Why your savings and pensions are at risk

The fractional reserve way of creating money means a lot of people are at risk of losing all or part of their savings and pensions.

If there is too much money supply in the economy then we have inflation and people with savings or pensions lose some of their purchasing power and those who owe money benefit because they repay their loans with less purchasing power.  Now you know why governments and the people who speak on their behalf promote mild inflation.  This is at least unauthorized taxation if not theft.

pexels-photo-2105902If you have deflation, then people who are owed money win because they are repaid with more purchasing power than they loaned.  The borrowers lose because they have to repay with more purchasing power.

To be fair to everyone we need to manage the economy so that just the right amount of money is available at all times.  At a time when the economy is on a down trend, this is very important as too much money puts us in danger of hyperinflation.

Getting this amount right has long been a challenge to central banks although the common sense answer is fairly simple.  The money supply should vary with the quantity of goods and services we want to exchange and it should be flexible up and down.

The wrench in the simplicity is the fractional reserve way of creating money.  When banks make loans they must (or should) keep a fraction of the amount on reserve for when the depositor wants his/her money returned.  As the amount is only a fraction banks are at risk of a “run” if depositors lose faith.  And because of the fractional reserve there is a multiplier effect involved.  Does not this sound like a set up for a crisis?  The mechanics of this process are a little complex although I have always found it easy to understand. To figure it out I suggest you Google “fractional reserve” or look at my free e book Funny Money: Adapting to a Down Economy or look at the essay Going to Market on this weblog.

The other end of the wrench is  that interest is charged on the loans made by the banks.  Mainstream economists have given little or no thought to the consequences of this. Because all of our money is created by the making of loans, if all the outstanding debt were to be paid off at one time there would not be enough money to repay it all because of the interest.  The charging of interest on the debt/money means there is never enough money available to repay all outstanding debt. Inflation is built into the fractional reserve way of creating money.

The system works only so long as the economy and the money supply continues to grow.  An upset in either means crisis of which we have had many.

The relationship between money supply and economic output is expressed in a formula, MV=PQ, some times known as the quantity theory of money.  Money times the velocity at which it circulates in the economy is equal to a price index times the quantity of goods and services produced.

I get ticked off because this is frequently taken to mean there is a direct, proportional relationship between the money supply and the inflation rate or price level.   Can’t people see there are four variables in this formula?  Total output is an important part of this formula.  If it should happen to go down something needs to happen to another variable.

Our society has a strong commitment to economic growth and a need to keep it growing so that people will not suffer from unemployment.   Some desperate people are trying to stimulate growth by increasing the money supply. This may increase inflation but it will not lead to growth unless we can find inexpensive energy and mineral resources to support it.  I suspect the new American president has  his eye on parks and reserve lands to encourage more economic activity.  He will probably succeed in the short term to be followed by a major economic collapse.

This blogger thinks we need some major economic reforms, not only in our financial system but in our commitment to economic growth.  We need to minimize our production and exchange of goods and services so we are using fewer energy and mineral resources.

A lot  of people operate on faith in our financial system and ignore suggestions we need reform.  I think the risk is so great that prudent people will at least give some thought to these issues.  It is your savings and your pensions and your future that is at risk.

 

 

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Regulating those evil payday lenders

Here is a link to an article from the Mises Institute opposing regulations for the American payday lending industry.

This simple proposal to regulate short-term lending raises important questions about how we treat poor people, about the role of money in our economy and how we regulate business activity.

This writer believes we should have a collective responsibility to ensure every one has the opportunity for the same standard of living as most other people.  Probably the best way to meet this responsibility would be a universal basic income scheme.  Such a program would not stop everyone from mismanaging their finances but it should eliminate the need for a lot of short-term credit.

Money can be an instrument of exploitation and is based on the debt created when banks make loans.  Debt is a path to slavery, especially for poor people.

We need a radical revision of the way in which we create money.  We treat money as a commodity which has its own intrinsic  value.  We would be better to treat money as a tool to facilitate the exchange of goods and services.  As a tool rather than a commodity there would be no need for interest.  Also the total amount of money available needs to be flexible up and down as the quantity of goods and services we need to exchange expands or retracts.  This guy has written extensively on this topic on his weblog and in his book.

As much as possibly economic forces, competition, should be used to regulate business activity. The more competition the fewer profits and the less need for regulation.  Regulations tend to restrict competition, allow greater profits and increase the demand for more regulations.

This writer is not enthusiastic about supporting the payday loan industry but does recognize that in our society there is a need for short-term credit.  I also believe there is a need to reform our financial system and the reforms could reduce the need for credit from all of us including the poor.

Why we should be sceptical of economic data

The following was posted as a comment on Paul Krugman’s blog on distrust of data.

I am one of those who distrust economic data because I see two problems with it.  One is that I do not always agree with the economic theory upon which data collection is based and the other is the difficulty in accurately and totally counting economic activity.

There are a great variety of economic theories and date collection represents the theory of the collectors which may or not be correct.  For example, money is usually defined as currency in ciruclation and bank deposits with several definitions depending upon what deposits are included.  I prefer to think of money as a tool to facilitate the exchange of goods and services.  How does one count or measure a tool?

Counting economic activity is another problem because it can only be recorded if there is a monetary exchange.  How do you measure housework or the many small things we do for each other.

When I worked as a journalist I realized there are two types of figures.  One we photograph and use to sell newspapers and the other put things into perspective.

Power of individuals and the universal basic income

Proposals for a universal basic income are bringing out lots of arguments which show a lack of understanding of the UBI and the nature of money. Here is an example in an article from  The Independent.

The author of the article claims a UBI will open the door for increased government control over people’s lives. This blogger figures the opposite will be the case and an income scheme will be a tremendous transfer of power to individuals.

The first and most important thing to say about a UBI is that it needs to be a part of a radical overhaul of the way in which we exchange goods and services and the way in which we create money.  Probably the current economic crisis is the result of our having used up the most easily accessible of energy and mineral resources.  There are lots of these left but they require lots of energy to extract.  The fractional reserve way of creating money also has lots of problems and needs to be reformed.

There are lots of people who want to tell others how to live and those of us who value Independence will always have to be vigilant and assertive.  This is separate from the UBI and will be an issue regardless.

Money represents purchasing power and giving it to people empowers them in that they can make purchasing decisions according to their values. This is different from food stamps in that stamps are for specified products and can hardly be the equivalent of money. A UBI will be a tremendous transfer of power to individuals and one would expect a lot of people to object to this.  Some of those who object will likely be the bankers whose power derives from creating fractional reserve money.

Another UBI issue is dependency.  Some people including the author of the reference article fear it will make us more dependent upon the state. I beg to differ because we should think of the UBI as an inheritance.  We can have it because we have such large agricultural surplus which is based on hundreds of years of agricultural and technological development.  We should all have a right to a share of the agricultural surplus.

The universal basic income will lead to a revolutionary change in the way we exchange goods and services.  Many of the issues are discussed in my book Funny Money: Adapting to Down Economy.  I encourage  you to have a look at it.  Details at the top of this blog.

Answering concerns about an income scheme

A discussion forum on the Canadian Broadcasting Corporation website brought out a number of concerns about proposals for a basic income scheme. There were more than 2,000 comments.  Here are answers to some of the concerns.

How do we pay for a basic income scheme?

There are two answers to this question.  The first is that it would replace a range of existing social welfare payments and would make these payments with more efficiency.  Employing fewer people this would increase the need.  Also I believe subsidies should be given to consumers rather than producers so this would release a lot more money for an income scheme.

For the second answer we have to focus on the agricultural surplus, the excess production by each agricultural worker which allows food for people to do other things. Without the agricultural surplus we would not have civilization as we know it.

Until now the agricultural surplus has been distributed via employment but the current level of technology is making this more difficult.  Thus the interest in a universal basic income scheme.  We should note that the agricultural surplus is based largely on petroleum and could be somewhat precarious.

As most of the technology that has gone into the agricultural surplus has been developed over the last 2,000 years and most if not all of us have ancestors who worked on that, we should consider it a part of our inheritance. We are all entitled to a share.  We should have a collective responsibility to ensure everyone has the opportunity for the same standard of living as most other people.  The amount of payments should depend upon the population and the quantity of goods and services we are able to produce.  If this ratio goes up then the payments should go up and if this ratio goes down then the payments will have to go down.

I believe there are some serious problems with the way in which our economy creates money.  As an income scheme involves money this would be a good time to deal with that problem.

How do we stop people from smoking dope all day?

The simple answer to this question is that we do not. We do not need everyone to work all the time to maintain the agricultural surplus.    We no longer need a work ethic.

A basic income scheme would be a tremendous transfer of decision-making power to individuals (from governments and from bankers who create money via the fractional reserve banking system) and we have to allow people to make their own decisions and to take or benefit from the consequences.  The agricultural surplus should give us all the right to decide what to do with our time.

An income scheme would be communist.

This blogger dislikes the isms because they tend to be mostly meaningless.  As I understand communism it involves treating people humanely and government control of the economy.  It seems to appeal to people who wants to tell others how to live their lives.    I believe we should try to treat people humanely and I do not want others telling me how to live my life. As decision making power goes with money an income scheme would be a transfer of power to individuals.  It is difficult to think many communists would want that.

A guaranteed basic income scheme would help with a lot of social and economic problems but such major changes would go against a lot of vested interests.  Even people who would benefit the most are likely to fear the unknown.  Therefore concerns need to be taken seriously.

This blogger has just published an eBook Funny Money: Adapting to a Down Economy which discusses a lot of these issues. The price is only 99 cents.  I encourage you to have a look at it. Until April 19, 2016 you can get a free copy from Smashwords.  Use the link and code at the top of this weblog.

Some concerns about the Swiss money creation referendum

The Swiss are going to hold a referendum on a proposal to change the way in which money is created by transferring this function from private banks to the central bank.  The more I think about this the more I see it as an attack on banks by people who do not really understand what money is and how the financial system functions, or should I say by people whose understanding of money is different from mine.

I believe there are some serious problems with the current fractional reserve way of creating money and anything which might lead to reform is to be encouraged.  However, I would like to see some debate rather than letting those who would tell the rest of us how to live win by default.  I want to see a libertarian reform in which decision-making is by all individuals rather than a select few.

Here are two links to information about the referendum. One, two.

Money is a tool to facilitate the exchange of goods and services and is backed by the agricultural surplus of which we have a huge amount although its continuation is somewhat precarious.  The fractional reserve way of creating money gives great power to bankers who create money each time they make a loan.  The Swiss critics are right about that. Money represents purchasing power for people who hold it and those who create money can decide to whom they will transfer that purchasing power. Transferring the money creation function to the central banks would be transferring power from one small group to another. I am not certain bureaucrats would be any better at making decisions in the public interest than private bankers.

A more libertarian approach would be to combine monetary reform with a universal income scheme and to call money agricultural surplus credits.  This is explained in my just released ebook Funny Money: Adapting to a Down Economy.  The book also talks about the problems with fractional reserve banking. (You may get a free copy of this book from Smashwords until March 19, 2016. See previous post.)

In reforming the way in which we create money two other factors need to be considered.  The total amount of money available needs to be flexible up and down as the quantity of good and services exchanged varies. If it is not flexible we should expect inflation or deflation, both of which rob people of their savings.  The Swiss proposal says the central bank would use its statistics facilities to help in this.

The other concern is interest.  I believe the charging of interest on loans is a Ponzi scheme which leads to periodic financial crises.  This too is in the book. I did not see anything in the proposal to indicate how interest would be handled.  It could be the people who crafted the proposal do not see that interest is a problem in money creation.

I fear that not too many people truly understand how money works in the economy and how the fractional reserve way of creating money is a serious problem.  Reforms are needed although I can not see that transferring money creation from one small group to another small group will be a satisfactory reform.

Free Funny Money

Here is a free promotional giveaway of the new ebook Funny Money: Adapting to a down economy.  This book is now available on Amazon Kindle and Smashwords.  The next step is for me to make some formatting corrections so Smashwords can distribute it to a number of book stores.

FunnyMoneyArtPowell-final

Smashwords allows authors to create coupons for discounts and free giveaways.  I have made a coupon to give this book away free for about two weeks. The code is HS63E and it expires on March 19, 2016

The book is available at: https://www.smashwords.com/books/view/620310

The book is also available at the Kindle book store at http://www.amazon.ca/gp/product/B01CH1LF6W?*Version*=1&*entries*=0  

at the regular price of 99 cents. So far as I know Amazon does not allow the free giveaway for the publishing option I have chosen.

This book is critical of some aspects of economics and endorses others. The author, who has also read history and anthropology, questions economic growth and the fractional reserve way of creating money. He has come to terms with the market economic model as a set of guidelines for economic policy. The current economic crisis is resource based in that we have used up the most easily accessible of energy and mineral resouces.  We need a guaranteed income scheme and a new way of creating money.

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