11 comments

• Comment Link Friday, 02 March 2012 20:35 posted by John Downie

  I don't get this. You seem to be begging the very question you are supposed to be answering. You start off by "imagining an economy with a fixed money supply" but whether such a thing can exist is precisely what is in question, given our present method of creating money.
  
  The point is that essentially the whole of the money supply takes the form of loans. Therefore your diagram is wrong. The diagram shows loans as a part of the system whereas in reality they are the whole of the system. The money involved in trade, bank spending, interest payments and principal payments all derives from loans. Consequently the next round of interest payments must be calculated as interest on everything you include in the diagram, not just the bit you have labelled "bank loans".
  
  To put it another way, your diagram shows how things would work in a system within which a given amount of money is circulating. What it does not show is the fact that that all that circulating money is itself earning interest which is not reflected in the diagram.
  
  This suggests that what you have presented cannot be a steady state. The money supply has to expand because otherwise the interest on the current money supply cannot be paid. And it can only expand by means of even more loans.
  
  You may be able to rescue your theory on the grounds that the interest even on the whole system is small relative to other parts of the system, so that it can still be legitimately included as just one flow within the diagram. However, to be convinced I would need that to be demonstrated with some credible figures followed through over a considerable period of time - a century, for example.
• Comment Link Friday, 02 March 2012 23:26 posted by John Downie

  OK, I retract. The point where I thought you were begging the question was where you said, "In a steady state, the rate of flow of money being created as new loans will be equal to the rate of flow of money being paid back in principal repayments." The whole question you were trying to answer was whether it was possible for the rate of money creation to be the same as the rate of money destruction, and that statement seemed simply to assume it was possible without argument.
  
  Nevertheless, if both figures were reduced to zero (so that no more money was lent or paid back but interest was paid on what had already been borrowed) I can see that your scenario would work, provided that nobody claimed it had any resemblance to reality, and provided nobody asked how any society could possibly arrive at such a situation.
  
  Bank spending (including bonuses) would then be equal to the interest payable on all the money in the whole economy. Maybe that's not so unrealistic after all.
• Comment Link Sunday, 04 March 2012 16:13 posted by John Downie

  I retract my retraction (see my posts 1 & 2) above. It was too late at night and I wasn’t thinking clearly. Michael Reiss is indeed begging the question. There is a logical flaw in his model.
  
  The underlying problem with his diagram is that he is presenting a flow as if it were a snapshot at a particular point in time. In order to understand a flow you have to look at the point you start from and the point you finish at. Michael does not do that. If he did, he would see that the diagram could well be unstable. The diagram makes it appear that the flows will be the same year after year. That may be incorrect. I suggest that the flow representing interest payments may have to increase exponentially through time relative to the others. That would mean that either the money supply has to grow to keep pace (which is what he is trying to disprove) or that the amount of money available to the real economy must decrease in order to pay the ever-increasing interest. (Yes, the extra interest would eventually find its way back into the real economy via bank spending, but at a progressively increasing cost.)
  
  For his diagram to be convincing, Michael would have to show that the system can remain unchanged year after year. In particular, he would need to show what happens to the borrowings that are needed to fund the interest payments, and what happens to the further interest payments that are incurred as a result of those borrowings. This is particularly relevant to the flow he marks as “Bank spending”. That money was created as debt and it still exists, so somewhere in the system someone is still paying interest on it. Next year that flow will have vanished into the sections marked “Households” and “Industry”, but have the debts that underlay it been repaid? If they haven’t, that interest will still be payable next year, even though the money from this year’s flow is no longer represented on the diagram. If they have, how did that happen, and how did it affect the other flows? The point here is that the diagram leaves loopholes for exponential changes that could completely undermine it.
  
  I am not saying that Michael Reiss’s general thesis is wrong. It could be that Professor Keen’s computer simulation really does show that there is no fundamental problem with interest payments. I am merely saying that, as it stands, the diagram Michael has presented does not do so.
• Comment Link Sunday, 04 March 2012 20:48 posted by John Downie

  Let me put this another way that may make it easier to understand.
  
  Let us suppose that the flows shown in Michael’s diagram correctly show the movement of money during a year. The money situation at the end of the year will then be identical to the money situation at the beginning of the year. So far so good for his model.
  
  However, the diagram does not show the flow of obligations, i.e. debts. Although the money situation is the same at the end of the year as at the beginning, the obligations may be different. Indeed, the very fact that the money situation is the same may ensure that the obligations have changed.
  
  In that case, what will happen in the following years? If the money flows remain constant year on year, as Michael implies, then the imbalance in obligations will grow exponentially until they become intolerable. Alternatively, if the money flows change so as to maintain the obligations at the same level, we are no longer in the neatly repeatable scenario that Michael is proposing. Either way, Michael's model fails.
• Comment Link Wednesday, 07 March 2012 13:29 posted by Michael MacKian

  Isn't there one important flow missing from the diagram - the leak of money which enables the "1%" to misappropriate an unfair and growing share of the national income? To assume that this is included in the "trade to households" flow seems to miss the problem.