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.

 

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LETS go to market: Dealing with the economic crisis

A 4000-word essay titled “LETS go to market: Dealing with the economic crisis”  has been added as a page to this web log.  Some of the ideas in this essay have not (yet) been presented in the web log.

The ideas in this article are outside mainstream economic analysis but I believed they are mostly based on the economics I learned as a student at the University of British Columbia.

We look at the formula from the quantity theory of money which I prefer to call the connectivity       formula  because it shows how the real part of the economy connects with  the financial.   There have been many ups and downs in the Q part of this formula.  These changes have impacted previous economic crisis.  The underlying cause of the current crisis is probably the unsustainable use of resources.

Three ways of creating money are considered  (gold, fractional  reserve and Local Exchange trading system [LETS]) and the advantages and disadvantages of each. If there is anything that should be considered funny money it is fractional reserve money.  Therefore I suggest we expand LETS into  a National Exchange Trading System.(NETS)

Such a radical change in our financial organization would be an opportune time to make other changes on our economic organization.  I would like to see the perfect competition model  used as a guideline.

I believe subsidies should be given to consumers rather than producers therefore I propose that transfer payments and subsidies should be replaced with a universal subsistence program.

You can read the essay here.

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.

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