[GJM] Replying to Peter Challen

[Myro Ashenopolitus]

[Shakespeare] "There is no need to expand on this any
more.  The banks create huge amounts of money -- ALL
of it is interest-bearing -- and the only way your
reply makes sense is if the banks create more and more
such money and so there has to be more and more debt."
------------------------------------------------------

In two previous postings I've demonstrated that this
is a false assertion.  Some significant amount of the
money that the banks create is not interest bearing,
that which they create when the write checks for
expenditures in the ordinary course of business,
including dividends to their stockholders, which
becomes available to the general community to pay
interest back to the banks.  It is not simply rhetoric
that the economy is a wheel of commerce, Rodney.  This
is generally accepted by most educated persons, so
when you go beyond your small clique of supporters to
present your ideas outside of obscure and little
watched cable channels, if you have the opportunity,
you're going to have a real problem.

[Shakespeare] "Therefore there must be a continued
creation of more and more (interest-bearing) money if
there is not to be a credit contraction overall."
------------------------------------------------------

This doesn't follow from what I said, which was that
the payment of interest cancels money, but when banks
spend for any purpose whatsoever, the money supply is
increased, enabling interest to be paid back to the
banks in reciprocal economic activity.  The receipt of
interest and the spending are going on simultaneously.
Again, it is a wheel of commerce.

[Shakespeare] "I do not think you understand the
effects of compound interest and, moreover, are only
thinking of interest at the branch of a local bank. 
What about those huge international loans at compound
interest?"
------------------------------------------------------

It is impossible for you to supply even a single
example of an international loan contract that calls
for compound interest, because it simply does not
exist.

[Shakespeare] "Myro, you are a very naughty boy in
saying that I associate with Islamic fundamentalists."
------------------------------------------------------

You object to the term "fundamentalists" which I used
to contrast them with the modern "reformists."  Please
address the point about the Arabic words from the
Quran: "fa'eda" meaning interest, and "reba" meaning
usury.  Interest is not usurious per se.

[Shakespeare] "Please go to
http://www.binaryeconomics.net and examine the diagram
on the main page.  Then please tell me what, if
anything, is wrong with it."
------------------------------------------------------

I've looked at it.  Since this list does not forward
attachments, I've appended the textual statement from
the diagram below.  There are several things wrong
with it, beginning with the concept of interest-free
loans for "productive" purposes.  

What is proposed is an economy without the
entrepreneur, with that function being replaced by
boards of bureaucrats determining what is
"productive." It is the elimination of the private
enterprise competitive profit and loss system, where
consumers in markets through their purchasing
decisions decide what is "productive."  Do you not
realize that is essentially the financial structure of
the old Soviet Union that is doomed to failure for the
same reason that the Soviet Union ultimately failed?

It makes the same error that I've addressed in
previous posts that "administrative cost" and
"interest" are allegedly separate things, whereas in
truth "administrative cost" is one of the three
components of interest, along with the insurance
premium for defaulted loans and the banks' profit.

Therefore the "halving or more the cost" bit is
fallacious, and naive to say the least, because the
real costs of supplying credit will remain, being
hidden, and will probably increase, due to
bureaucratic inefficiency as compared to the free
market.

[Shakespeare]  Please give my compliments to your
supervisor and ask him if he thinks that Social Credit
is a good thing instead of being something which is
inflationary, not directed at productive capacity and
exclusive of the private sector.
------------------------------------------------------

I've had many conversations with him about Social
Credit.  He says that your characterization of it is
complete nonsense.

Myro

-------------------------------------------------------------
------------------------------------------------------------

Textual statement from Rodney's diagram:

"A gradual rise to 100% banking reserves requirement
stops the banking system from creating money out of
nothing.  Interest-free loans for productive purposes
then come from central banks and are lent to approved
institutions which may charge for administrative cost
but may NOT add interest as they lend for 1) small
business micro finance, 2) homes, 3) public capital,
4) environmental projects, 5) medium and large
business IF wider ownership is promoted, and 6)
student loans, thereby halving or more the cost."



--- Rodney Shakespeare
<rodney.shakespeare1 at btinternet.com> wrote:

> Dear Myro,
> I am delighted to know that you are Myro and Bill
> Ryan is your thesis adviser.  Your discussions
> together must be most stimulating.
> My response is in blue below.
> 
> Rodney Shakespeare
> 
> 
> 
> ----- Original Message ----- 
> From: "Myro Ashenopolitus" <new_economics at yahoo.com>
> To: "Rodney Shakespeare"
> <rodney.shakespeare1 at btinternet.com>; "Discussion
> Forum for Global Justice"
> <Discussion at globaljusticemovement.net>
> Sent: Friday, January 18, 2008 1:57 AM
> Subject: Re: [GJM] Replying to Peter Challen
> 
> 
> > Rodney, my replies are inserted below:
> > -------------------------------------------------
> > 
> > Dear Ashenopolitus, 
> > 
> > It is always a pleasure to correspond with
> educated,
> > open-minded and expert people like your good self.
> 
> > 
> > 1.  Where is the whopper when I say the banking
> system
> > creates money out of nothing and you say exactly
> the
> > same?
> > 
> > [Reply: The fact that banks create money out of
> > nothing was not one of your whoppers that I cited.
> But
> > I do object to the nefarious spin you put on the
> term.
> >  "Out of nothing" derives from the Latinized legal
> > term, "ex nihilo," which means contractual in this
> > context.  Modern creditary money is contractual,
> > calling for future performance.  When we sit down
> to
> > write a contract, any contract, we will agree on
> terms
> > and conditions that did not exist before we sat
> down. 
> > Hence, they were created "out of nothing" in the
> > finalized contract that we will sign.]
> "Ex nihilio" means "out of nothing" and your 
> attempt to deny that meaning is part of the usual
> conventional attempt to assert that  conventional
> endogenous money is God's Gift to the universe
> because it is at the heart of the (purportedly
> successful) 'free market' system).  Such money is
> created out of nothing, has interest (and admin
> cost) added and is NOT  directed to the true purpose
> of the society and the economy i.e the development
> and spreading of the ownership of productive
> capacity (together with the associated consuming
> capacity).  Such money is also the direct cause of
> the present global financial crisis.
> > -
> > 
> > Does your education and open-mindedness include
> being
> > logical?  Is Steven Consilio being unfair in
> > implicitly accusing you of Orwellian double-think
> (the
> > ability to hold two mutually exclusive ideas
> > simultaneously)? 
> > 
> > 2.  Where is the whopper when I say that the banks
> do
> > not create enough money for the repayment of
> interest?
> > I am sure that you can explain where in the
> process
> > the banks create the money for the interest.
> > 
> > [Reply: That was explained in my original posting,
> > which I'll be glad to expand upon as much as you
> like.
> > The banks as a statistical matter create more than
> > enough money to pay interest back to them when
> they
> > write checks for any purpose whatsoever without
> > correspondingly debiting any bank customer's
> account.
> > Those checks are deposited into transaction
> accounts
> > that are liabilities of the banks, as is exactly
> the
> > case when they extend the principal of loans. 
> This
> > process is not a mystery and is acknowledged by
> the
> > economics profession.]
> There is no need to expand on this any more.  The
> banks create huge amounts of money -- ALL of it is
> interest-bearing -- and the only way your reply
> makes sense is if the banks create more and more
> such money and so there has to be more and more
> debt. SO NOW YOU KNOW what is the fundamental cause
> of the g;lobal financial crisis today -- the banks'
> continual (and necessary if the present system is to
> be maintained)  creation of money at interest.  BUT,
> of course, once confidence collapses as at some
> stage is inevitable,  the huge amounts of debt and
> money not properly directed means a collapse.
> > -
> > 
> > 3.  Please display your expertise further in
> > explaining your statement that, when interest is
> > repaid, it is cancelled.
> > 
> > [Reply: Because when interest is paid to the
> banks,
> > deposit accounts held by the public are debited,
> > without any corresponding credit to any accounts
> held
> > by the public.  The deposit accounts are
> liabilities
> > of the banks to the public, which are reduced when
> > payments are made to them for interest or any
> other
> > purpose.  The sum total of bank deposits held by
> the
> > non-bank public are thereby reduced, reducing the
> > quantity of money as generally defined.]
> Therefore there must be a continued creation of more
> and more (interest-bearing) money if there is not to
> be a credit contraction overall.  
> > 
> > 4. Please also explain how banks pay their
> employees
> > etc if the interest the banks receive is
> cancelled.
> > 
> > [Reply: By writing checks, which are their
> > liabilities.  When those checks are deposited into
> > bank accounts, the sum total of bank deposits
> thereby
> > increase, increasing the quantity of money as
> > generally defined.  It's all handled by the
> ordinary
> > rules and conventions of double entry accounting. 
> Let
> > me also comment on another point you made in the
> > program, that two things are paid to the banks in
> > addition to principal: administrative charge plus
> > interest.  Actually, the administrative charge is
> in
> > fact interest, inasmuch as interest is defined, in
> the
> > standard definition, as the amount paid to the
> banks
> > in addition to principal, regardless how it is
> > calculated.  The three components of interest are
> a)
> > ordinary business expense, what you call
> > administrative charge; b) what is effect an
> insurance
> > premium to cover defaulted loans, which varies by
> > credit risk category; and c) profit for the
> financial
> > services that banks supply.  By far the largest
> amount
> > collected through interest by the banks is the
> > insurance premium, the next largest is business
> > expense, and the smallest is the banks' profit.]
> > Again more and more money (not properly directed)
> must be created if this is to work.  You asre a
> covnentional economist/banker in mind and spirit.
> Yes,  in interest at present there is an element of
> 'insurance premium' 
> 
> I do not think you  understand the effects of
> compound interest and, moreover,  are only thinking
> of interest at the branch of a lcoal bank.  What
> about those huge interntitonal loans at compound
> interest?
> 
> > 
> > 5.  I am fascinated by your comments on
> riba/interest
> > and the Qu'ran. I have contact with many Islamic
> > scholars and the consensus is undoubtedly that
> > interest is riba and that in ancient usage 'usury'
> > generally refers to riba.  
> > 
> > [Reply: The "consensus" is from the Islamic
> > fundamentalists you are conferring with. Myro, you
> are a very naughty boy in saying that I associate
> with Islamic fundamentalists.  I am sure that your
> supervisor Bill Ryan would not approve.  Kindly ask 
> if he agrees with you on this.
>  The
> 
=== message truncated ===



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