Mike Maloney: This Is The Peak

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21

Dave

I have to respectfully disagree. You can pay back the P+I of the loan if the total money supply keeps increasing, because somewhere, someone else borrowed a loan and new money was created. Then, that additional money will somehow flow to your account and when you repay the principal, that money is extinguished. the bank debits your bank account (liability) and credits the loan (asset). This is just accounting 101. The flow is just the same money going back and forth between different holders.

Regarding this statement "even if NO money was created when the loan was initiated" , I think you´re missing that the money that someone used to buy the bonds, already existed and had to come into existence by the only mean that new money is created, that is through a bank loan.

I stand by my reasoning. The key for me is this: Money is created through bank loans (either central banks or commercial banks), and is extinguished when you pay back the principal. The net interest collected by the bank becomes part of the bank equity, through profits. But no additional money is created by the interest earned.

I do agree when you say that the faster the money supply flows through different holder (velocity), the easier it is to keep paying the P+I without default, but this doesn´t change the basic premise that I described in the previous paragraph.

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This is a financial documentary that breaks down and simplifies the ways in which central banks influence the world we live in not only in Japan,but,around the world.Insanity and evil doesn't begin to cover what they have done to there own people and the rest of the world!After watching,you will be unable to ever look at the country in the same way again."Only power that is hidden is power that endures."Highly recommend for economics teachers,traders and those that look for greater understanding…Brainbox may explode!

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Being myself unable to respectfully disagree with Dave on these monetary matters… I simply comment much less on PP.com than I used to.  I applaud your work though, and I encourage your voice here - Thank you.  
Chris has argued the same point with Dave recently.  For me this is settled science… we have a money system that has a fundamental flaw - it is dynamically unstable because it creates the money to pay back the principle, but not the money needed to cover the interest obligation (in a systematic sense).  The best the system can do is to keep expanding… the expansion therefore acts to cover up this instability.  If one simply opens their eyes, it is very, very easy to see that the masters of the system are doing everything they can to keep it net inflating;

-  deflation, although beneficial to savers, has been demonized.  The system has been run in an almost constant state of inflation since the 1950's, in stark contrast to the way the system ran in the 1800's;

            http://www.advisorperspectives.com/dshort/updates/Inflation-Since-1872
-  Central bankers target positive inflation, usually 2%, even though their charter is for, "price stability". Duh.

-  The system has been demonstrably exponential for decades; 

https://peakprosperity.com/blog/exponential-money-finite-world/29744
Net:  To think that the central bankers, who have only on trick (i.e. to print more money and do things with it) are going to stop printing money is foolish.  Don't let DaveF fool you into thinking that they don't have to keep printing. 
24

Carlos-

I stand by my reasoning. The key for me is this: Money is created through bank loans (either central banks or commercial banks), and is extinguished when you pay back the principal. The net interest collected by the bank becomes part of the bank equity, through profits. But no additional money is created by the interest earned.
I agree with everything you say, more or less.  My conclusion is just different.  It goes back to what underlies "accounting 101" and the details of what "retained earnings" really are.

The retained earnings line on the balance sheet doesn't mean actual bank credit received from interest payments are stuffed away in a (metaphorical) box somewhere.  If that were true, you'd be 100% right, because the interest payments would get "stuck" at the bank and over time, this would gradually run the economy right out of money (and/or require a dramatic additional creation of money over time).

But retained earnings really aren't "retained."  They are actually spent right back out into the economy by the bank - used to buy bonds, build new branches, expand operations, and to buy other assets.  The "retained earnings" on the balance sheet is just the accounting notation that rolls up up the aggregate net profits over the lifetime of the organization which has (presumably) been put to good use by management.

http://www.investopedia.com/terms/r/retainedearnings.asp

Retained earnings refer to the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business, or to pay debt. It is recorded under shareholders' equity on the balance sheet. The formula calculates retained earnings by adding net income to, or subtracting any net losses from, beginning retained earnings, and subtracting any dividends paid to shareholders.

So given that retained earnings aren't actually retained by the bank, but instead are spent right back out into the economy, no additional money needs to be "created" by the system to pay the interest.  The interest payments can come from normal money flows from the pool of existing money.

My conclusion: we definitely have exponential growth in money supply - that's easy to see just by observation - but it is not for the reason that we "don't create enough money to pay the interest."

JimH-

Net:  To think that the central bankers, who have only on trick (i.e. to print more money and do things with it) are going to stop printing money is foolish.  Don't let DaveF fool you into thinking that they don't have to keep printing.
Eh, Jim, once again you're trying to put words in my mouth.  Of course they'll keep printing, I agree completely with that.  [I put this in bold, so hopefully you wouldn't miss it.]

At some level, the important bit is the exponential growth, and we all agree on that.  We just disagree on the cause.  Steve Keen and I believe the Fed is the direct cause.  You and Chris blame the system design and "not enough money to pay the interest."

Your claim that this is "settled science" is an appeal-to-authority fallacy - without even stating your authority! 

25

You said,

Banks create money to pay wages, bonuses, capital expenditure, dividends, investments and any other expenses that they incur.  In effect they borrow from themselves.
Can you please find some documentation or validation for this point?  Banks lending themselves money to pay wages?  Really?  I am sure that banks do take loans at times like any other business.. but I don't think they generally would do this to pay wages or bonuses.  They make money off of interest and fees, which is a net demand on the overall money supply.   
26

Dave said,

Your claim that this is "settled science" is an appeal-to-authority fallacy - without even stating your authority!
I showed data - data is what settles the science.  The long term chart showing inflation/deflation trends since 1870 shows how a system goverened by hard currency works vs. a system of debt-based fiat (with the understanding that the system has been constantly changing toward more central management since the FED came into being in 1912).  The system is flawed, and FED and the sister central banks will do what they can to keep it alive until such time as they need to find a scapegoat to blame it's demise on.      
27

Dave:

So given that retained earnings aren't actually retained by the bank, but instead are spent right back out into the economy, no additional money needs to be "created" by the system to pay the interest.  The interest payments can come from normal money flows from the pool of existing money.
This is beside the point. The earnings of banks are just like the earnings of every other business. They can be paid back to shareholders or spent on investment or whatever. This has nothing to do with the money supply. And I agree that increased velocity (flow) does improve the ability of servicing the debt. But this mechanism is being exhausted, and the signs are becoming quite clear. The growth in central bank balance sheets through QE, negative rates, rising financial stress are all symptoms of this, I believe. Servicing the debt is becoming harder and harder, as the ability and/or willingness to borrow is just not there in the needed scale, even with the incentives central banks are currently providing (imagine if we had conventional monetary policy.. which is just a distant memory these days)

I keep to my argument. Bank deposits can only be created by issuing debt/loans, specifically bank loans, not corporate or sovereign bonds (unless they are bought by central or commercial banks - in this case it is the same as creating a bank loan -> debit on the asset side and credit on the liability side of the bank´s balance sheet). And bank deposits can only be extinguished when loans are paid back. Every other kind of transaction is just the same deposits changing hands. And to pay back the interest, someone, somewhere, at some given time has to make new money come into existence.

 

28

Pull it.
https://www.youtube.com/watch?v=xrzeN-wvHD4

29

Carlos-

.... The earnings of banks are just like the earnings of every other business. They can be paid back to shareholders or spent on investment or whatever. This has nothing to do with the money supply. And I agree that increased velocity (flow) does improve the ability of servicing the debt. But this mechanism is being exhausted, and the signs are becoming quite clear. The growth in central bank balance sheets through QE, negative rates, rising financial stress are all symptoms of this, I believe. Servicing the debt is becoming harder and harder, as the ability and/or willingness to borrow is just not there in the needed scale, even with the incentives central banks are currently providing (imagine if we had conventional monetary policy.. which is just a distant memory these days)
Ok, it sounded like your claim was that "retained earnings" meant the bank was consistently withdrawing money from the money supply via "retained earnings" and thus systematically hoarding the interest payments out of the money pool.  Now I understand you aren't saying that.  (Problem was - Chris was making this case previously, and that's probably why I thought you were saying it too.)

Again, I agree with you in every particular about the symptoms: financial system stress, growth in CB balance sheets, overall size of debt, etc.  I just disagree about the cause.

My claim is that the cause of our problem is NOT about "failure to create enough money to pay the interest."   By definition, by placing the blame on "not creating enough money to pay the interest", you must be talking about a money supply problem because creating money (or in this case, not creating it) must be about money supply.  If failing to create the money to pay the interest isn't a money supply issue, then what sort of issue is it?  Money flow is the only other variable left, and we've already eliminated that by agreeing that banks aren't hoarding those interest payments in a box somewhere.

From my understanding of the money system model, we have two choices: flow, and supply.  The problem must be in one area or the other.  Is there a third choice that you see?

And to pay back the interest, someone, somewhere, at some given time has to make new money come into existence.
So Carlos, what is special about paying bank loan interest vs, say, money I borrow from you?  Why must "bank interest money" be created, while "Carlos personal loan interest" can come from the existing pool of money?

This is the key.  If you can tell me why bank interest has to be treated differently from corporate bond interest, or loan-shark interest, we'll be able to nail this down.  That's the piece I'm missing.

If banks don't hoard interest payments, and base money exists, it all works just fine.  That's what I understand to be true.

Its the Fed that causes the systemic exponential growth in money supply, by their short-circuiting of recessions via interest rate policy.  They don't give the system a chance to flush out all the bad debt.  Enough cycles of that, and here we are, at the top of a debt bubble.  And all the money printing is a desperate measure by the Fed to avoid the inevitable pop - since interest rate policy has now failed for the first time in generations.

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JimH-

I showed data - data is what settles the science.  The long term chart showing inflation/deflation trends since 1870 shows how a system goverened by hard currency works vs. a system of debt-based fiat (with the understanding that the system has been constantly changing toward more central management since the FED came into being in 1912).  The system is flawed, and FED and the sister central banks will do what they can to keep it alive until such time as they need to find a scapegoat to blame it's demise on.    
Wait.  What happened to your very specific claim of "not creating enough money to pay the interest" being the cause for all our exponential money growth ills?

Now you are talking about the Fed, and sister banks, and central management, and hard currency.  This all has nothing to do with "not creating enough money to pay the interest."

Or - did I miss something in there somewhere?

BTW, even under a gold standard, assuming you have fractional reserve lending, banks still create bank credit.  They've done this since the world was young.  Even in 1870.  Even before the Fed.  All during the time of your "hard money" nirvana, banks were madly creating money through lending.  All the while, they were "not creating enough money to pay the interest."

Go back far enough, you have warehouse receipts.  That is bank credit.  That causes inflation.  Not because of "not enough money to pay the interest", but because fractional reserve lending allows banks to expand the money supply.  And they're motivated to do this because more loans = more profits, so they push it as far as it will go.

Its really simple.  Its not because of "not enough money to pay the interest", its because banks are greedy (kind of like the rest of us), and ultimately they just can't resist making "just one more loan…"

That's my theory anyway.  I don't claim its "settled science."  Its just my theory.  But it does seem to fit both historical context and human nature.

31

Dave, first of all, I´m glad you understood what I meant and we cleared some misunderstandings.
I do get your point regarding the mixing of the concepts of supply and velocity or flow. This I think is a common mistake made by a lot of people when discussing monetary issues. The fact is that the two are tied together and velocity is a way to expand and contract a given money supply = quantity. And this way velocity also allows or improves the capacity of repaying previously issued / borrowed loans, but only if the aggregate amount of loans keeps increasing. If the opposite occurs, then deposits keep getting extinguished and at some point (which I have no idea when that is, but I´m sure there is one), velocity alone cannot allow the repayment of principal and interest.

Let me just comment on some other points you´ve made:

So Carlos, what is special about paying bank loan interest vs, say, money I borrow from you?  Why must "bank interest money" be created, while "Carlos personal loan interest" can come from the existing pool of money?
It´s not that in can come form existing money.. it has to. The difference here is that I cannot create a deposit when I loan you some money.. neither can a non-financial/non-credit company. I merely shift the ownership of pre-existing money to you and you give me an IOU in return. In a sense, this could be transformed into currency, if I could then use your IOU for commerce or saving or paying down my own debt. The catch is that only a bank or equivalent (credit card company for eg.) can issue legal tender IOU´s = currency. You and I cannot and this is, I believe, the key difference.
Its the Fed that causes the systemic exponential growth in money supply, by their short-circuiting of recessions via interest rate policy.  They don't give the system a chance to flush out all the bad debt.  Enough cycles of that, and here we are, at the top of a debt bubble.  And all the money printing is a desperate measure by the Fed to avoid the inevitable pop - since interest rate policy has now failed for the first time in generations.
I completely agree with you that central bank intervention inhibits the cleansing of bad debt by market forces and this has allowed for larger and larger imbalances in the economy and financial markets. But if they had allowed for all the bad debt to be defaulted upon, there would be massive losses for bank depositors and well.. I guess I don't need  to expand much on the effects of something like this happening on a massive and global scale. This is because deposits are backed by those same loans (this I think is clear to both of us, right). In a commodity based system, this would not happen, since deposits would also be backed by the gold/silver or whatever commodity you chose.

In a sense I believe we do still have a commodity based money system (we just don´t believe it), since central banks and/or treasuries are still very large holders of gold, and when the time for a reset comes, they will have to return to some kind of gold standard to restart the monetary / financial markets.

Look forward to your comments.

Cheers

32

Twenty dollars = two tens =five four=twenty ones, this how money goes around; twenty dollars gets transfer from one account to the other money stops, terminate hold. New  money dose not go around in a circle.
   

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Carlos-

... velocity also allows or improves the capacity of repaying previously issued / borrowed loans, but only if the aggregate amount of loans keeps increasing. If the opposite occurs, then deposits keep getting extinguished and at some point (which I have no idea when that is, but I´m sure there is one), velocity alone cannot allow the repayment of principal and interest.
Yeah, I agree, they are both important, and that at some point, velocity alone cannot support repayment of P&I.  My sense is, the ability to repay debt roughly follows the equation:

 debt-payment-ability = velocity x money supply

If too many bank-credit defaults happen, money supply shrinks.  If people get too scared, velocity shrinks.  If both happen at the same time, its multiplicative, and we're back to Great Depression-land.  And as you say, there's probably a minimum amount of money supply, below which things get really iffy.  Base money helps to cushion that, and these days base money is not a small number.  I used to think that if we paid down (or defaulted upon) all the bank credit, money would be gone.  But that's just not true.  Base money remains.

... only a bank or equivalent (credit card company for eg.) can issue legal tender IOU´s = currency. You and I cannot and this is, I believe, the key difference.
Sure, that is a key difference.  Borrowing money from a bank increases the money supply.  Borrowing money from a friend leaves money supply unchanged.  And that brings up the following question:

In view of the equation I described above, is repaying a friend easier or harder (from the system perspective) than repaying a bank loan?

  1. Borrow $100 from a friend.  Money supply is unchanged.  Repay Friend $110.  Money supply unchanged.

  2. Borrow $100 from a bank.  Money supply +$100.  Repay bank $110.  Money supply -100.

In this simple example, it would appear that repayment in case 2) should be easier, if the equation I stated at the top holds true.  Bigger money supply makes repayment easier, and that only happens in the bank-credit money case.

In both cases, you must make an interest payment.  Both interest payments are equally hard.  But the principal payment in case #2 is easier than in case #1.  [The side effect is, case #2 is more inflationary.  Easier repayment, but the cost is a more inflationary economy.]

But if they had allowed for all the bad debt to be defaulted upon, there would be massive losses for bank depositors and well.. I guess I don't need  to expand much on the effects of something like this happening on a massive and global scale...
Surely true.  From where we are right now, the cleansing will be quite the event.

But my claim is, if the Fed had let the cleansing happen way back when the "ponzi loan" defaults would have been relatively small (say, back in 1960), then it would have been like falling off a footstool.  Worst you get is an ankle sprain.   Now, after 50 years of interest rate interventions, it will be like falling off the top of a tall building.

Our goose is pretty well cooked at this point.  This whole discussion is really much more theoretical - "who should we blame, and what should we do next time" - versus any sort of immediate cure for where we are now.

Should we blame "not creating enough money to pay the interest"?  Or should we blame the Fed's "well-intentioned" interest rate interventions that short-circuited the default cycle?  Clearly I think its the latter.

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Both housing and stock prices are inflated. But if you account for the increasing loss of value of the dollar, are they really inflated? Assume that today's dollar is 30-40% less than from 7 years ago. So a house which costs 700k could have been bought for only about 500k 7 years ago. But is it overvalued or just reflecting the deflated dollar?

35

Hi David-
   I agree that win-win is a very effective strategy.  But I've also learned through personal experience that not everyone sees life through a lens (worldview) that values mutually beneficial solutions. One author that really helped make me aware of this concept is Patricia Evans.  In her excellent book, The Verbally Abusive Relationship, she introduces the concept of "two different kinds of power":

"As I researched verbally abusive relationships, the most significant and surprising discovery I made was that the verbal abuser and the partner seemed to be living in two different realities.  The abuser's orientation was towards control and dominance.  The partner's orientation was towards mutuality and co-creation.  In many respects they were in two different realities." [bold mine] (p. 24)
Evans goes on to say:
"...Those who feel power through dominance and control (Power Over) are living in Reality I.  Those who feel power through mutuality and creativity (Personal Power) are living in Reality II." (p. 25)
It is easy for those of us who exist in Reality II (Personal Power), and believe in cooperation and win-win solutions, to assume that that is how everyone else sees the world (i.e., we project our worldview on others).  But that is not the case.  People who live in Reality I (Power Over) see the world -and their interactions with the world- from a very different perspective.  They don't care  a hoot about achieving win-win solutions; because their motivations are dominance and control, they are all about  "I win, you lose".

While Evans is writing about these two different realities in the context of verbally abusive personal relationships, she notes their existence in other types of relationships as well:

"...verbal abuse is symptomatic of personal, cultural, and global problems which originate with the misuse of power..." (p. 22)
If the sociopathic elites pulling the strings on the world-stage see the world through the lens of "Power Over", they may be capable of things that those of us who believe  in mutual cooperation and "win-win solutions" could never consider. 
36

Solving the hard money problem is only one very small piece of a much larger problem.  The exact thing the Fed is doing is precisely what our industrial agriculture system is doing in spades.  Each new "solution" creates ever more severe problems, more toxic herbicides and pesticides destroy the fabric of the soil and the natural predators that would keeps pests in check.  Meanwhile ever more toxic resistant weeds and pests evolve that then require more intense toxins.  Now GMO engineered plants to take even more toxic doses of herbicides. On and on the spiral goes, every more toxicity, energy, and water resources to ever more resistant pests, weeds and degraded soils.  Talk about in for a penny, in for a pound.  The thinking is the same.  It is the pervasive way we human beings do business.
Our proposed solutions seem always to be the problem, why?  Perhaps our foundational understanding of reality is off.  Without a change to that, even a gold money standard will be for naught.

37

Is there a fallacy in "Money is a claim on energy."? It can be energy expended in a product or service or a claim on labor and resource utilization in the future, it doesn't matter.  BUT, if the EROEI (Energy Retured on Energy Invested) has peaked (which is pretty much agreed on) then there will be a declining value in any money no matter what it's type.
Hence, 'printing' much more money keeps the facade going a little longer. It provides more nominal face value currency for paying interest and debts and give the appearance of lots of money for whatever velocity the courage of the world's citizens to trade is willing to use, but its underlying value is at best peaking as we speak or more likely starting to avalanche down the Mt Everest high peak of underlying value that was reached when EROEI actually peaked in the recent past. Kind of a Potempkin Village approach to fooling the world a little bit longer.

From this perspective, if we focus on net energy available, then we can look past all the central bank smoke and mirrors and have a more accurate look at 'what's' it all really worth'.  Gail Tverberg seems to have taken this approach in her analysis and it provides a clarity of where we really are in this process of declining net worth in the world economy.

So, there is my thinking on 'Money is a claim on energy'.  I would love for those more expert to shoot holes in it and discuss the strength or weakness of this view of money. I am always trying to understand a complex issue from a more simple view.  It may be a hopeless cause, but I would like to hear from this site's more educated what fallacies you see in this view.

Thanks

I remain aggrivated

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Hi Aggrivated,

BUT, if the EROEI (Energy Returned on Energy Invested) has peaked (which is pretty much agreed on) then there will be a declining value in any money no matter what it's type.
That makes a lot of sense to me.

However, Nicole "Stoneleigh" Foss equates peak oil with deflation. Your comment above sounds more like inflation to me. You're right this is complex stuff to try to make sense of.

 

 

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Lets not get to deeply sucked into the old paradigm.  Decreasing energy need not be the definition of our lives.  While it is forcing a transition, it is not the end of the road.  Life is not a zero sum game, that is what is so great and terrible about the predicament that we are currently in - it doesn't have to be this way.  Consciousness is an adequate counter balance to entropy.  Joel Salatin has better productivity on his farm while increasing the fertility of his soil.  He is feeding people and building capital at the same time. That is possible, we don't have to behave like parasites, we can do better than this.

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Hi Treebeard. Our potential is great for making things better. If all of us on this site get busy planting, harvesting, etc. things will be great. But maybe I'm not as optimistic as you are since most people don't seem to be thinking like you or I.
Also, how many times over the years has Chris Martenson advocated for solar hot water heaters? But how many of us have them? I bet we're not as good as implementing our vision-thing as we are at envisioning it.