Money, interest rates and purchasing power

This week’s The Economist has a column on the implications of high and low interest rates.
One of the problems with money is that we treat it as a commodity – something which has a value of its own. Every time I use the bank’s ATM I told to let the bank put my money to work for me (and the bank).

We would have fewer macro financial problems if we were to think of money as a tool that facilitates the exchange of goods and services.  It is a concept  which represents purchasing power.

One of the things I like about local exchange trading systems (LETS) is that they create money that only facilitates exchange.  It has no value of itself and there is no interest involved.

This is in contrast to fractional reserve money which is based on debt issued by banks and upon which interest is charged.

In a fractional reserve system when we deposit money in a bank or make a loan to somebody we are transferring purchasing power to somebody else.  We do this expecting a return of even more purchasing power.  But this additional purchasing power is an illusion.  It  comes at the expense of somebody else or it  leads to inflation.

When the economy is growing more goods and services are being produced so there is extra to be purchased and the problem is not so obvious.  When the economy is stagnant there are no extra goods and services to be distributed and this is showing up in the form of low interest rates.

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

 

The Euro and fiscal timebombs

The Euro crisis and the fiscal cliff are such serious threats they should be considered time bombs.  For that reason I have been trying hard not to even read about them let alone think and write. Well, anyways, here goes.

There are two parts to the problems – the physical and the financial.

The physical is that the resource base is in trouble.  We have used up the most easily extracted resources.  Those which are left are difficult to extract and require a lot of energy – energy which was previously used for other economic activity.

As most of these resources, especially energy, are non-renewable there is bound to be a negative impact on our lives.  Yes, I know we can recycle some items and there are several sources of renewable energy, but so for there is not a lot of evidence that either of these will save us.

The impact of resources will probably be a slow steady decline.  For those people hit be natural disasters recovery will be slow and difficult.

The impact of the financial crisis will likely be a much wilder ride.

The source of the financial crisis is the fractional reserve way of creating money.  Money is created when the banks make loans.  Thus most of our money supply is based on debt and the fact interest is being charged on this debt means there is never enough money in existence to repay all the debts.  (For a more detailed explanation of how money is created and the problems, please see the essay LETS go to market: dealing with the financial crisis on this weblog.)  The effect is that our money supply is a Ponzi scheme which is likely to collapse at any time. And it has in the past.  We could say we are living in a house of cards.

At this point in the crisis the question is whose standard of living is going to be hurt.  So far the answer is “everybody but me.”  Thus we have demands for austerity which impacts those with less income, demands for stimulus which means inflation which impacts those with savings, and protests in the streets.  If or rather when the crash happens a lot of people are going to lose their jobs, savings or fortunes.

Just thinking about all this makes me depressed.  At this time I want to spend the rest of my life in the  wood shop  or taking the dog for walks in the forest.  However, it won’t be long before the urge to write resurfaces.

Last week I received in the mail a little statue of the Laughing Buddha.  One of his functions is to tell us to laugh in spite of all the suffering in this world because there is also a lot of joy and happiness.

Investments, gullibility and trust

If you have some savings to invest I urge you to first read this fascinating column about a Ponzi scheme in the Philippines.  If you already have invested some savings, including a pension fund, I urge to read the column and evaluate your position.

The column is about he nature of gullibility and trust and what the author calls the inflation of trust.  It is what allows Ponzi schemes to suck in their victims.

The reason I encourage you to read it is that I think it describes the psychology behind the operation of the larger investment industry.  Through the years there have been financial collapses in  which lots of people have lost lots of money.  Regardless of what the financial salesmen might promise there is a high probability it will happen again.  This explains why and how.

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

Prices and running out of resources

When one takes an unconventional position it is comforting to find somebody who takes a similar stand.  Here’s an article by someone who is also concerned that we are running out of resources.

I like the following paragraph because it show that resource prices declined during a period of growth and then started to increase when growth slowed.  I think it  supports my claim that to have economic growth marginal cost has to be falling.  When marginal costs start rising new resource discoveries only slow the rate of decline.

The price index of 33 important commodities declined by 70% over the 100 years up to 2002 — an enormous help to industrialized countries in getting rich. Only one commodity, oil, had been flat until 1972 and then, with the advent of the Organization of the Petroleum Exporting Countries, it began to rise. But since 2002, prices of almost all the other commodities, plus oil, tripled in six years; all without a world war and without much comment. Even if prices fell tomorrow by 20% they would still on average have doubled in 10 years, the equivalent of a 7% annual rise.

This writer also points out there are threats to our food supply from climate change and the depletion of two non-renewable fertilizers – phosphorus (phosphate) and potassium (potash).   Agriculture is so important we need to be aware of what is happening on the farm or rather the factory farms.

 

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

Economic salvation from shale gas?

A lot of people believe economic salvation depends upon economic growth and some people believe that salvation will come as a result of shale gas.

It could be true.

However, in a previous reincarnation I was a charter member of the skeptics club.  A more likely scenario is that shale gas may give us a temporary reprieve.  There are environmental and economic concerns.

The environmental concerns relate to global warming and earthquakes.  Also the current availability of cheap shale gas is interfering with the development or renewable energies such as wind and solar.

The economic concern relates to marginal cost.  (Marginal cost is the cost of extracting the last unit sold.)  If shale gas is going to be our salvation, then the marginal cost of extracting it will have to decrease as more gas is taken.  If the marginal cost increases, then it will only slow down the rate of economic decline.

The exploitation of shale gas is the result of high oil prices and the development of new and expensive technology.  It takes a lot of energy to get it out of the ground.  Certainly the gas currently being extracted is the easiest and cheapest.  There is some probability that future extractions will be more difficult and expensive.

Another concern about the potential for a return to economic growth is what is happening to the marginal cost of other minerals and resources such as topsoil and copper.

Rather than seeking a return to economic growth we might be better off to adapt our lives and our economy to zero or negative growth.  For some ideas about how to do that please see my essay: LETS go to market: Dealing with the economic crisis.

Here are links to three articles on shale gas. One, two, three.

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

Bank gambling with long-term loans and short-term deposits

Turning short-term deposits into long-term loans is one of the main reasons banks exist, enabling customers to have the comfort of deposits that can be withdrawn at any time together with the certainty of mortgages that might last for 25 years.

This statement from a columnist in The Economist  contradicts what I always thought was prudent bank policy – that the time term of a loan should be matched by a deposit of an equal time term.  To mismatch these terms is to use other people’s money to gamble on which way interest rates are going to move.

I know of a Canadian financial institution that purchased a pile of government bonds at ten percent expecting interest rates to go down in which case the deal would have been profitable.  This was just before interest rates went up to 19 percent and this business lost a pile of money as it had to pay a lot more on short-term deposits than it received on its long-term bonds.

This was an extreme case but with the current economic instability we should probably be asking banks to publish information about how the time-terms of their deposits and loans are matched.  Banks should make their profits on the spread between deposits and loans.

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

Greek debt world wide

An editorial in this week’s The Economist calls for Greece’s official creditors to write off a big chunk of the Greek debt so that country can start over again.

Debt is not a problem restricted to Greece.  It is a problem for most of the countries around the world.

So much debt, government and consumer, has been for projects that will not earn the income with which to repay the debt.  There is little hope  any of this debt will ever be repaid and therefore it will eventually have to be written off or defaulted.

The down side of this is that a lot of people are going to lose their savings.

Once the big crash happens I hope the survivors will be smart enough to find a way of creating money that is not based on debt.

 

%d bloggers like this: