that taxpayers can earn it again, total debt must increase somewhere to provide this money. Often governments simply borrow money to pay the interest on previously borrowed money, and the National Debt grows inexorably.

Are you saying you prefer the latter scenario? Why?

As for my objection to interest, please bear in mind I have no moral objection. In fact it seems quite reasonable to me to expect interest on a loan if the lender is deprived of his own use of that money and risk of loss is involved. However, the model you asked me for is really quite simple.

Say we have the proverbial isolated island economy with no inputs from elsewhere, and 11 people on this island. One becomes the banker for the rest. The banker creates 100 money units and lends 10 to each person demanding 11 units back at the end of a year. So obviously, at the end of the year, no matter how much productivity in real stuff has resulted, 110 money units are needed to pay off the loans but only 100 money units exist. Someone is doomed to default. And, if it happens that every one of the ten people is exactly one unit short, they all lose the assets pledged as collateral to the banker. Is the banker not guilty of suckering them all in to "impossible contracts"? Is such a system moral, just or even functional? Obviously not. To be sustainable the banker has to collect interest in the form of goods and services only - not money .

So the solution is to pay the interest monthly. This way the banker buys the borrowers' real stuff with his monthly interest earnings, returning the money to circulation. Everyone must still be in debt to the banker for money to exist, but as long as the banker spends (not lends nor hoards) every penny of interest there is always enough money to pay both principal and interest on an ongoing basis. The system is always one payment behind, and the justice of it can be questioned, but it is sustainable. No one is forced to default just by the arithmetic.

However, with all this income, the banker has all he needs materially for daily living and might decide to stash some of these money units taken in as interest payments in order to deliberately create a shortage of them. Someone must now default as a result of the math. The banker, by simply hoarding rather than spending his interest earnings, can now pick off the weakest competitors in the economy, seize their collateral and make them his slaves.

Also the banker could choose to re-lend some of the interest earnings at interest or... one of the borrowers, being more materially successful than the others, ends up with more money units than he owes, and decides to become a moneylender himself and collect some of that interest. No matter who does this secondary lending, that money-unit that must be available to be earned to retire the first debt, is only available to be borrowed at interest. Now two interest charges are due on the same principal and the principal itself is only available as a loan. It cannot be used to erase both debts.

In the real world there is no guarantee of 100% recycling of interest. Banks take interest earnings and use them to make more profits. There are secondary lenders. Thus bank loan contracts are, in the aggregate, impossible. The only way to prevent massive default due to the induced structural shortage of money is to constantly expand the money supply, which governments obligingly do by creating ever-growing national debts that MUST NEVER BE PAID OFF.

Lastly you ask ... what is the difference between interest and taxes? Interest is money that doesn't exist because it was never created. In our debt money system, Principal is all the money in existence. Principal is not enough to pay Principal plus Interest unless interest is zero, or the interest is 100% recycled over time as described above. As this 100% recycling of interest does NOT happen, there's a structural problem.

Taxes are simply prices. I could pay the garbage-man $2 in price per bag directly or I can pay the government $2 in taxes to pay for garbage collection. Neither has any bearing on the amount of money in existence or whether debts can all be paid off.

[Stephen Hilder]

Mr. Grignon,

I am happy to hear from you. I couldn't agree with you more that many people are confused about many things. I think it is exactly for this reason that quantitative examples are critical. I think your desert island example is trivially wrong.

Responding to your points in order,

1. "arbitrary prices". I mean the prices would be arbitrary because it is the nature of government to do big things that individuals cannot do. I would consider it pretty safe to say that due to inherent monopoly/monoposony considerations, and numerous other real world realities, it would be absolutely ludicrous to claim that there is a free market for, just to pick random examples, stealth bomber contracts or London Bridges. Therefore, there is an inherent non-equilibrium component to those spending actions. Do you honestly claim that any "least bid", or "best bid" or whatever bidding system you have in mind results in market prices under such conditions? If not, then we have no significant disagreement. Maybe instead of "arbitrary prices", you would find "perturbed from market equilibrium prices" more to your liking.

2. In terms of you 100M bridge, I think you have too much handwaving, and some of it very very suspect. I also very specifically would like not to get caught up in some philosphical how many angels on the head of a pin style debate. Let's try this. I'll pick this one statement you made, "If insufficient taxes are collected, inflation results", and I would like to ask you. What historical numbers should I plot against what other historical number to show this? I say you made this up out of whole cloth. There are other examples, but let's just start with that one.

3. Most critically, your desert island example is simply and obviously incorrect, and contains no features that my corn growing example did not contain. In fact, you've conveniently neglected a very critical fact which causes you to draw the wrong conclusions. It's simple--- the banker spends money too. In my example, "B" was the banker. "B" loaned to "A", under terms creating a stream of interest payments totalling to INFINITY. Yet, with a fixed $5 money supply, there is no problem and no default. In your example, you again claim that simple arithmetic dooms someone to default. NO! Someone is simply forced to do something of value which the banker is willing to pay for. This causes cash flow from the banker back to the borrower, which can then be used to pay the interest.

Again, according to your claim, my corn grower example is for some reason wrong and unworkable from simple arithmetic. Yet, it is trivial that the $5 simply trades places indefinitely with no issue. You say that interest forces borrowers to default from simple arithmetic. Your argument for this is a flawed example where a banker creates and lends 100 MU (money units), and expects 110 MU in return in that year, during which he spends nothing. The example is flawed because the banker in the real world spends on food, beer, hookers, etc. You specifically said that interest cannot be repaid from newly created value. Obviously, my trivial example shows that that is simply not true.

From the remainder of your comments, you sound as if you have also come to this conclusion. Given that, you proceeded to handwave, sometimes very amusingly ("monthly" payments work but not "yearly"), "recycling" of interest, evetually asserting that there is somehow a net imbalance of lending and borrowing, resulting in bankers hoarding money and forcing borrowers to default. This is putting the cart before the horse.

Suppose that we have a closed economy, where one party decides to hoard money. He literally hides physical currency in his secret vault. He doesn't charge interest, he doesn't do any complicated banking. He simply spends less than he earns and puts the surplus under the mattress. Guess what, the economy eventually implodes. Does this have anything to do with interest payments? No. Your claims are conceptually no different, except you've obfuscated it with all this nonsense with "recycling interest", "impossible contracts", and hilariously "collecting interest payments only in goods and services". None of that is relevant. All this proves is that if one guy keeps making more than everybody else, he will eventually own everything. Duh. In the real world, this doesn't happen because of the miracle of natural market forces.

Let me paraphrase succinctly what you are saying:

1. Bankers, being greedy and stingy people, hoard money.
2. The government helps them do this.
3. This is not fair to productive members of society.

Now, assuming that these points are true, your solution of banning interest is like cutting off the foot because it has a hangnail. It also makes no sense even superficially.

Where exactly do you think the banks hoard the money? You're the one that complains that they keep fractional reserves. Do you think banks in general are net lenders or net borrowers? If net lenders, then don't they have nothing in their vaults but promissary notes? If net borrowers, then aren't the banks the ones paying the interest? Let's not get caught up tracing a cycle of earn/spend/borrow/lend around and around until we get confused. Let's just focus on the balance sheet of any individual entity. What does it look like, your immoral hoarder? Net lender or net borrower?

I'm sorry but it seems clear to me that you are attacking a complex problem with nothing but gut feel. The analyis doesn't add up.

You say that "In the real world there is no guarantee of 100% recycling of interest". Yes there is. It's called, "everyone doing their own accounting and not going bankrupt".

Finally, if you think interest and taxes are different, then I propose that banks only be allowed to collect interest payments in a separate currency called the "rollad". Borrowers acquire rollads by going to a government window ans asking for them. They have a face value of 0, but the sale is taxed at 1 dollar per rollad. Banks go to another government window, and exchange rollads for dollars, at a rate of 1:1. This way, all borrowers don't pay any interest, they only pay taxes to the government. Lenders still get a reasonable return for lending. The government tax is to cover the cost of "maintaining the economy". Yay, problem solved. Then one day, someone will decide, to heck with it, let's just take the dollars straight to the bank and skip all the waiting around in lines.

[Anne Belsey]

Hobson's Choice

The situation with the credit crunch is surprisingly simple; the major industrial countries have largely run out of borrowers.

The debt-based money system works like a pyramid selling scam, requiring an exponential growth in the number of new members. There are certainly still a few people able and willing to get themselves heavily in debt, such as the money system requires in order to function, but their number is no longer sufficient to provide the exponential gowth in the money supply that is needed to pay for all the interest on the massive debts currently within the econony AND to provide enough money to enable the day-to-day activities of the economy to function.

A reformed money supply based on debt-free money is not an alternative to the current debt-based system, because that suggests that the present system is itself still a viable alternative to a reformed debt-free system. It ain't. Money reform is our Hobson's Choice; the only question now is how long it will take for widespread recognition of this fact to bring the necessary reform into being.

Just as the world will eventually, inevitably run out of oil, so today our economy has run out borrowers.

Incidently, anyone who would like a free copy of Money As Debt can get one from myself, just email your postal address to info@moneyreformparty.org.uk and I shall happily pop one in the post for you.

Anne Belsey
(Leader of the Money Reform Party)

[Paul Grignon]

Mr. Hilder

Responding to your points in order,

1. "arbitrary prices". The defense spending you quote as examples of arbitrary prices would be of that nature no matter how financed. Now from the point of view of the banks looking forward to the interest payments, the more the gov't spends the better. Would you agree? After all, government borrowing is considered almost risk-free. But if government itself created the money it spent on these items there would be no interest to pay, so overall cost would be reduced by a huge amount. Or do you somehow disagree with that?

Eliminate government interest payments and taxes can be cut by the same proportion. Any argument there?

"100% of what is collected is absorbed solely by interest on the Federal Debt ... all individual income tax revenues are gone before one nickel is spent on the services taxpayers expect from government."
-Grace Commission report submitted to President Ronald Reagan - January 15, 1984

2. You ask for a historical example that excessive spending of interest-free money by government, unbalanced by money destruction through taxation would cause inflation? Amazing! That is the argument opponents of the idea usually trot out first. The historical example is the Continental, which was supposedly overspent by the American Revolutionary Government until it was completely worthless. However, the truth some historians claim is that the British counterfeited 8 times what the Americans printed so it was not the example of gross fiscal incompetence it is generally held to be.

Any government spending more debt-free money than it has taken in as taxes would cause inflation in the absence of increased demand for money. A bad record on inflation would likely be an election-losing issue as I cartooned in my movie. In an economy where government spends money into existence and taxes it out of existence, the big issue would always be who gets taxed to balance the money supply, how is taxing to be done and what are the relative merits of taxation vs. inflation as the way to support government spending?

3. (a) You call my desert island example "trivially mistaken" when I proved exactly what you proved with your corn example. If interest is 100% recycled it can be charged and paid ad infinitum. I did mention this in Money as Debt as the solution to the problem.

As for trivial examples, your corn story can hardly be beat. You started with a contract between A & B that locked in 100% recycling of the interest. Pretty easy to prove a point when you lock the conclusion you want in as the starting assumption. The scientific method to prove a theory is to design experiments that will disprove the theory if it is not true.

What you did NOT demonstrate is what happens if B only buys $2 worth of corn from A and wants the $3 in cash. This how whole countries get taken down. The banks create money that gets lent to the third world country. Most of that money is spent importing capital goods from the lending nations and will have to be re-earned by exporting the poor country's natural resources. The lenders lend to several competitors in the same market, creating overproduction and very cheap prices for consumers in the lending countries. As prices for their resources plummet, the gap widens between the borrowing country's foreign currency earnings and the payments due on the loans. This is analogous to B driving down the price of A's corn to $2 and demanding $3 cash that A does not have and has no way to earn. The World Bank and IMF then step in to offer another loan under terms of "structural adjustment" which usually means sale of the county's assets to private interests at bargain prices. Conquest has never been so easy.

http://www.globalissues.org/article/30/the-scale-of-the-debt-crisis

You also did not demonstrate what happens if A decides to lend his $5 to C and charge $1 interest at the end of the year so he will have a dollar left over after he pays B. There is only $5 in existence so C cannot possibly pay the extra dollar. That is an act of fraud if A knows there is only $5 in existence.

Your corn example does not take into account secondary lenders or profits diverted out of reach of borrowers.

Let's say D is a private moneylender. He doesn't get to create money like a bank does. He has accumulated $1 million that he does not need to spend and puts all of it to work for him as loans. When he lends $100,000 for a mortgage it is money that was originally created as the Principal of a loan from a bank to borrower E.

In order for E to be able to pay off the money-creation debt, every dollar of that debt must be available to be earned by E. But D has it. And D simply rolls it over into new loans as the payments come in, rolling his ball of money like a snowball. At 7.2% interest D's ball of money doubles every 10 years. The only way E can get a dollar to make payment on the original loan is to borrow it at interest from D or earn it from someone D lent it to. When paid to the bank, whatever portion of that dollar is Principal ceases to exist. But a full dollar plus interest is owed to D. And D does NOT recycle any of the interest he takes in. The only place that dollar plus interest can be created is by someone borrowing it from a bank that CREATES money. So now more has to be borrowed than last time just to keep up the payments.

I have sat at the computer of someone doing this, rolling his one $1 million towards being $100 million and there are many many like him. So where in this real world of ours is 100% recycling of interest guaranteed? Bank loan contracts don't contain any such contractual provisions like the one made between A and B in your example, and it would be beyond their ability to do so given the existence of secondary lenders, and the diversion of vast funds into the gambling economy of foreign exchange and the like. So in my opinion, your corn-contract assumption has no bearing on the real world.

3 (b) You claim a decrease in money in circulation resulting from hoarding will cause the economy to implode yet fail to say why. You do however, state definitively that it has nothing to do with charging interest. When money gets tight it gets harder to earn and fixed loan payments become more difficult to pay. Shrinking money supplies cause defaults en masse a la the Great Depression and today's credit crunch. The larger portion of loan payments are commonly interest and yet you say interest has nothing to do with it?

Yes I oversimplified the issue of interest being unavailable in Money as Debt 1. I judged the full explanation to be too complex for an introduction to the topic. But I have illustrated all of the above in animated diagrams in Money as Debt 2

As for this all being some gut idea of mine, here is my references page covering much of the years of reading that went into Money as Debt

http://paulgrignon.netfirms.com/MoneyasDebt/references.htm

I recommend reading The Nature of Money and Fractional Reserve Parasitism especially.

I also highly recommend Ellen Brown's book The Web of Debt http://www.webofdebt.com/ and the documentary historical movie The Moneymasters http://www.themoneymasters.com/

The rest of your arguments are against straw men you set up by twisting what I said so I see no need to answer them.

[Stephen Hilder]

Mr. Grignon,

Thanks again for responding to my comments.

1. I would say we are in agreement on the fact of "arbitrary prices". My point was, why tie monetary policy directly to these spending acts which are non-equilibrium. This complicates policy decisions unnecessarily. Also, I totally disagree that the government can just "create the money" it desires to spend. The whole point of creating the money through financing is that this ensures that whatever the government chooses to do, build bridge, develop a stealth bomber, etc, the cost is going to be backed up by citizens who are saying, I am willing to work to pay off that X amount of debt. Part of the function of banking is to match up lender with borrowers, that's the value add, right? Now you are unhappy because essentially you claim that there are some high pressure sales tactics being used here on consumers to get them to take on more debt than they should, and it's a racket anyway, sort of like having the doctor and the lawyer in the same office. Well, I think everyone agrees with that. What people like myself don't necessarily agree with is that the solution is the sorts of strange monetary reforms you propose. When fast food restaurants sell fattening junk food, do you think the solution is to sue them? Personally I don't. I think the thing to do is to educate the consumer. Once upon a time, I would guess that many or most heads of households could calculate from first principles their own mortgage payment. Today, I don't see that. I think that's bad, and is the root of the problem.

I also take issue with your presentation of the problem as being mathematically inherent in the system. It is not. Whether or not you know better, the film of yours I watched is misleading, and the chain of logic presented in the film is trivially disproven by simple numerical examples. Now if you say that the film is just a cartoon to first order, and your arguments are more complex than the cartoon, fine. That is why I keep asking you questions.

2. "Eliminate government interest payments and taxes can be cut by the same proportion. Any argument there?" Probably not. But this misses the point. Obviously, when the government borrows, it chooses to pay interest and pass that cost onto the citizen. So what? Just as when an individual takes out a business loan to start a business, he is not necessarily impoverishing himself, the goal is for the government to act the same way towards managing the economy. If there are problems in the realities of this, so be it, but why point the finger at interest payments? The point of interest payments is to make borrowing possible. Whether or not to borrow or defer a specific expenditure is an entirely separate issue. So your point is that government spends foolishly? Again, duh. This is known from ancient times. "Tragedy of the commons." Hardly news to anyone's ears. How about let's work on improving government?

3. The historical data I was asking for was NOT under the situation issuance of interest-free money by the government. Come on. The whole point is that when the government prints money arbitrarily, inflation results. Your own example shows this. We obviously agree on this. That's the whole reason that this is not done today. So why in the world are you holding up an example of your current proposal, which failed in the past, to say something about why it's a good idea now?

4. Yes, our examples demonstrate the same thing. Except, you took the banker's spending out of your example. Yes, I acknowledge that whereas you used to claim that any interest payments are arithmatically unsustainable, you now say that they are unsustainable when not "recycled". The point of my corn example, is specifically to disprove the claim YOU made, that interest payments cannot be made out of value added. You said this, so I had to disprove it. I'm sorry if you now think that it's obvious. Look at your own comments from previously. You said it. I'm sorry you did.

5. "What you did NOT demonstrate is what happens if B only buys $2 worth of corn from A and wants the $3 in cash." I didn't say it explicitly because it's obvious. In my corn example, the cost of "A"s production is $5 per year, and enough for himself to eat. The $5 comes from the fact that that's what he owes "B" in interest. What happens if "B" only decides he's going to buy $4 worth of corn? Guess what, "A" has no choice but to raise prices to cover his cost so that he can stay in business. That's what happens in the real world. What mechanism does "B" have to force "A"s hand, in my example? None. In the real world, yes, "B" can apply other pressures to "A" to perturb the functioning of the market. The whole point, which you keep obfuscating, is that the interest payments are not that mechanism. Your exploited third world country is exploited not because of interest payments, but because the market for their product was manipulated. Those are your words. I have no problem with them, except that the interest is not the culprit. That's the whole point of the trivial corn growing example. If you want to demonstrate a problem with it, you've got to bring in other real world considerations, that, again, are nothing to do with interest.

6. The problem is not the interest!

7. The problem is not the interest!

8. One more time, the problem is not the interest!

9. Good grief with your party "C". "B" can't lend the $5 to "C" because then he won't eat that year. Obviously, any time you assume that "B" doesn't spend anything, you will generate a cash flow problem. In the real world, "B" gets hungry and spends. The amount he spends by definition must cover the costs of "A" and "C", that's how market forces work. By definition.

10. Double dog good grief on your "D" and "E" examples. You add complexity for no reason. All you succeed to show is that someone who has money to invest will earn a return on that money. The point is that that is not an inherently bad thing. Again you say that the only way for "E" to get a dollar to make his interest payment is to borrow from "D" again. No, no, no, no, and no. He only needs to SELL something to "D".

11. 100% "recycling" of interest is guaranteed because nobody takes money and hides it under the mattress. If someone did, that would be bad. That is exactly why we went away fom a monetary standard based on any commodity. See, the point of our modern economy is that really there is no paper money, it's all numbers on books. You don't like this. I think it's a good thing. This guarantees that every dollar is always working, be it in circulation or invested, and it's the flow that is the relevant thing. The fact that there is no artifact means that the flow is guaranteed.

12. "You claim a decrease in money in circulation resulting from hoarding will cause the economy to implode yet fail to say why." Ay ya yi. This is YOUR claim, that the economy is arithmatically unsustainable! I repeated it only to show that the arithmatic issue would only arise from people stuffing bills under mattresses and not from interest payments. In the real world, the money stays in circulation. ALL of your examples have some nasty evil banker man somehow collections coins in a secret vault.

13. "When money gets tight it is harder to earn... cause defaults en masse". Yup. Not a good thing. So let's work on keeping that economy strong, by borrowing and investing wisely. If I am poor, and find it hard to buy enough food, I do not say that the price of food is the problem. Interest is the price of borrowing money. This price is determined by market forces, just like for any other commodity. If I can't buy food, it's because I need to earn more. If I borrow money to start a business, and fail and default on my loan, the problem is that I decided to sell Beanie Babies instead of something with lasting value. Should it be forbidden for everyone to borrow, because some borrowers are idiots? In this sense, "it has nothing to do with the interest".

14. "Yes I oversimplified the issue of interest being unavailable in Money as Debt 1." Fine.

15. "The rest of your arguments are against straw men you set up by twisting what I said so I see no need to answer them." Sorry. It's fun sometimes.

[Ian Greenwood]

Hi Paul
Congratulations on getting the mainstream blog exposure. I vote you get Nobel Prize in Peace Communications on this difficult issue and request that you are funded urgently for a simple explanation of capitalism in the second half of a new 30 minute DVD with simplified Money as Debt to start it off.

Reading the blog makes me surer than ever that we should be talking about a DIVERSION of new commercially created credit money - it would answer most of their points.
1. I agree with one of the bloggers that you have verged on the hysteria (depending on the viewpoint of those watching). When I watched it again I noticed more balance and I really respect your argument, but i was so wound up first time with the total unfairness and confirmation of what we all suspected, maybe anyone could be forgiven.

2. "Old tricks by Mr Flintoff"? well I do not know him but a nearby blogger one Stephen Hilder may be up to something with long and detailed rebuffs about something he probably knows a lot about. Or possibly not. Lets cut to the chase:

3. The genie is out of the bottle/lamp. Credit Money belongs to us and should give rise to a charge - however small and whether only on secured mortgage loans is the minimum to come down to.
a) Whether in the UK/Europe or the US or both - these originators of an unjust "economic" finance system that has created extreme disadvantage/waste/war throughout society and the world have a lot to answer for. Quakers were bankers and yet they knew they were getting substantial amounts of paper currency free! So we need to right an inbuilt wrong. (No offence to Quakers now - of whom I count some as my friends - or to others declaimed as in secret societies). Many of the old bankers probably did a lot of good with a lot of their wealth. But today it's only shareholders and highly paid executives. Free money must stop!

b) Rather than argue about the details, a friend has suggested the new term "Credit Creation Charge" for what I had previously called the Credit Money Banking Adjustment - to simply divert the Base Rate (cash rate in some countries) on any form of commercially created new money whether as credit, debt or otherwise - to the public purse thus allowing an offset of essential new green emergency taxes such as for organic sea barriers properly planned for their eventual 80 metre - yes METRE height, plus associated river/port and energy works. One of these could be a great European Sea Barrier project, the first of which would protect the Mediterranean nations - all at once. Very good value!

The New Economics Foundation in London has suggested that such funds should be hypothecated for special purposes. One could be to help stabilise the markets as long as it does not mean extra revenue for the banks. Although the UK Treasury has discounted hypothecation in conversations with me I still agree with NEF and other correspondents that to put the funds in the common pot would allow less transparency and more political interference.

To conclude, the UK BBC Radio 4 Today programme held a cross-party "buddy" proposal this morning (8-08-2008) with Nicholas Soames and Frank Field over another thorny issue - immigration, with a good constructive solution. Also the latest US saga over FannieM-FMac housing finance restructuring hit the headlines. Apparently the public purse in the US will benefit. About time too. The Credit Creation Charge would accomplish similar objectives and would be far simpler mending fences if diverted to an Environmental offset and equally allocated between producer and consumer nations. Those interested in more detail and having our summary of fairly remarkable progress, please email ian.greenwood[at] STEERglobal.org for the charts, cartoons, etc. This is a simple and comprehensive solution - Climate, Energy and Credit Reform which will help to bring inflation under control by both its parts. [Please copy and paste this all into Word for reference and email to let me know who you sent it to and for the proper documents which have been well supported worldwide from the Stern Review to Harvard and on to New Zealand.]

[If Mr Brown/Obama does not wish to spearhead this campaign, then might we suggest Messrs Soames/Field help the Cabinet and spread the load with effective action to bring the Treasury round, bringing the Country to Victory for global benefit! After all the Treasury invited us to contact the OFT and FSA and it only takes a little time to understand.] Pasted below is the document - we also invite readers to email/phone for "Every Town an Eco Town" (especially Mr Field)

COMMENT on Climate, Energy and Credit Reform:

"From my initial impression (the last thing we need is yet another tax and mere tinkering with interest rates) I decided to give it a fair go and actually read it and the attachments in full. I am glad I did because I have changed my view to seeing that you do know what you are talking about. I now like your proposal because, whilst I do not think it fixes [all] the fundamental flaws in the current system, it mitigates some of the worst aspects of it, and so can buy us some more time. I think your critical analysis of the ill-effects of the current system covered and cited in your material is correct. I like the thrust of internalising some of the so-called externalities to approach a better financial accounting reflection of reality. I like the practical, pragmatic, expedient approach which comes from your scientific/engineering/technical background.

What you are proposing can be relatively easily bolted-on to the existing system to make it work better for longer” Jamie Walton Global researcher 2008

**Climate, Energy and Credit Reform

Steps to understanding : 1. The one-off cushioning effect of the floating ice has protected the planet from warming and sea level rise - when it is gone it is gone. Potential 80 m rise would devastate many towns and cities – it’s a climate and civilisation crunch! Long term planning would be good.

2. That we can do something about it if we act quickly - uniting to achieve somewhat less ‘frivolous’ consumption and energy/material waste via demolition (i.e. embodied energy and thermal mass. Because of the current waste, buildings should be modified, insulated and extended/improved in most cases rather than demolished). Plus individual savings. A moratorium should be placed on demolition through the Planning mechanism unless a sufficient case can be made and reasonable enquiry undertaken.

3. Revenue must also be directed as part of the system towards insulating the “hard to treat” buildings - it is no good having difficulties/time lag in applying for adequate funds/subsidy, long delays or stop-start of funding, immense staff or bureaucracy costs.

4. The message from STEERglobal is that an equal dollar return must be made to the producer nation for their sustainability & energy efficiency. This can be achieved via an Environmental Tax on Imports (ETI) or ET. Credit money re-directed (the Credit Money Banking Adjustment) at the level of the base rate can then enable offsetting of ETI Tax (which the UK Cabinet Office said was “interesting”).

5. Additionally, now that the other proposal, the Credit Money Banking Adjustment (CMBA) has been devised, the revenue can flow - from where it has been inflationary (or held back in the credit crunch) to where it is necessary to achieve energy and resource sustainability, directly to projects investing in a sustainable future. Allowing these investments in a balanced way across the world would also create more stable finances and benefits socially, environmentally and politically. Confidence can return.

“STEER (ETI) sounds like a sensible policy option for helping to make the market tell the ecological & social truth and thus move toward a more environmentally sustainable economy”
Earth Policy Institute 2004
“[CMBA proposal] … has excellent analysis. As regards the required alternative solution, the claim for the present system is that it allocates resources efficiently. This claim is nonsense but any alternative must show that it allocates resources much more efficiently and addresses the question of ensuring that productive capacity (and the associated consuming capacity) becomes more widely spread” Professor R. Shakespeare London and Jakarta. [It would be - by returning to the producer or consumer region where the work is done or the loans are raised (or the money spent) directly to the actual articles/projects needed, this would increase the retained income of the poorest working people via lower energy or transport prices– giving them hope and therefore increasing motivation, but at the same time reducing inflation, tax and cost in almost all sectors – the efficiency referred to. This would be a truly free-er trade partnership.]

Contents: page 2
Introduction page 3
Climate change over the past decades has been suppressed by a little-known cushioning effect – the cooling effect of the floating ice. The vast need for funding to deal with this phenomenon and the end of fossil fuels give a clear incentive for credit money and trade reform. Without a specific investment mechanism, with sea level potentially 80 metres higher, inundation begins soon. A great deal of current civilisation and production is close to the sea in low-lying areas and rivers might dry up without melt-water, so this is a global problem affecting everyone. With the two reforms proposed - simple, efficient and transparent economics reduces poverty and increases motivation.

A mechanism for credit reform, to allow partial offset of green taxes - described on.. page 5 -
is required because of an important and shocking inflation statistic: In the last 30 years property inflation has driven prices up in some areas by 20 to 30 times (3000%) in sharp contrast to Treasury targets of 3% pa which would total 245% when compounded 30 times. So there is no shortage of money if it could be better directed. Such a ‘tax’ would not be on all loans, only on any element of “free” money – i.e. that created by commerce. Any element of “free” ,money could and should attract a charge at base rate as there is no return to a depositor on it. The base rate could then be payable to the publicly owned central bank (Treasury) to be spent in the region where the loan and interest burden arises and carefully monitored. That way both the burdens – the interest burden from borrowing and of resource depletion would be more fairly shared. Credit Money Banking Adjustment proposal is simple: Bit by bit, each year on all new “money as credit/debt” issued by big banks (which might only be on the secured loans) government would reap interest at the base rate. This would tend to reduce taxes and prices . The banks’ profits can be reduced from this area, as they need only to be based on whatever interest they charge the customer over and above the base rate (in some countries the term “cash rate” is used). Most bank profits would remain. [Relatively risk-free secured loan, mortgage and cash issue and withdrawal service has been operated like this for many years by building societies].

Conclusion and suggested relationship to the ETI page 6

(The next couple of pages are all you need to read to understand the credit adjustment)

Appendix 1: Environmental Tax on Imports (ETI) - Abstract 6
The importance of floating ice as a latent heat cushion 7
Currency exchange rate advantage 7
E T I - Charts existing and proposed 8
Feedback comments from an economist 10
Appendix 2: Back-up quotes on credit money creation 11

“I like your ideas…” Professor Lodge, Harvard Business School in response to ETI proposal.

“CMBA is the right way to reform the banking system and by far the simplest, having some of the features of a land tax, this could be the solution we have been looking for” -Land Tax expert whose suggestion was that it could also be called the Credit Creation Charge as policy reform.

Climate and Credit Reform

Introduction: The overwhelming response by government and business to impending climate change and its effects could be likened to the attitude of one Dickens character, Mr McCawber, who is convinced “something will turn up”. The only thing sure to turn up is the temperature, bringing with it very disastrous effects, across the world, but also close to home. Biding our time is not a valid option in the face of much worse effects than have been predicted so far. Action needs to be taken. The more we invest in carbon reduction measures and cut frivolous consumption in the short term, the better off the world will be in the medium and long term. There is one source of funding that could provide the capital for much of this investment, whilst not affecting the global economy detrimentally if directed for the best long-term purposes. This paper states a compelling case for taking swift action, and offers a clear, just and easy route to liberating billions of pounds for investment in making our future sustainable, globally. Lastly, we show how this step, if taken, could have beneficial side-effects, for example by reducing over-target inflation (footnotes 2, 3 ) and carbon usage, an underlying cause of climate change.

Climate change over the past decades has been suppressed by a little-known cushioning effect. As Arctic floating ice over the past decades has melted, it has absorbed vast amounts of latent heat that would otherwise have contributed to a further rise in global temperatures. During the 30 years that it was possible to measure the thickness of the floating ice, it reduced by almost half (endnote ). The corresponding surface area is considerably less in summer (endnote ) so as it disappears; a great deal of extra heat will be available to warm up the planet. It is the ice on land that, in melting, causes sea level rise, sea ice just shrinks into its original volume of displaced water. Once the floating ice is gone, more heat will be acting on a much-reduced area of ice on the land, so as this melts it will add to sea levels with increasing speed. As the speed of melting has already contributed to water shortages in Africa, what is the future for river water in Asia, Europe and America or even Australia? [Danish research has recently revealed that the floating Arctic ice surface reduced by 25% in a single year (2006-7), ten times the rate of the previous decade ] Do we need any further confirmation about the above-mentioned cushioning effect and the melting - reinforcing the need for swift action now? Jim Hansen of NASA believes the IPCC had “scientific reticence” driven by fear for their career by some scientists, holding back a clear action statement from them and recent conversations with their senior staff indicate that these factors may not have been sufficiently included.

Without a clear mechanism to release sufficient funding for wide-scale action and solution to the sea-level problem, the government is likely to be trying to play down predictions on climate change as much as possible. However, the Stern Review stated that action now would cost a twentieth of inaction (en - see also STEER progress summary). Government needs to create substantial incentives for ordinary people to take costly actions in the right direction (fn ). Government itself needs to act similarly as well as take much more seriously the conservation of conventional, convenient energy sources in existing buildings (see our Every town an Eco Town paper). The rise in prices could lead to investment by power companies if regulators do their job, but Governments also need to incentivise the right investments to help the public and business to act more quickly. On the current trajectory each saving or improvement is going to be wiped out by higher consumption if blind ‘economic’ and monetary growth continues to be the target. This brings us to the presentation of the desirable source of funding for some of the investment required, which would cost the general taxpayer nothing. The change proposed would reduce some of the (inflationary) pressure for ever-higher consumption in the wealthier sections of society. The mechanism would essentially redirect bit by bit some of the money-as-debt created by banks. The current “bank money” situation and how it came about is difficult to describe briefly but a new video Money as Debt does it well (footnote giving link below and see Appendix 2 for some very interesting quotations supplied by the author of the video). A chief accounting strategist described it as “fascinating”.

This new video Money as Debt describes very clearly in the first few minutes and in an entertaining way how the system of extra money via loans and interest payments thereon grew up over more than two centuries, (leading to instability in 2007). Banks became used to reaping immense profits from creating paper money and then later from the interest payments on extra money created as lent ‘on-screen’ - based only on the customers’ ability to pay. The extra money created caused price rises because of the demand for goods, particularly real estate, and particularly in the wealthier countries such as the UK and USA etc. This level of money, known also as “bank” money grew to an annual figure ten times greater in the period between the 1946 and 2006. Whereas other products are tangible in some way and cost the companies selling them more effort and/or materials to produce, credit these days is simply invented the moment the numbers are tapped into the computer. In feeding interest (>higher prices) back into bank profits people keep working longer to service higher and higher amounts. As described in the video the money from the loan money issued comes back from someone else as the purchase transaction has occurred and shows up on banks’ reports as a deposit. This can add to excess consumption affecting climate change. So the banking system operates as a loop. Banks then also make further profit from many other areas: fees, charges, penalties, interest mark-up on depositors’ “real” money and investments etc. So we are not talking about an impossible task to redirect some of the interest on this new ‘credit’, ‘bank’ or “quasi” money. It would be a very fair adjustment desirable for ethical reasons and some of it could be contributed to sustainability. Adjusting the direction of it would help to level the playing field for other businesses such as start-ups (or those competing for the best staff ) and the spending of it on long-term capital projects would reduce inflation (footnote 2, page 2 above), the cost of living and taxation. So this adjustment when clearly put across could be hugely popular.

Currency issue has been reserved to the central bank in the UK since the 1940s but credit money and the interest thereon was never similarly treated. It has grown post-war to a much larger proportion. Therefore it’s hardly surprising that credit is pushed on the public from all sides, and companies seemingly from all backgrounds are now touting credit cards, store cards and finance for payment in instalments. In some cases, large retailers are taking over the function of banks for this very high profit role while adding further cash and inflation to the system. By re-issuing “cash-back” the till service in a supermarket saves cash handling charges. Some supermarkets are also taking on the role of credit money issue - loans and mortgages – it is therefore unsurprising that with so much virtual money in circulation the real sector has declined. So to be fair on banks the proposed adjustment must include the same redirection of a proportion of this money from all organisations undertaking similar activities. There are also other possible ideas - tracked minimum savings rates could be paid to small depositors at “base rate” helping government targets for savers. Interest rate charges could be regulated for different kinds of risk by banks. These are not mentioned further here. Obviously a more stable currency could take some pressure off pensioners or those on fixed incomes.

By having a simple proposal that is self-evident to fulfil a need that is easily accepted both by the public and the banks themselves, incremental change can be introduced. Even former bankers have described the current relatively obscure process as unsound (see Appendices). To understand money creation it is first necessary to realise that the government does not create credit money which is 95% of the money supply - this is an advantage mainly to commercial banks and shared with investors. It has grown ten-fold since the 1940s in the UK.

The Simple Proposal: For all new credit money issued, the government would reap interest at the base rate, and the bank’s profits would be reduced from this area, as they need only to be based on whatever interest they charge the customer over and above the base rate (in some countries the term “cash rate” is used). This will reduce inflationary tendencies built into the system. It could also be arranged that the interest on debts already existing could be divided more evenly between the government and the bank, but the threat of this might only be retained as a negotiating lever in the event of serious resistance by the banks or if an even greater need for funding by government could be shown, for example in the event of climate catastrophe. Some politicians have already coined the phrase “the war on climate change” or “the war on inflation” which this would help. Probably it would be sufficient to levy the base interest rate in increments, unilaterally, allowing time for a close study.

This new Credit Money Banking Adjustment (CMBA) would initially provide the government with finance to invest in measures that protect its population and economy from the adverse effects of impending climate change. In the long term, it would also reduce the need of the government to rely on expensive credit to cover budget deficits. It would be best if the funds were to be directed only to specific and relevant targets - hypothecation. In addition to the climate needs, another project could be credit stabilisation funds. There could be many additional advantages to introducing this measure. Less incentive for credit would make people less likely and able to become heavily indebted. The re-focus on real growth would reduce the need for companies to continually “push” consumerism or credit on people thereby creating inflation. This would bring down to some degree the excesses that dominate sections of society - a new enlightenment helping global security. It would also have a significant positive effect by stabilising inflation in the housing market in the case of a future “bubble” giving time for wages to catch up, and the government would be at liberty initially to waive part, or all, of its share of the interest to any sectors of the market it chose to, such as first-time buyers or those who only own one property, to give some examples.

Conclusion It has become apparent from a very detailed analysis of the banking and trade system that use of money and resources has become more frivolous in recent decades, not only because of the big banks’ relatively unregulated activities but because of, in part unjustifiable financial “growth” via the free part of the money supply worldwide. By creating additional competition for other industries over profitability, short-term-ism has crept in. Rather than further regulation a simple adjustment of the system is proposed. In recent years retail price inflation has only been held down by the availability of cheaper imports, an effect soon to be over as prices in developing nations rise. Meanwhile house price inflation has continued unabated over a prolonged period and may re-ignite after the credit crunch. To deal with this the simplest means is to divert part of the interest (CMBA) on additional money created by the big commercial banks and other players at the level of the base rate towards anti-climate change initiatives (or at least initially) as an offset payment to those most affected by environmental taxes such as the Environmental Tax on Imports. ETI is vitally needed, has found some support, but is stalled waiting for a push by the G8 (ETI would be like VAT and is described in Appendix 1). Could the time for it be now?

CMBA could be easily understood and easily achieved, bringing some of the element of free money into the public purse. An offset to ETI could then simultaneously be brought in bilaterally and both measures could improve financial stability, reducing tendencies for future “boom and bust”. Please request by return email the STEER progress paper - summarising progress so far with governments and organisations (and send for the original CMBA, case study, STEER money, etc see these mentioned below in an economist’s feedback). Also send in your comments.

Ian Greenwood +44 (0)121 449 0278 March 2008 End doc –see appendix1 and endnotes..
STEERglobal Group

Appendix 1: Logical investment for reduced inflation of prices and possible sea barriers – the ETI tax incentive “E T I proposal” Oct 2005 revised 2008 to include offset.

ETI Proposal
Abstract. The need to invest heavily against climate change is accepted (see the 2006 Stern Report, 1). It is proposed in our much shorter paper here that even the level in that report was underestimated and should lead to reform as stated above. Via credit reform the opportunity exists for the following:

(a) for global energy stability to subsidise renewable energy and conservation of it by insulation.
(b) to return environmental tax funds equitably across the world – initially with an offset of the tax.
(c) to direct substantial funds against threats to civilisation such as resource shortages or sea level rise.

A new ‘VAT style’ tax could be placed on sales of imported products and the funds invested in projects mitigating against climate change and adapting to its effects. Uniquely, the proposal is to return an equal share of the funds direct to these projects in the producer nations which would otherwise be unable to afford them. Thus the tax proposed, the Environmental Tax on Imports (ETI) could levy in excess of $500 billion per annum if adopted worldwide and be a major stability fund. This could be an opportunity to keep oil and gas prices under control, limit shortages, as well as reduce the frequency of disasters. The STEERglobal paper “Climate and Credit Reform” describes a credit reform measure that would enable offsetting of such a tax, protecting those most affected.

1. The importance of floating ice
It is a well-known basic scientific fact that floating ice displaces its own mass of water. Floating ice shrinks back into an equal volume of water when it melts. The melting of Arctic floating ice has, in the last few decades, reduced in height by about half. This has added nothing to sea levels: relatively small rises are due to other land-supported ice melt or expansion. In the next few decades it will have substantially disappeared in the North and therefore will not be there to absorb (as it has done) large amounts of latent heat, a cushioning process that has been shielding the planet from sea level and temperature rises. Accelerated rise is expected with the full rate of melting of land-supported ice discharging into the sea, requiring sea barriers and other plans soon because trapped energy in the summer months in the Northern hemisphere inevitably means more energy feedback into the smaller area of land ice. Accelerated action will require an efficient funding mechanism, but government subsidy has been held back by certain economic thinking, some of which has been ably illustrated by Tim Harford in The Undercover Economist (Abacus 2007).

2. The currency exchange rate advantage
If the necessity of action was recognized a mechanism could be developed that would free existing financial resources to fund strategic actions in the area of environmental sustainability. Such a mechanism could use some of the great profits from the more highly polluting activities. One concept that provides scope to source these funds is the currency advantage (or import advantage) that wealthy countries automatically have when they spend their valuable currencies in ‘poor’ countries. (A similar ratio has been used in past studies to allow for the reduced comparative cost of living in poorer countries in dollar or sterling terms, that is: the purchasing power of the stronger currencies.) The traders who benefit most from the currency exchange rate advantage are frequently the same ones who cause enormous pollution and resource depletion by transporting goods between poor countries of production and rich countries that provide the market for the goods, for example by air.

Although these activities contribute to economic growth, the current trade and finance system tends to avoid contributing to the cost of pollution caused and little allowance is built in to allow for resource depletion or the research needed to avoid such depletion, develop alternatives or defend against sea level rise. Therefore only wealthy countries can do this research or benefit from clean technology and clean transport, and so on. Using the advantage as a guide (recognising differing labour rates, costs of living and production), the difference between the cost of comparable goods and the value released when resold in the importing country, companies and traders operating in this way would be subject to a levy designed to protect future resources (and to tend to moderate consumption) which might be named the Environmental Tax on Imports (ETI like VAT see Fig. 2). The revenues from ETI would be split equally between the country of production and the country of destination of the product. It would not be enough only to have a piecemeal approach to taxation as suggested by schemes such as airline fuel taxes or carbon taxes alone although they could contribute to a reduction in un-necessary consumption needed to extend the life of fossil fuels. Using the ETI funds substantial incentives could then be given by government to subsidise retro-fitting of more efficient insulation to existing buildings (for example those which been developed with multi-layer foils). In this way carbon neutrality via natural air-conditioning utilizing thermal mass, renewable energy and less waste could result.

2.1. ETI implementation
The body responsible for the collection and use of the ETI levy would then allocate it direct to projects promoting long-term environmental sustainability, such as renewable energy and sustainable transportation improvements some of which can be used as barriers to the sea where these are necessary to protect townships. They could also be foundations for renewable energy projects or built in conjunction with port re-design. With the ETI in place some of the inherent imbalances between poor and rich countries in terms of investment against natural disasters and in such technology could be reduced. By reducing the imbalances using a stable system of allocation in these areas an actual boost in healthy trade and investment should occur. There would then be an increase in the return to poorer counties, tending to reduce borrowings for essential infrastructure. The funding allocated towards such things as organic sea barriers (which might eventually be needed as land ice melts and sea levels rise) could be of great interest to governments and to the insurance and re-insurance industries. Figure 1 shows in a simple form the existing situation, Fig. 2 the change. The burden would be fair, shared between consumer, retailer, importer and government and only a few percent each on imported goods. A corresponding alteration in credit money issued by banks can simultaneously be diverted to moderate the effects of a tax on vulnerable businesses and individuals on lower incomes. These could be unilateral or bilateral measures, avoiding the need for international agreement which has held up other proposals, such as Kyoto protocol or Doha trade negotiations because these would have limited benefit.

Fig 1, Existing simplified trade split (see larger text in fig 2):

Fig 2 The Currency Advantage – difference in purchasing power as exports are re-valued (often a paper process - transfer pricing) before “import” could justify the proposed shared burden of taxation for investment directly to specific projects in balanced way across the world.

2.2. Benefits of ETI
Existing production would be relatively unaffected, so the proposed solution is an ideal way to ensure that resource users pay a fairer contribution. As an addition to such measures as carbon taxes or trading, ETI (operating like VAT) could be used to stimulate renewable energy and conservation in both producer and consumer regions of the global economy, introducing a more stable funding regime independent of the vagaries of consumer or financial markets. The UK or EU Treasuries have the potential to understand how such an adjustment to international trade could return some of traders’ profits in a more managed way and in the process reduce economic shocks, the problems of climate change and unsustainable loss of industry in ‘developed’ regions. ETI could also reduce the current dependence on interest rate rises as the main controlling mechanism of monetary policy and reduce otherwise inevitable property price inflation. Currently interest rates rises should be seen as a rather blunt instrument as they suppress healthy business investment, for example in research and development.

2.3 Critique
It has been claimed that any tax or fiscal change could lead to price rises but this does not apply in the areas of highest profit . Understanding of the market and of how high prices or interest charges/costs cause inflation, shows that those re-sellers with considerable profits achieve sales at prices that the market will bear. Then taxes tend to be absorbed. If hidden profits or sources of very high profit are targeted as in the above two proposals, then the general taxation/inflation can come down with a tendency to reduce prices.

3. Conclusion
The proposal outlined in this paper touches briefly on a number of topical and ethical issues including the subjects of economic and energy rationalisation. It proposes a practical way of implementing what would effectively be a global ‘Marshall Plan’ (which has been suggested by a German organisation of this name that has received wide support, ref 2). Yet it is not suggested that the funding should come entirely from the USA (as for the original Marshall Plan) but that the idea of using the currency advantage of wealthy countries to support directly the necessary projects needs to be urgently implemented — otherwise resource shortages will be very fast upon us as has already begun with the 2008 oil and food price increases. It will be necessary for people to do their bit to get behind ETI as a practical proposal both by informing and by lobbying MPs, MEPs and other officials. It is suggested that: “All of the world would get all of the benefit from all of the ETI” via economic and energy supply stability. Time is short to turn the world from its unsustainable path and the investment cost to each sector: consumer, retailer, importer and government is only about 3% of the final price on international trade. A small price to pay for security and sustainability ?

REFERENCES
1. See http://www.hmtreasury.gov.uk/independent_reviews/
stern_review_economics_climate_change/stern_review_report.cfm
2. See http://www.globalmarshallplan.org/
3. See www.carbonneutralbritain.org.uk

As submitted to the Institution of Civil Engineers With thanks to Richard Sands for some editing
Civil Engineers, London UK
Briefing note (Proceedings)
Engineering Sustainability

Ian Greenwood is an engineer of structures without a vested interest in stimulating the market for major projects and has been saving energy for 30 years at a practical level. Adding to his broad career, areas of investment and overland travels, he researched the STEER idea for sustainability in trade and resources and founded STEERglobal.org
Support is being gathered from government, other organisations and the public.

Some notes from a global economist, lecturer and barrister: Professor Rodney Shakespeare

Ian
Thanks for writing. These are excellent, practical papers which are highly relevant to the need for policy change.

Case study for renewable energy

You are right that lower cost is the main way to get clean renewable energy. You then point out that governments are short of funds for subsidy and you propose a tax to provide the funds. There is nothing wrong (and everything right) in what you say except that the scale of the problem is such that it is doubtful if there is any real solution without a colossal change of paradigm and associated large-scale new financial solutions etc. Obviously we must work together to get the change and the required new financial policies.

ETI proposal

Much splendid stuff here -- I like the organic sea barriers. The world will pay a heavy price for mangrove destruction


CMBA Treasury

This has excellent analysis. As regards the required alternative solution, the claim for the present system is that it allocates resources efficiently. This claim is nonsense but any alternative must show that it allocates resources much more efficiently and addresses the question of ensuring that productive capacity (and the associated consuming capacity) becomes more widely spread. Just getting the interest money back to the Treasury insufficiently answers the questions of how to spread productive capacity and get going the environmental capital projects etc. But your proposal is certainly a step in the right direction and is part of the new thinking seeking new answers.

STEER money.
Yes, the need is for people to unite behind a single, main idea.

Depriving the banks of interest is a positive idea -- well done -- but it should not deprive the banks of administration cost (and administering banks are required in modern economies). At the same time the banks should be used to administer interest-free loans for developing and spreading productive capacity etc.

I think the comprehensive scale, humaneness and originality of your thinking and look forward to further contact when you are back from Australia.

I would be delighted to receive a copy of the Treasury letter (if you have one) saying that the banks create money

Rodney
Thanks Rodney - CMBA does partway return the money for climate change investment, but I agree that the rest of it needs to be hypothecated (specifically attached to relevant projects). What about another area being loan funds for stabilisation at interest of any wobbly banks, guaranteeing against a run, so depositors can never lose money, only banks can lose if a loan defaults which was not based on re-issued deposits? We may need a system to “tag” deposits?

Endnotes follow and some comments on the origin of credit money from as far back as 1690s

[Stephen Hilder]

Ha. Here's long and detailed for you: "Pfiffle".

[Jamie Napier]

In the interesting debate between Messrs Hilder and Grignon, I believe that it is helpful to split out the Economic theory, the Morality and the Current economic climate.

Macro-economically, Hilder is correct, the problem being illustrated by Grignon is Savings, not Interest. As Grignon himself says, there is no economic problem if the banker does not hoard the interest. "Hoard" equals "Save". This is not a new argument. It is akin to J M Keynes' famous "Paradox of Thrift" - if everyone saves more, consumption goes down, employment declines etc.

(Interestingly, if savings increase, the supply of money rises and therefore the price of money - the interest rate - falls, stimulating more borrowing for investment to bring the economy back into equilibrium where Savings equals Investment in textbook economic theory.)

At an individual level, a loan is not a problem if Person A creates sufficient surplus each year to repay principal and interest. Eg. Person A earns $100 pa, spends $80 and saves $20. He borrows $180 to buy his home. Next year he earns $100, spends $80 plus $6 interest plus $9 principal, and saves $5. Money supply goes up when he borrows and money supply goes down gradually when he repays. Where is the economic problem? All that has happened is that, instead of saving $20 pa for 9 years before buying a home, Person A has chosen to borrow today and pay it off out of savings for the next 20 years plus pay an additional cost, the interest, for this privilege.

On the other hand, if person A does not have an ongoing surplus but is borrowing with the intent of using the fundsto create a surplus with which to repay the principal and interest, then this, by definition, requires growth to repay the loan.

(This distinction between the "consumption" loan and the "investment" loan is a reference to Douthwaite in FEASTA 13 Aug and Flintoff's Ban Compound Interest column last month, where the consumption loan is OK but the investment loan is not because it requires growth to be repaid.)

With regards the morality of someone earning a living from lending, this depends to some extent on each of our angles (though I would point out that the Catholic church first banned lending in 325AD and this was only for clergy and was a ban on lending money at interest above 1% per month!). There is a, however, an opportunity cost of lending (no longer being able to use the funds oneself) and there is risk, so it is normal to expect the borrower to pay a price, which is the interest rate. It is a misconception that bankers want their clients to go bankrupt so that they can take their homes to repay the loans.

It is true that some bankers have been found to have acted immorally, eg some sub-prime lenders in the US, and this requires laws and prosecution.

But if private ownership of banks is morally unacceptable to society, one solution is to nationalise the banks so that the people take the risks and the profits. Personally I have no strong opinion on this. Nationalised industries tend not to have performed well in other sectors. On the other hand, if the government is going to bail out the banks when they fail, then the public purse should also earn the profits in good times.

The third area to consider is the current economic climate. Personal debt levels in the UK and US are at historic highs and many commentators would agree that there is potential for a downward cyle into a major recession (lower asset prices, bankruptcies, lower consumption etc).

How did these high levels of personal debt levels come about? A number of reasons, amongst which
- Overly aggressive lending policies because of bank chiefs needing higher profits to meet short term stock market expectations, because of very liquid balance sheets (due to the wealth generated in the 90s), and because of misjudgements of the stability of asset prices and interest rates.
- Over-borrowing due to the availability of cheap credit, poor education and cultural changes encouraging more and more consumption.

Personal debt levels did NOT increase to these high levels because, inherently, the economy has to grow to repay the interest on loans.

Some general points.
- Yes, the current economic system is unstable and has a propensity to go into positive or negative spirals of demand and growth/recession. And yes, debt makes the growth faster and creates potential for a harsher recession. But bare in mind that debt-free economies are also unstable (a loss of confidence and lower demand can result in a downward spiral).
- With regards Flintoff's specific question at the start of his piece, even if the system does inherently require growth or collapse, as Grignon claims, presumably collapse could be good for the environment in which case it is still worth installing solar panels.

[Simon Davies]

Jamie Napier said :-
" Money supply goes up when he borrows and money supply goes down gradually when he repays. Where is the economic problem? "
This is not true because once the money is created as a loan, it is always in existence and adds to the pool of existing money. The only situation when this does not apply is if the borrower were to not spend or deposit his new loan, in other words bury his money in a field for example.
The ratio of mortgage lending to wages has increased very much in recent years, so adding to the money supply and causing massive inflation. There is no housing shortage, only a shortage of affordable housing because there are a million homes for sale in the UK and 750,000 lying empty.
Anne Belsey is correct in saying that the debt-based money system works like a pyramid selling scam, requiring an exponential growth in the number of new members for it to continue to function.

[Ian Greenwood]

Thank you Mr Hilder for that short reply, I am rather glad you have not waded into an area that might be too broad (even for you) as this has saved quite a lot of my time.

Thank you Mr Napier for your constructive comments, to which I would like to add a few responses. Sorry about the length of my original posting with its free document/appendices. I have picked out the main points first below in case Mr Hilder wants to come back to this. (Please note that IPCC have recently indicated that they may not have included for the rapidity of the next lot of faster melting of land-supported ice which would give urgency to the changes proposed):

****No hope for the planet unless we reform economy ***(that was the subject):

You say "the problem being illustrated by Grignon is Savings, not Interest".

NO, the problem is instability by creating inflation - too much money in the wrong places! The proposal in the current conditions is to direct the money to contract the "wrong" areas slightly bu increase incentives in the "right" areas as referred to below.

I (Greenwood) said; "Credit Money belongs to the people in the same way that the currency" ..in the UK with the Queen's head on it does and should give rise to a charge - however small and whether only on secured mortgage loans. This is the minimum to come down to. This should initially be around 10 % of the existing free money revenue stream and therefore 5 % of the total free money stream created by loan issues and repayments. That revenue to the public purse would grow for a while and should be directed initially into incentives to insulate buildings etc.. The other 5 revenue streams to big banks remain in place.

Specifically
I said: "new term 'Credit Creation Charge' for what I had previously called the Credit Money Banking Adjustment - to simply divert the Base Rate (cash rate in some countries) on any form of commercially created new money whether as credit, debt or otherwise - to the public purse thus allowing an offset of essential new green emergency taxes such as for organic sea barriers properly planned for their eventual 80 metre - yes 80 METRE height, plus associated river/port and transport/renewable energy works. One of these could be a great European Sea Barrier project, the first of which (across the mouth of the Med) would protect the Mediterranean nations - all at once. Very good value!"

You (Mr Napier) say: "there is no economic problem if the banker does not hoard the interest".

Greenwood: There HAS been an economic problem (herd effect etc). First of all as credit money grew to 10 times the levels immediately post-war by 2006, the banks did not hoard the interest - they joined in the rush - a goldrush in paper money terms - onto the bandwagon offering highest salaries, depriving the rest of the business world of some of the best minds (Comments by Bank of England Governor). And spending vast amounts into the richest property causing a ripple several times across the UK (and affecting the world, causing even more "divides").

More recently bankers contracted the supply by fearfully having to reduce their loan issues to protect against a complete crash (herd effect again) with no mechanism to connect to the reality of each local area. By reducing the issue of loans (and less free money to themselves) causing a double whammy problem.

Whereas with our proposals the diversion of the free money to support the area where the loans are made as we have said below would be healthy by allowing public spending to be improved in anti climate change which is INTERNATIONAL but could be brought in UNILATERALLY and for the best long-term purposes in the current emergency. Unless this is done further free-fall is, I believe, inevitable because of no clear road map. I strongly suspect that the Freddie/Fannie rescue will do little good because lots of the fantasy money elsewhere in the world will evaporate as the reality continues to dawn across the world about the "real" economy (see Treasury Select committee 2007 Globaslisation Report No 14 for the first part of the STEERglobal Proposals - ETI or ET. Although the CMBA was too late for report No 14, together CMBA and ET offer hope for a softer landing. As we propose the money returned for an offset out of CMBA (the credit creation charge) must be first allocated as close as possible to the point of loan issue. This would mitigate the cost of interest and climate change costs there where loans are derived. That should be the strong connection needed in the structure which would be achieved by this adjustment. Devolution without a devolved mechanism for investment is inefficient and
frustrating. Our proposal is a minimal bureaucracy system.

Mr Napier says "a loan is not a problem if Person A creates sufficient surplus each year to repay principal and interest".

Reply - Certainly not a problem for wealthy bankers - quite the reverse in normal economic conditions - hence the rush towards those jobs driving up the prices. But for those in business start-ups crippled by the cost - well one only has to look along the high street to see how long those start ups cling on - a couple of years? Result - the big boys rub their hands with glee as the competition folds. They are in some cases creating their own money (store cards, GE finance etc for example) or owning the high priced property.

Napier - Where is the economic problem?

Reply -As above - but add in cost of commuting (time, noise pollution, oil depletion - see "externalities" not accounted for and leading to further climate change (and shortage of time/driven-ness/waste in companies and families etc). These externalities need to be included in public transport costings for medium cities, mentioned in 'case study for renewable energy/sustainable transport') as property becomes more expensive near centres. [For transport Even to the extent of "Fast frequent and free" in cultures such as the US and Australia] Add in Mental ill-health, a growing problem for the NHS as people cannot afford their own house/flat however humble or the rents become higher, forcing longer hours and family breakdown.

Napier: There is however, an opportunity cost of lending (no longer being able to use the funds oneself).

Reply - That is only true for deposits which would be unaffected by CMBA/CCC proposals. New money only would be targeted. (The old and well-proven trick [sometimes a trap honestly fallen into] is to muddy the waters between "real money" earned, deposited and spent and "quasi" "credit" or "debt" money created by banks which rapidly becomes mixed with real as it is pumped into and then through the system. In our view this ended up contributing to an inflated and unstable mushroom on a stalk of trade injustice and monetary injustice complementing each other. As the stalk/mushroom grew the money became bigger by inflation overshadowing even the middle classes and taking money out of the reach of ordinary people. For instance it is well known that the house-price/earnings ratio was in the 1970s 2 or 3 times annual income whereas now it might be 5, 6 or even 10 times. This causes further stress in families and individuals.

Mr Napier says "and there is risk, so it is normal to expect the borrower to pay a price, which is the interest rate".

Reply - The biggest risk was/would be when all the house of cards falls flat (or should we say - is falling flat) or sudden deflation occurs, which is why something had to be done to let inflation out of one side of the leaning tower of the global economy in 2007. The weaknesses caused instability because under one side of the foundations (which Mr Napier kindly refers to as "Morality") are the two primary or fundamental weaknesses embedded more and more for many years but doubling in intensity over the last several decades:

1. false value appearing in GDP of the "developed" nations from international trade goods imported and re-sold for the benefit of powerful people/currencies. and

2. the Money injustice, as in Money as Debt the 'pipeline' of money from each big bank pressurises and causes the inflation across to under the foundation of the other side. Acting together we have here an illustration of the cause of the gross instability leading to fear in the banking sector.

Napier: It is true that some bankers have been found to have acted immorally, eg some sub-prime lenders in the US, and this requires laws and prosecution.

Reply - The sub-prime could eventually be shown to be a smokescreen set off when the DVD Money as Debt (MaD) came out well over a year ago. The idea of selling derivatives on property loans sold on far away is probably a more fundamental flaw and I am not so sure that the continuing fall-out might not even spread to other derivatives and futures - eg Carbon trading - unless a real price for carbon and other resources that reflects the true future value could be established. This is not my area. I content myself with the sure and certain - Simple is good for communicating these ideas. Is it yet plain enough that over 20 years experience in property, investment buildings and finance, this has paid dividends in these two relatively sure-fire solutions? I have noticed one thing - it has been down to engineers to get a grip of this so I ask Mr Hilden - how is your applied "MATH". Please see also PS point 4 below to conclude.

Best regards and in good faith - for global benefit
Ian Greenwood STEERglobal and Greenwood Structures.

1 PS. Napier: But if private ownership of banks is morally unacceptable to society, one solution is to nationalise the banks so that the people take the risks and the profits. Personally I have no strong opinion on this.

Nationalised industries tend not to have performed well in other sectors.

1 PS. Reply: Only because of perception problems - late trains in the UK were not the norm before the fiasco of rail privatisation., only a few well-worn seats.

Nor was it the norm to have several sets of wasteful empty buses running on the same route like we have now. Competition has not reduced prices on the buses - just doubled the price and the pollution via duplication. Euro visitors cannot believe the prices or the lack of system in the UK [see also recent positive comments in the press about Indian Trains].

I remember the (obviously ignorant) headline in a tabloid about British Rail losses before privatisation. "£100 million loss for BR". In comparison with the last decades that was very good value, reflected in the fares. Engineers running the service at the time should have stood up and not rolled over! That is relevant to my point. We DONT need to privatise the banks: just get the pipeline to take some steam out of the gravy train so the system works better in the future - Simple is best when designing anything and this is worth a try - ETI/ET and CMBA to offset it, creating an entirely new balancing revenue stream for long-term investment. Our economics correspondent in the EU says: “it is possible to reduce inflationary pressure of public expenditure by directing it towards long-term, rather than current, consumption”. Nick 2008-06-04

2 PS. Napier: The third area to consider is the current economic climate. Personal debt levels in the UK and US are at historic highs and many commentators would agree that there is potential for a downward cycle into a major recession (lower asset prices, bankruptcies, lower consumption etc).
2 PS. Reply - There is room for downward adjustment if it can be done over years. The "free riders" Professor Stern's words, currently get tax-deducted expenses and if from overseas are really only paying VAT in the UK. The new ETI/ET would counteract this and everyone would know their environmental contribution (but most people would be protected by an offset. We recommend this MUST be in the UK Pre Budget Report this autumn as well as the Planning for the US Presidential Campaign (Simultaneous Policy - see SIMPOL) if the Labour/Conservatives or Demos/republicans are to regain any credibility.

3 PS You say: "Personal debt levels did NOT increase to these high levels because, inherently, the economy has to grow to repay the interest on loans".

3 PS Reply - This is where clarity is a little lacking in Pauls DVD. Instead a clear roadmap says we need to differentiate between "good" and "frivolous" consumption and make the long-term investments (referred to in the DVD) THEN you get your peace, stability, well-being and everyone working better together USING CMBA/ETI.

4 PS You say: Some general points.
- Yes, the current economic system is unstable and has a propensity to go into positive or negative spirals of demand and growth/recession. And yes, debt makes the growth faster and creates potential for a harsher recession. But bear in mind that debt-free economies are also unstable (a loss of confidence and lower demand can result in a downward spiral).

4 PS Reply - YES!! Mr Napier, you are clearly illustrating how these two proposals would help us out of our predicament of hesitation by Government/banks/investors. THANKS

Greenwood: It is precisely the point about instability that drove me deeper into the areas of economics, banking and its effects on instability/injustice which can be investigated and presented clearly at a level understood by ordinary people ( Before the ones that cannot work without a calculator die out, which is what we have achieved between us). Such investigation is long overdue and I thank Grignon/Flintoff for their success on this blog.

5 PS Napier- With regards Flintoff's specific question at the start of his piece, even if the system does inherently require growth or collapse, as Grignon claims, presumably collapse could be good for the environment in which case it is still worth installing solar panels.

5 PS Reply; Thanks for bringing us back to solar panels which are only worthwhile if losses can be reduced quickly enough with "space-age" insulation incentives. Why not pay for them both with a minimal contribution by customers as has shown to be successful with cavity Wall insulation by the UK govt. We have shown that with our proposals on "Every House and Eco house" that a good many of these could be made 4 times more efficient by trapping double the thermal mass (using the outer leaf as well) There are 12 million buildings to go at here alone in the UK - how many yet to do in the North in the USA/Canada? In our "Every Town an Eco Town" document (applies to country areas too) are figures to help you make a decision and a phone number for free advice!
We need governments that can act decisively and together before it is too late and the jet economy nosedives further - pull the "joystick " back and pull us out of severe recession or the problem of the ice-melt.
I look forward especially for contact by government officials - yes they get it free too! It's for global benefit! (and Oil companies have a more sustainable future.)

Regards Ian Greenwood
[at] STEERglobal.org

[Ian Greenwood]

addendum to first few lines of text

paper money should read

"Quasi", "debt" or "credit" money.

(The commercial banks do not get the benefit of free issue of currency as used by the general public - they have to pay for it or borrow it, but - as in the main Climate, Energy and Credit Reform document on the blog - they do get substantial amounts of the other Money as Debt, an advantage that grew up as shown by Grignon, who incidentally has said elsewhere that CMBA could be a useful transitional arrangement to consider).

Will check the remaining text again later
Sorry about the error
Ian G

[Jamie Napier]

Reply to Simon Davies. Let us work it through. Let us assume everyone spends 80% and saves as deposits 20% of the income they receive.

In my example, person A earns $80 each year and saves $20. The people receiving the $80 spend $64 and save $16 etc etc.. The total of the new deposits ($20 plus $16 plus $12.8 etc) is $100, called the Multiplier Effect in Economics. So in a normal year with no loan, the Money Supply, which includes deposits by definition, has increased by $100 from person A's earnings. Over 10 years, the Money Supply increases by $1000 with no loan.

Now person A borrows $100 and repays $10 pa over 10 years. He spends the $100 in year 1. This creates additional money supply of $100 as the people receiving the $100 spend $80 and save $20 etcetc.

Also each year, person A repays $10 principal. This $10 can either come from the $20 that he saves each year, or from the $80 he spends (by consuming less of other things). If the former, he spends $80 (which in turn is $64 spent and $16 saved etcetc), saves $10 and repays principal $10. Total deposits increase by $90 pa. If, instead, he reduces expenditure to repay principal, he spends $70 (which in turn is $56 spent, $14 saved etcetc), saves $20 and repays principal $10. Total deposits increase by $90 pa via either method. Thus, over the 10 years, with money supply increasing by $100 (from spending the loan) and then $90 pa, the total increase in the money supply is $1000.

Money supply is the same at the end of the 10 years whether or not there was a loan.

This is, in fact, basic economics. The "multiplier effect" of spending is reversed when it is not spent. So really, bank lends you $100, Money Supply increases by $100, you pay it back gradually and the money supply decreases by $100.

You will notice that my example did not include interest. That was to simplify to illustrate the main point. Now, where do the interest payments, say $5 pa, come from? They come from savings or reducing other consumption. Either way money supply goes down by $5 pa. But the $5 interest represents income to the banker, who spends 80%, saves 20% etcetc with a total increase in money supply of $5. So, interest payments neither increase nor decrease money supply.

With regards the rest of your contribution, I am not saying that the system is neccessarily equitable (my section on Morality) nor that it works well (the Current situation section). I agree that these are debatable. The economics, however, in this point is not and I do wish to correct people when they create an argument using false economics.

[Jamie Napier]

Reply to Mr Greenwood. Let me address the parts where you quote me, but first let me remind you that my original contribution differentiated between Economic Theory, Morality and the Current Economic climate. Further, my comments on Economic Theory address the Hilder-Grignon debate of whether interest-bearing loans inherently require more debt money creation if the original loans are to be repaid. Perhaps this wasn't clear.

1. My quote "The problem being illustrated by Grignon is savings, not interest."
I was specifically addressing the economic theory behind Grignon's and Hilder's opposing comments on usury. Hilder is correct, the problem is not the interest payments per se in the models they use.

2. My quote "There is no economic problem if the banker does not hoard the interest."
You reply "there HAS been an economic problem". Again, I am referencing the economic theory of interest debate between Grignon and Hilder. My quote does NOT say that there is no current economic problem. In fact, later under Current economic climate I do say there is a problem.

3. My quote "A loan is not a problem if person A creates sufficient surplus each year."
You point to start-ups crippled by costs. But, again, I am referring to the debate about whether loans inherently require more debt money creation, it was not a comment on the affordability or morality of current interest rates. Also, by the way, a start-up by definition is not an example of a "borrower that {already} creates sufficient surplus each year".

4. My comment "where is the economic problem?"
I used an example where a person with a stable income saves money to buy a home in the future and compared this to the person borrowing today to buy a home and then saving to repay the loan. You say the problem is the externalities of commuting. Not sure what the connection is. A typo?

5.6.7etc . various other quotes which lead into your comments on the risk of loans (I agree that a greater risk is the house of cards falling down), instability of the current system (we agree), nationalised industries (I agree that not all performed worse than private sector), plus CMBA/CCC proposals and other solutions which make interesting reading.

[Paul Grignon]

Dear Messrs Hilder and Napier, and thank you Ian Greenwood for the "nomination".

I am happy to have this discussion with you on a public forum of mainstream media. I hope people are reading and have watched Money as Debt because I welcome the opportunity to admit to the movie's shortcomings. So far the ones I feel justifiably criticized for were compromises I consciously made to keep the explanation simple enough not to lose the attention of the general public.

My sequel movie is not introductory and over-simplification will not be resorted to. It is to be as accurate as I can determine it and if there really are holes in my analysis I am genuinely interested in discovering them. Let me weed out some of the more extraneous issues that have come up in this discussion, and see what of the following 12 points we can agree on.

1. Chartered banks create the money they "loan" from the "borrower's" promissory note. Correct? The truth is therefore, THERE IS NO LENDER AND NO BORROWER. There has simply been an EXCHANGE OF PROMISES in which the so-called "borrower" promises to pay the so-called "lender" Principal plus Interest over time and the "lender" promises to pay the "borrower" Principal in cash on demand . This PROMISE on the part of the bank is called a BANK ACCOUNT. Banks are legally allowed to make these promises far in excess of the cash or sale-able assets they have to back them up. This is readily acknowledged by the fractional reserve system and can be observed in action in any serious bank run. Any objection so far?

2. If Bank A creates a $10,000 loan account for Jack, all it has created is a brand new PROMISE TO PAY. So far no existing money is needed to do this. If Jack spends that $10,000 to buy a car from Jill, he gives Jill a cheque drawn on Bank A. Jill has her account at Bank A also. When Jill deposits that $10,000 cheque all that happens is that the PROMISE TO PAY $10,000 that was created for Jack is transferred to Jill's account and becomes a PROMISE TO PAY $10,000 to Jill instead. This can go on ad infinitum if all the participants have their accounts at Bank A. It will never cost bank A a dime other than for operating expenses, which are more than paid for by the Interest charged. However, as Jack "pays back" his "loan" the Principal gradually shrinks to zero, eliminating this $10,000 from existence by writing it off the positive side of the bank's balance sheet.

An indeterminate number of transactions can theoretically be carried out with this new bank credit without one penny of legitimate cash or pre-existing bank credit money being needed to do so. In reality a small percentage of transactions demand cash and the bank must have enough to cope with that demand on an ongoing basis. This cash and the credit the bank has with the central bank are the bank's "reserves" that back up many times as much in promises. Are we still in agreement?

So... Jack has added $10,000 to the money supply, claimed a car from the real world, and stuck society at large with the resulting tiny bit of inflation. He has promised the bank more than $10,000 for the privilege of doing this. As he pays the bank the $10,000 plus interest, the $10,000 of Principal will be extinguished as it cancels Jack's promise to pay. The interest will be the bank's to do with as it pleases. Correct? However, the bank has many expenses, including interest paid to depositors that will account for most of the interest that the bank takes in. Good so far?

3.THE BANKING SYSTEM FUNCTIONS AS ONE BANK. If Bank A creates $10,000 that is deposited at Bank B and Bank B creates $10,000 that is deposited at Bank A the net transaction is zero so that both banks got to create that money for free and collect interest on it just as if all the transactions took place within one bank. Add a multiplicity of banks in competition and you get the same principle of net transactions (clearing) but as individual banks attract more or less incoming bank credit as deposits, there can be winners and losers in the net transaction game.

4. NO ONE BORROWS MONEY FROM A CHARTERED BANK. THE SO-CALLED BORROWERS FUND THEIR OWN ACCOUNTS WITH THEIR PROMISSORY NOTES. All credit is self-issued when the borrower signs the "loan" papers. The bank is not a lender as the bank will only lose its own funds if the borrower defaults AND the collateral seized by the bank does not cover the unpaid Principal of the "loan". As a bank's own assets cannot possibly honour all the promises to pay in cash the bank has made, and as these new promises to pay have made new claims upon the goods and services of the real world and society far in excess of the bank assets backing them up, it is thus logical to conclude that THE BANK IS NOT THE LENDER. SOCIETY AT LARGE IS THE LENDER.

5. There are SECONDARY LENDERS. They DO NOT GET TO CREATE CREDIT FROM PROMISSORY NOTES. These TRUE LENDERS are foregoing the use of their own money and must actually possess the cash or bank credit in order to to lend it. This type of lender can be a commercial business, a non-profit cooperative society or an individual.

6. Banks take profits from various forms of charging interest and loan or invest this money in order to make more money. Much of it is in play in the foreign exchange market and other money markets all the time. Am I wrong?

7. Is interest actually payable? Let's take the example of a so-called "loan" of $100,000 from chartered Bank A. The "borrower" has to pay back $110,000 at the end of the year in one lump sum. Clearly if all money comes into existence as a so-called "loan" on the same terms, then there are no external inputs available. It is impossible to pay $110,000 in one lump sum when only $100,000 exists. Thus a system where everyone borrowed Principal on Jan 1. and was bound to pay Principal + Interest on Dec. 31. would result in the amount of the total default being exactly the total amount of interest charged. As ALL money has come into existence as interest-bearing debt, any "spending by the banker " is an externality. It cannot be used to "create" the extra interest as it is in reality, DEBT and interest is similarly owed on it.

8. In reality, bank loans usually work by having the "borrowers" pay monthly. The Principal portion of each payment ceases to exist as it cancels out a portion of the "borrower's" promise to pay held by the bank. The Interest portion is the bank's to spend. The bank has to pay:

(a) interest to depositors

(b) operating expenses: rents, salaries, etc.

(c) capital expenses

(d) shareholder dividends

All of the above may route the interest money back to the general economy where it can be re-earned by the "borrower". Or it may not. The borrower will have to compete for it in the "free market". And there is absolutely no guarantee that the bank will recycle 100% of the interest it takes in so that the borrower can re-earn it. That portion that goes to shareholders is likely to be invested for further profit, not spent on the borrower's services. The bank itself may take some of the interest it took in and invest it to make more money. More money by far is involved in the foreign exchange markets than in the productive economy most borrowers count on for their income. This gambling money can only be acquired in a zero-sum game where one party must lose in order for another to win. Thus, while some borrowers' may win in the foreign exchange market casino and pay off their mortgages, as a macro-system, money that is tied up in any area of the "gambling economy" of high finance cannot be counted as being available to retire the so-called "loan" that created it.

IF 100% of the interest taken in by banks is made available to be earned again by the borrower, that is exactly what I mean by "taking interest in the form of goods and services only" and what you mean when you say" there is always enough money to pay the interest" and "the interest money can be created from new value" . However, to the extent that banks do NOT make the interest they take in available to the general borrowing public, to that extent the system will be short.

9. At any stage in its circulation, a secondary lender may earn the bank credit money created by the borrower's promissory note. It puts that money into continuous rotation as loans at interest. This money is NOT AVAILABLE TO DISCHARGE THE DEBT THAT CREATED IT EXCEPT AS A LOAN AT INTEREST. So let us say that the secondary lender has intercepted $100 that the original "borrower" needs to make a payment on the original $100,000 "loan" that created that $100.

Now if the original borrower borrows $100 dollars from this secondary lender to make his monthly payment to the bank, the portion of that payment that is Principal is extinguished. Let us say that $20 was Principal. Now the bank has $80 in Interest it can make available to the borrower by spending it on his services. IF it is spent so the original borrower can earn it once more, he will have only $80 towards paying back the $100 plus interest ($105) to the secondary lender. So the system is now $25 short. Have I missed anything here? I think I have properly excluded all "externalities" but perhaps you don't agree.

One can interpolate any number of intermediary steps of who earns or sells what to whom between the main players here. For instance, the original borrower, instead of borrowing from the secondary lender himself, manages to earn the $100 he needs to make his payment. But it was earned from someone who borrowed it from the secondary lender. It makes no difference to the arithmetic of the total.

So now there is a shortage of money until someone goes to a chartered bank where money can be created from promissory notes and borrows the missing $25 into existence. Perhaps the government just added $25 to its debt ( one nanosecond's worth ?) . It doesn't matter who creates it so much as whether that $25 is created in such a way that the original borrower can earn it or sell something for it. No matter who creates it, this is an INCREASE IN THE TOTAL DEBT/MONEY SUPPLY NECESSITATED BY THE INTEREST ON THE PREVIOUS DEBTS as I claim in Money as Debt 1.

Money as Debt 1 gives only the two theoretical extremes of no recycling of interest as the problem and 100% recycling of interest as the solution to that problem. There is no way I can imagine of determining the actual unpayability of interest in the real world. One would have to track the the actual flows of all the money on the planet. And trying to explain these arithmetic convolutions to those who are just discovering the truth of where money comes from would have lost them.

Mr. Hilder claims all this is understood and in the "financial pages". The outcomes and mechanics are reported but the fundamentals are never explained. I have personally shown my movie to several audiences and received countless emails from others to the same effect. People are shocked and dumbfounded when they watch Money as Debt. They did not have a clue. Most people believe money is printed at the mint by the government, many still believe paper money represents precious metal. For others all they know, and all they care to know about money is that they don't have enough of it. That is as far as their thinking goes. Change the subject.

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
Henry Ford

10. Credit is already self-issued. That is the nature of Money as Debt. Our whole money system is exactly the same as a LETS system except that banks have convinced us that they are the "lenders" when they are really just transaction clerks, and co-signers who have to take a loss only if the real credit issuer defaults. Given that banks have only a small proportion of assets to cover their total potential liabilities, they cannot even be called guarantors. To call themselves "lenders" is fraudulent use of the language.

When banks fail en masse due to the human herd instinct causing a boom and bust, the representative of the real guarantor, the government has to step in and back the whole system with the full "faith and credit" of the nation meaning the ability to force the taxpayer to pay on penalty of imprisonment. This is especially odious when THE REAL CREDITOR IN A BANK LOAN IS SOCIETY AT LARGE.

When a bank creates credit, the collective society, believing this is money, trades real goods and services for it. This brand new bank credit money subsequently erodes the purchasing power of their savings through inflating the money supply. But despite the fact that it is us, the citizens and taxpayers, that are both the real creditors and the real guarantors of the system, the banks through their pretense of being "lenders" exert massive control over individuals, corporations and governments. Almost everyone is in debt to bankers and has to follow their dictates, including governments who should be claiming the society's and the natural world's rightful role as the only real creditor, and issue all new money debt-free, but instead shackle their citizens with a perpetual burden of mounting debt and devaluing money until the system breaks.

Banking doesn’t involve fraud, banking IS fraud. ~Tim Madden, monetary historian, consumer advocate, expert court witness

11.. Deposit Banks do three essential things that the REAL LENDER, Society at large, the Collective Credit Issuer needs done.

(a) They determine the credit worthiness of the individual Credit Issuer (formally mislabeled "the borrower")

(b) They run the transaction system that mediates the exchanges between individual Credit Issuers (people in debt to banks) as well as the general public using those Credit Issues as money.

(c) They enforce the integrity of individual Credit Issuers through the courts (an institution of government subsidized by the taxes of the Credit Issuers)

That should be enough for now. I await your critiques.

[Dominic Graham de Montrose]

Utter tosh! I simply don't have the time to go into explaining how fundamentally flawed John-Paul Flintoff's argument is, so this will have to suffice!

[Stephen Hilder]

Mr. de Montrose,

Why couldn't you have seconded my "Pfiffle"?

[Stephen Hilder]

Mr. Grignon,

I have come to respect your tenacity and genuinely well-intentioned hard work in the public service. Misguided (as I think you are) or not, I think the world is in your debt for your efforts. Therefore you have created a new debt obligation which can never be repaid since the currency does not exist to pay it. Just kidding on the last bit.

For now, I just want to comment one one point that you make, where you say:

"in the "financial pages". The outcomes and mechanics are reported but the fundamentals are never explained. ... People are shocked and dumbfounded... They did not have a clue."

Well, when I turn to the sports pages, all the stories are scores and summaries, and NO WHERE are the workings of the infield fly rule reported. People are shocked and dumbfounded...

Personally, I was once shocked and dumbfounded to find out that Ceasar salad dressing contains raw eggs. Raw eggs?

But in seriousness, I agree that you've identified a serious, if not THE serious issue at play here.

The newspaper reporting assumes a minimum base of knowledge which the reader must use as context. These days, many people are missing that context, partially because the sphere of human knowledge has grown so vast. Again, I would guess that most people cannot calculate their own mortgage payments from first principles, and this is not even a difficult problem.

Given this, the general public's response to news is confused at best, and counterproductive at worst.

Consider Mr Flintoff's befuddled "unwilling to lend" comments.

Consider Mr. Greenwood's explanation of the melting of floating sea ice not contributing to rising ocean levels. Apropos of nothing? Why did he mention that? I'll tell you. Some years ago, there was a global warming scare in the newspapers about Arctic ice (floating) melting, and raising the ocean levels and flooding coastal cities. Panic panic, what to do? Well, eventually (it took some time), people were brought to realize the bit about displacement of equal volume, etc. Of course, this was after the wave of panic, and who knows how many countless wasted man hours by activist do-gooders. Nowadays it's become standard fare in many high school textbooks, as sort of a novelty "practical application of physics". Too bad no one knew to have that in textbooks before. So of course now Mr Greenwood and those of his persuasion need to fire this off as sort of a disclaimer, "no no, this is NOTHING like last time, this time we REALLY REALLY need the Great Mermaid Sea Dome" or whatever the heck it is he wants to build using his freshly printed debt-free inflationary money.

Consider the headlines right now, considering the possible destruction of the world by the accelerator at CERN creating black holes. The point is, nobody that knows anything about particle physics is worried about this happening, and for practical, demonstrable reasons. But you might say, what about that guy in Hawaii, isn't he a trained physicist? Sure he is. There are two possibilities. One, is that he's genuinely an idiot. As you know, human fallibility being what it is, we occasionally have things like doctors operating on patients in the hospital without even having gone to medical school. The other possibility is that the news stories are misleading and non representative of what he claims. This latter possibility is by far more likely. Anyway thank goodness there doesn't seem to be much public reaction to this, much to the newspapers chagrin I would guess.

So, we have various complex situations, irresponsibly reported on by media, misunderstood by the public, and prejudiciously acted on by cause-heads. I can only hope that Money as Debt 2 doesn't contribute to this. Nevertheless, I now support your efforts (despite that you are wrong) as you seem to be well intentioned and of an open-minded character. Still, you are wrong. Just look at your item 7 and compare to the previous discussion. If you don't like my corn grower, Mr. Napier's examples are also quite lucid on this point, though I'm seriously worried how you will treat summing the geometric series. I say again, you cannot keep thinking in terms of A lending to B buying from C making interest payments to D which eats fish and chips on Tuesday borrowed from E who hides money under his mattress. Draw some black boxes to represent some entities, as few as you necessary for illustrative purposes, and draw the cash flows between and assets and obligations of each. Now, when you do this you will discover that there is only a problem when someone is hoarding money. Precisely because most of the money supply is not physical currency, this doesn't happen in the real world (to extremely good approximation).

Here's a real problem for you: Mortgage lender A decides they are going to aggressively speculate on the housing market. They decide they want to a long position on houses. They offer no down payment interest only floating rate mortgages, which are sold by aggressive sales people to naive little old lady B who thinks she is just getting a good deal, never mind that the "too good to be true alarms" ought to be clanging. These sales people make no mention of the fact that buying such an instrument is essentially buying a portfolio of "shares" in the real estate market and interest rate futures, infinitely leveraged. Of course, little old lady B would never open a margin account to buy (gasp) stock, or sell short. She's just oblivious to what she's doing. Then, the housing market goes sour, A folds and its assets are sold to less "accomodating" institutions, her adjustable rate hikes and and our little old lady B can't make her payments and is foreclosed on. She shoots herself, and everybody is sad and starts calling for bailouts. You know, all we wanted in the first place is for our little old lady to buy less house, one that she could afford. But hey, she doesn't need to know no stinking math. She doesn't hold by all that highfalooting nonsense.

Anyway, I'm sure you'll be doing some good with your efforts. There is no lack of economic problems that need to be solved.

But interest is not one of them!

[Stephen Hilder]

Mr Grignon,

OK. Hat trick, a detailed response, a slightly different approach. I've paraphrased your points, and responded accordingly.

1. Money is no longer backed up by any artifcat, and banks are no longer required to keep any physical artifact in a vault to back up their outstanding loans.

Of course.

2. When the bank loans to Jack, it can do so with no money, therefore Jack can buy a $10000 car from Jill, the car changes hands physically but nothing else really changes except where the numbers are stored in some database. This can go on ad infinitum... without one penny of legitimate cash.

Of course. So what? Your problem with this is the fact is that you have this cognitive dissonance. On the one hand, you know that money is really just a "promise", but then it just bother you that that means there's no "legitimate" money.

How about this: draw a box around the two people Jack and Jill. Let's refer to this as JackJillInc. JackJillInc has a ledger that Jack and Jill use to keep track of trades internal to JackJillInc. Initially, JackJillInc has $10000 which it borrowed from the bank. Internally, Jack and Jill record in the JackJillInc ledger that this is Jack's money. Jack and Jill then barter between themselves to whatever extent they want. Jack wants sexual favors, Jill wants a diamond ring. Jill wants someone to cook some food, Jill wants someone to wash some dishes. Jack wants the lawn mowed, Jill wants someone to paint the house. They barter all these things between themselves, recording everything in their ledger, but all these trades are invisible to the outside. At some point, Jack wanted Jill's car, and traded away the $10000 on his side of the JackJillInc ledger to Jill's side. The bank doesn't know this, they just know that JackJillInc still owes them $10000, except now Jill is the one deciding what to do with it. So, is there some problem with this? Does this economy implode for some reason?

Then Jack and Jill, to avoid the problem of having to barter physical good between themselves, invent something called "tokens" that they track in the JackJillInc ledger to help simplify their trading. Then, they say, heck, let's just use "money" instead of "tokens", give the ledger over to the bank, and let them perform the service of accounting for us. The point is, it never matters the slightest bit how much money the bank has in the vault, in terms of Jack and Jill's internal trading. Note that it's perfectly permissible for Jack to borrow a tractor from Jill, and promise to pay back two tractors in a year. (100% interest!) He just needs to build a tractor at some point.

You might say, but WAIT A MINUTE, JackJillInc owes INTEREST to the bank, that's where the problem is! They can never pay back that interest because they only HAVE $10000! Well, personally I think this more abstract and harder to get a gut feel for than the corn grower, but maybe you'll like it. You can draw a new box called JackJillBankInc. Just like Jack and Jill could make lending agreements internally with terms including interest, so the three parties can do the same.

The same thing happens in the real world. Take ANY set of entities. You can draw a box around them, and aggregate their assets and obligations. In terms of impact on anything outside of the box, you only have to track the net imports and exports--- it doesn't matter the slightest bit to the outside world how much trading goes on inside the box. If A owes B an interest payment, all this means is that it must create something of value which B is willing to pay for. It doesn't matter if A is Jack, Jill, or JackJillBankInc.

Now draw the box around the whole world.

3. Banks are all one bank.

Fine. You're saying make a box called MegaWorldBankCo.

4. The bank is not the lender, society is the lender.

Of course. That's explicitly what happens in the real world. A mortgage lender gives a borrower money to buy a house, in exchange for a paper promise. It then aggregates many of those paper promises and sells them as a MBS. Someone else, with some money, decided to buy the MBS as an investment. The mortgage lender itself only matched up the parties, and did some paperwork. So what? One party promised to generate value for the other party in the future, in return for getting something of value now.

5. There are SECONDARY LENDERS. ... These TRUE LENDERS are foregoing the use of their own money

Nope. All money is fake. On the other hand, there are people with things, and people without. Sometimes, a person will want to borrow, to purchase something and enjoy it in advance of having produced something to trade for it. For this privilege, the lender will want a return. On the other hand, sometimes people create the value first and defer their spending. For example, I might chop down a tree and carve it into a canoe today. Jim, who has 10 apples, offer to trade me for the canoe. Joe, on the other hand, who doesn't have a canoe or apples, and who needs one to go to visit Grandma on her private island retreat today (it's her birthday, you know), offers to give me 11 apples if I just wait until next year to collect. It's my choice, do I want 10 apples now, or 11 apples later. Why is this different, just because it's backed up by apples? What happens if there's a bumper crop of apples, and massive inflation? Would it matter if it were backed up by gold coins instead? If so, why? Because gold is "intrinsically valueable"? No. Any commodity has an barter value which floats depending on supply and demand. The only difference is the volatility, which must be compared numerically. So let's just pick a particular piece of paper with pictures on there. Even better, let's just pick tally marks in ledgers.

See, once upon a time you needed the currency or the gold because when Sir Gawain travels from Canterbury to Camelot with nothing but a piece of paper signed by Friar Tuck saying that Friar Tuck will next year give him a barrel of mead, and no one in Camelot knows Friar Tuck from a can of paint, Sir Gawain doesn't get his drink in the pub, until he draws his sword and explains that Friar Tuck is a close personal friend of King George, who issues the swords. Nowadays, it's all backed by fissionable materials and inertial guidance systems in silos in Nebraska. So, rather than swing all that hardware around all the time, we use lawyers and politicians. The miracle of modern technology!

6. Banks take profits ... and make more money ... play in foreign exchange

Please draw me the boxes you are talking about, and define the assets, obligations, and cash flows. Give me the example which is problematic. Then, we'll talk about whether or not the problem is caused by interest.

You seem, also, to have this twisting discomfort in your gut that banks take profits, which are somehow removed from the economy at large. Do you have a problem when the apple grower takes profits and invests them? Why not? The apples are eaten or go bad eventually, what then is backing up the money?

7. Good grief.

Spending by the banker is an "externality"? Again, please draw me the diagram and tell me quantitatively what you are saying here.

I suspect, that you're now worried that instead of hoarding the money, what if the banker is ONLY spending on importing Koalas from Australia, and the Australians are buying up all the property using this money and all we are getting in return is a bunch of stinky pseudo-bears? I agree, this would be a "bad thing". Of course, this is an example of a trade imbalance, and has nothing to do with interest payments.

8. "monthly payments", no guarantee that the bank will recycle 100% of the interest

Again, forget about orbits of the heavenly bodies. Let's use units of time called the "snooze". It's approximately how much you time get in the morning from hitting the "snooze" button. For convenience, we'll work in "megasnoozes". Does it really make a difference? It's not a straw man. The only reason you use sub-intervals of time is because you put banker spending in there at those times. The key is the banker spending. It doesn't matter what the spending is for, be it operating expenses, shareholder dividends, or call girls for the CEO. If you're jealous of said CEO, start your own bank.

9, 10, 11. zzzzzzz

Sorry, I just ran out of steam for now. How about focusing on number 2?

[Simon Davies]

Reply to Jamie Napier.
Thank you for reading and replying to my comment. I am not an expert in economics.
Please can you explain to me how a basic two bed terraced house costing £ 4000 in 1979 in a northern town now costs £ 80,000 ? This is because there is either a shortage of houses now (not true because there are many houses for sale, to let, and empty properties), or a large increase in the money supply in the last 29 years, causing this inflation. The money supply has grown through bank lending in this period, and grew by £147 billion in the UK last year alone, or £ 2450 for every person in the country. My wage as a trainee accountant in 1979 was £ 2500 per year, giving a ratio of 1.6 to the house price. The same person in the same town doing the same job would now be paid about £ 18,000 per year, giving a ratio of 4.4 to the house price. I accept that house prices are now in decline, but they have a long way to go before we get back to the affordable ratio of 1.6, and this house would be priced at £ 28,800 if the 1979 ratio still applied. The house has not been extended, the only improvements are double glazing and central heating since 1979. The area that the house is in has also declined since 1979, because there is more crime, drug dealing and anti-social behaviour. In other words the value has not gone up because there has been huge investment, Russian billionaires moving in, or the area has morphed into 'Kensington and Chelsea'. The town in question is Bradford which has suffered a decline in industry and employment over the last 30 years, and has a large proportion of the population relying on state benefits.
There is nothing wrong with increasing the money suppply if it is matched by more products, services, people etc. Perhaps you agree with me anyway, and I defer to your greater knowledge of economics.

[Ian Greenwood]

To be distracted from the main point of Paul Grignon's Money as Debt would be wrong, because it gives an opportunity to rectify the inherent instability in the global economy. If it can be thought of as a leaning tower the reason I am interested in the reform of money supply is to stabilise the tower and grow it into a strong future structure by underpinning the two weaknesses under one side - the credit money weakness and the trade injustice weakness. As I said, the credit money weakness directs money too strongly into the banking sector. It is some of THIS we would expect that government could use, rather than creating it. In this way we avoid all the inflation arguments.

The Main Point - to reply to Mr Hilder is not, in my opinion to abolish interest, nor to create unlimited money, or even (in my opinion) create ANY government money for projects - in other words the system stays as is - with a simple adjustment proposal, an OPTION substantially different from the other bloggers, I commend it to you for further examination if you would:
[- did you read the text first provided or only skim it? Or some of it. To draw attention to my claim that it is worth reading I have brought forward comments and put them below here.]

SO THE MAIN POINT IS to establish the basic fact that a charge must be made for money created, especially with respect to simple housing loans. In considering whether such loans should or not be issued and therefore create money as debt (at least for housing loans) banks should be rewarded at the same level as building societies for all housing loans issued. Only the base rate would be diverted on only those loans, when the proposal is first introduced.

WOULD you, MR Hilder Or anyone else) be kind enough to answer that point directly as I believe it could be simple and without much bureaucracy? Is there that much gap between us?

And there IS no hope for the planet without the climate investment, trade reform to reflect reality - climate reality, energy reality and credit reality. Below are 3 Steps.

As Jamie says in COMMENT quoted on Climate, Energy and Credit Reform, full paper below under Sept 8: about these realities (I commend the full paper and some time perusing the additional work available by return from
Ian.greenwood [at] STEERglobal.org)

"From my initial impression (the last thing we need is yet another tax and mere tinkering with interest rates) I decided to give it a fair go and actually read it and the attachments in full. I am glad I did because I have changed my view to seeing that you do know what you are talking about. I now like your proposal because, whilst I do not think it fixes [all] the fundamental flaws in the current system, it mitigates some of the worst aspects of it, and so can buy us some more time. I think your critical analysis of the ill-effects of the current system covered and cited in your material is correct. I like the thrust of internalising some of the so-called externalities to approach a better financial accounting reflection of reality. I like the practical, pragmatic, expedient approach which comes from your scientific/engineering/technical background.

What you are proposing can be relatively easily bolted-on to the existing system to make it work better for longer” Jamie Walton Global researcher 2008

Summarising Money as Debt

3 Historical STEPS TO MONEY INSTABILITY;
Simple example of how banks became too rich
Step 1
Lets say £1000 was in gold or coins deposited. It became popular to swap paper receipts, which came into use as currency. Bankers became able to issue £1000 extra currency on top of the paper they first issued, because of fractional reserve banking (first fraction 1/2) Now let's call the extra paper money X - the amount of extra created by banks in step 1.
(2X in circulation)
Step 2: Loans and mortgages 2 X more was issued. 4 X in circulation
As these became popular, bankers became able to issue extra money based on the security and the ability of borrower to pay - as Grignon says - they had extra money coming in in interest and capital repayments. It is a red herring to say the money is cancelled - only the loan account is cancelled between bank and customer on full repayment the money created remains in the inflated pool pressurised by more money from each bank.
BY 1946 this form of money in UK was 2 X as a proportion, but when the Bank of England was nationalised the X-worth of currency in 1 above was taken into the public purse, leaving only 2 X free to the banks. They did not go out of business!

STEP 3 Credit money is inflated to 20 X
The TEN-FOLD growth up to 2006 is probably the heart of the problem of property inflation post-war. Several ripples have crossed the UK since the 70s.

The Treasury target of 245 % when compounded over 30 years is in contrast to property price inflation our paper below in Sept 8 might help is to explain the Bradford example to MR Davies with the explanation?

To conclude: The Banking power grew the trade advantage in recent years and each now feed each other to the disadvantage of the producer nations. The trade advantage will diminish taking with it the trade and currency advantages/banking power in the UK/USA so we have a window of opportunity before the trade pendulum and banking pendulum swings further to the East to work for the good and to use the currency advantage remaining to build a more peaceful world for the future.

[Stephen Hilder]

Mr. Greenwood,

OK. I will answer you as directly as possible.

I'm glad you don't want to abolish interest. That would be the financial equivalent of abolishing the wheel, or at least, abolishing round ones.

Is there that much gap between us? I don't know. Here is what I would need to know (rhetorically), to answer that question:

1. Do you sincerely believe in the practice of economic policy without numbers and calculators?
2. Do/Did you teach your children how to spend and borrow responsibly? Quantitatively using a budget?
3. Do/Did you teach your children a trade with lasting value?
4. Can you calculate a simple fixed rate fixed term mortgage payment?
5. Do you believe in personal responsibility for poor decision making, financial or otherwise?
6. Do you recognize that fixing any environmental issues we may have, and any weaknesses in our financial infrastructure, are not inherently coupled problems?

In all this discussion, I these are the issues that I personally have opinions on. You see, number 1 is idiocy. Number two is a practical application of number 1. Number three has to do with keeping an economy based on solid fundamentals--- value creation. As they say, "With bad laws and good civil servants it's still possible to govern. But with bad civil servants even the best laws can't help". The same goes with economic systems. Number four demonstrates some basic competence in finance, otherwise you're an armchair quarterback, a backseat driver, a weekend warrior, a member of the peanut gallery, etc. Number five is a cultural problem we face today, that leads to issues with numbers 2 and 3, and combined together has resulted in our current credit crunch. Number six is demonstrating ability to think clearly and define abstraction barriers around complex issues, without which a person's mind is simply in chaos.

As for your main point, do I think it's a good idea to levy an additional tax on loans? General principles argue against, and certainly no convincing case has been made here. I personally don't know of evidence that mortgage lenders made too much money. Competition up to the burst of the bubble was extremely stiff, each bank in the chain scrambling to make a basis point here or a basis point there. Given this, what would a tax on mortgage loans do, except make it more costly to buy a house? Again, this is based on first accepting that there is no "money creation" issue, except when it comes to handling defaults. Back to point 5 above. If on the other hand you really still believe that there is a "money creation" issue, and it should be somehow stopped, then you are, in point of fact, essentially arguing against interest (which you say you are not doing)? Or to be more generous, are you saying that loans should be taxed to reduce overall borrowing since historically, it would seem that the public borrows beyond its means? If so, then I point you to issue 1, 2, and 5. As they say, "make something idiot proof, and they will invent a better idiot".

In terms of your angst towards the scary relative growth of the East, I point you to issue 3 above. You see, around here, everybody wants to be a high end fashion designer (just a quirk of the neighborhood).

You want to talk about unsustainable...

[Jamie Napier]

Reply to Simon Davies who asks for an explanation for the rise in the ratio of UK house prices to incomes.

There is a website economicshelp.org which seems pretty good and and can help you for general questions and economic theory. There is an article there entitled overvalued housing market which was written in April and addresses the UK housing market in particular.

As it says, primarily an interplay of cheap credit, bank lending policies (which made borrowing easier), limited new supply and speculation. I think we can agree that there is a bubble and the house price to income ratio will have to come back closer to its long term average. I think we can also agree that there is too much personal debt (including mortgages) the reasons for which I briefly mentioned earlier.

[Ian Greenwood]

Thank you for the relatively detailed and specific reply (to the question Would you agree to a charge going from Banks issuing free money to the public purse (to REDUCE TAXATION) on any money CREATED?

In your points No 1-5 the answer seems that we are mainly in agreement.
ie YES is the answer to most of the questions. But as you subtly have changed the emphasis to a tax on mortgages, please allow me to bring you back to the point:

Building societies who only loan out depositors' money make ample profit to issue a cash withdrawal service and a mortgage loan service. There is no need or suggestion to tax them.

Banks on the other hand that create credit money in order to lend it would be subject to a Charge on any new money created - at least on the mortgaged loans which are secured, and in normal conditions almost risk-free. They would still get the markup on those loans offered beyond the base rate if we had the simple system I described below in the original submission to the blog. This is still available with its coloured charts and back-up documents by emailing to Ian [at] STEERglobal.org.

That would be a step towards stability. So why should those banks have free money in addition to their other profits? (these extra profit areas are outlined in the document published earlier on in the blog - below) THEY SHOULD NOT

You Ask: what would a tax on mortgage loans do, except make it more costly to buy a house? Again, this is based on first accepting that there is no "money creation" issue,

I have bracketted off the last bit of the sentence in order to answer this first bit again - re-iterating the answer already above. I do not accept there is no money creation issue. There IS a money creation issue - the banks have been getting it free - several billions a year EACH at least.

There will NOT be a greater cost in buying a house - because competition with building societies will ensure that.

[except when it comes to handling defaults.]

The same procedures apply as with building societies.

You Mr Hilder say : Back to point 5 above. If on the other hand you really still believe that there is a "money creation" issue, and it should be somehow stopped, then you are, in point of fact, essentially arguing against interest. NO I MOST CERTAINLY AM NOT (see original document [Dear other reader - can you see what is and has been going on here for a couple of CENTURIES? We the Tax and Extra-interest/price-paying Public have been MUGS to let this carry on] In clever attempts to confuse the not-so-well-versed in Money, Bankers and others in the economic system get seriously rich (or at least get free money)

(which you say you are not doing)?

Reply : No I am not arguing against interest, only against free money to any sector.

Or to be more generous, are you saying that loans should be taxed. NO IT iS NOT THE LOANS THAT ARE TAXED. .. to reduce overall borrowing since historically, YES BORROWING AND PRICES WOULD EVENTUALLY GO DOWN, HURRAH .

YOU SAY ..it would seem that the public borrows beyond its means?

Well I think that sentence puts the case in a nutshell YES BEYOND OUR MEANS - well most of us anyway!! Or those who cannot afford your lifestyle (which you refer to below). What IS your lifestyle Mr HIlder? And occupation. Are you identifiable?

If so, then I point you to issue 1, 2, and 5. As they say, "make something idiot proof, and they will invent a better idiot".
WHO might "they" be in your opinion?

You say: In terms of your angst towards the scary relative growth of the East, I point you to issue 3 above. You see, around here, everybody wants to be a high end fashion designer (just a quirk of the neighborhood).

Reply _ the rest of this is self-explanatory
and i commend it to readers. I have no angst against the East, only against rip-off and cleverly concealed rip off at that - which for many years did disadvantage the East - but it seems there are some very clever in China - Watch out MR Hilder and the rest of us, we now live in a global community.

Thank you everyone for your time, the end of this fascinating issue must be nigh (if we stick to the point and work together - Action!)

In reply to Mr Napier and Mr Davies I would suggest that almost all goods we purchase have an interest element built in from the monetary injustice referred to above - so it is not just house prices! Thanks

[Ian Greenwood]

Ian here again: Sorry I should have said BIG banks (towards the middle of my recent post in answer to stephen hilden)

The BIG banks get several £ billion of free money each per annum by issuing extra loans (in normal conditions) ie creating Money as Debt otherwise known as credit money or bank money.

This distorts the national and global economy (because the "free" money is relatively unearned) and allows very high salaries and perks for some employees (even if set against company tax).

With our proposal - outlined on a document pasted here on 8 September, the "base rate of interest" would be adhered to (collected by the Bank of England for the public purse) and the mark-up allowed on this free money, bringing banks into line with building societies on housing loan issuance. Five or six other areas of profit would remain with the banks.

This should be of great interest to Government of all persuasions and the Civil Service as indeed it would be to other businesses, families and individuals because it would tend to reduce both taxes and prices in the long term - a reduced cost of living all round.

Those initially against such a move because they have bank shares should think again - stability would result and lower social, environmental and security costs as well as lower inflation.

It would offer a spiral towards stability and allow us to work around the credit crunch, creating jobs in the process. Meaningful jobs and renewed enthusiasm for a common purpose.

Last year the UK Treasury suggested that the OFT and FSA should be involved to bring in such a change. We propose that this should be mapped into the Pre Budget Report and Budget without any further delay. The beauty of my suggestion is that it would only be a few billion pounds in the first year if initially brought in on new money issued as secured lending.

What do you think Stephen?

[Paul Grignon]

Hilder vs. Grignon on the Issue of whether the Practice of Charging Interest on Loans creates an Inherent Financial Imperative for Constant Economic Growth

POSTED BY: STEPHEN HILDER | 4 SEP 2008 21:57:56

"SO PLEASE EXPLAIN WHERE IN ALL OF THAT, THERE IS A PROBLEM OF EXPANDING ECONOMY, NATURAL RESOURCES, WHATEVER YOUR BEEF IS, AND WHAT DOES IT HAVE TO DO WITH THE EQUITABLE 5% AGREEMENT "A" AND "B" ENTERED INTO? HINT: NOTHING. INTEREST IS NOT THE ISSUE AT ALL. WHICH IS NOT TO SAY THAT THERE AREN'T ISSUES, JUST THAT INTEREST, BEING A TOOL OF FINANCE AND TRADE, IS MERELY A TOOL THAT CAN BE USED FOR GOOD OR EVIL. SO HOW ABOUT FIGHTING EVIL INSTEAD OF DECLARING WAR ON A SCREWDRIVER?"

Stephen Hilder claims that the charging of interest DOES NOT create an imperative for constant economic expansion, generally requiring ever-increasing natural resource depletion and resultant environmental degradation as I claim in my movie Money as Debt I (embedded on this page)

What has Stephen Hilder offered as proof of this contention? Two facile examples of CIRCULAR REASONING in which the desired conclusion is the premise on which he builds his example!!!!

There has never been any argument that 100% recycling of interest makes paying interest possible indefinitely. I said so in Money as Debt I and in every one of my previous 3 posts to this forum. Yet Hilder keeps trying to teach me this as if I don't understand it.

Hilder defends his position that 100% recycling of interest is what happens in the real world with 2 contrived examples: (1) the corngrower story in which the participants sign an agreement that guarantees 100% recycling of interest. (2) the Jack&Jill Inc. story where again everyone agrees to spend any interest they receive on the others' services or products. Both examples are circular reasoning and fail to apply to the real world.

Anyone ever heard of a bank loan agreement in which the bank GUARANTEES the borrower the opportunity to EARN every penny of the interest payments back?

Of course not. So who or what guarantees this 100% recycling of interest? Apparently it is the "free market" in which all such problems are miraculously taken care of... if we don't look too closely.

Mr. Hilder is really at a huge disadvantage here because his argument that interest does not create an inherent need for constant economic expansion depends on his argument being 100% true. Anything less than 100% recycling and Hilder's argument fails and my argument is true.

There are two reasons the free market does not make 100% of the interest money available to the borrowers who need it. One is that banks use interest money to make more money, rather than spend it. The only way this shortage of money can be remedied is to either increase the total money supply by increasing total debt necessitating real economic growth to prevent inflation... or increase the velocity (transaction rate) of the same amount of money, which by definition, means an increase in GDP (ie economic growth). If bank loan payments are on a fixed schedule, increasing the velocity of payments is not actually an option , leaving the constant expansion of total money supply (total debt) as the only real option.

The other factor is the existence of secondary (and tertiary) non-bank lenders who intercept the money that needs to be recycled and make it available only as a loan at interest. To pay these additional lenders their interest requires an increase in output on the part of the economy, which Hilder proves for me in his Jack & Jill Inc. story but doesn't seem to realize it.

Here is what Hilder wrote:

"Note that it's perfectly permissible for Jack to borrow a tractor from Jill, and promise to pay back two tractors in a year. (100% interest!) He just needs to build a tractor at some point."

WOW!!!!

As building an additional tractor requires real world materials, energy and labour, that is to say an EXPANSION of the real economy, with this one inadvertent statement Hilder has very elegantly proven the point I make in my movie, the very point he is arguing against. The charging of interest necessitates economic growth and is incompatible with any other situation except constant economic growth. Good work Stephen. To make Hilder's admission even more damning, where is Jack supposed to get the materials to build this tractor? Hilder 's example is a closed loop so he will have to:

1. earn it from Jill (assuming she gives him with the opportunity). This requires a doubling of economic activity but no increase in total money supply.

2. create new money as a loan from the bank, an increase in total money supply requiring a doubling of economic activity to prevent inflation.

3. We let Hilder off the hook here and change the extra tractor Jack owes (tractor = resource & industrial economy) to massages instead (pure service economy) and we'll assume Jack already has a table and oils. Now he is just exchanging additional labour equal to a tractor (a 100% expansion of the real economy) for the 100% interest.

So in all three cases, Stephen Hilder has proven that the central thesis of Money as Debt I, that charging interest is only compatible with continuous economic expansion is clearly TRUE !!!

But I shall venture further. Stephen Hilder asks me for diagrams and numerical examples to prove my point and then ignores what I present. ("zzz..."). I demonstrated with a numerical example, that if $100 that is needed to make a payment on a primary (created money) loan is only available as a secondary (existing money) loan at $5 interest, then someone must borrow it from that secondary lender in order for it to be available to make the $100 payment on the first loan. As the principal of the primary loan is extinguished, whatever part of that payment is principal, let us say $20, is extinguished once the loan payment is made. The bank now spends the $80 of interest back into the economy for the borrower to earn. But the borrower owes the secondary lender $105!!!! Thus arises an actual shortage of money ($25) that can only be remedied by constant expansion of total money supply ie DEBT!!!!

I have now posted online for your previewing pleasure, the 7 minutes of Money as Debt II, Promises Unleashed in which I diagram very clearly what I contend.

http://paulgrignon.netfirms.com/MoneyasDebt/The_Un-payability_of_Interest.html

Unless someone comes up with an actual counter-argument that makes sense, I see no reason to change the movie except perhaps to include the numerical proof above.

[Ian Greenwood]

Thank you Mr Grignon for pasting the text reproduced below Mr Hilder's CAPITALS

If there is still life in the counter-argument, when all we are saying is to divert the base rate (cash rate in some countries). When that is accomplished for public investment a clear road map out of the Credit crunch "mess" (see BBC Radio4 programme to be aired tonight Monday 15 September) would exist.
please let me reply to Mr Hilder’s Points which seem to me to go to the bedrock of the thinking behind the current state we are in globally. Where some vested interests in certain countries hold all the strings, indeed the sway (sometimes using the media). Rather than any real interest in the common universal good or real interest in democracy, a rather selfish attitude prevails. I wish to spell this out for those not well versed in global politics, or who like me would prefer not to get involved in it. (this changed for me when I realized that the DIRECTION was wrong and someone with wider practical experience and problem solving at a simple level needed to be involved.
It is CHEAPER and BETTER to CO-OPERATE. For example it was recently stated on the media that the CERN LHC project (which MR Hilder brought up in his discussion) cost less than a medium sized university in spite of employing thousands (or was it several hundreds) or scientists. CERN was lauded as one of the best value examples of co-operation the world has yet seen and incredibly good value. Lets hope so.
We have the opportunity to cooperate for better efficiency and that includes banking and finance. Perhaps we live now in a world where collaboration and co-operation are the new imperatives rather than a self-centred worldview. Maybe now we live in a world where resources are to be used responsibly and a bit more evenly spread so terrorism is not necessary to get the message through to those with literally all the strings?
Mr Grignon has dealt with the problem of the expanding economy in his latest reply. This is the extract that prompted his and my responses, I suggest a slow and steady spiral towards stability or "transition" could be achieved with the CMBA "adjustment":
POSTED BY: STEPHEN HILDER | 4 SEP 2008 21:57:56
"SO PLEASE EXPLAIN WHERE IN ALL OF THAT, THERE IS A PROBLEM OF EXPANDING ECONOMY, NATURAL RESOURCES, WHATEVER YOUR BEEF IS, AND WHAT DOES IT HAVE TO DO WITH THE EQUITABLE 5% AGREEMENT "A" AND "B" ENTERED INTO? HINT: NOTHING. INTEREST IS NOT THE ISSUE AT ALL. WHICH IS NOT TO SAY THAT THERE AREN'T ISSUES, JUST THAT INTEREST, BEING A TOOL OF FINANCE AND TRADE, IS MERELY A TOOL THAT CAN BE USED FOR GOOD OR EVIL. SO HOW ABOUT FIGHTING EVIL INSTEAD OF DECLARING WAR ON A SCREWDRIVER?"
Where is the evil that we fight? Is it intolerance, injustice (banking or otherwise) selfishness, bigotry, lack of basic information, keeping others in the dark, descent into the globally warm "Hell" full of struggle over resources, etc, etc.

Or is it the more simple kind of evil: slowness to respond, lack of practical experience, lack of finance ability, lack understanding of global risk and threats from sea levels provable using a simple experiment with a glass of water and an ice cube?
I commend the original documents to you. Interest IS a tool, the question is whether we can as a global society use that tool properly or not. Rather than allowing credit money to unbalance economics (herd effect etc) "free" money should NOT be allowed to continue to all go to one group or sector (held offshore, etc) but some of it to the public purse for long-term investment in renewables and sustainability… Over to you to act.. please.

I will try to post a chart soon to help in basic, balanced economics.

[Ian Greenwood]

HULLO MR HILDER !!! (and any others)

Can you hear us!! Please come back with a constructive comment - after all, its YOUR world as well. Perhaps you can help move this forward using pure logic.

Kind regards
ian

[Jamie Napier]

Dear Mr Grignon, I have enjoyed the quality of the debate between yourself and Mr Hilder on the issue of whether the Practice of Charging Interest on Loans creates an Inherent Financial Imperative for Constant Economic Growth. However, I still remain sceptical of your position. I see your Island example as misleading because the banker does not accept services or other forms of exchange as interest payment (he only accepts the "money" that he created of which there is insufficient quantity), and your banker lends to people who do not have sufficient regular income to repay him (in fact they earn zero income in the only money that is acceptable to him).

On 9th Sep, I raised the question of whether your theory still stands if the borrower generates sufficient regular income (eg a salary) to repay the loan and interest. I wrote "At an individual level, a loan is not a problem if Person A creates sufficient surplus each year to repay principal and interest. Eg. Person A earns $100 pa, spends $80 and saves $20. He borrows $180 to buy his home. Next year he earns $100, spends $80 plus $6 interest plus $9 principal, and saves $5. Money supply goes up when he borrows and money supply goes down gradually when he repays. Where is the economic problem? All that has happened is that, instead of saving $20 pa for 9 years before buying a home, Person A has chosen to borrow today and pay it off out of savings for the next 20 years plus pay an additional cost, the interest, for this privilege. On the other hand, if person A does not have an ongoing surplus but is borrowing with the intent of using the funds to create a surplus with which to repay the principal and interest, then this, by definition, requires growth to repay the loan. (This distinction between the "consumption" loan and the "investment" loan is a reference to Douthwaite in FEASTA 13 Aug and Flintoff's Ban Compound Interest column last month, where the consumption loan is OK but the investment loan is not because it requires growth to be repaid.)"

Let me additionally quote Richard Douthwaite, a critic of interest bearing loans, from FEASTA Aug 13th, "There's no problem with simple interest - people expect to pay that out of their normal income. With compound interest, however, economic growth is required if everyone who has borrowed to invest is to be able to pay the interest on their loans without impoverishing themselves. So lending money at interest for investment purposes means that economic growth has to happen if it is to be successful." Please see my 4th Sep comments on the timesonline blog, in which I argue that any distinction between simple and compound interest is irrelevant and that the growth imperative comes from the PURPOSE of the loan.

But let me create more complete examples of when the interest charged on a loan does not create a growth imperative. My Island in Example 1 looks a little strange because I purposefully create a borrower who generates sufficient regular income to repay the loan and interest and this requires another person who is living beyond their means.

EXAMPLE 1
There are 4 people and they each earn a living by giving massages and they each spend money on massages. "I Owe You a Massage" (IOUM) is a tradeable currency. In a normal year Alan receives 10 massages from Betty, paid for with 10 of Alan's IOUMs ("AIOUM"). Betty receives 10 massages from Charlie and gives the 10 AIOUMs to Charlie. Charlie likewise, buys 10 massages from Debbie for 10 AIOUMs. Debbie buys 15 massages from Alan for which she redeems the 10 AIOUMs and writes 5 Debbie IOUMs (DIOUMs) which Alan saves because he likes to save for a rainy day. Debbie is living beyond her means, effectively funded by Alan on an interest free basis. At the end of Year 1, Alan has saved 5 DIOUMs and Debbie owes 5 DIOUMs.
If this continues, at the end of year 4 Alan would have saved 20 DIOUMs and Debbie would owe 20 DIOUMs.

Instead, during year 2 Charlie lends Alan 6 massages to sort his back out. Alan signs a loan note and receives 6 Charlie IOUMs (CIOUMs). The deal is that Charlie will repay 3 IOUMs principal plus 1 IOUM interest in year 3 and the same in year 4.

In year 2, then, Alan buys 16 massages from Betty, 10 paid for with AIOUMs and 6 with CIOUMs. Betty now earns 16 IOUMs and spends 16 with Charlie. Charlie earns 16 IOUMs and buys 16 massages from Debbie who receives 10 AIOUMs and 6 CIOUMs for her work. Debbie continues to buy 15 massages from Alan. She uses the 6 IOUMs and 9 AIOUMs, saving one of the AIOUMs to partially repay her interest free debt with Alan. (Going full circle, Alan earned 15 IOUMs, received 6 IOUM inflow from the loan and spent 16 IOUMs). So at the end of year 2, Alan has 4 DIOUMs and 6 CIOUMs saved, Alan owes C 6 IOUMs to Charlie and Debbie owes 4 massages to Alan.

In year 3, Alan as usual receives 10 massages from Betty and writes 10 AIOUMs. Alan also repays Charlie principal and interest using 3 CIOUMs and 1 DIOUM respectively. Betty earns 10 AIOUMs and spends this with Charlie. Charlie therefore receives 10 AIOUMs which he spends, 3 CIOUMs which he retires as principal repayment of the loan, and 1 DIOUM interest which he "hoards". Debbie earns 10 AIOUMs and buys 15 massages from Alan, as usual, funded by 10 AIOUMs and 5 DIOUMs. So at the end of year 3, Alan has 8 DIOUMs and 3 CIOUMs saved, Charlie has 1 DIOUM saved. Alan owes Charlie 3 IOUMs, Debbie owes Alan 8 IOUMs and Charlie 1 IOUM.

The same story for year 4, at the end of which, Alan has 14 DIOUMs saved, Charlie has 2 DIOUMs saved and Debbie owes 16 IOUMs.
Compare this to the first scenario when there was no interest bearing loan... Alan would have saved 20 DIOUMs and Debbie would have owed 20 DIOUMs. (Obviously, if Betty or Charlie saved all of their additional income, then Debbie would have only received 10 IOUMs and spent 15 IOUMs with the result that Debbie would still owe 20 DIOUMs at the end of year 4. So the interest charged on the loan has not created a growth imperative or further debt. In fact, if ANY of the additional income is recycled to Debbie, then the total debt in society is LOWER at the end of year 4 which is a surprising result !)

With regards the total number of massages, in both scenarios by year 5 the number of massages is back to what it was originally which is 45 massages annually. In the meantime, the total number of massages pa increased to a peak of 63 massages in year 2 but this was because of the loan, not the interest payments.

So, in conclusion, I cannot see any inherent growth requirement from an interest bearing loan to someone who generates sufficient regular income to repay the loan and interest. Is this an unusual situation in our daily lives? I don't think so. When Bankers are lending for consumption purposes (instead of investment purposes), bankers often (unfortunately not always) calculate a stream of future repayments such that the annual repayments (principal and interest) are affordable. (By contrast, It is unusual for bankers to make a consumption loan of 10, with 11 to be repaid at the end of year 1, to someone who has no income as in your Island example).

EXAMPLE 2
Let me create a further example of an interest bearing loan which does not require additional growth. In this example, the borrower exchanges rental payments for loan and interest payments.

Again there are 4 people on an Island. On an annual basis, Adam buys 6 massages from Beatrice paid for with 6 AIOUMs. He also rents a room from Beatrice for which he pays 4 AIOUMs. Beatrice buys 10 massages from Candice for 10 AIOUMs and Candice buys 10 massages from David for 10 AIOUMs. David buys his 10 massages from Adam, redeeming the 10 AIOUMs. There are no loans or savings at year end.

At the start of year 2, Adam borrows 30 IOMs from Candice and agrees to repay her 3 IOM principal and 1 IOM interest per annum, including year 2. Adam uses the 30 IOMs to buy the room off Beatrice. So now, for year 2, Adam buys 6 massages from B paid for with 6 AIOUMs and repays principal and interest to C with 4 AIOUMs. Beatrice continues to buy 10 massages from Candice, paid for with 6 AIOUMs and 4 CIOUMs received from the sale of the room. Candice has income of 6 AIOUMs and 4 CIOUMs from Beatrice, plus 3 AIOUM loan repayment and 1 AIOUM interest payment from Adam. She retires 3 IOUM of the loan and hoards 1 CIOUM interest. With the 10 AIOUMs she buys 10 massages from David who in turn uses it to buy massages from Adam. In effect, instead of borrowing an asset (a room), Adam is borrowing money and bought the room. The practice of charging interest on the loan did not require any additional loans, nor any additional growth.

Mr Grignon - I would be grateful if you could look at my examples and show me if I have made a mistake.

Mr. Greenwood - apologies for staying on this narrow, theoretical issue and not addressing your solutions, but I have not had a chance to review your proposals.

[Paul Grignon]

Dear Mr. Napier

I am glad you think this debate has quality. I just wish it had the quality of dealing with the examples I have furnished. I am genuinely interested in getting critical feedback on my analysis.

Here is the 7 minutes of the movie that puts forth my argument

http://paulgrignon.netfirms.com/MoneyasDebt/The_Un-payability_of_Interest.html

As for your very convoluted example...you lost me at

"Instead, during year 2 Charlie lends Alan 6 massages to sort his back out. Alan signs a loan note and receives 6 Charlie IOUMs (CIOUMs). The deal is that Charlie will repay 3 IOUMs principal plus 1 IOUM interest in year 3 and the same in year 4."

I thought Alan was the borrower, why is Charlie repaying?

Without doing all the math I think you did the same thing as Mr. Hilder.. create a premise that guarantees the result, 100% recycling of interest by a closed loop in which all participants guarantee 100% redemption in product or labour.

Go back and calculate what happens if all these trades require resource materials that have to be bought with IOU's at interest. Make your premise that these IOU's can only come into existence by borrowing them from a heartless BANK at interest, people cannot just create them themselves (that is a LETS system) and they have to be paid back in IOU's not massages. Now add in that some of the participants decide they don't need a massage, opt out of this agreement to trade you have assumed, and either loan out their IOU's at interest in order to live off their fellows, or go off to the casino with their IOU's and keep that money in play for as long as they can succeed at living off their winnings.

That to me much more accurately describes the real world which is the subject of debate. Desert island examples are often very useful for illustrating simple principles in ISOLATION, but they always fail to describe the real world where NOTHING EXISTS IN ISOLATION.

There has never been any disagreement that 100% recycling of interest makes usury sustainable. It doesn't have to grow and no one need default just because of the arithmetic. You and Stephen can prove it over and over.

Prove to me that in the real world 100% of the money banks take in as interest is spent in such a way that those who need that money for their next interest payment can EARN it.

Prove to me that the mere existence of non-bank secondary lenders who lend existing money already created as a loan at interest don't make defaults inevitable, a result that can only be avoided by constant growth of the money supply.

Prove to me that banks themselves don't do both kinds of lending, money creation and lending of existing funds, thus being guilty of the fraud of impossible contracts.

Prove to me that the simple expectation that people who have money far in excess of their needs and expect it to grow through interest and accumulate can only do so by extracting it from those who collectively have to borrow ever more of it into existence at interest to survive.

Prove to me this is not accomplished on a collective level by creating massive and ever-growing corporate, government and consumer debts (debt=money) that cannot be paid off and MUST NOT be paid off as this debt is our money supply. No debt no money.

Thank you

[Jamie Napier]

Mr Grignon, I am sorry that you stopped reading my last contribution when you reached a (fairly obvious?) typo. If you had continued, you would have seen that my example purposefully has the banker hoarding the interest and not recycling any of it.

Yes I have created examples that prove my point (I hope). That was the point of them! You believe that interest payments, if not 100% recycled, inherently require growth. By providing examples of when this is not the case, I am disproving your point. I would therefore be grateful if you would consider my examples.

I am not sure why you suddenly do not like desert island examples! You created an Island to support your view. Your Island example has a banker creating 100% of the "money" in existence, lending it all out, hoarding the interest, and only accepting his "money" in return. Someone has to default. Being in isolation, it pays no heed to what already exists in the economy (eg a LETS or barter system or gold which the king had minted into coins and spent building a castle). Your 7 minute video is the same principal. Banking system creates debt (P). Debt is the only money in existence, therefore interest cannot be repaid unless 100% recycled or unless there is a new loan.

Yes, Island examples (and your video) are simply illustrations. Yes, there is too much debt in the modern world and most of the money created in the modern world is via debt. But, in trying to prove or disprove this question about whether interest payments INHERENTLY require growth, it is relevant to use simplified examples.

In which case, which of our Islands more accurate? For this, it is worth considering how the first interest bearing loans came to be introduced into the economy. Is it more realistic that a banker came along and created the only units of "money", lent out 100% of the "money" he created, only accepting the "money" he created as payment in return (of which there is not enough), wanting someone to default (your island)? Or is it more realistic that loans were introduced when there was already economic activity taking place, that there was already a medium of exchange (my island)?

Paul Johnson the historian writes "Most early religious systems in the ancient Near East, and the secular codes arising from them, did not forbid usury. These societies regarded inanimate matter as alive, like plants, animals and people, and capable of reproducing itself. Hence if you lent 'food money', or monetary tokens of any kind, it was legitimate to charge interest. Food money in the shape of olives, dates, seeds or animals was lent out as early as c. 5000 BC, if not earlier. ... Among the Mesopotamians, Hittites, Phoenicians and Egyptians, interest was legal and often fixed by the state."

Be that as it may, please read my examples. I believe they illustrate the existence of interest bearing loans that do not require interest to be 100% recycled nor additional growth.

[Paul Grignon]

Dear Mr. Napier,

My apologies but for you to expect someone to wade through the first example including the uncertainty of typos is a bit much.

In the second much shorter rental example you set up a 10 year payment period for the room ( 30 borrowed 3 principal 1 interest paid back annually) but Beatrice will run out of money from the proceeds of the sale before that.

"Beatrice continues to buy 10 massages from Candice, paid for with 6 AIOUMs and 4 CIOUMs received from the sale of the room."

If she does that for 10 years she will need 40 CIOUMs from the sale of her 30 CIOUM room, will she not?

The interest on the loan totals 10. The shortfall in Beatrice's input to this purportedly balanced equation over 10 years is 10.

The equation is not balanced and I would say that the interest is the direct cause of the deficit. Do you see that differently?

[Paul Grignon]

Dear Mr.Napier,

In addition to my first comment below, if you argue that it was Candice's hoarding that caused the deficit not the interest on the loan, please note that you set it up yourself so that Candice the moneylender does the hoarding OF INTEREST. She can do this presumably because she has an EXCESS of money over her spending needs that she has derived from moneylending, and would in the real world, very probably lend or invest this growing surplus with even FURTHER EXPECTATION OF RETURN rather than hoard it.

If she doesn't hoard, lend or invest it and spends it or gives it away instead it does work out. We have been in agreement all along that if interest is 100% recycled, usury can be sustainable.

Once again it has been proven.

The problem is it doesn't happen in the real world because Candice wants her excess money to grow. She doesn't want to spend it or give it away. she wants to get rich and use lending money at interest to do so.

[Paul Grignon]

It looks like I will have to correct my own errors in thinking.

I gave an analysis that $100 created by LOAN 1 is needed to make a payment, but that $100 is now only available as LOAN 2 from a secondary lender for $5 interest. Someone borrows it and it finds its way to the first borrower who makes a payment of $100, $20 of which is principal leaving only $80 of interest to be spent by the bank and available to earned again by the borrower who now owes the secondary lender $105.

I argued that this was a $25 shortage, which it is in a sense. However, we have proven repeatedly that if the primary lender of LOAN 1 is recycling 100% of the interest, which we are assuming here, the existence of the money to make the monthly payments of $100 are assured. The next payment would have been $100 anyway.

Thus the shortage is actually only the second interest charge of $5. The LOAN 1 borrower can now earn $105 from those LOAN 1 funds and pay back the secondary lender. And then borrow the $100 again to make a $100 payment on LOAN 1, again owing the secondary lender $5 interest.

The extra work necessary to earn the $5 is an expansion of the economy.

Now the secondary lender has $5 left over, and the borrower owes another $5 interest that could be left over.

If the secondary lender spends the whole $5 each time it is available to be earned with some extra work.

However, if it is kept and especially if used for further lending, the $5 /month left over each month will grow.

As all the money in this world was created by LOAN 1 this accumulation of loan capital can only result in a reduction of the money supply available to pay LOAN 1 except as a loan from the secondary lender with the extra interest.

So it is not inevitable that secondary lenders cause an actual shortage of money... just an extra burden of interest that must be worked off.

Comments?

[Stephen Hilder]

Mr. Greenwood and Mr Grignon,

Since you ask, just let me confirm that I did in fact hear everything you have said. With great "interest". I apologize for not having responded sooner.

Mr. Greenwood, I have not responded to you because your comments here are so wide-ranging (floating sea ice?) and loosely coupled that it's really hard for mere mortals to get to the bottom line of what you are saying. Not everyone can follow you in the breathtaking gyrations of logic which you are capable of. It would seem that you are a revolutionary thinker, and I'm sure that you have something to be proud of in this dramatic synthesis of seemingly unrelated things. I particularly enjoyed your pot shots at math and calculators, and "pure logic". I agree that these things are a crutch for those who do not have your level of perception. I might draw the analogy to that which has been commonly observed in young children, where bright and talented kids are often misdiagnosed as having ADD. Therefore I wish you nothing but continued success in your efforts, and hope that you would be willing to employ your talents in the public service as a politician.

Incidentally, are you really curious about my lifestyle, and whom it is I think are idiots? If so, let me know. I will answer. To reciprocate, out of pure curiosity, I wonder if are either of you gentlemen are romantically involved with Ms. McNeill?

Mr Grignon, recently you have been insisting that I have been proving to you what is perfectly obvious and known to you since the early days of the empire. That is perfectly fine by me. I have no interest in what you know or don't know, I am only interested in what you have been saying. If you are considerably more clever than you appear, I am cheered by the news. You see, someone reading your comments of Sep 5 (search below for "Santa Claus") might accidentally think that you were asserting various dumb things. For example, "monthly" payments, rather than yearly, as if it makes any difference whatsoever what units we use to measure time. Also, the idea of bankers collecting payment in "goods and services only", again, as if money were anything but a medium of exchange for goods and services in the first place. The uneducated reader might actually believe you thought something dumb, and are just backpedalling now to save face, but we know better, that you were just (over)simplifying things for the unwashed masses.

OK, given all this. I would like to try a slightly different approach than that of Mr. Napier, who is far more fearless.

Firstly, I am not guilty of circular reasoning. My statements were simply a counterexample to your comments that interest bearing instruments are, in brief, "impossible contracts" because of the scenario where the banker hoards money. You for some reason thought I was arguing that "interest is 100% recycled", using my example where interest is "100% recycled". No. My argument that interest is "100% recycled" is simply that everyone is responsible for their own borrowing. (See my comments about everyone doing their own accounting and not going bankrupt.) Therefore, everyone who borrows expects to be able to produce enough to cover their payments. That's called using a "budget". Your problem, simply put, boils down to this: "What happens if Jack lends 10 coconuts to Jill, and refuses to take payment in anything but trained orangutangs, which cannot be found on the island". To beat the dead orangutang completely dead, note that the problem has nothing to do with interest. Even if the loan were at 0%, Jill can never make her payment of 10 coconuts' worth of orangutangs. What happens in the real world, is that Jill never enters into this agreement with Jack, knowing that no orangutangs are to be found. If Jill is ignorant, and just assumes the presence and her capability to catch and train orangutangs, well then she's done something dumb. Nothing can protect people from stupidity. You might say, but Jill was hungry and had no choice because she had to eat, and did what she did only to survive. OK. You give me some case studies and let's see if I agree that they were extorted. If so, let's make some meaningful laws against such extortion.

Let's address your comments of Sep 13, following "WOW!!!". Apparently I made some damning admissions. Let's talk about them. Apparently, my suggestion that Jack repays Jill 2 tractors is damning, because he must use natural resources to build the second tractor, and even if he were to repay in services, he would simply be repaying the equivalent in labor, and therefore the economy would be expanded (which you assume is intrinsically bad for the environment (also not true, but never mind for now)). The conclusion from this is that charging interest necessarily expands the economy. No. Consider Jack. Jack expects to grow 1000000 pounds over the course of his working career. He has a wide spectrum of choices in behavior. He can borrow considerably less that that amount now (at interest) and use the borrowed amount immediately, or he can save everything and have one wild party on the last day of his life. Either way, interest or not, his production and the impact on the environment are the same. His personal utility and how he chooses to distribute it over his lifetime is the only thing in question. If you claim that the agreement of the tractor loan at 100% interest intrinsically requires growth in the economy because of the production of the tractor, then you fully misunderstand. You see, Jack must have intended to produce the tractor _anyway_, or he would not have entered into the agreement.

So interest is good for the environment! You see, rather than waiting until he completed and sold the tractor, getting 1 tractor's worth of goods/services in exchange, he decided to sell a hypothetical future tractor in exchange for fewer goods and services now! This means, less was produced due to his economic activity overall!

Again, to beat the tractor dead, your comments about labor and materials needed to build the tractor apply to ANY production of a tractor whatsoever. It doesn't matter whether the tractor is in exchange for coconuts or for the privilege of spending money one doesn't have at the moment. So, you seem to be fundamentally against the production of tractors, not against loans at interest.

Again again, you are incorrectly mixing up entirely unrelated issues. A sustainable economy has nothing to do with interest, and everything to do with educated consumers, ones that understand math.

[Stephen Hilder]

Mr Grignon,

Just to save some time, would you mind not responding along the lines that everyone knows that building tractors requires raw materials?

I agree, everyone knows this.

I just wonder why you brought it up in the context of loans and interest.

[Ian Greenwood]

Hullo again Mr Hilder

Good to see you are still willing and able to create further diversions from the fundamental question which I have asked you: WHAT IS WRONG WITH MAKING COMMERCIAL BANKS PAY FOR THE MONEY WHICH THEY CREATE? Especially as they have been the prime causes of the current instability by creating about 10 times more than in the 1940s, ie at least 20 times more than we get into the public purse from actual currency (notes etc, 2006 figures).

[In the 1940s apparently the banks got X worth of free money as currency in addition to deposits (i.e. doubled the money to get an extra X free) and 2 X worth of free "credit money" on top by fractional reserve banking on the basis of loans and mortgages, but since the demutualisation of many building societies into banks this has exploded the money supply and revealed these sources of money to the public - because of the sheer volume of it. ]

I am beginning to think that you, Mr Hilder must have an interest in this source of free money to be defending such an injustice. Without the transition I suggest the credit meltdown is likely to cause meltdown in the wider economy as virtual money withers and no clear road map out of the "credit mess" has been made available to engender confidence by the authorities. Acceptance of CMBA and ETI published here and elsewhere could enable that confidence. I encourage Mr Hilder and other readers to examine these proposals and take them forward constructively to those whose responsibility it is to give a clear direction and solutions. Please reconsider my proposals.

In response to your point about lack of connection between the floating ice melt and the global economy, it may have escaped your notice that the absorption of latent heat has protected the planet from more extreme climate change than we've had until now. The heat being generated by the vast degree of consumerism currently going on will finish the floating ice in a relatively few years.

From now on then, the land ice will begin to take up that latent heat, eventually melting 3 times as quickly as now because in the north the Land ice is about a quarter of the area of the floating ice. The oil-based economy has been proven to have accelerated this melt and the proposal is to fund alternatives, fast-track insulation etc.

I am only asking that the banks be brought into line with the old building society system where deposits went in and they charged interest markup for the cash handling, mortgage and loans service. COMMERCIAL BANKS SHOULD NOT BE GETTING THE BENEFIT OF FREE MONEY (or certainly not all of it). All this talk about tractors is a red herring to distract readers from the point of the video and Mr Flintoff's initial comments. The money is there to do the necessary job it just needs to be directed and USED - used more efficiently as it says in comments back to the text given. Please try reading about the credit Money banking Adjustment and ETI/ET with an open mind.

Best wishes to all

[Ian Greenwood]

Hullo again Mr Hilder

Good to see you are still willing and able to create further diversions from the fundamental question which I have asked you: WHAT IS WRONG WITH MAKING COMMERCIAL BANKS PAY FOR THE MONEY WHICH THEY CREATE? Especially as they have been the prime causes of the current instability by creating about 10 times more than in the 1940s, ie at least 20 times more than we get into the public purse from actual currency (notes etc, 2006 figures).

[In the 1940s apparently the banks got X worth of free money as currency in addition to deposits (i.e. doubled the money to get an extra X free) and 2 X worth of free "credit money" on top by fractional reserve banking on the basis of loans and mortgages, but since the demutualisation of many building societies into banks this has exploded the money supply and revealed these sources of money to the public - because of the sheer volume of it. ]

I am beginning to think that you, Mr Hilder must have an interest in this source of free money to be defending such an injustice. Without the transition I suggest the credit meltdown is likely to cause meltdown in the wider economy as virtual money withers and no clear road map out of the "credit mess" has been made available to engender confidence by the authorities. Acceptance of CMBA and ETI published here and elsewhere could enable that confidence. I encourage Mr Hilder and other readers to examine these proposals and take them forward constructively to those whose responsibility it is to give a clear direction and solutions. Please reconsider my proposals.

In response to your point about lack of connection between the floating ice melt and the global economy, it may have escaped your notice that the absorption of latent heat has protected the planet from more extreme climate change than we've had until now. The heat being generated by the vast degree of consumerism currently going on will finish the floating ice in a relatively few years.

From now on then, the land ice will begin to take up that latent heat, eventually melting 3 times as quickly as now because in the north the Land ice is about a quarter of the area of the floating ice. The oil-based economy has been proven to have accelerated this melt and the proposal is to fund alternatives, fast-track insulation etc.

I am only asking that the banks be brought into line with the old building society system where deposits went in and they charged interest markup for the cash handling, mortgage and loans service. COMMERCIAL BANKS SHOULD NOT BE GETTING THE BENEFIT OF FREE MONEY (or certainly not all of it). All this talk about tractors is a red herring to distract readers from the point of the video and Mr Flintoff's initial comments. The money is there to do the necessary job it just needs to be directed and USED - used more efficiently as it says in comments back to the text given. Please try reading about the credit Money banking Adjustment and ETI/ET with an open mind.

Best wishes to all

[Ian Greenwood]

Hullo again Mr Hilder

Good to see you are still willing and able to create further diversions from the fundamental question which I have asked you: WHAT IS WRONG WITH MAKING COMMERCIAL BANKS PAY FOR THE MONEY WHICH THEY CREATE? Especially as they have been the prime causes of the current instability by creating about 10 times more than in the 1940s, ie at least 20 times more than we get into the public purse from actual currency (notes etc, 2006 figures).

[In the 1940s apparently the banks got X worth of free money as currency in addition to deposits (i.e. doubled the money to get an extra X free) and 2 X worth of free "credit money" on top by fractional reserve banking on the basis of loans and mortgages, but since the demutualisation of many building societies into banks this has exploded the money supply and revealed these sources of money to the public - because of the sheer volume of it. ]

I am beginning to think that you, Mr Hilder must have an interest in this source of free money to be defending such an injustice. Without the transition I suggest the credit meltdown is likely to cause meltdown in the wider economy as virtual money withers and no clear road map out of the "credit mess" has been made available to engender confidence by the authorities. Acceptance of CMBA and ETI published here and elsewhere could enable that confidence. I encourage Mr Hilder and other readers to examine these proposals and take them forward constructively to those whose responsibility it is to give a clear direction and solutions. Please reconsider my proposals.

In response to your point about lack of connection between the floating ice melt and the global economy, it may have escaped your notice that the absorption of latent heat has protected the planet from more extreme climate change than we've had until now. The heat being generated by the vast degree of consumerism currently going on will finish the floating ice in a relatively few years.

From now on then, the land ice will begin to take up that latent heat, eventually melting 3 times as quickly as now because in the north the Land ice is about a quarter of the area of the floating ice. The oil-based economy has been proven to have accelerated this melt and the proposal is to fund alternatives, fast-track insulation etc.

I am only asking that the banks be brought into line with the old building society system where deposits went in and they charged interest markup for the cash handling, mortgage and loans service. COMMERCIAL BANKS SHOULD NOT BE GETTING THE BENEFIT OF FREE MONEY (or certainly not all of it). All this talk about tractors is a red herring to distract readers from the point of the video and Mr Flintoff's initial comments. The money is there to do the necessary job it just needs to be directed and USED - used more efficiently as it says in comments back to the text given. Please try reading about the credit Money banking Adjustment and ETI/ET with an open mind.

Best wishes to all

[Jamie Napier]

Mr Grignon,

With regards my Example 2, you note that Beatrice's shortfall (10) equals the total interest. This is because Adam's annual rent equals the annual principal plus interest. If, for example, annual principal was 2 and interest 1, Beatrice's shortfall would equal 30 which is the interest (15) plus Adam's surplus (15). With a different loan agreement Beatrice's shortfall could be interest 1 and Adam's surplus 29. In fact, Beatrice could have a shortfall which is 100% because Adam decides to save, nothing to do with any loan. So it is savings that create the shortfall, not interest.

So you ask how I see this. I see the example as showing an interest bearing loan, where the interest is hoarded (not recycled 100%), and which does not inherently create a need to generate growth or additional loans to pay the interest. There will, however, be a downward cycle in consumption and income because the interest is hoarded, in exactly the same way that a downward cycle would occur if Adam suddenly decided to start saving and buy less massages. This is back to my comparison some days ago to Keyne's Paradox of Thrift argument.

In your later comment you foresaw that
I would claim Candice's savings as the key, not the interest. You are right. You then counter, "The problem is it doesn't happen in the real world because Candice wants her excess money to grow. She doesn't want to spend it or give it away. she wants to get rich and use lending money at interest to do so." Well, I agree that in the real world Candice often chooses to re-lend the interest earned (just as, in the real world, people choose to lend money that they have saved from their salaries). But this is beside the point. We are talking about the economic theory behind your claim that interest inherently creates a growth imperative. The choice to re-lend is not an inherent growth imperative.

Let me try and stir things up with a totally different point. Could there be more loans, more growth and more problems of indebtedness if there was no interest charged ? If there was no cost to borrowing, wouldn't the demand for loans be much higher ? Isn't one of the causes of the current crisis that, for too long, interest rates were too LOW ? If interest rates had been higher historically, maybe that would have kept debt levels more manageable?! Don't worry, I know it misses the point of what you are saying.

Anyway, it is all very interesting but unfortunately I head north tomorrow by bus to El Salvador where I will be staying with a fishing family. So it will be a few weeks before I can access another internet cafe and read any further comments. But it gives you plenty of time to walk through my Example 1, which is surely not too complex (and has but one obvious typo)!

[Stephen Hilder]

Hi Mr. Greenwood,

I don't intend to distract from what you are saying at all. I wish you continued success in your efforts.

Hypothetically, if I were to try to argue against your proposals (I won't try, I support you!), the argument might go something like this:

A new reality for new times. Sustainability for the next century. Scaling of economic process no longer tracks the historical paradigm! The unjustice must be corrected. Pig farmers continue to benefit to excess from the public consumption of franks in a blanket. How long must the public bear the yoke of so-called "standard" pub fare? ABC Radio National today hosted a program (FG-1728-4) wherein the Pig Farmer Excess Methane Reduction Adjustment (PFEMRA) was espoused by one forward thinking John Holmes Quinn. Why should pig farmers foist their unwanted tetrahedrons on the unwitting public at no cost? Such funds generated, easily several billion in the first year, would be earmarked for the de-orbit the moon (yes, DE-ORBIT the MOON) project, expected to stop parasitic bleeding of tidal energies from our oceans. A very good value! Such action would render the CMBA/ETI entirely redundant and unnecessary. Email ian@StEErGLObal.CoM for the full proposal (with graphs!)

[Ian Greenwood]

Thanks very much for the clarity of your intent Mr Hilder.

Do you accept that the recent figures of $48 trillion meltdown, etc necessitate some action of the "right" kind? If so, can you suggest anything better than The CMBA/ETI which you kindly refer to?

(If you really exist, that is?) So long for now.

[Stephen Hilder]

Mr Greenwood,

I propose we prioritize a minimal level of education in critical skills, such as math. A person who cannot balance his own budget should keep his big mouth shut about everyone else's.

I propose that with these new found skills, we can begin to close the many imperfections in corporate accounting rules and banking regulations that allow these crises to happen. As with any democracy, this requires public outrage. Currently, the only mechanism to generate that outrage is through some kind of crisis.

Our problems are not complicated and deep conspiracies. They are simple abuses, driven by greed, of obvious loopholes and opportunities for conflict of interest. Off balance sheet obligations to special purpose entities, allowing an institution to issue securities from one desk, with ratings issues by another desk. The whole concept of an interest-only mortgage under existing bankruptcy laws. Obvious things.

Everybody knows that money is being stolen by greedy criminals. By making a big hoo-ha about a non-issue, you are making it more difficult to draw attention to the the real ones.

Without educated voters, these crises are inevitable. That's democracy. If you want, move to bring on the philosopher kings.

[Stephen Hilder]

Mr Greenwood,

By the way, I looked into this latent heat of sea ice thing. The latent heat is a non-issue. If you don't think so, show me the numbers on which you base your claims.

[Paul Grignon]

As both Mr. Napier and Mr. Hilder keep coming back to my first 'desert island" example to berate me for my apparent "dumbness" let us first return to that example. I posited that if a banker created $1000 on Jan 1, lent $100 to each of 10 people at 10% flat interest all payable in one lump sum on Dec 31, full payment of all these loans would be impossible as $1100 is required by the banker on Dec. 31 but only $1000 exists. This example is to demonstrate when interest would be clearly impossible to pay. I never claimed it represented reality.

Napier and Hilder scoff at this example because I have omitted spending by the banker. However, it should be clear to anyone that, in this example, the banker has not collected any interest yet and so he has no income to spend. Of course, if real world loans worked like this, there would be no credit system as the impossibility of paying the interest would be obvious. That was the point of the example.

I said that in the real world "payments are usually made monthly" as a statement of fact, not necessity. Of course, the banker could just arrange for payment in two half-yearly sums of $55. Now the equation works. The first payment of $55 leaves $45 in circulation, retires $45 of principal and gives the banker $10 interest to spend. If the banker spends the $10 of interest it can be earned by the borrower and the remaining $55 principal debt cleared. There, do I get it?

Now do you get it? If the banker or for that matter anyone on this desert island re-lends any of this money at interest, the debt cannot be cleared without borrowing the money from the secondary lender and incurring even more interest.

Now to my mind, the interest charged by the banker already required an extra 10% production over what would be required to pay back just the $100 of principal. Unless we bring in the argument that inflation makes the repayment dollars easier to earn, how can this be denied? 110 is more than 100.

Yet both Mr. Napier and Mr. Hilder claim that an interest charge does NOT necessitate economic growth.

Even more additional real world production is required to pay off the secondary lender's interest charge, which Hilder proves in his tractor example.

Hilder: "Note that it's perfectly permissible for Jack to borrow a tractor from Jill, and promise to pay back two tractors in a year. (100% interest!) He just needs to build a tractor at some point."

The second tractor is clearly real world economic expansion necessitated solely and entirely by Jill's interest charge but Mr. Hilder argues that it isn't. Let's bring this into the real world. Why did Jack borrow the tractor? So he could build another tractor? Apparently Mr. Hilder thinks so. He even states this absurdity.

Hilder: "You see, Jack must have intended to produce the tractor anyway, or he would not have entered into the agreement."

How does Mr. Hilder arrive at this assumption? Just because Jack agreed to the terms?

I would assume that Jack's only intention was to grow food, not build a second tractor. Jack was forced to build the second tractor because Jack is a farmer (labour), people need food, and there is only one tractor, Jill's. Jill (capital) has made her condition 100% interest and that is the only way Jack is going to get to use her tractor. The only legal defense we all have against Jill is that we do without the tractor and suffer the consequences which might include going hungry.

To my "dumb" way of thinking three things seem abundantly clear:

1. If Jack didn't have to pay Jill the extra tractor, he would NOT have to grow the extra food to pay for it.

2. Or... if he DID grow and sell the extra food and built his own tractor just ONCE he would never have to borrow Jill's again.

3. Jill's interest charge makes it doubly difficult for Jack to build his own tractor and escape her trap; a trap in which Jack, in order to grow food, has to build a new tractor for her every year and never gets to keep one.

Here is another example of Hilder's artful circular reasoning which sounds good, even amazingly sophisticated but is in reality completely invalid.

Hilder: "Jack expects to grow 1,000,000 pounds over the course of his working career. He has a wide spectrum of choices in behavior. He can borrow considerably less that that amount now (at interest) and use the borrowed amount immediately, or he can save everything and have one wild party on the last day of his life. Either way, interest or not, his production and the impact on the environment are the same."

How could it be otherwise? Hilder has ASSUMED that Jack's lifetime income is FIXED at one million pounds and nothing can change that. He also assumes that Jack's environmental impact is directly proportional to Jack's income.

Both assumptions are specious nonsense.

Mr Hilder, I am a self-employed entrepreneur not some statistician's FIXED INCOME model. My lifetime earnings are not fixed. Nor are the earnings of corporations. Nor are the earnings of someone who has to rustle up a second or third job (like my sister) because the payments on their variable interest rate mortgage just took a big jump .

The question is: does paying interest drive Jack to have to earn more (lifetime income NOT FIXED) than he would if he did not pay interest?

The real situation is that Jill has the only tractor (capital ) and Jack (labour) needs it to produce food. Jack needs to produce more food than he would otherwise, in order to buy the materials to build the second tractor . Yet somehow Stephen Hilder refuses to acknowledge that this is an INCREASE in the real economy necessitated entirely by the interest charge and would not happen if Jack could just return the one tractor.

Furthermore, with a lot of Jacks all competing for earning opportunities to pay the added burden of interest, the imperative is to produce both more food and more tractors than are needed, necessitating a constant expansion into new markets for selling food and loaning tractors until all markets are saturated. A glut of food results in lower prices meaning even more work is required to pay off the principal as well as the interest. And because the demand for food is finite, at some point the earning opportunities can no longer expand and competition drives prices so low that debts cannot be paid off and a wave of defaults begins. Too many defaults and the credit system collapses.

In addition, the overproduction, due entirely to this interest burden, depletes the resource base faster than may be sustainable, even causing resource collapse and irreversible environmental damage. The increasingly intense competition for markets and profits causes all kinds of nasty shortcuts to be adopted, from adding poisonous chemicals to boost production to gaining access to markets by means of political corruption. The cheap food leads to much of it being wasted.

Case in point. Some years ago a British Columbia Forests Minister, in a rare candid admission, told an environmentalist reporter friend of mine that sustainable forestry was not financially possible because the interest rate was higher than the 2-3% annual growth rate of timber. If a buyer buys a stand of timber at fair market value, and doesn't immediately clear cut and retire the debt, his financing charges will cause him a loss (unless there is a very large rise in the value of timber).

The only sustainable forestry project in my area is on Merv Wilkinson's PAID UP land. As Wilkinson himself describes it, his type of forestry is collecting the interest on the trees, not the principal. As the interest is only 2-3% per year that is only enough to operate and live on, not make interest payments to a bank.

http://www.zerowaste.ca/articles/column88.html

Now to Mr. Napier

Napier: "So you ask how I see this. I see the example as showing an interest bearing loan, where the interest is hoarded (not recycled 100%), and which does not inherently create a need to generate growth or additional loans to pay the interest. There will, however, be a downward cycle in consumption and income because the interest is hoarded, in exactly the same way that a downward cycle would occur if Adam suddenly decided to start saving and buy less massages."

and..

"Napier: Well, I agree that in the real world Candice often chooses to re-lend the interest earned (just as, in the real world, people choose to lend money that they have saved from their salaries). But this is beside the point. We are talking about the economic theory behind your claim that interest inherently creates a growth imperative. The choice to re-lend is not an inherent growth imperative."

Secondary re-lending of existing bank-credit money requires even MORE economic output to pay off the added interest. The more re-lending of bank-created money, the bigger the total interest burden, the more economic activity it takes to pay it off. This isn't just in terms of direct debt payments affecting only those in debt. Interest charges are included in prices and taxes as well. And as Napier admits, even salaried employees with money in excess of their spending needs try to make it grow through some form of re-lending. Re-lending and the added expectation of gain from having money is everywhere.

But Mr. Napier considers re-lending to be "beside the point" and "not an inherent growth imperative". On what basis does he make this assertion? I see debt at interest, in fact the simple expectation that money should grow from money in any fashion, as a growth imperative and I have explained why.

"Downward cycle"? No problem according to Mr. Napier. In the real world, downward cycles are called recessions, long ones depressions. They result in cascading defaults, massive waves of foreclosures, bank and business failures, unemployment, and the threat of total economic disintegration.This threat is so great right now it is causing unprecedented desperate government bailouts almost every week with the taxpayer left holding the bag for a debt so huge it is impossible to imagine, never mind repay.

But for Mr. Napier a downward cycle "does not inherently create a need to generate growth or additional loans to pay the interest."

Life must be different in Napierland.

[Stephen Hilder]

Mr Grignon,

Please forgive any disrespect, as I'm sure you know it's not directed towards your person.

We are discussing these toy models in an effort to isolate, in simplicity, exactly what sequence of transactions you claim is unjust, necessitates growth in the economy, or whatever it is you are not in favor of. Otherwise, all we have is this sweeping claim that banks are crooked. Well, I agree there is crookedness there. I just don't agree with you that lending at interest is the culprit.

Here's the summary so far:

You: Desert island, banker, borrower, no other cash. Borrower can never repay because the cash doesn't exist.

Me: Take into account banker spending, which the borrower earns and uses to make payments.

You: That's not realistic, the banker can hoard.

Me: No, in the real world the borrower would know there is demand for his services before he makes the borrowing decision, otherwise it's not responsible borrowing.

You: But what if the banker re-lends out his earnings, at INTEREST (Muah-ha-ha)

Me: So what? Again, who borrowed without the ability to repay?

You: But people don't borrow tractors to build tractors, they borrow them to grow food.

Me: Maybe. Maybe he wants to grow food, the surplus of which he trades for an additional tractor. Maybe he is a metalworker who actually plans to disassemble the tractor to copy it part by part. I don't care why he borrows it. Maybe the "tractor" is just a stand in for some abstract, generic marketable good and isn't intended to be restrict the discussion specifically to actual farm equipment. In any case, he would not agree to borrow it under terms of 2 tractors repayment in a year, if he wasn't capable of doing so, or is stupid.

You: Well, he wouldn't HAVE to produce if there weren't interest.

Me: Again, he is capable of said production, and therefore can be assumed to engage in said production anyway, in order to enrich himself. That's what people do, to ensure a better life for themselves and their progeny.

You: Well, the borrower uses up resources he otherwise would not have.

Me: No, your accounting is backwards. Again, the borrower FORGOES some utility in order to borrow and consume now, rather than later. This reduces the total production overall. The tractor is built in any case, because Jack wants to live the good life.

You: But environmental impact isn't directly proportional to income! That's specious nonsense!

Me: Very interesting. I think I agree with you! But aren't you saying that somehow it's directly proportional to interest payments?

You: It's not fair, because if Jack were just allowed to build his tractor up front in the first place, then he would never need one from Jill.

Me: You're right. If he is able, it's better for him to build his own tractor up front, and he knows this. Therefore, it must be that he's not able to do so if he chooses to borrow one. Maybe he needs time and doesn't want to starve while building a tractor. Maybe he doesn't know how to build a tractor, and needs to reverse engineer one. I don't care, he should do what is best for him.

You: But maybe he's just a farmer, and NEEDS the tractor, and is being extorted into unreasonable terms in order not to go hungry.

Me: That would be bad. Did that happen to you or someone you know? If so, let's hear about the details of how it happened. Was interest really the culprit?

You: But it's unethical that Jill should profit just from HAVING a tractor over Jack, this is an accident of fate.

Me: Well, probably not, probably she or her ancestors worked hard to build it. In any case, by lending it out she forgoes her opportunity to use it and therefore deserves compensation for this forgone income opportunity. This amount might be called, for lack of a better term, "interest".

You: But who guarantees that the amounts and rates result in perfect "100% recycling".

Me: A large ensemble of lenders, borrowers, producers and consumers all dancing the global economy dance to produce to miracle of "market forces".

You: Too much tractor borrowing and the food gets too cheap, and and the farmers get too poor, and they default on their loans and can't pay back all those tractors and everything collapses!

Me: Don't worry about it. Thanks to the miracle of modern technology, there are hardly any farmers left because of factory farms, economies of scale, and yes, market forces. "Mamas... don't let your babies... grow up to be cowboys..."

You: Hogwash to your market forces.

Me: You dirty communist.

You: Look, I'm an entrepeneur, and my income isn't fixed. It's nonsense to assume so.

Me: Bully for you, that you can earn whatever you want. Stop producing and messing up our environment.

You: My sister is struggling under her suddenly increased variable rate mortgage payments!

Me: I'm sympathetic. Who told her to take one out? I recently moved and bought a house. Believe me I was offered this sort of deal, which would have been cheaper, at least initially. I didn't take it. I bought somewhat less house than I would have liked, because of this. Oh well, that's called using a budget and accounting for risks and uncertainties in life, and not listening to glib salesmen and pundits and politicians who lie. Oh, did I mention that being able to do this requires math?

[Paul Grignon]

Hilder: "We are discussing these toy models in an effort to isolate, in simplicity, exactly what sequence of transactions you claim is unjust, necessitates growth in the economy, or whatever it is you are not in favor of. Otherwise, all we have is this sweeping claim that banks are crooked."

What a load of nonsense. I have presented very clearly my claim that EVERY interest charge is an imperative to either produce more or raise prices, whether it is a bank, a building society, a credit union, a mafia loanshark or your Uncle Bob.

Mr. Hilder avoids confronting this truth by sticking to his theoretical economist's model in which everyone's lifetime earnings and consumption are defined as FIXED. He then works backwards to conclude that by borrowing, one consumes less despite the fact that to pay off the loan PLUS interest requires more output not less!

I really see no point in continuing this conversation as Mr. Hilder is truly unreachable and has only convinced me that people who buy into these fallacious economics axioms have lost all connection to reality.

[Stephen Hilder]

Mr. Grignon,

I gladly accept your unconditional surrender. For your information, I am, as you say, "unreachable", not because of any cleverness on my part, but simply because my intellectual position is perched on top of a high tower in an impregnable fortress of righteousness, built by great thinkers before me, some of whom wrote textbooks. You might want to read them. Or, you can continue your descent into drooling foolishness muttering about those "theoretical economists" and all that newfangled mathematical hooey, such as Mr. Greenwood and millions of others have done. If you choose this route, be prepared to be taken advantage of by those who would ruthlessly turn these tools against you, instead of just poke some fun at you.

It should be painfully obvious to anyone capable of clear thought, that economic growth is only connected to lending at interest in that the concept of "buy now pay later" is a powerful sales tactic used by lenders to trick consumers into spending beyond their means, as your sister has discovered. This works much the same way that record executives (almost as close to ones heart as bankers) use tits and lipstick to sell music. Of course, no one wants to ban tits and lipstick, because they can be understood by anyone, even without math. The only way to prevent irresponsible spending is better education. It's really not that complicated. Just because some people cut their fingers off, we don't ban circular saws.

It is the height of irony for you to claim that a fixed, predictable income is some kind of theoretical construct. It is, in point of fact, a way of life for many salaried employees, retirees, welfare recipients, most anyone with a stable career. Most people do in fact know with reasonable accuracy what they will make the next year. When these people choose to borrow, in point of fact they are specifically choosing to forgo future spending for the privilege of consumption now. On the other hand, when someone says, I'll buy now and take on a second job to earn the money, this is what grows the economy. Note that this happens whether or not they decide to buy with financing or without--- it's the fact of increased production that IS the growth.

It's also tremendously ironic that an eco-whiner would stomp off with a parting shot complaining about an approximation with a fixed income per person. Don't you think the planet has some sort of Malthusian carrying capacity for humans? Wouldn't this assumption necessarily result in a fixed, sustainable production level per person, inversely proportional to the population? Anyway, that's a whole other debate which I'm sure you would also lose handily.

I'll give you a hint--- you would end up stomping off muttering about scientists and engineers and all their theoretical new technology, totally divorced from reality.

Looking forwards to "Money as Debt 2".

[Ian Greenwood]

Ian Greenwood's reply to post by Mr Hilder http://timesonline.typepad.com/environment/2008/09/limits-to-growt.html?cid=129077216:
Ian Greenwood's reply to Mr Hilder:

Mr Hilder says "Otherwise, all we have is this sweeping claim that banks are crooked".

I return patiently to the point: I have not said that banks are crooked, only that the credit money system grew up and the banks were allowed to get away with it (although others are beginning to join in questioning the morality). As Mr Grignon says, many on the staff of banks do not know precisely how the bulk of money creation works. I have recently had comments from senior accountants to the same effect "fascinating". If the detail of this system is not widely known by auditors or those that devise policy then it is no wonder that a problem of instability grew.

As said below, earlier in history the system grew to allow the banks about an equal amount of FREE paper money (X proportion as described below in this blog on 8 Sept) in addition to the actual deposits. This went on for a long time until the UK woke up and nationalised the Bank of England - the printing of paper currency then became a value into the public purse.

This is not now questioned internationally. Private printing of a nation's currency -counterfeiting- is illegal. Meanwhile CREDIT MONEY continues to be allowed via the loan/mortgage process (from a proportion of about 2X in 1946 -see the 8 Sept description) FREE to the commercial banks (and now, more recently to other forms of commerce - watch out banks!).

But the entirely obscene thing is that this free credit money (which appears not to have been disputed by Mr Hilder) grew to 20X in the 60 years to 2006 and is, once it is properly understood, now known to be a main source of inflation and of the global financial instability of the last year or so, growing over the last couple of decades since the demutualisation of building societies . No wonder we have had "divides" and "terror".

This "free money" aspect should be an entirely separate issue: as this is in in addition to other bank revenue - charges, penalties, fees, investments and interest rate mark-up on "real" wealth creation and deposits. Under our proposal the interest rate mark-up would still be allowed on the free money created as would repayments of the free capital (but less money to the commercial banks would help to reduce inflation as that revenue would tend to reduce taxes - one of the main planks of US Republican policy!).

All we are saying is that Credit money must in future (and SOON) be subject to a charge, that this charge can be set at the Base rate - directed preferably for hypothecated (ring-fenced) purposes. This is now ESSENTIAL to the public purse (the currency part of which is rapidly shrinking as a proportion collected by government due to the popularity of electronic money and tax revenues generally declining in the credit crumble). Lets call this CCC or CMBA as described in the paper posted on 8 Sept.

To answer some mild comments by critics (who have suggested that instead of a gradual incremental charge ALL credit money should be directed to the public purse IMMEDIATELY) I suggest the CMBA change will come in quickly enough, growing each year over the average life of loans, stabilising after 20 or 30 years..

OTHERWISE INSTABILITY WILL GROW AGAIN.

For government to rely on revenue from only the corporation tax element ( a decade or two of increases in the economy thru the Credit money part of "growth") looks increasingly problematic in times of recession/contraction of the credit money supply. To have decreased revenue at a time of climate crunch appears to bear out what I was saying for the last few years about the importance of a dedicated Environmental Tax equally returned towards investment against climate change threats across the world instead of relying entirely on aid or debt for essential infrastructure in the poorer countries or on a politically-led government system in rich ones.

The credit crunch has been somewhat of a distraction from the climate issue but has had the dual advantage of highlighting the credit money injustice and lowering some consumption.

By partly allocating such a Charge as an offset to enable an Environmental and Energy investment Tax (which WILL be needed) some of the proposed tax can in turn enable the necessary climate change investments on the other side of the world. Otherwise with accelerated inundation - imminent loss of land, culture, value from trade etc (again, see the paper and other supporting docs also available direct from ian.greenwood@STEERglobal.org) we are sunk. We should be fast-tracking wide-scale insulation on external walls in both hot and cold climates to keep energy resource prices stable. Why not get behind this with a message of support or at least contact me to understand it further?

Best wishes

[Paul Grignon]

Stephen Hilder gladly accepts my "unconditional surrender" which was never offered.

The fact is I am leaving in disgust at both his abusiveness and the lack of substance in his arguments. If one goes back through our debate to review Mr. Hilder's arguments, when they are not merely distractions or an attempt to blame the faults of a systemically bankrupt system on the "personal irresponsibility," of borrowers, they tend to be like that email where the "mystic cat" shows you five face cards at the beginning and asks you to pick one. Then you stare into the eyes of the mystic cat as it "reads your mind" and the cat removes the card you picked. Sure enough the card you picked is not among the four cards left at the end!!! Amazing. Of course the cat always manages to pick your card because NONE of the initial five cards are among the final four. The trick is getting us to accept the false assumption that they are.

Mr Hilder uses similar mental parlour tricks that are indeed taught in economics textbooks, and have been criticized by many as useless at best and deceptive at worst. The convenient assumption of a lifetime fixed income being a perfect example.

I learned economics from real world land developers, on a real development project that sealed the fate of the tiny island I live on. Real world land developers, like any other business I can think of, DO NOT have a lifetime fixed income. They have unlimited ambition. They do however, have a fixed expectation of profit for each project they take on. The higher the rate of interest they have to pay, the more they have to sell, the higher the price they have to get, and the faster they have to sell it to "beat the interest clock" and make that expected profit. As we live in a competitive system where most everyone is in the same position, raising prices can only be done in tandem with one's competitors. This leaves only the produce more, sell faster ( and cut costs wherever you can) option.

In our specific case, the interest clock prevented any consideration of the minimal development and minimal destruction options. I earlier reported that our Forests Minister once said that interest made sustainable forestry financially impossible. So I don't really care what the textbooks say. I know from real life.

And anyway.. given that personal incomes expressed in fixed 2004 dollars have doubled or more since 1950, how does one come up with an assumption of anyone's "fixed income", even that of the "wage earner"? One would have to take into account the CONSTANT CHANGE in personal incomes to arrive at such a prediction of a FIXED INCOME. I know that mathematically it can be done as a projection but the truth is personal incomes change, they are not fixed.

http://en.wikipedia.org/wiki/Personal_income_in_the_United_States

However, as Ian Greenwood has pointed out, these issues are almost red herrings.

Ultimately the really important question everyone should be asking is...

"If the governments have so much money to inject into the banks in order to help them survive, why - at the same time - are the governments borrowing money from those very banks? Who now provides the governments` borrowing requirements if the banks are short of cash?" (Dr. Sahib Mustaqim Bleher)

The answer is you and I the citizen-taxpayer and borrower are the source of ALL credit, government and bank, and ALL real productivity. Borrowers, including governments fund their own accounts with their promissory notes. That is where money comes from... us.

Banks are parasitic "mystic cats" that we assume are "lending" money because they call this money "loans".

Because we fall for this assumption, just as we fall for the assumption about the cards, we let bankers run our personal lives, our businesses and our governments because they have fooled us into believing we are in debt to THEM when we are not. We issued the credit ourselves and if we didn't have to pay interest, it would be much easier to honour that credit with real productivity given to the real creditor, society at large.

Instead, thanks to the deliberate obfuscation of this fact, most of us deliver the major portion of our lifeblood to the bankers through interest payments on money we ourselves created. We let banks get rich on the interest on their non-loans and when their greed for this interest gets the better of their judgment, the scam falls apart as it is doing right now, revealing banking for what it really is... the biggest con job in the world.

Then the price of keeping these crooks in business is added to the debt of the productive people, because that is what money is... the debts of the people. There is nowhere else it comes from. As I said in my movie No Debt, No Money.

Mr. Hilder, the only thing I concede to you is that you are well-versed in the misleading rationalizations of the banking con, the so-called "science" of conventional economics.

Why Philosophers Should Decertify Economics as a Science By Stephen Zarlenga
http://www.monetary.org/radfordphilosophers.htm

For fans of all the mathematical analysis you can stand, I recommend reading the following two essays on which my work is largely based. Then you can make whatever judgements you please about my understanding and interpretation of economic issues.

Fractional Reserve Banking as Economic Parasitism
A Scientific, Mathematical, & Historical Exposé, Critique, and Manifesto
Vladimir Z. Nuri

and The Nature of Money by John Kutyn

Both can be downloaded from my references page at

http://paulgrignon.netfirms.com/MoneyasDebt/references.htm

[Stephen Hilder]

Mr. Grignon,

Haha, mystic cats, eh? Very poignant. This little plea of yours made me suddenly realize that you're genuinely befuddled by all the complex financial goings on of the world around you. The good news is that it's really all much simpler than many conspiracy-theory-spouting chicken littles would have you believe. The bad news is, that to understand how make things better requires math and numbers, and discipline. The price of freedom as they say.

I will try to help in a less abusive way, since no one wants to hurt your feelings just for the sake of hurting your feelings. So, I'll ignore most of the below, and focus on a few, more important issues. The general theme being, that maybe you shouldn't believe everything you read.

First of all, no one thinks people must have a fixed income. I said that very clearly below, so you can go read it again if you're so inclined. If on the other hand, you just want to stick your fingers in your ears saying "nyah nyah nyah", that's up to you, and it's not my fault if you look silly. In terms of personal incomes having grown since 1950, so what?

Second of all, on forestry, this is a well known situation that has been studied ad nauseum for hundreds if not thousands of years. It's also well understood how to deal with these situations. You say that trees grow 2-3% per annum, which is less than current interest rates, therefore sustainable forestry is impossible. No. This means one of two things. If you believe that "sustainable" necessarily implies "no growth of the economy", then this means that this particular type of forest is a common good which must be owned/regulated by the government, since there is no economic incentive for individual players to act in the common interest. If you believe that "sustainability" is possible even with economic growth, then this means that in equilibrium, the price of this type of wood will continually increase to make up the difference between the 2-3% growth rate and the equilibrium interest rate. This price increase is what would cause the per capita demand of this wood to fall, such that the total demand is fixed at what is sustainably producable. Those involved in forestry will all implicity be speculating on the continued rise of said prices. (Please don't start squawking about "inflation", this is not inflation.) In either case, there is no problem of sustainability.

Thirdly, you didn't understand the Nuri paper. It's also not a particularly good paper, but never mind that. If you think you did understand it, then please point me to the statement you think supports your views, and the assumptions of the underlying model used. I'm perfectly happy to go through this paper with you in gory detail, but since you seem to lose patience with corn growers and desert islands, I doubt you'd stay interested. It's also ironic that you don't hold with all that "science" of economics mumbo-jumbo, but you'll swallow wholesale the modeling work of a physicist, who drew some of his conclusions based on analogy with the ideal gas model. It would seem that theory is only valuable when it supports you?

Fourthly, I'm sorry but the Kutyn paper is, to be generous, useless for your purposes. Pick one section in there that you think most supports you. What do you think about the bottom of page 64, does that support you? What part of this paper is the "rigorous analysis" that you are trying to impress everyone with?

Looking forwards to "Money as Debt 2".

[Stephen Hilder]

By the way Mr. Grignon, I accept your surrender, conditional on everybody agreeing that "there's something rotten in Denmark", and validation of your upsetness.

[Ian Greenwood]

In the eyes of some people any charge to the banks for what is acknowledged as "free" credit money - instead of diverting some of it to the public purse - may be seen as "taxation"

CURRENCY IS NOT A TAX, SO

WHY SHOULD REDIRECTION OF

SOME OF WHAT IS NOW A FORM OF

ELECTRONIC CURRENCY (as created by banks during the "normal course of banking business") TOWARDS

SURVIVAL BE CALLED A TAX?

as in our full, but brief paper on Sept 8 this weblog.

An opportunity exists for the media to use some of the practical,

innovative proposals on the available texts from Ian.greenwood [at] STEERglobal.org

- texts as inspiration to improve on Keynes

(the ETI/ET proposal is like his "bancor" but simpler and more effective, as the funds

would be well directed) for fundamental reform of the global economy, fast re-education and

co-operate in getting a real and simpler solution to the credit crunch. Otherwise

oncoming accelerated sea level rise crisis will

probably start to hit within 10 years if not sooner. The power

O of the sea is not to be underestimated.

THE FIRST STEP IS USE SOME GOVERNMENT-CREATED MONEY - IN either CREDIT OR IN PAPER FORM - TO GET A WIDE-SCALE new type of super-NSULATION PROGRAMME IN PLACE and stimulate to soften the crash - literally investing ourselves out of it, PENDING THE ACTIVATION OF THE REFORMS SHOWN IN "CLIMATE, ENERGY and CREDIT REFORM" a short paper with supporting remarks as to why this can be bolted onto the existing system. THE SIMPLE< EFFECTIVE REFORMS WOULD NOT BE DIFFICULT TO START and are easyfor a layman to understand - ring for answers to queries and to see how the insulation is 4 times better than the current building regulations and ten times better than solid walls or double glazing!! Now THATS worth spending money on!.

No hope for the planet unless we reform economy - as John Paul Fintoff says

[Sandy Sanders]

All this quibling over profit through interest is wasting valuable energy. The truth is that money IS debt. The minute it exists, and is the sole transaction agent, the person who has it (banker, govt, ruler, etc.) is rich and the one without it is the debtor because he must obtain it to survive. In early civilizations people had multiple options of sharing, barter, you-name-it-options-other-than-money. Now that the planet is full of humans beyond expansive carrying capacity, and the means of production of survival essentials (food and water, shelter, and clothing) has been removed from availability (urban areas are designed as desert islands devoid of resources, thus enslaving it's population to working for money from the "master" of the money), 95% of humanity is trapped by this phantom debt of consensual delusion. Money has no intrinsic value past that of belief. You can't eat it, ride it or use it to design. It's a consensual trick like monopoly money used to run a game as long as everybody plays along. This trick has been used by us humans to get us to this advanced state of technological development. But like any trick, when the illusion fails to work anymore (like when the price of a house on Park Place has no limit), and there is no more suckers left in the maxed out pyramid scheme, it fails.

Now it's back to reality. Back to neighborhood food garden collectives. Back to simple generic mechanical, non-toxic and speed safe transportation like bikes and trains. Back to sunlight, wind, wave and geothermal for energy. Back to the public sector (which is all of us 95% left of the benefits of the capitalist pyramid scheme) to provide our technology tools, such as machinery and electronics, in generic industries based upon human need rather than a mechanism of the rich, and neardowell rich, to profit. This is the path of ecotopia, the morning-after oif the tyranny of "money".

This is the future of a sustainable future for humans on earth. It will bring us not the one-world monoculture of the Money-God, but the ultra diverse self-sustaining micro cultures free of war, free of work-slavery, and free of tin gods of authority, too busy living life (and having fun!) to try being a greedy Gollum.