[GJM] Replying to Peter Challen

Fri Jan 18 14:30:23 MST 2008

Dear Bill, Myro, Silas, Peter, whatever

>> [Reply: I am amused by the conspiracy theories implied> by the other posts, from Chris, Steve and others,> which failed to address even a single point I made in> my original post, as if they didn't matter. The> propensity toward conspiracy theory seems to be a> characteristic of the "crank" mindset. As to Bill> Ryan, I am not Bill Ryan. I am a graduate student. I> do know him very well, and see him almost every day,> as he is my thesis adviser, as well as being employed> by him as a research assistant. My involvement in> these discussions is part of my assigned research> project.]

If it pleases you to pretend to be the Apprentice rather than the Sorcerer, then that's up to you, but, to mix metaphors: if it argues like a duck; uses the same language and conceptual framework as a duck; and the same quality of logic as a duck, then it IS a duck IMHO.

It amuses me to be lumped in with "cranks" and conspiracists as well - particularly because that is a typical Ryanism which immediately identifies you.

Having read quite a bit of your output in various fora, I can think of few people with a better understanding of a deficit-based monetary system as a logical and practical construct.

Where I disagree with you is in your assumption (as I understand your interpretation of Social Credit) that Money should be issued as Credit, but unlike our current system, should be Credit created by the State rather than by Banks.

In fact Credit (time to pay) is inherent in the concept of Money, but need not actually BE Money.

So that wherever there is a barter network with bilateral "trade" credit, the result is a monetary system, requiring an accounting system, and an abstract "Value Unit" with reference to which "Money's Worth" may be exchanged. cf the WIR, and proprietary currencies like Bartercard's "Trade Dollar".

The question is, what units of Value (or "Money's worth") should be exchangeable, or "fungible" on such a barter network or "Clearing Union" as Keynes had it?

I believe that it is straightforwardly possible to create "Pools" of entitlement to (say) energy (eg MegaWatt-Hours) or land rentals (eg square metre-years) through the use of legal vehicles such as the US LLC or UK LLP. These units would not be dated (as with debt, and hence are "debt-free") but would be analogous to a Redeemable "Share". We already see close analogies to such units in the form of "Exchange Traded Funds" (particularly those owning  gold) and "Real Estate Investment Trusts" come close.

In other words, we may create pools of quasi "Equity" entitlements, which I term "asset-based" finance based upon "ownership" of Value, rather than "deficit-based" finance consisting of claims over Value owned by someone else and issued by Banks (existing system) or Governments (a Social Credit system). 

In addition to such units, which do not confer any rights to income, there is also the possibility of proportional "Equity shares" in the rights to production of a productive asset using the "Capital Partnership" form of LLP or LLC - quite familiar to students of Islamic Finance, like you, Bill, as "musharakah". 

I believe that these partnership-based structures are now "emerging" simply because they work better than the existing form of "shareholder value" Equity. Again you see a very close analogy to this in your homeland, Canada, in the form of the new asset class of units in "Income Trusts" which are listed on Canadian stock exchanges alongside conventional Equity.

These emerged because "they work" ie pension funds rather like investing in the GROSS revenues of Companies and therefore getting their hands on the revenues BEFORE rather than AFTER the management does. ie  a "pre-distributive" model, as is the "Capital Partnership" I advocate.

Re Islamic Finance, I think that Michael Hudson puts the subject of "Usury" to rest, and thanks to Peter Challen for the quote. The issue underlying usury relates to the fair and unfair sharing of risk and reward. Neither a contract of debt, nor the sociopathic legal form known as a Joint Stock Limited Liability Company shares risk and reward fairly.

The definition of usury as "excessive interest" is IMHO merely self interested post rationalisation from the people who brought us indulgences and modern day fatwa's, and is not in line with custom or practice dating back to Babylonian times, as Michael demonstrates. 

The costs of Credit (and therefore of "Money as Debt") is in fact, as your excellent analysis demonstrates, the sum of administration costs and default costs. 

The cost of "Capital" (ie property in productive assets) is whatever is the current market price. This has in fact fallen from around 25% pa in Babylonian times, through 10% pa in medieval times to around 5% prior to the Industrial Revolution, and now that the world is awash in Capital, is probably somewhere between 1 and 1.5% pa. This is of course in real terms, since inflation results from a combination of absolute property rights, profit and loss accounting and Money as debt

The problem is that  we are used regarding accumulated debt money as "Capital" and our money supply derives from credit created by banks and secured over property, principally land. ie over two thirds of our money supply is "deficit-based" but "property-backed".

The point I am getting to here is that Money in fact has no "cost": however, Credit has a cost, and Capital has a price.

To return to Islamic Finance.

The proscription in Islam relates to charging for the use of Money. Not charging for the use of Credit, or charging for the use of Capital.

Investment in productive assets (Capital) is perfectly permissible under Islam, provided risks and rewards are shared fairly: unfortunately that is neither the case with secured debt nor is it the case with conventional Equity but most Sharia'h scholars ignore that point.

Equally, sharing the costs of (interest-free) credit is permissible under Islam.

But unfortunately where Money IS Credit/Debt, then the result is a tremendous muddle and a very remunerative role for Sophist scholars able to place an Islamic veneer on an unIslamic (and unChristian) Reality.

Apologies for writing at such length, but I do actually believe that the quality of your writing deserves a comprehensive response.

Best Regards

Chris Cook

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