Article : why debt growth must exceed interest payments

[Nivelles]

Re: Article : why debt growth must exceed interest payments

I have balanced books. I understand double entry accounting. Also, there are only two entities in this scenario, gnk and tpc. There is no bank in my scenario.

Then the scenario you're doing is different from what people were talking about.

In my scenario there are always, from the initial event, exactly 100 scraps of $GNK$ paper in the system, ...

Then you're not paying back the loan.

... none of those original 100 scraps of paper are ever destroyed. ...

They will be if the loan is paid back. You've got tpc owing $10 per week in perpetuity, with the loan never repaid.

There are only two parties in my scenario, not three. There is no Bank.

There are three. The only exception would be if you have it that gnk is lending money to himself.

The bank is not the same as the banker. If you have it that the banker, himself, is lending the money, where does he get it? To lend it to tpc, as a loan from one person to another, gnk would first have to lend it to himself, to have it, himself. One must keep in mind that, at the beginning, there is no money at all; gnk, as a person, has none.

The way it works is that there are three entities: tpc, gnk, and the bank. The "bank" may be only the notebook in which the amounts are recorded. "Bank" doesn't imply a building with a vault.

At time 0, there is no money. No money at all.

tpc then goes to gnk, and asks for a loan. gnk agrees, and he creates a "bank," by writing -100 in a ledger. Against that -100, he gives tpc 100 pieces of paper, each of which has $1 written on it.

That is not gnk's personal money, because he did not have any. To create the money, gnk has to create a "bank."

To repay the loan, tpc must return some of those $1 pieces of paper, periodically, to gnk, according to their agreement.

As the $1 pieces of paper are returned to gnk, he counts them against the -100 at the "bank." The pieces of paper are then destroyed, as the loan balance is reduced.

The amount of money in that system decreases as the loan balance is reduced.

[ThePythonicCow]

Re: Article : why debt growth must exceed interest payments

There remains the issue of how gnk gets the interest from tpc.

I have spelled out exactly how tpc got the 10 additional scraps of paper needed to pay the interest. He was paid them as wages from gnk, which wages gnk paid out of the loan repayments that tpc made to gnk. There is no issue; there is no remaining question.

However, if tpc sold his services to some other entrepreneur who borrowed money from the bank to purchase those services (in other words, tpc sold his services to someone for bills of credit (cash,)) then the interest comes from an increasing money supply.

No bank, no increasing money supply. No, you apparently don't understand my scenario yet.

[ThePythonicCow]

Re: Article : why debt growth must exceed interest payments

The system that you are talking about is not a system of fiat currency, but rather a system defined by fixed coinage (e.g. gold) in this case the paper takes place of gold -- in other words, the paper cannot be created out of thin air by either party (or also known as counterfeiting)

Good grief ... I can't win. It was fiat money; 100 scraps of paper with gnk's mark on them. My particular scenario happened to have exactly one money creation event, in which 100 scraps of monetary paper were created to fund a debt issued of the same value.

gnk created that currency out of scraps of paper and a marking pen, just the same way (with fancier technology) that dollar bills are created. I could easily construct an infinite variety of specific scenarios in which any number of such currency creation events occur.

[ThePythonicCow]

Re: Article : why debt growth must exceed interest payments

The pieces of paper are then destroyed,

The pieces of paper are not destroyed in my scenario. You make several other such assertions of what is in my scenario that are incorrect. You apparently do not yet know what I wrote.

Everything you write in your latest response above insists that my scenario is wrong because it is not your scenario.

I invented this simplified scenario to illustrate one point:

With sufficient cash flows it is not necessary to have the total of all P+I cash in the system at any single point in time.

Yes, my scenario does not reflect other aspects of our monetary system. It is an example to show one point.

So far as I can tell, you still do not understand my scenario. I don't know how to make it any plainer or simpler.

Perhaps if you re-read my scenario to see what I actually wrote, rather than to look for the many ways in which it is not the same as the more complete model of our financial system that you understand, then you will be able to understand what I wrote.

Good luck.

Ah -- what might work better, since you choose not to understand my example, would be for you yourself to concoct a scenario, with such fiat money and banks and bankers as you deem proper, in which the total money in the system is always strictly less than the total Principle + Interest (P+I) due, and in which both those totals (the money and the P+I) never exceed some tight, constant limits. Construct a scenario using fiat debt-based money and interest bearing debt in which the money supply does not need to grow without bound. You can do it. Go for it.

[ThePythonicCow]

Re: Article : why debt growth must exceed interest payments

In case Rajiv or Navelles have not read all of this lengthening thread, let me remind them that I entirely agree with others that our current monetary system is failing due to exploding debt. I am making no claim that such can't happen. I would even agree that it usually, perhaps always, happens with debt-based monetary systems.

I am just claiming that this is not a mathematical necessity. Proofs that since P+I > P, therefore the money supply must grow exponentially miss the point. Rather this is a social, economic, political, cultural, ... necessity.

[Nivelles]

Re: Article : why debt growth must exceed interest payments

The pieces of paper are not destroyed in my scenario. ...

Then you aren't talking about what other people are, and you aren't repaying the loan. In other words, you've got it wrong.

[ThePythonicCow]

Re: Article : why debt growth must exceed interest payments

Then you aren't talking about what other people are, and you aren't repaying the loan. In other words, you've got it wrong.

To repeat a paragraph from an earlier post of mine:

Ah -- what might work better, since you choose not to understand my example, would be for you yourself to concoct a scenario, with such fiat money and banks and bankers as you deem proper, in which the total money in the system is always strictly less than the total Principle + Interest (P+I) due, and in which both those totals (the money and the P+I) never exceed some tight, constant limits. Construct a scenario using fiat debt-based money and interest bearing debt in which the money supply does not need to grow without bound. You can do it. Go for it.

[Nivelles]

Re: Article : why debt growth must exceed interest payments

To repeat a paragraph from an earlier post of mine:

You really do need to pay attention to what others are trying to tell you. The fact is that you are wrong.

You might also go back to your own Google docs post, and observe that you left out the loan balance.

Your basic error was in failing to treat the loan as a loan. You overlooked that necessity. You treated the loan as if it was a gift, with no need for repayment.

Taking the loan repayment into account would require a column with 100 at the top, and 0 at the bottom, of course. If you will examine your own doc, you'll see that you did not include any such column.

You didn't show the loan being repaid. Where that would properly appear, of course, is the far right column, as you had things set up.

And that far right column is the amount of money in the system.

[ThePythonicCow]

Re: Article : why debt growth must exceed interest payments

You really do need to pay attention to what others are trying to tell you. The fact is that you are wrong.

As I acknowledged in the very first lines of my very first response to you, what I labeled "balance" was misleadingly labeled. It was cash on hand (in gnk's hands, tpc's hands and in total.)

You have made numerous claims of what I have said, and numerous claims of what I got wrong. Other than that mislabeling, you have been mistaken in each such. I have not responded to most of your misunderstandings of my posts, in an effort not to be too ill-mannered.

Here's one such example, from your latest post:

You didn't show the loan being repaid.

The loan is repaid at 10 $GNK$ per week, as described in my original post and as shown in the "tpc -> gnk repay" column in the spreadsheet. Your statement that I don't show that is misstaken.

Once again, may I suggest:

Ah -- what might work better, since you choose not to understand my example, would be for you yourself to concoct a scenario, with such fiat money and banks and bankers as you deem proper, in which the total money in the system is always strictly less than the total Principle + Interest (P+I) due, and in which both those totals (the money and the P+I) never exceed some tight, constant limits. Construct a scenario using fiat debt-based money and interest bearing debt in which the money supply does not need to grow without bound. You can do it. Go for it.

Finally, yes, I am well aware that my simple example does not capture the full complexity of the banking system as you or I understand it. It is a bare bones counter-example contrived to show one thing: it is not mathematically necessary that a debt-based money system keep growing its quantity of money.

[Rajiv]

Re: Article : why debt growth must exceed interest payments

Time for you to visit/revisit

A Primer on Money

and

Fractional Reserve Banking as Economic Parasitism

See also

Money and Debt - Part I Political Money and the Debt Imperative

[Nivelles]

Re: Article : why debt growth must exceed interest payments

You have made numerous claims of what I have said, and numerous claims of what I got wrong. ...

No, I've showed where you were wrong. It's a fact, that in the scenario at issue, the total amount of money decreases as the loan is repaid.

You did not show the loan being repaid. You showed the loan balance at $100 in perpetuity, which is incorrect.

It may be, the difficulty lies in misunderstanding the nature of the currency. Since gnk is not a national sovereignty, he cannot create a national currency that circulates in perpetuity. As a banker, he can only create bank money, a.k.a. checkbook money. That is, the loan is provided in the form of a checking account at the bank, against which checks can be written.

In the scenario at issue, there is no greater currency - the bank money is all of it. The currency, then, is in the form of checks, against a checking account.

In daily experience, the checks that people use are left blank for the amount. The check writer fills in the amount as he uses them.

In the scenario, as described earlier, the checks are preprinted in $1 amounts, and given to tpc in that form, ready to use. However, that makes no essential difference. They're checks, against the checking account created when the loan was made.

As tpc returns the original checks to gnk, to make payments on the loan, the checks are cancelled, i.e. they are destroyed as money. They can't be used any further (except that tpc can keep them, as receipts, to prove payment.)

That's how the loan is paid down. -$100 + $10 = -$90. Of course. The loan amount, on the ledger at the bank, is incremented as the checks come through and are canceled.

If you aren't canceling the checks, you aren't paying on the loan. And you weren't canceling the checks.

When you speak of gnk supposedly paying tpc, to be his servant, with that "currency," it won't work. tpc won't accept his own cancelled checks as payments, nor will gnk accept, a second time, a check he has already canceled.

Does that help you to understand it?

[Aetius Romulous]

Re: Article : why debt growth must exceed interest payments

I'm scoring it this way.

On day -1 there is no money and nothing to exchange. All accounts are zero.

The act of creating a loan instantly demands an accounting with an opposing entry. We can record that many different ways, but for our purposes we will use LOAN. Specifically, LOAN for 100 $gnk$.
The opposite entry is the disbursement in CASH, the 100 $gnk$'s. Debit LOAN 100/ credit CASH 100. More complex than that in terms of bookkeeping of course, but this keeps it simple. (the cash created will have it's own entry regime, but I think it's irrelevant at this point).

So our accounts have two entries, both balance sheet entries of the 100 LOAN, and the disbursement of the 100 CASH. Our cash account is upside down because we drew down from a zero opening balance. We are the bank as we created the LOAN entry. There is a bank and it is us. When we run a trial balance we find we are worth nothing when the upside down CASH entry cancels the nice fat LOAN entry. Thus, we are a bank with no capital.

One of two things happens; the loan is repaid, or the loan is not.

Assume the loan is paid in full within a single fiscal period for simplicity's sake. We have entries this way; Credit LOAN 100/ debit CASH 100. This closes off the Balance sheet account for LOAN, debit 100 against credit 100. The LOAN account and the loan both go to zero and "disappears". Our CASH however, returns to zero in the same fashion, debit CASH 100/credit CASH 100. We run a trial balance and find we are worth nothing. Our only two accounts read zero. And yet, we have 100 hunks of paper just the same.

In addition we have been paid interest on the loan. We create the accounts; Credit interest income (INT) 10, debit CASH 10. On our balance sheet we have an asset called CASH for 10, on the P&L a revenue item for 10. But we also have an additional rental income of 10 as well; debit CASH 10, Credit RENTINC 10. Our BS now shows the 20 CASH, and our P&L the two income fields totaling 20.

So far so good I think.

However we also have the accounting for the wages we are paying for the construction, care, and maintenance of the "shack". We open the accounting by recording the first weeks (periods) wages, but we will look at the aggregate entries for the cycle. Credit CASH 10/ debit WAGES 10. When we run the trial balance we find that we have a net income of 10 and a corresponding CASH asset of 10. And of course, we have a handful of notes that show up nowhere. This is becoming a problem - where did the record of those notes go? They are not represented on our books. They must be worthless, or we are gonna have to "plug" it somehow. Remember we are the bank, and we did not borrow that cash into existence, creating another set of entries as we did. We simply printed the cash, created the appropriate accounts, and put the cash in circulation.

But maybe the loan is not repaid. We will assume not repaid at all as it makes it easier. What are the entries? Well, in the absence of any regulation, we don't need any and the thing just hangs out there forever. You always owe 100. The LOAN account is always at 100 and remains an asset within the BS, however our CASH is permanently upside down 100 as well. The trial balance shows zeros all around. But we are still paying wages that have to be expensed, from a CASH account that is already upside down - no interest income. The only income we record is the rental income of 10 and its corresponding CASH entry.

But we have accounting standards in our simple world and they require we deal with the situation. We have to close the LOAN account by law, and bring it to zero. It is noncollectable...a bad debt. So we must then post 100 against the LOAN and bring it to zero, making it disappear, and we make up an entry to balance it called BADDEBT; Debit BADDEBT 100/ credit LOAN 100. The interest income and associated entries are moot. Our BS shows assets of just the cash from the rental income, and our P&L a one time hit of 100 via the BADDEBT account. But now you have the mitt full of notes and I do not.

The problems so far have been with the 100 physical notes we wrote up and the fact they appear nowhere in the accounting, as well as with the treatment of our books as we operated without cash somehow. These are our options as I see them; We can just ignore the notes wherever they may be and record them as they show up in entries when one of us recirculates them in the larger economy, or we can create an accounting scheme that accommodates this unpleasant glitch by creating rules and treatments that gets this paper on paper in order to "respect" the double entry system. Which, of course, is exactly what happens but on a grand scale and complexity that is soul crushing in its detail.

The system breaks down not in the math or in the economics, but in the accounting. The most basic accounting principles are regularly mashed and molded and bent and broken in order to accommodate a fiat money system where the notes are not backed by anything but faith and goodwill, neither of which are easily measured or quantified enough to meet good standards of accounting. I defy anybody to break a fiat money system down to basic accounting principles as they have been observed since about 1600 or so. You can sustain anything for any amount of time if you have a liberal enough accounting regime which has the power to create and classify in its own self interest. In this way, it appears "lenders" no longer have to account for the real nature of their "assets" and like our simple fiction above, misrepresent both themselves and the state of the economy in doing so. This is fiat money.

[ThePythonicCow]

Re: Article : why debt growth must exceed interest payments

Does that help you to understand it?

It reinforces my absolute certainty that you have no clue what my example shows. My model has no banks, no bankers, and no checks. The money in the system, those 100 scraps of paper, is not destroyed.

You have a model in your mind of how the banking system works. You presume I am trying to describe how the banking system works. When what I present doesn't match your model, you conclude I am wrong.

You have no clue what my model shows.

I am not trying to fully model the banking system you know.

[ThePythonicCow]

Re: Article : why debt growth must exceed interest payments

Thank-you, Aetius Romulous, for taking a fresh approach to this.

I did not entirely understand your post, so perhaps I'm missing something here. I'd suggest that cash (actual paper dollars) is on the books of the Federal Reserve, not on the books of any bank. When I take out a loan at my local bank, I give them a signed note promising them a certain income stream (the repayment, with interest), and they credit my checking account with the amount of the loan. I could do several things with that checking account balance.

• Perhaps I already have some other loan with the bank on less favorable (higher interest or shorter due date) terms, and I use that new balance to pay off that prior loan. In that case, the bank makes some more bookkeeping entries and we're done, without the use of any paper cash.
• Or perhaps I write a check on that account which I use to pay someone else for something. He then deposits that check in his checking account (likely in another bank) and that night the two banks settle between them the difference. The originating bank reduces my balance (lowers the liability of what they might have to pay on demand to me) and the receiving bank increases the balance of the check recipient (increasing the liability of what they might have to pay him on demand.)
• Or perhaps I withdraw my loan as cash. Cash is essentially just a bearer demand check. It affects the books of the involved banks just as does a check. The only difference are the usual terms of printing and transacting. Anyone can print checks, but they have to be signed by the payer. It is quite illegal to print cash unless you're authorized by the Fed and they send some of their best Secret Service enforcers after you if you break that law. But cash can be transacted on sight, including depositing into any checking account without revealing its source (well, so long as you don't run afoul of the IRS or War on Drugs or War on Terror money laundering provisions.) Also, when I write a check, the source account is not debited until the check is deposited in another account. When I withdraw cash, the source account is debited immediately (reducing the banks liability correspondingly.) Thus the Federal Reserve has a vested interest in how much cash is outstanding, for it will have to credit the books of any bank receiving that cash on deposit. The Fed has no care nor clue how many boxes of unused checks I have on hand, as those checks present only as much liability to the system as what is available in my checking accounts (not much.)

In sum and in short, I don't see where our banking system, at this level of detail, must break down in accounting.

What am I missing?

[xela]

Re: Article : why debt growth must exceed interest payments

There is no issue; there is no remaining question.

While your concept is perfectly clear, you are not adressing the problem. GNK is the owner of all the money and thus tpc will always be "his". The violation couldn't be more appalling. I sincerly doubt that the GNKs of this world will ever get it. Pride has always been a terrible thing.