Economics 101: The Money Problem

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Economics 101: The Money Problem

Post by The Dude on Fri Sep 23, 2011 1:16 am

There's a problem with money, and no, it's not the root of all evil.

Money is called a fiat currency, because it's used in place of something of value.

In the old days, people traded goods. Sugar for meat, or horseshoes for people shoes. You made something, and you traded away your surplus for other goods you wanted.

Well, if you grew corn, and the cobbler didn't like corn, you were out of luck...you couldn't get shoes. So, you'd have to trade corn with someone who had what the cobbler wanted, so you could trade that with the cobbler instead.

So, we switched to gold and silver, since everyone agreed that they had value. But gold gets heavy, so after awhile, we switched to pieces of paper that represent the gold or silver. 1 piece of paper can mean 1 cob of corn, or one shoe, or whatever. This is the purpose of money...to make trading easier than trading the things themselves.

But in our modern world, the money has been taken control of in two fundamentally corrupt ways. Compound interest-bearing debt, and the creation of money from nothing. Let me explain:

Let's imagine that we're going to create a society of Anonymous. Let's make our society 10 people, and each person needs 10 pieces of paper to swap with other people so we can do trade.

But we can't just make the paper. We're forced to BORROW the paper from a central bank. Where do they get it? The same place anyone would. They print it FROM THIN AIR. Now, we have to go into debt to get that paper, and pay the debt back, with interest.

So we borrow $100 for our society, at 10% interest, and we'll pay it back next year. But when it comes time to pay it back, we owe the bank $110! That's more money than exists in our entire society! We pay back the original $100, but still owe $10 to the bank. AND our society has no money again! So we borrow $110 this time, and give $10 to the bank (for what we owed them) and keep the $100 for our society to use this year.

At the end of the second year, we owe the bank the original $110 (remember, we gave them back $10 instantly and kept $100 for our society), plus $11 in interest for the loan. So we have even more debt! Now we owe the bank $121 for the $100 in our society!

But of course, we only have $100, so we need to borrow the extra $21, just to pay them back. And we need $100 again for this year. It's not hard to see how the Central Bank can come to own and rule a country very quickly using this system.

So, there are two equally important, corrupted aspects of money supply:

Eliminate Interest-Incurring Currency
Earning interest for pieces of paper that say IOU is just plain WRONG. It's the ultimate business, and totally unethical. Government needs to take control of the issuance of money, and make it free for us to use (i.e. there's no cost associated with creating it). So money is a public service provided by the government, and no profit is made from the creation of money. No interest-bearing money creation means no ponzi scheme, and no built-in collapse.

Responsible Control of the Supply of Currency
The amount of money in system effects how well the system can do business. Too much money, and prices go up, and bubbles form. Too little money, and recession kicks in, because nobody can get the money (IOUs) they need to engage in trade. If it gets really bad, they start to barter, but that's the whole reason money was created in the first place...to make barter unnecessary. So the amount of money is very important to make sure the economy runs smoothly. Central Banks create boom/bust cycles by controlling the amount of money in the system.

Many people believe in the gold standard because they believe nobody can be trusted with creating money from nothing. It's too great a power. If you can print money from thin air, then you can do that to buy or control anything. By tying money to gold, you have some 'objective' way of controlling how much money is created. This is a separate debate.

One last thing about money in the US:

The US dollar is the "Reserve Currency". Basically this means that the US forced the world to use its money to buy and sell oil. This means the Federal Reserve can print lots of money to fight wars, pacify its citizens, and buy anything it wants, without making the money worthless. Countries are forced to buy US dollars to buy oil, or other goods. This creates additional demand, and keeps the US dollar stronger than it would otherwise be.

Many people in Anonymous believe that the most important thing in changing the world is to take control of the money supply for the people, instead of having it controlled by Central Banks.

What do you think?


Want to learn more about Money and Economics?

The Money Fix - A Documentary on Monetary Reform.
http://topdocumentaryfilms.com/money-fix/

Chris Martenson's Economic Crash Course.
http://www.chrismartenson.com/crashcourse
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Re: Economics 101: The Money Problem

Post by The Dude on Fri Sep 23, 2011 1:18 am

maelstrom wrote:I would say you're absolutely correct. Fiat currency does not work. It cannot work. Gold is limited, paper is not, and that is why the dollar is worthless and will inevitably fail.
I sorta disagree. The Dollar isn't worthless yet because it's still the Reserve currency, and there are a LOT of ways to manipulate The System to ensure the dollar maintains 'value'. This is one of the main functions of terrorism, threat of war, financial worries. When the world looks scary, big money moves to the US dollar for safety. Just look at EUR/USD exchange rates surrounding the Christmas Day underwear bomber. These geopolitical events cause what's called "a flight to safety".

I don't believe that fiat currency, in itself, is a problem. That's why I said backing money with gold is a separate debate. It's not about so much an economics question, as a human nature question.

Vigilante teen wrote:Absolutely correct, I agree with the points made entirely. That of course leaves one big question, how do you move from the current system to the sort of improved way of doing things you suggested without a seriously fucked up transition period?
Easy. Start by cutting out the middle man. Don't involve Wall St. in anything you do. Bank with a local bank, S&L or credit union. Keep your money at home. Work with a bank that supports locally-based economies. Eliminate credit cards and replace them with local lines of credit. Invest in municipal bonds.

For more information on this, look at the work of Catherine Austin Fits. She's excellent in this manner.
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Re: Economics 101: The Money Problem

Post by The Dude on Fri Sep 23, 2011 1:18 am

lopezje001 wrote:I enjoy the information the collective has shared. The question should be; knowing what we know of how modern day currency and economics what can the collective do in order to allow for altruist autonomy?

How can I as an individual dream, build, live, survive and govern myself but still provide, share, contribute and nurture community?

So I thought isn't what social network models all about? How can we use what we know of economics and apply the functional parts to a social network model. Where every individual can serve the collective and serve self.
I'd suggest looking at the work of Catherine Austin Fitts. If you're not familiar with her work, it'll take a bit to understand, so let me summarize a few basic points:

  • Bank and invest locally. There's no need to involve Wall St. in your daily transactions
  • Look at the TOTAL return of your investment. Investments need to address all aspects of the community, not just the individual investor.
  • Currencies are losing the value quickly, and the best hedge against inflation is investing in sustaining infrastructure (farms, local production of goods, and day-to-day goods)
  • Self-sustaining communities with individuals that look after each others' interests

What I think to be required reading for anyone in this forum: Narco Dollars for Beginners: How Drug Money Permeates The System
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Re: Economics 101: The Money Problem

Post by The Dude on Fri Sep 23, 2011 1:20 am

shamanymous wrote:
poporella wrote:If you search for a transitional economy, maybe take a look into that paper and tweak up your ideas a bit:
http://www.naturalmoney.org/

maybe you can come up with a good mix of both!

Awesome website with a good amount of information on how to base our economy off of the most stable system we know; nature.

Some good condensed information I found:

The basic concept of Natural Money can be explained using the following 12 steps:

  • Interest on money should be banned. Return on capital is a good thing, and should not be abolished.
  • Raise a tax on holding money. This is not a tax on wealth, so shares, real estate and money lent, should not be subject to this tax.
  • Do not create more money, so there will be no monetary inflation.
  • Because there is a tax on holding money, people will soon use the money to invest, to consume or to lend without interest.
  • Because on money lent, no interest may be charged:
    - money will only be lent to reliable people and companies.
    - less money will lent and more money will be directly invested in equities and real estate.
  • Therefore there will never be an economic crisis, because money is spent directly and there are practically no bad loans.
  • Because all money is directly used for investment or consumption, the economy grows steadily at maximum potential and there is full employment.
  • The financial sector is largely superfluous. That is a good thing, because this sector produces nothing and destabilises the economy.
  • Governments also need much less to interfere with the economy.
  • As the economy grows constantly at maximum speed, and because no more money is created, prices will fall. Therefore loans with zero percent interest will have a return that is probably higher than the interest rate you will get at the bank now. The money lent will be worth more when the loan matures.
  • If one country chooses to apply this system, it will attract capital from other countries since the return of loans with zero percent interest rate is higher than the yield on interest in other countries. Therefore, all other countries will need to do this, if one country has changed its money system in this way.
  • Now everyone can achieve economic freedom. There will always be work for employees and there will always be customers for viable businesses. Nobody is deeply in debt.


http://www.naturalmoney.org/finsectordesign.html is a link to a full economic system based on natural money that is backed by goods and services, which works perfectly with the idea of a Resource Based Anarcho-Syndicalism.

Thanks again for the link! My hypothesis on Resource Based transitional systems will definitely benefit from this information. I suggest everyone who is interested in strengthening our economy and communities by modeling our systems after successful systems in nature check out this website!
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Re: Economics 101: The Money Problem

Post by The Dude on Fri Sep 23, 2011 1:21 am

xecnet wrote:AnonGirl wrote:

"I'd rather work on creating a society where people care about each other enough to be able to use and responsibly maintain a fiat currency without trying to screw each other over for a few bucks."

Creating the fair society is the most important thing - once a society based on a leaderless model incorporating respect and equality has been set up then the appropriate form of money system will emerge.

There are lots of great ideas in this thread - and it's key - because the wrong type of money (interest and debt-based) - which we now have - ruins everything.

I would also mention 2 other great sources of info about money:

1 Bernard Lietaer (http://www.lietaer.com/)

2 Thomas Greco (http://www.reinventingmoney.com/)

As others have noted, today governments are the problem, and the danger of any revolution is that we replace one type of government with another (usually far worse).

The solution is a form of direct democracy e.g. (http://realdirectdemocracynow.blogspot.com/) as well as a leaderless model of working, e.g.:

The Leadership Delusion: Travels in Search of a New Organizational Model for the 21st Century, by John Michell, 2007. ISBN:978-0-9557826-0-2

The Starfish and the Spider: The Unstoppable Power of Leaderless Organizations, by Rod A. Beckstrom & Ori Brafman, 2007. ISBN: 978-1591841432

The Myth of Leadership: Creating Leaderless Organizations, by Jeffrey S. Nielsen, 2004. ISBN: 978-0891061991
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Re: Economics 101: The Money Problem

Post by ravenpaige on Thu Nov 17, 2011 8:00 am

Adding additional posts from this thread by cryosun. This stuff is to good to risk losing.
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Re: Economics 101: The Money Problem

Post by ravenpaige on Thu Nov 17, 2011 8:00 am

All this talk of commodity money (gold, tobacco, cowrie shells, hemp, etc.) serves to remind us that while ANYTHING can be used as exchange media, some things work better than others. Be this as it may, every commodity money has the same drawback- it must first be mined/harvested/produced before it can be available for use as either itself as a commodity or traded as exchange media. The ideal exchange media will always be that very special non-commodity we call credit. Credit is simply trust that has been accounted for. Trust (like love or fear) is an emotion and it is the motivator that allows for human co-operation.

Look at the tribal gift economies that have served humans since before recorded history. It is trust that allows people to work together in a gift economy. Trust to do what? Specifically, if I have faith (trust) that some of my needs can be met by other people in the community, then I can afford to not try to meet all my own needs myself. I can afford to specialize and become very good at meeting one specific need for the rest of the community. The flint worker can make the spearheads for everyone else. The spearheads are theirs for the asking. When the leather/hide specialist asks for arrowheads, he knows he is going into debt to the flint worker; he's getting the arrowheads on credit. The hide specialist redeems his credit when he provides his skills to the flint specialist or to friends/family/tribespeople of the flintworker! The credit is informally accounted for. In a gift economy, good credit is maintained by making contributions to the other members of the tribe, and therefore by making contributions to the well-being of the tribal community. The tribespeople don't like the feeling of being in debt and do their best to stay in the role of contributor and not slide into moochdom and ostracization. But there's no quid-pro-quo exchange within the tribe- no barter, no direct flint-for-leather exchange. Look around you- there are gift economies in action everywhere around you at this very moment. At work I weld up specialized tools my co-workers dream up to make their job easier. My credit in their eyes goes up and I enjoy the increased respect in return. Lovers give affection and the relationship breaks down when the reciprocity breaks down. Police may not get a cash bonus when they bust more chops, but they gain status within their tribe and that motivates them to get more bad guys (us! we're the other tribe in their minds). The gift economy is what holds the Mafia together. Taking from the community is a charge to the member's credit, contributing to the member's community redeems it and adds status in all these cases.

The monetary economy is in constant conflict with the gift economy in our world today. You may want to give your weekend to the family (gift economy), but the boss announces mandatory overtime on Friday (monetary economy). You may want the company you work for to operate efficiently and profitably (monetary economy), but you'll annihilate your status with the other supervisors if you report their thefts of company equipment they help each other to pull off (gift economy).

The ideal money[b] is an exchange medium that allows the monetary economy to serve the same objectives as the gift economy. That money has to be credit based. The only challenge is to account for credit in such a way as to account for positive contribution to the community as social status does in the gift economy. Michael Linton's LETSystem is really close to this- Thanks AnonGirl for posting "The Money Fix". I have Tom Greco's "The End of Money and the Future of Civilization" and it's pretty darn good- it was cool to see him featured in the documentary. Silvio Gesell's stuff is really good, too. You all might also be interested in E. C. Riegel. A grip of his writings are available on Tom Greco's site http://www.reinventingmoney.com/. Also http://www.newapproachtofreedom.info/


=========================================
"To desire freedom is an instinct. To secure it requires intelligence. It must be comprehended and self—asserted. To petition for it is to stulify oneself, for a petitioner is a confessed subject and lacks the spirit of a freeman. To rail and rant against tyranny is to manifest inferiority, for there is no tyranny but ignorance; to be conscious of one's powers is to lose consciousness of tyranny. Self government is not a remote aim. It is an intimate and inescapable fact. To govern oneself is a natural imperative, and all tyranny is the miscarriage of self government. The first requisite of freedom is to accept responsibility for the lack of it."

E.C. Riegel
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Re: Economics 101: The Money Problem

Post by ravenpaige on Thu Nov 17, 2011 8:01 am

The Dude Abides wrote:
cryosun wrote:The ideal money[b] is an exchange medium that allows the monetary economy to serve the same objectives as the gift economy. That money has to be credit based. The only challenge is to account for credit in such a way as to account for positive contribution to the community as social status does in the gift economy. Michael Linton's LETSystem is really close to this- Thanks AnonGirl for posting "The Money Fix". I have Tom Greco's "The End of Money and the Future of Civilization" and it's pretty darn good- it was cool to see him featured in the documentary. Silvio Gesell's stuff is really good, too. You all might also be interested in E. C. Riegel. A grip of his writings are available on Tom Greco's site http://www.reinventingmoney.com/. Also http://www.newapproachtofreedom.info/
I've generally stayed out of discussions about monetary reform; this is a topic for others.

But I'd like to point out one thing about 'a medium of exchange'. It should specifically be something NOT of value. Without intrinsic value, it cannot be swayed by market forces as it's commodity value. Gold is a bad example because it has uses other than money. It's a traded commodity, and subject to supply/demand, etc.

This is one of the problems with the US dollar: it has artificial demand associated with it because it's the reserve currency, so the US can play geo-political games (i.e. terrorism or threat of war, etc.)to manipulate the demand for it. This has kept the US dollar from collapsing for a very long time....

The reason so many people demand gold, or another valuable commodity, is because we can't TRUST PEOPLE to control the money supply responsibly, so commoditizing it gives it an external control.

So, the monetary problem isn't really a monetary problem, it's a 'human nature' problem. The gold standard, or any other, is another case of treating a symptom, not the root cause.
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Re: Economics 101: The Money Problem

Post by ravenpaige on Thu Nov 17, 2011 8:02 am

cryosun wrote:
AnonGirl wrote:
cryosun wrote:The ideal money is an exchange medium that allows the monetary economy to serve the same objectives as the gift economy. That money has to be credit based. The only challenge is to account for credit in such a way as to account for positive contribution to the community as social status does in the gift economy. Michael Linton's LETSystem is really close to this- Thanks AnonGirl for posting "The Money Fix". I have Tom Greco's "The End of Money and the Future of Civilization" and it's pretty darn good- it was cool to see him featured in the documentary. Silvio Gesell's stuff is really good, too. You all might also be interested in E. C. Riegel. A grip of his writings are available on Tom Greco's site http://www.reinventingmoney.com/. Also http://www.newapproachtofreedom.info/
I've generally stayed out of discussions about monetary reform; this is a topic for others.

But I'd like to point out one thing about 'a medium of exchange'. It should specifically be something NOT of value. Without intrinsic value, it cannot be swayed by market forces as it's commodity value. Gold is a bad example because it has uses other than money. It's a traded commodity, and subject to supply/demand, etc.

This is one of the problems with the US dollar: it has artificial demand associated with it because it's the reserve currency, so the US can play geo-political games (i.e. terrorism or threat of war, etc.)to manipulate the demand for it. This has kept the US dollar from collapsing for a very long time....

The reason so many people demand gold, or another valuable commodity, is because we can't TRUST PEOPLE to control the money supply responsibly, so commoditizing it gives it an external control.

So, the monetary problem isn't really a monetary problem, it's a 'human nature' problem. The gold standard, or any other, is another case of treating a symptom, not the root cause.

[b]BINGO!


Yes, that is it precisely. What I would like to call for in the Anonymous community is for it to become an accountor of credit. Yea verily, a monetizer of credit. Anonymous can take up the role of banks by providing credit clearing services and therefore replace the need for banks and their ungodly cut of the wealth they take from the producers/consumers of the world. Banks don't just print and issue money, they monetize credit and there's no reason why the tech savvy among us cannot do the same in an honest way. Anyone out there with any input on this idea?
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Re: Economics 101: The Money Problem

Post by ravenpaige on Thu Nov 17, 2011 8:02 am

zangetsu wrote:
cryosun wrote:... there's no reason why the tech savvy among us cannot do the same in an honest way. Anyone out there with any input on this idea?

This is sort of what bitcoin aimed to do but in my personal opinion, they got it wrong. The distributed and nearly anonymous nature of bitcoin a pretty good attempt. Because of the desire for an anonymish (you can track a user if they don't take precautions) the project was forced to reject the concept of monetizing credit (creating and destroying currency as needed) and were forced into a create once use forever model. As there is only so much gold on earth, there will only be so many bitcoins. This means that it doesn't solve the problem of people not being able to obtain the currency needed to kick off the currency cycle. Essentially the people who have all the bitcoins to start with (mostly the early miners) have no one to spend their coins on because no one wants to accept because no one else accepts them. If everyone had gained access to bitcoins from the start, then everyone would want to spend them and everyone wanting to spend them would have in turn primed the population to want to receive them as well.

Anyway there are already systems in place that operate in this manner. They are called LETS (http://en.wikipedia.org/wiki/Local_exchange_trading_system). Many groups already have software to manage this sort of information.
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Re: Economics 101: The Money Problem

Post by ravenpaige on Thu Nov 17, 2011 8:03 am

anon17782111 wrote:What we are seeing here and now is the birth of a new era. We may not come to see it pass in our lifetimes. However, in the next 50 to 100 years the world is going to drastically change.

We will revert back to a civil war era economy. We will still have currency, though it will be based on gold and silver rather than the "farts and sunshine" that it is based on today. Sorry to those of you who think otherwise, but, historically, gold and silver have been the absolute, most stable thing to base a currency on. Even the bible spoke of currency using "honest weights and measures' in gold and silver.

Now, I say that we will go back to a civil war economy, and you probably think of how it was back then. I'm not saying we'll go back to riding horses and firing muskets, or owning slaves. We will still have access to all the technology we do today (more so, because who can imagine what we may have in 100 years.) I'm simply saying money will be worth about the same, and, the distribution of wealth will be much less unbalanced. The rich won't be as rich, and the poor won't be quite so poor. Everyone regardless of income will be able to afford just about anything they want. Yes some will have more than others that is inevitable, but, they honestly won't have all that much more than the average person.

The world will also have a much different type of society, Our legal system will revert to what is was in a much older era, people will be truly free. There will be need for a few basic laws necessary to keep some amount of order in society. However, on the whole, we will be much more free in our everyday lives. Governments will not be able to legislate every aspect of our day to day lives, so long as our liberties do not infringe on that of another. We will observe the Constitution of The United States as it was intended to be observed.

So in other words, imagine societies with great technical prowess, but, a totally free and unencumbered way of life. So, there may come a day (if any of us live so long to see it) when you or I could sit down on the steps of capital hill and fire up a joint or a "space joint" (this is the future after all.) Nobody (Least of all the law) would think anything of it. jocolor
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Re: Economics 101: The Money Problem

Post by ravenpaige on Thu Nov 17, 2011 8:04 am

Silvas wrote:After you read "Crossing the Rubicon" and finally "Confronting Collapse" or just watching his documenatary called "Collapse" you will soon relize that Michael Ruppert. is a pretty damn smart man. If you truley think "your" method is best, well get out there and get it moving but Mike's way is the only way in the post-collapse a trader that comes to my doorstep is not greeting a bullet.


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Re: Economics 101: The Money Problem

Post by ravenpaige on Thu Nov 17, 2011 8:04 am

_sc13nc3 wrote:
ItsOver9000 wrote:Gold has actual uses though for electronics and space, the resulting hoarding could damage those crucial industries.

your exactly right, nowadays thats all gold is really good for (that and jewlary,but lets be honest thats not neccesary)
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Re: Economics 101: The Money Problem

Post by ravenpaige on Thu Nov 17, 2011 8:04 am

cryosun wrote:Yes, BitCoin makes no sense from any monetary theory I know of. They limit the number of coins to be issued to some arbitrary amount, and bitcoins issued have nothing to do with the amount of stuff that might have been enabled to be produced by the issue. In other words, the amount of stuff available to be bought has nothing to do with the amount of money available to buy it. In this way they have indeed mimicked the production of some kind of virtual online mineral that nobody accepts as money because nobody knows what to do with it. BitCoins are altogether useless to finance new production. The financing of new production by a new currency is key to acceptability of a new currency for buying the new production that was enabled by it.

LETS is good- it is simple and the credit used to buy stuff in the market creates money to spend on the buyer's sales of his own specialized production. As for software to manage the credit, credit limits, etc. I've had a hard time using the open source software out there. There's Cyclos http://project.cyclos.org/ which sounds great but it only runs only on servers as far as I can comprehend it. I have not been able to play with it on my PC at all. Arrrgh! If only I could figure out how to use it- the features seem great and very appropriate to the task! I would love to use it to start a local currency in my city! Do any of you know how to get cyclos to work? Can Anonymous defend such a system from the bankers' inevitable attacks once it becomes successful enough to run some serious competition on their game?

I've been looking into local currencies and time exchanges also. I found this one that looks pretty good, but I'm really just starting to look into it: http://www.communityforge.net/home

What have you found that are the needed features?
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Re: Economics 101: The Money Problem

Post by ravenpaige on Thu Nov 17, 2011 8:05 am

zangetsu wrote:Bit coin is supposed to be nearly infinitely divisible, so in theory as demand for the coins grow they can be used in smaller and smaller pieced (deflation). So supply of coins really isn't the issue. The issue is the 'don't have any can't use it' problem.
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Re: Economics 101: The Money Problem

Post by ravenpaige on Thu Nov 17, 2011 8:06 am

cryosun wrote:
ravenpaige wrote:
cryosun wrote:Yes, BitCoin makes no sense from any monetary theory I know of. They limit the number of coins to be issued to some arbitrary amount, and bitcoins issued have nothing to do with the amount of stuff that might have been enabled to be produced by the issue. In other words, the amount of stuff available to be bought has nothing to do with the amount of money available to buy it. In this way they have indeed mimicked the production of some kind of virtual online mineral that nobody accepts as money because nobody knows what to do with it. BitCoins are altogether useless to finance new production. The financing of new production by a new currency is key to acceptability of a new currency for buying the new production that was enabled by it.

LETS is good- it is simple and the credit used to buy stuff in the market creates money to spend on the buyer's sales of his own specialized production. As for software to manage the credit, credit limits, etc. I've had a hard time using the open source software out there. There's Cyclos http://project.cyclos.org/ which sounds great but it only runs only on servers as far as I can comprehend it. I have not been able to play with it on my PC at all. Arrrgh! If only I could figure out how to use it- the features seem great and very appropriate to the task! I would love to use it to start a local currency in my city! Do any of you know how to get cyclos to work? Can Anonymous defend such a system from the bankers' inevitable attacks once it becomes successful enough to run some serious competition on their game?

I've been looking into local currencies and time exchanges also. I found this one that looks pretty good, but I'm really just starting to look into it: http://www.communityforge.net/home

What have you found that are the needed features?

Ok, there are a few basic ways to go about running a local currency. You can piggyback off a national currency as is done in Toronto, Canada with their "Toronto Dollar". In Toronto, Toronto Dollars are bought at an exchange (a local bank or credit union, I think) with Canadian Dollars by people who intend to spend them locally. Local merchants accept the Canadian Dollars usually for something like %10 off of the purchase price of their goods as compared to the price in Canadian Dollars. The local businesses accept the Toronto Dollars because they know they can redeem them for Canadian dollars at the exchange to pay their bills to outside suppliers. But they can only redeem Toronto Dollars at 90% of face value, so there's an incentive for the merchants to spend their Toronto Dollars locally. The redemption fee funds charitable projects around the town. And the exchange is funded by interest (Yuck, I know) earned by the exchange from the Canadian dollars pooled waiting to be redeemed. So, the system is kind of cool in some aspects, but as national money gets scarce, so too does the local currency because it depends on purchases of local money with national money to first put the local money in circulation. Its strong point is that businesses love it because they trust that the redemption fund will be there if they have to use it. Otherwise, they know the local money is very likely to stay in town and generate more business than would otherwise be possible. There are several variants of this scheme currently in play.

Berkshares is kind of cool in its own way. They got started by farmers who got locals to invest in their (the farmer's) future production with investment dollars. The locals' investments paid off as claims against the farmer's harvest. So here's a kind of variant of national currency being used to buy a local currency (harvest claim checks) kind of like what is done with the Toronto Dollar. In practice today, the Berkshare more closely resembles the Toronto Dollar than it's original form as a direct claim against future local production. Obviously, the farmers benefited by avoiding usurous bank financing and the local investor/consumers benefited by having a healthy supply of local food.

Be on the lookout for anything produced locally that might be conducive to generating its own currency via this local investment/future claim mechanism to further strengthen its own production. There are a few key universal market segments that are universally redeemable and always in need of money today to insure their availability tomorrow. Transportation service, Food, Labor, and even perhaps a local utility (if there is such a thing anymore in this post-Enron world- maybe in remote areas). Your local currency doesn't necessarily have to go that route, but if there is that kind of redeemability ready to be monetized, that can be a nice jump start. But to be a truly mature and independent system, it has to move away from direct redeemability and go to monetized credit. And by credit we mean the opportunity the community gives to its members to produce and contribute products and services to their community. They take from the community on credit so they may live to produce something of value to be taken by someone else in the community on that someone else's credit.

And this is the idea behind LETS. Participants in LETS all get credit accounts that start with zero balances and a standard newbie line of credit. When "member X" contributes (someone else wants what they have to offer and buys it from them- good or service) their credit balance goes up. The buyer's credit is transferred to the seller in the amount of the sale price. When "X" takes from the community by buying some other member's product, "X's" credit is transferred to the seller and "X's" balance goes down. What this system does really is to formalize and quantify the point at which the community decides "X" has been taking too much real wealth from the community that has not been offset by contributions. When the line of credit has been exceeded, then X needs pitch in and add some wealth before he can take any more out.

Now, here's the problem that pops up in many, many LETS attempts: Some member of the community is providing something everyone else needs. That ought to be a great thing, and it is, but what happens with straight LETS accounting is gradually the person making the most consistent contributions (sales) of wealth ends up with more LETS credit than he can spend within the community. He consumes the rest of the communities produce more slowly than they consume his, and the rest of the community gradually transfers their credit into his account where it is sluggish to return back into circulation. They get collectively maxed out and trade shuts down. This usually happens before the community gets big enough to become very diverse.

Solution: the organizers of the system must impose a positive credit limit as well as a negative credit limit. Account balances above the positive limit are subject to depreciation - the concept Silvio Gesell wrote about that other members on this thread have referenced. The system managers can fund their existence through this depreciation- credit is transferred from excessive accounts into the "public" or LETS management account.

Another Solution: Positive balances in excess of positive balance limits become transferred to a lending pool. People with production ideas (like start-up businesses) can ask for interest-free financing and credit from the lending pool can be allotted as financing by the people who's excessive credit accumulations have been transferred to the lending pool. In this way, new innovation can be financed by the most successful contributors to the community.

Also- the size of a member's lines of credit (both positive and negative) must change depending on how much contribution (sales) volume a member has been able to make over the last while. Tom Greco recommends absolute credit limits equal the last three months of sales volume as a rule of thumb.

Crap. This is a long post. I'll try clear up questions and flesh this thing out over the next while.
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Re: Economics 101: The Money Problem

Post by ravenpaige on Thu Nov 17, 2011 8:06 am

ravenpaige wrote:I just did a quick read of this on my lunch hour, so I'll have to go back later and re-read before commenting much, but this has been very, very informative so far and the kind of information I've been trying to find. I am sure to have lots of questions, though, once I do a more thorough reading.

I am especially confused about how "value" is built into the system. Must it come from either the introduction of resources (things) or from an outside currency (exchange)? Or can it be built in through labor only? If so, who/how is it determined the value of that labor? For that matter, who/how is it determined the value of the exchange rate, or the commodity price? It seems to me this should be a simple enough thing, but every time I try to wrap my brain around it, I come back with potential for serious problems or corruption. Am I thinking too hard about it, or are these serious concerns?

Again, thanks very much for the info.
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Re: Economics 101: The Money Problem

Post by ravenpaige on Thu Nov 17, 2011 8:07 am

cryosun wrote:
ravenpaige wrote:I just did a quick read of this on my lunch hour, so I'll have to go back later and re-read before commenting much, but this has been very, very informative so far and the kind of information I've been trying to find. I am sure to have lots of questions, though, once I do a more thorough reading.

I am especially confused about how "value" is built into the system. Must it come from either the introduction of resources (things) or from an outside currency (exchange)? Or can it be built in through labor only? If so, who/how is it determined the value of that labor? For that matter, who/how is it determined the value of the exchange rate, or the commodity price? It seems to me this should be a simple enough thing, but every time I try to wrap my brain around it, I come back with potential for serious problems or corruption. Am I thinking too hard about it, or are these serious concerns?

Again, thanks very much for the info.

About value- I like to talk in terms of "wealth". Wealth is created by humans for humans. It is created by human labor. Rocks are just rocks and dirt is just dirt until some human smelts the metal out or cultivates the soil. Even a buffalo is just a critter on the prairie until someone puts in the labor to turn it into jerky.

Coming from the perspective of how economic evolution is taught, namely that barter progressed into fractional reserve "lending" via the goldsmiths of Europe, it is not amazing in the least that there is some confusion as to the source of worth and value. Let's go back to our tribal ancestors. And let's compare what they were doing way back then with what we do today with YouTube. They would share stories of bravery of past and present tribesmen around the campfire and go out to try to be even more fearless in the face of the enemy tribe. We today share the coolest videos on YouTube with our friends and then go out to create the best (by best I mean everything from the most shocking-(Two Girls One Cup), the most extreme, the funniest, the most entertaining, to the most informative- (NurdRage! The Young Turks!) ) content we can to present to the YouTube viewing populous. Why do we do this? We seem to be hard-wired to want to contribute to what we see as our tribe or our society. Look at what hackers have been doing for years- hacking for lulz and flaunting their achievements on the Usenet. The Usenet is a rather small group compared to the users of the Internet, but for many, many years hackers could be perfectly happy showing off to each other in that scene. It seems many hackers have become (h)activists and now do what they do to contribute for the good of their society. To be an effective creator/producer/contributor seems to be the innate desire of most of humanity. So, how do we humans know if our creations have value? How do we know what we have created constitutes wealth for our community? We know because our fellow humans tell us so via some kind of language. When a tribesman has done something that is valued by the tribe, his status within the tribe increases. Within the tribal gift economy this means the other tribespeople are willing to give whatever they can to the valued contributor. They feel indebted to him and want to feel less so, and therefore give to him out of a desire to be on more equal footing. This is how respect is translated into loyalty. Loyalty is given from a feeling of indebtedness to the one respected.

I believe this has everything to do with value as it is perceived within a monetary system. When someone in the world today has a lot of money, we respond to that money as if that person had contributed a great deal to our society. "What can I do for you, Mister Gates?" "How may I serve you, Sir Evelyn?" What is perceived to have value is that which many other people have shown to respect. And the Dollar is the vote of respect in our system. Even when the system is gamed by these people, we still respond to the dollars as if these people had the claim to our production that genuine tribal gift-economy respect would have given them, loathe them as we may.

Anyway, more to the point of what I believe you were trying to wrap your brain around, value/wealth is perceived by the people within the system. That which is perceived to be useful has value and constitutes wealth. That which is perceived to be beautiful has value. That to which the minds of the people within the system can connect is valued. So it's not just labor that constitutes value, but intelligent labor that is in some way in synch with the needs and desires of the community and produces what the community likes. The only real trick is to account for that value. Again, in the tribal gift economy, respect, loyalty, gratitude and so forth are the accounting for value added by the tribal communities members. These are all emotions! In a monetary system, these emotions are accounted for by units of measurement. Your contribution might be valued as much as the average American values 1/4 ounce of silver in the open market. Your contribution might be valued as much as the average speculator trusts a the government to make good on one of it's short term bonds as traded in the open market. It's not the silver that has the value in the system and it's not the dollar bond- it's your contribution. The trick is to try to compare your contribution with some other emotional valuation in a sea of other continually fluctuating emotional valuations... Sorry to further make you feel like you are out in some void unable to pin down any kind of fixed point when it comes to value but I'm afraid that is indeed our situation as best I understand it. Value is completely subjective.

In the market, obviously buyers and sellers have different notions of what an item for sale is worth to themselves. The sale is made when the sale price comes within the acceptable range of the the item's perceived worth for both parties. But to even communicate with each other about their perceptions of the item's value, they first have to be communicating with each other in terms of the same UNIT of value. And really all that's all a monetary system is: a very specialized language designed to communicate magnitude of value. The dictionary of this language may consist of only one word- the language's unit of value. The thing about this language of communicating value transfer between people that throws people off is that the use of the word (unit of value) of the monetary language is transferred as if it were exchanged for the item of value that number of units attempts to define. Crap- trying to make sense here... I can say the word "elephant" all day and never run out of the word "elephant" to convey the idea of "elephant" to other people. So it is with spoken language. With monetary language, I have to put my money where my mouth is, so to speak. To get a physical elephant transferred to my possession, I have to transfer a claim to value equal to the value of the elephant to the seller of the elephant. The seller then gets to use those "words" of the monetary language to communicate to other members our community his claim to its products they might be offering that he may feel he needs.

The definition of that word- that unit- is what makes or breaks the users of that system. Federal Reserve issued units of value are defined in such as way as to communicate to the people of the United States that the member bank providing monetary "words" to its clients has an exponentially growing claim to the wealth available in the market of the United States (or anywhere else using the dollar) during the time the client is using those "words". LETS units communicate that one person has valued the product of another and they have together quantified that value. LETS units also communicate the give/take balance of the communities members.

As for the idea of their being value "in" the money or "in the system" let's use the LETSystem as an example.
When a LETSystem is set up, it's founders usually define the size of it's monetary "word" of unit of value in terms of something familiar and conveniently recognizable to its members. Usually the just agree the size of their unit equals one unit of the national currency. If the national currency is falling apart, they agree on something else more stable. The size of the unit does not matter as long as it is convenient for measuring the value of things commonly exchanged in day to day transactions. But the unit of value does not itself have value and is not made of value- it's just a unit. A liter is not made of gasoline or water or helium, we just communicate how much gasoline or water or helium we have in terms of the unit "liters". So don't worry about having to put value into a local currency unit to make it useful for measuring value in trade. The unit is just a word that is used to communicate the value that has been transferred at the point of sale. People just tend to get confused because unlike liters, the use of the unit to define claims on wealth is transferred at the point of sale as well.

Ummm- well let's close here by mentioning there are many, many ways of defining a monetary unit. A monetary unit is defined by the rules of its issue and retirement from circulation and there are several ways to design those rules. A community can agree to coin metals, coin land (as described by Benjamin Franklin- I'll be posting some of his stuff) issue claims against government services, print paper to mimic the function of coined metals, print paper to represent debts, and so forth. Back to our YouTube community, at least four different currencies have been designed to assess value the value of our posts: number of views, "likes", ratings and comments. However we design currencies, their definitions produce very different social results. The whole process of designing a currency is usually to set up the rules of its issue and retirement. We can set up these rules to produce any result we want, even to achieve the goals of the Venus Project. (Sorry to offend fans of Peter Joseph, Jacques and Roxanne here, but supercomputers can only decide what is most valuable to produce for a society if the computers have some unit of value to measure with! Bear with me please, I promise we will find common ground here!)
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Re: Economics 101: The Money Problem

Post by ravenpaige on Thu Nov 17, 2011 8:07 am

cryosun wrote:No comments since my last post... Monetary theory is such a conversation stopper. *Sigh*

Really quick this time- there's one more model I'd like to at least mention today. The Ithaca Hour has gotten some media attention over the years. It has had great staying power and found decent acceptance with local businesses. https://www.youtube.com/watch?v=pWfrnfJmP5w Here's the rules that define the Ithaca Hour unit of exchange:
1. One Ithaca Hour is worth one hour's wage for an "average" person in Ithaca. That average wage was defined as 10 US Dollars per hour, last time I checked. Therefore, one Ithaca Hour is worth 10 US Dollars.
2. 4 hours are issued as a gift to people who advertize their services and products in the free local classified ad newspaper "Hour Town". The people who advertize agree to accept some portion of payment for their services and products in Hours from their customers. They are free to determine whatever percentage of payment for their advertized service/goods they will accept.
3. People who accept HOUR for services may price their labor in terms of the standard HOUR ($10/hr). That is to say someone might mow lawns for for one HOUR and someone else might practice dentistry for two and one half HOURS per hour. The buyers and sellers are totally free to agree on whatever their sale price might be in terms of Ithaca HOURS.
4. There is no scheduled retirement of the currency- no repayment of the original gifted 4 hours (equal to 40 US Dollars toward purchases from the community) to the classified paper that issued them.

So this system is not credit based. HOURS are an exchange medium that works simply because barter is so much worse, not because it follows any kind of ideal issue/retirement scheme. The amount of money in circulation has almost nothing to do with how much is needed to facilitate trade- it doesn't expand and contract as needed so that's a major drawback. But people get a feel that they will be accepting HOURS when they list in the classifieds. As they find that they really can spend HOURS with everyone else in the listings they get more comfortable with accepting the HOURS themselves. Despite its drawbacks, Ithaca HOURS can be used in amazing ways in Ithaca- since the Hospital can spend HOURS for a portion of employee wages, it is glad to accept HOURS from its patients. Many landlords in Ithaca accept HOURS as a portion of rent. So HOURS are definitely worth having if you are in ITHACA.
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Re: Economics 101: The Money Problem

Post by ravenpaige on Thu Nov 17, 2011 8:08 am

ravenpaige wrote:No fear, I haven't stopped reading, but I am finding I have to let the information soak in for a day or two.

I do understand the concept of money as simply an agreement. The "value" increases geometrically, I suspect, along the lines of the "net effect." That is to say, if only you and I agree it has value, then that value is very limited. But if you're in Ithaca, and have Ithaca Hours, the size of the agreement network makes those Hours quite valuable.

I am still having problems, however, with the necessity of a plan for destruction. Why is that important again? I mean, I understand on one level that physical notes wear out and need to be replaced. But is there more to it than that? Does there need to be a function to control the money supply? And if so, how is that done? Who or what controls that?

On the one hand, creating an alternate currency sounds like it is an easy thing that almost anyone could do, given basic tools and just a small network. But right now to me it feels like jumping into a lake at midnight...so many unknowns.

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Re: Economics 101: The Money Problem

Post by ravenpaige on Thu Nov 17, 2011 8:08 am

Jon_A98 wrote:money at one time did have meaning, this was what fort knox was. however we stopped using fort knox because it represented the paper money. why is this? because you could literally go to a bank and trade your cash for what it was worth in gold or silver. So what? its still in our economy and is still of worth? yes, the problem lied in when people from other countries came, exchanged their cash for the american dollar, then went to the banks and withdrew the gold or silver. this is when it was taken out of our economy and started draining our coffers.

the point im making is simple, we do need to make cash stand for something once again. however, this time, make it so that only the american citizens can withdraw the gold and silver, or whatever is in worth at that time, (personally i believe it should be platinum.)
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Re: Economics 101: The Money Problem

Post by ravenpaige on Thu Nov 17, 2011 8:08 am

cryosun wrote:
ravenpaige wrote:No fear, I haven't stopped reading, but I am finding I have to let the information soak in for a day or two.

I do understand the concept of money as simply an agreement. The "value" increases geometrically, I suspect, along the lines of the "net effect." That is to say, if only you and I agree it has value, then that value is very limited. But if you're in Ithaca, and have Ithaca Hours, the size of the agreement network makes those Hours quite valuable.

I am still having problems, however, with the necessity of a plan for destruction. Why is that important again? I mean, I understand on one level that physical notes wear out and need to be replaced. But is there more to it than that? Does there need to be a function to control the money supply? And if so, how is that done? Who or what controls that?

On the one hand, creating an alternate currency sounds like it is an easy thing that almost anyone could do, given basic tools and just a small network. But right now to me it feels like jumping into a lake at midnight...so many unknowns.


Can I just spend some text here saying that I just love, love LOVE your questions! Completely relevant stuff here! I've been meaning to put together a YouTube video series (house projects and gardening have pre-empted all that this summer- bleah) and this conversation is helping get me back into the groove- thanks.

Destruction of money... Let's see... Ok, well let's see what the terms "money creation" and "money destruction" imply. Physical objects get created and destroyed. We exchange physical objects for monetary units and we are therefore used to thinking of monetary units as physical things. One minute we have the dollars, the next minute someone else does. You give me old sofa, I give you 50 bucks, you give me one big thing and I give you 50 little things that add up to the value of the one big thing you gave me. Some oppressed workers in Indonesia created the sofa, my unruly kids in America destroyed the sofa. The creation and destruction of the physical sofa is easy to visualize. But what on earth does it mean to create a dollar that functions as money and then to destroy it?

Because you are on this forum, I think I can safely assume that you already understand money is created as debt contracts between "borrowers" and the banking cartel. And you probably also understand that a bank "loan" is the most twisted misnomer ever to mislead the mind of mankind. If you lend your I-pod to your sister, the I-pod has to both exist and be in your possession before you can lend it to her. And she had darn well better give the loaned I-pod back to complete the loan cycle. When the banks lend to the public, the public sees money come from the bank (assuming it is just like any physical object) and they understand they have to give it "back". Therefore, the vast majority of people believe the money both existed and that the bank possessed the money before the bank "loaned" it to the "borrower". An acquaintance of mine works for a bank as a systems analyst and she sees the transactions the bank makes every day. She can see that if the bank doesn't have the money to lend, they just borrow it from another bank who borrows it from a Federal Reserve Member Bank who borrows it from the Federal Reserve. She still swears that banks don't create money; "the money exists before the loan is made, and that's why it has to be borrowed from somewhere else, and that somewhere else can be tracked down via its paper trail." The problem with this belief is that the Federal Reserve is owned by the Federal Reserve Member Banks. Yep, just like my wife and I own our dog. Claiming that banks borrow money from the Federal Reserve is pretty much the same thing as my wife and I setting up our dog as the CEO of a Limited Liability Corporation and claiming that our actions can't be pinned us as individuals because we are only acting as employees of our dog. Anyway, I'm turning away from this opportunity to turn this post into a rant- but it does bother me that the people within the system are so easily fooled by just a couple of iterations of paperwork. At any rate the banking system is circular and recursive within itself in such a way as for each individual bank to be able to deny that it creates money, but it is indeed the banking system that creates new money with each and every new debt contract. (I hate to call debt contracts "loans" because they are not, NOT loans, although they have enough of an appearance of loans to trick people into believing bank "loans" are exactly what that word implies- a loan of something that already exists!) If debt contracts create money (put money into circulation) then debt principal payments destroy money (retire money from circulation). Retiring money from circulation is precisely what is meant by destroying money.

The banks' accounting rules work like this:
First, there must be some money deposited in the bank. If this is a newly chartered bank, the money might come directly from the Federal Reserve as "high powered money". As I understand it (if anyone out there knows of some quirks and rules concerning "high powered money" please correct me) the bank promises to pay it back, and the contract to repay *poofs* the money into existence on the banks books as a deposit and on the Fed's books as a loan. The bank must retain this money as a deposit in order to write new debt contracts with the public. They are allowed under the accounting rules to write new debt contracts creating new money into circulation up to nine times the amount of the original "high power money" deposit. You've probably already seen this on Zeitgeist- further deposits create new reserves that expand the permission to write even more debt contracts, blah blah blah... so I'll try to keep it brief and cut to the destruction part. The accounting rules allow the bank to demand repayment of principal and interest. The accounting rules do not allow the bank to keep the principal as their money. Remember, the principal was created by the debt contract as a zero sum. What do I mean by that? Well, again, first there is a deposit that serves as a "reserve"- a permission to write new debt contracts. The reserve is not loaned out, it just sits in the bank justifying (by how big it is, according to the fractional reserve accounting rules) the amount of debt contracts the bank is allowed to write. The debt contracts exist as a plus figure (deposit, "loan" principal) in the account of the "borrower" and they exist as minus figure in the account of the bank. When the "loan" is repaid, the positive number (principal) simply cancels out the negative number on the bank's books. +1 plus -1 equals 0 (zero!). It's that simple. The money has been destroyed. It was circulating until it got "repaid" and now it's gone from circulation.

The banks get to keep the interest they collect from debt contracts. That's what they call their profit.

Oh, by the way, to add to the confusion in bank terminology, the negative numbers they add to their own accounts that offset the positive "loan" principal they give their customers- they call the negative amounts in their accounts "Bank ASSETS"! At first it really baffled me that a negative amount of money could be called an asset. Then I remembered the definition of the word "asset". An asset is something you own that brings income to you. A child is not an asset in the financial sense because a child does not bring income to you. Neither is your car for the same reason, unless you use it for a business. A profitable business is an asset. Land that you rent out is an asset. Dividend bearing stocks are assets. And of course, that which brings income to a bank (negative money on their balance sheets that define their outstanding "loans") are their assets. So if you ever wondered why bad loans are called by "toxic assets", that's why. But I digress...

Now let's look at LETS. Once again we see a zero sum, when a buyer transfers credit to a seller. Assuming both parties start at zero, the buyer's account goes into the negative and the sellers account becomes positive by the same amount. We call the negative number in the buyer's account his credit that he has spent. We call the positive number in the seller's account money that she has earned. Her money was created from the buyer's credit. In other words, the credit became monetized.

Now let's say she (the seller) buys from some third person and spends all that new money in the transaction. That new money was transferred to the third person, and no new money had to be created out of any credit to do it. The money is circulating.

And of course, the third person then goes on to buy from the original guy who has the negative amount in his line of credit. For the sake of simplicity, let's say he spends all the money he just barely earned from his recent sale to the nice lady. The money is transferred once again without needing to monetize any credit. The positive amount of money exactly cancels out the negative amount in the line of credit. Now all three parties have a balance of zero. The money is gone, cancelled out, destroyed!

Now, if you look only at the positive value as having any importance, then money destruction would seem to be a disaster. But of course it is no disaster at all if you look at the credit still available to turn into money. It's still as ready to facilitate trade as ever. Someone just needs to dip into it to create the money needed. When money is created, credit is expended. When credit is restored, money is expended. So in LETS, no matter how much money is circulating, no matter how big the numbers in the accounts, the net of them all is always and forever zero! See- money is not a thing, but we transfer it around as if it were a thing. In electronics, electrons can only transfer around a circuit if electron holes appear for the electrons to move into. The holes appear to move in one direction, the electrons jump from hole to hole in the opposite direction. For there to be a current in the circuit, the circuit has to simultaneously create the holes for the electrons to transfer through. http://en.wikipedia.org/wiki/Electron_hole Currency is just like that. Real stuff moves in one direction, money in the opposite direction. Like an electron hole, currency serves as a "real goods and services hole". It is not a real thing, it is a way of allowing the transfer of real things. And to do that it has to mimic the behavior of a real thing. And currency, in turn, comes into being via positive "money" and it's corresponding "hole": credit.

Ok, the the net positive/negative money/spent-credit in LETS is always zero. (In Fractional Reserve Lending the net is always an expanding negative number because of the impossible interest!) But what about the unspent credit in LETS? Because LETS are local and experimental right now, credit is currently evaluated any way a local LETS feels might work out to serve the communities needs. Usually, LETS that survive figure out that it works best if members' lines of credit increase depending on the amount of real goods and services they provide/sell to the other members of the LETS community. If they sell a lot, they are trusted a lot to be able to provide goodies to others and their credit goes up. They can be trusted to spend more credit because they have come to be known to accept more money/credit. They totally need to be allowed by the accounting rules to give others the opportunity to recapture their spent credit through sales. Credit is quantified trust to provide to society. If everyone is producing and providing their specialized production to everyone else in a healthy web, everyone's credit is increasing. Increasing credit cannot produce inflation. And the only way to turn credit into money is to buy something on credit. The money created exactly matches the the need to trade at all times in LETS. If people's needs are met over time and the whole community needs to trade less and less, their credit drifts down accordingly to match only that which they need to facilitate trades. It's not a problem that sales fall. It's not a problem that the economy shrinks when people are satisfied. Off the interest treadmill, such an economic slowdown could only be called leisure time, and not unemployment. Such a system only produces what it needs or wants or finds amusing; it does not produce in order to pay the mortgage.

So we see that the term "money destruction" is confusing. When we realize that exchange medium in both fractional reserve lending and in LETS is really just positive and negative credit, the confusion clears up rather quickly. It just sucks that we are used to our fractional reserve bank run debt contract system. That damn third party- the bank- only monetizes our credit when it wants to. "When it wants to" depends on its evaluation of our ability to compete with everyone else to capture their loan principal and prevent them from being able to retire it without stealing it from yet someone else. The bank is using something that works for the good of human co-operation: credit monetization. But it gives that very legitimate system just a little mathematical twist to turn intelligent humans into producer cows to be milked and then slaughtered when the milk runs dry. LETS, with a few tweaks I'll get more into later, uses credit monetization as the language humans need to specialise beyond the level possible in a gift economy and yet to regain the family/tribe quality of life lost to our current mode of industrialisation.


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Re: Economics 101: The Money Problem

Post by ravenpaige on Thu Nov 17, 2011 8:09 am

ravenpaige wrote:Thank you. This was very informative. I did know a lot about money creation/fractional reserve banking before, but I had never really thought about debt repayment as money destruction. So then that all kind of clicks together for me now.

I had always assumed that the Fed (or other central banks) create money along the dictates of its charter: to maintain "full" employment and to keep inflation levels around 2%. The inflation (or so I reason) is necessary in order to basically cover the interest that needs to be repaid and yet is not created. So, inflation creates the interest, therefore compelling people to not save, but take on more debt instead. Money saved (and not invested) loses value over time. Money invested (ok, well invested) has the potential to increase in value. This process serves as the engine of money re-circulation and helps to ensure that currency continues to flow.

At least, I think that's the theory.

Ok, that's where I have to stop for now because I want to go on about the risks in that system (our current system) and how things have gotten so out of balance. And I want to compare that to the possible risks in a LETS system. But now I have to go and think, because this is where I get really fuzzy. Clearly one of the risks of our current system is that more and more value (both in terms of real assets and in terms of money assets) gets concentrated in the hands of too few. How can a LETS system prevent that from happening? Another risk is that of too much money destruction, i.e., deflation (if I'm understanding this properly). In the case of too much money concentrated in the hands of too few, the money stops circulating and so we essentially run out of money in circulation (it ceases to circulate). In the case of deflation, essentially the same thing happens: people save instead of spending because they know they will be able to buy more with their dollar tomorrow than they can buy today. Money stops circulating. So I think what you're saying is that a LETS avoids those problems because in a LETS, the velocity of the circulation is self-regulating. Is that right? I don't know; I've struggled over this post for about two hours now, and I still don't feel like I've figured it out.

So, off to think and maybe when I get back, someone will have explained this so my brain can stop hurting.

Thanks!
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Re: Economics 101: The Money Problem

Post by ravenpaige on Thu Nov 17, 2011 8:09 am

I found this LETS (actually, not a LETS since it's international):

http://www.community-exchange.org/

I was thinking about encouraging my local Occupy and other Occupys to join. Local exchange can be used for the local community, but exchanges can also take place between the exchanges.

Should all or many of the world-wide Occupys join, this could broadly increase the number and type of offers, which in turn might help to eliminate the problem of not enough offers to get the velocity of exchange high enough to warrant additional offers, especially in the form of goods that might require real dollars for the purchase (or the purchase of supplies to create).

Thoughts?
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Re: Economics 101: The Money Problem

Post by ravenpaige on Thu Nov 17, 2011 8:10 am

cryosun wrote:I think we're set up pretty well from our previous discussion to sort out the problem of inflation. As we hear on the news every day, the central banks claim to have the ability to manage inflation/deflation by the setting of interest rates to manipulate the conditions of the market to create more or less inflation as desired. Experience has shown us, the public, that all their PhD's ever Piled higher and Deeper have not one single time in history ever succeeded in creating a stable 0% rate of inflation.

Inflation is easier to understand if you first understand that there are actually two different economic phenomena that are both called inflation. One of these is Quantity Inflation. The other is Price Inflation. In the news both are treated as the same thing- the talking heads point to higher prices and speculate whether the Fed will increase interest rates in order to "curb" inflation. Remember, the idea of raising rates is to reduce the quantity of money available in the market by sucking more back into the banks than is made by new loans. This is the story that they tell to explain their thinking:

The PhD's story: When interest rates are high, borrowers become reluctant to borrow because they'd rather avoid paying the high rate. This slows down the rate of new debt contracts being written by banks, ergo less new money is being brought into circulation. Old debts continue to be paid off, thereby removing money from circulation and shrinking the money supply. Less money in circulation makes money scarce and precludes consumers' ability to pay high prices, forcing producers to lower prices to be able to sell anything at all.

And to continue their story: When interest rates are low, borrowers storm the banks for new loans as if it were the morning of Black Friday. They create so much new money with all these new debt contracts they put themselves under that the new debt-money becomes cheapened relative to the value of everything else. Consumers buy everything they possibly can with their debt-money, which forces manufacturers into bidding wars for raw materials to feed the consumer frenzy and this drives up the price of everything from copper to coal. The manufacturers borrow even more low interest money to expand their production and bidding wars, causing money to be so easy to get for the raw materials producers that it loses its value relative to the commodities they produce. Ergo low interest rates cause inflation, according to our wise professors of economics. This is what they mean when they say low interest rates cause the economy to "overheat". While the public can recognize the fragment of truth in this story, it is my NO MEANS the whole story and is at best a half truth. Presented as the complete explanation of the relationship with interest rates, it serves to get the public to consider the question to be settled and therefore to see no need to answer further questions.

We hear this story over and over on NPR, FOX, the old TV networks, the AP, EVERYWHERE. It's hard not to become angry when writing this, because the problem with this dogma is so glaring: when a businesses expenses go up, it can hardly afford to lower prices for it's customers. When the price of beef goes up, Wendy's can hardly lower the price of a hamburger. When the price of commercial paper goes up (commercial paper is the class of loans banks make to businesses to float their day-to-day expenses; commercial lines of credit) the expense of doing business goes up. Businesses can in no way lower prices when the interest rate on their commercial paper goes up; they can only fork over more of their profit margin to the banks and suffer as that margin gets eliminated. Then they have to raise prices just to break even. At the same time, consumer's cost of credit rises with an increase in their interest rates. Just as the PhD's claim, they have less money to spend at the same time prices are rising all around them. To make things even worse, their employers start eyeballing the employee's pay rates to see if they can make cuts there to pay for their commercial paper. Everyone in the market gets desperate to pay for their financing and they all try to take it out on each other. Jobs are cut. Prices rise. Wages stagnate or are even sometimes reduced. This is what high interest produces- STAGFLATION. Less money in circulation and higher prices in the market. By following the logic of what must unavoidably happen to prices when a producer's costs increase, we can see that when Quantity Inflation is reduced, Price Inflation increases! So Price Inflation is not at all the same thing as Quantity Inflation as your talking heads would have you believe.

Now, this stagflation would be a temporary situation if commercial debt contract writing were the only means of adding money into circulation. In stagflation, many businesses go bankrupt and so do the unemployed. Huge segments of the population are deemed un-creditworthy and cannot obtain bank money to add to circulation. But the government still can because it is harnessed by the central bank to keep us all on the treadmill as long as possible. Because of the special relationship between the government and the Fed, the government is often called the "borrower of last resort". The Fed writes government bonds (debt contracts again!) to allow the government to spend money into circulation to make up for the lack of money being created by commercial debt contracts. Voila! The transition from the years of the Carter administration to Reaganomics is explained! This drags out the problem for a longer time than would be the case if the money supply were simply let collapse and all us suckers went bankrupt and debts were written off and the system re-booted with brand new loans and brand new money to go for another run into the same inevitable doom. But it doesn't drag it out forever- the same money supply collapse happens eventually anyway when the sovereign debt load becomes "unserviceable"- meaning the interest payments grow to where they become higher than tax revenues. Voila! Today's European sovereign debt crisis explained! So, even when lack of commercial lending is compensated for by "sovereign debt" money injections into the commercial markets, the government remedy for stagflation does lead to "austerity measures" (forced reductions in writing of new government debt) which severely reduce the Quantity of money in circulation. During the time governments are able to heap up all the sovereign debt they want to (such as immediately after an IMF intervention in the third world), the banks have faith that government debt money will eventually be captured by businesses and employees and the banks become willing to write commercial and consumer loans again. They may even do it at low interest rates and it seems the stagflation has been cured by government spending. But let the Greeks, Italians, Irish, Spanish, and Portugese serve as examples- government spending within the bank controlled money system is like taking morphine for cancer pain. The pain comes back and we're no better off when it does. Conversely, withholding government spending from the interest-burdened economy does not simply "allow" the economy to heal itself-just as withholding morphine from cancer patients does not simply "allow" them to heal themselves. That whole debate over monetary policy (government spending as a means of market manipulation for the greater good) is irrelevant, but the Republicrats constantly go round and round in circles to distract you with it.

This is a squirly topic- it's like trying to tie up Jell-O with rubber bands. I really want to talk only about inflation, but it relates to everything else and it's hard not to talk about everything else and adequately discuss inflation. Let's review in order to re-focus. The Fed or ECB imposes high rates to cure inflation. This makes prices go up and people's ability to pay the high prices go down. This causes temporary stagflation. With or without government intervention, the stagflation is temporary because eventually people become accustomed to having no money and become willing to work for less and less of it as their desperation increases. So eventually, the PhD's are right after all, high interest rates DO cause reduced Quantity inflation and reduced Price inflation and even deflation.

But not so fast- the process is not yet over and this is not the final result. As long as there is a little bit of something in the market to buy, and there are people willing to produce it to just avoid starvation, prices for products can stay low. But when the people can no longer afford to eat, they become somewhat less stoic in general and instead become rather irritable. They've got nothing left to lose. As Timothy McVeigh once said, "A man with nothing left to lose is a very dangerous man and his energy/anger can be focused toward a common/righteous goal." http://en.wikipedia.org/wiki/Timothy_McVeigh Obviously, banks are willing to lend to their captured governments in order to keep the angry mobs intimidated. "Austerity measures" go right out the window when it comes to protecting the power structure. But government spending on riot police and paramilitaries and the military itself just puts new money into the market without producing market products for people to buy with that money. The money is not invested in production, it is wasted on repression. The things people need to sustain their lives remain scarce. Before the government turns to total military spending, money is even scarcer than market goods so prices are low compared to money. But prices are high compared with the increased hours of labor required to get the little money to buy them. When the government goes completely military, they dump money into a market with its production capacity destroyed and suddenly market goods become intensely and insanely scarce compared with money. The money is now there, but there's nothing to spend it on, so it becomes worthless to buy things. Market goods' prices are very high compared to money in this sudden hyperinflation. Prices of market goods remain high in terms of hours of labor that must be spent to buy them- that condition of misery hasn't changed much. But things are a bit worse from the frustration that happens when a huge face value of money is earned from labor at a given hourly rate and goods prices increase further out of the range of affordability before the laborer can cash his check to spend it in the market.
Voila! The condition of all the Third World dictatorships is explained! When a countries currency is defined as interest bearing debt, hyperinflation is the ultimate end result. There are periods of price inflation and deflation along the way, but it all ends in hyperinflation. Look around the world- repressive regimes and worthless national currency go hand in hand.

How about low interest rates? Ask any four-year-old what the opposite of "high" is: "Low". So, with this idea of the implication of what "opposite" means, when we hear of a bank charging a low rate we think they are doing the opposite of charging a high rate. In our minds we think this would have some kind of opposite effect. Let's blow out the fog here and remember that rates are numbers. Although the number 26 is higher than the number 8, we can hardly say that 26 is the opposite of the number 8. Both are simply positive numbers. 8% interest does exactly the same thing as 26% interest; it just does it more slowly. Yes, low rates do fuel speculation bubbles IF people can use new debt contract money to gobble up land or dot.com stocks or anything else that will increase in value faster than the growth of interest on their loan money. You get people like Carlton Sheets running around telling everyone to get rich by grabbing a piece of the housing market and hoarding it until the price goes up due to scarcity created by the new artificial demand he's creating. Low rates enable that. It's harder to find something that will return money faster than a bank loan payments gobble it up when the loan rate is high. That's about the only real difference between a high rate and a low rate relative to returns on possible investments. Both high rates and low rates ultimately kill the system in a blizzard of hyperinflation. It's only the difference of how fast the cancer grows.

I've spent this post really trying to focus on Price Inflation as it relates to the interest rate as preached by our banks and their media. Next post I'll cover Quantity Inflation specifically.

After that I'll get to your wealth concentration concern. These things are all related, and it's impossible to get the big picture all at once.




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