[GJM] James Robertson.....Multiple Personality Disorder?

[Rodney Shakespeare]

Dear Peter,

  On interest being profit I suppose we are really arguing about whether or 
not the profit is unnecessarily huge plus the detrimental effects of that 
profit (distortions in the market and two lots of financing required).  I 
will also be saying that you are taking a narrow accounting view all the 
time.  Moreover, you want the profit but, when the going gets rough, not the 
liability; and you have absolutely no understanding of economic matters like 
Say's Theorem.

1.        a) Nigeria loan
In the year 2000 President Obasanjo of Nigeria, commenting on his country’s 
debt to international creditors, said:‑



“All that we had borrowed up to 1985 or 1986 was around $5 billion and we 
have paid about $16 billion yet we are still being told that we owe about 
$28 billion.  That $28 billion came about because of the injustice in the 
foreign creditors' interest rates.  If you ask me what is the worst thing in 
the world, I will say it is compound interest.”



This does not give all the information you asked for but there is sufficient 
to show that the difference between interest-bearing and interest-free loans 
particularly as in this case, virtually all the administration cost is borne 
by the borrower.  A default premium is hardly conscionable if the original 
principal has been repaid.  16 + 28 = 44 (that's nearly nine times the 
original principal) and,  moreover,  in the year 2000 the 28 would still be 
accruing interest.



b)    The UK Humber Bridge

 The story is as follows. A bridge over the river Humber was required.  The 
materials and expertise were available; the finance was by the UK government 
which provided interest-bearing loans; and construction was begun in 1972 at 
an estimated cost of £28,000,000.  Because of price inflation, difficult 
ground conditions, labour relations difficulties and adverse weather, the 
cost rose to £98,000,000 but, by the time the bridge opened to traffic in 
1981, interest charges had taken the cost up to £151,000,000.

At which point an important fact should be noted ─ every year since being 
opened in 1981 the bridge has made an operating profit i.e., its running 
costs (basically, repair, maintenance and staff salaries) are exceeded by 
the fees it receives from travellers crossing the river Humber.  Put simply, 
it’s a money-maker in operational terms.

With that fact in mind, now consider what happened in the years that 
followed.  In 1982, because of compound interest, the debt was up to 
£164,000,000.  However, by 1992 ─ only ten years later ─ it had shot up to 
an amazing £439,000,000!  Wow!!

Whereon, to stop the huge repayment burden falling on the Humberside 
residents, the UK government intervened to reduce the rates of interest, 
write off amounts and give grants of £40m per year so that the debt was 
effectively pegged for six years.  Further ‘re-structuring’ then took place 
to reduce the debt, i.e., a large proportion of it was cancelled.  Readers 
are advised not to even think of the horrific level the debt would be at 
today if the government had not ‘re-structured’ the debt by cancelling a 
large part of what was due.

The story of the Humber Bridge then gets egregiously preposterous and 
completely outrageous.  The original money was lent, at interest, by the UK 
government, which had borrowed the money at interest!  Thus, today, the 
National Debt carries the burden and the UK public as a whole (as opposed to 
the residents of Humberside) will be eternally paying for the never-ending 
interest on the Humber Bridge!

NB Default premium is not involved and virtually all the administration 
cost is done by the Humber authorities.



c)    America's infrastructure.

With the Humber example in mind, kindly consider the USA's infrastructure 
and tell me whether you think interest does, or does not, involve a 
(roughly) doubling or trebling of the original cost.  It's your levees and 
bridges which are in question and you are being asked whether you wish to 
pay more than double the necessary cost.



2.    You say banks are lending liabilities to themselves and not to the 
lending public.
Really?    The liabilities are now liabilities to the public.  The Federal 
Reserve (Bank of England etc) are now lending billions of public money to 
the banking system, are they not?  The banks want the profits and not the 
losses.

You are taking much too narrow a view of things (a very narrow accounting 
view) and are failing to see the wider implications of creating money out of 
nothing; adding interest; and,  in particular,  not directing it where it 
should be directed.  When the system crashes you will still be declaring the 
Sublime Perfection of the existing system (although, like Voltaire's 
Pangloss, will be adding in respect of the disaster that Everything Is For 
the Best in this Best of All Possible Worlds).

3.    Home loan -- $100,000 to $300,000
You have said that the banks only lend liabilities to themselves.  The 
original liability was $100,000.   Why should the bank receive $300,000?  On 
your own argument you say $200,000 is being repaid.  Well, that's $80,000 
too much.

Moreover, inflation  is directly due to banking practice which requires TWO 
lots of financing (one for production and one for consumption).  Again, 
taking only a narrow accounting view, you are not  seeing the wider issues 
of economics and finance and have the fond belief that accounting is 
something which is not related to the wider real world.

If you are not prepared to relate your arguments to the wider world and the 
implications for poverty and well-being etc, you should not be debating with 
me.

4.  Full costs of financial services.
You say the allocations are not on market principles if the customers are 
not paying the full costs of the financial services.

They are paying two to three times the full costs.

Your case on this would look better if the banks were not (at this very 
moment) demanding billions and billions (no doubt soon to be trillions) 
instead of taking the full liabilities they have created.

5.  Development and spreading of productive capacity
Without the development and the spreading of both productive (and the 
associated consuming) capacity you get the present burgeoning crisis and 
what is increasingly looking like a  financial collapse to equal all the 
others combined..

You are completely wrong about wanting to put in bureaucrats etc and it is 
time you made an effort to understand what is being proposed.  Business 
proposals would be vetted by the banks as now but interest-free loans would 
only be available if  projects also spread ownership and consuming 
capacity -- this is essential to implement Say's Theorem (about which you do 
not care).

If you read the History page at www.binaryeconomics.net you will see that 
Pravda thought binary economics is extreme right-wing and Friedman though it 
extreme left-wing  (as you do).  You mind is locked in old-paradigm 
thinking.

6.  Fifty false assumptions
You dispute that the system creates money sufficient for the repayment of 
the principal but not for the repayment of the interest as well.  You say 
that the system disburses loans plus salaries, dividends etc sufficient to 
repay back the principal of loans and the interest.

That can only be true IF more and more interest-bearing money is being 
created all the time in an ever-expanding monetary boom with, at some point, 
inevitable catastrophic results.  And THAT is a major area  where your 
comprehension of economic reality profoundly fails.

Rodney Shakespeare.
----- Original Message ----- 
From: "Peter Hogwood" <p_t_hogwood at yahoo.com>
To: <discussion at globaljusticemovement.net>
Sent: Sunday, March 23, 2008 10:06 PM
Subject: Re: [GJM] James Robertson.....Multiple Personality Disorder?


> Rodney, I've inserted some replies [Reply]:
>
> Peter Hogwood
> ---------------------------------------------
>
> Dear Peter,
>
> Thankyou for informing us about Zack Johnson (your
> partner in Monroe, Louisiana), your good self, and
> past happy times at the Houston, Texas, Rice
> University Economic Studies Club with Bill Ryan as
> stimulating faculty adviser.
>
> 1.  Definition of interest.
>
> You define interest as "anything beyond principal that
> is paid by the borrower to the lender no matter how
> calculated" and you say that interest has three
> elements -- administration cost, default insurance
> premium and lender's profit.
>
> I wish to dispute the lender's profit because
> a) administration cost contains an element of profit
> ---------------------------------------------
>
> [Reply]:  Not as defined as being salaries, wages and
> ordinary business expenses charged against gross
> income.  The net after expenses is profit.
> -
>
> b) when the bank creates the money it is making a huge
> profit on something which is ultimately society's
> property (and not a private bank's).
> ---------------------------------------------
>
> [Reply]:  Why do you think the profit is huge.  What
> they are lending are liabilities to themselves, not
> the public.
> -
>
> Society's right to a proper use of the money supply
> has been usurped.
> This might not matter if the banks allocate the money
> efficiently for the purposes of a genuine free market,
> but they do not --  at present, as events are proving,
> the improper allocations are bringing disaster to the
> global economy.
> c) the profit is highway robbery.  I gave examples of
> i) the Nigerian loan which resulted in a repayment of
> eight times the original principal;
> ---------------------------------------------
>
> [Reply]:  Please explain the dates and circumstances
> of this particular Nigerian loan.
> -
>
> and ii) a home loan of, say, repayment of $300,00O on
> a principal of $100,000.
> ---------------------------------------------
>
> [Reply]:  This is the same assertion that Steve Nieman
> made.  That would be $200,000 over thirty years, which
> is effectively less than $200,000 in terms of original
> principal dollars when inflation is factored in,
> because the borrower is continually amortizing his
> loan with ever more cheaper dollars.  Moreover, that
> would only be at a relatively high rate of interest on
> the initial loan.
>
> 2.  Distortion of free market mechanisms
>
> Profit is contained within the administration cost
> ---------------------------------------------
>
> [Reply]:  Again, profit is not contained within the
> administration cost but is a separate component of
> interest, along with the default premium.
> -
>
> and interest is in fact a large tax which has the
> consequence of greatly diminishing the consuming power
> of the borrower (think of the extra $200,000 on the
> home loan) AND of diminishing  the borrower's ability
> to repay.
>
> Furthermore, the addition of an outrageous element of
> interest has the hugely undesirable consequence that
> the 'free market' economy always requires TWO lots of
> financing (one for production and one for consumption)
> with the result that there is continual inflation.
>
> Kindly say exactly why there should not be a money
> supply originating with the national bank but
> administered by the banking system (charging
> administration cost and default premium) on market
> principles.
> ---------------------------------------------
>
> [Reply]:  Why do you think that would be cheaper than
> today's system, particularly when the default premium
> is factored in?
> -
>
> In particular, please say why there is any
> "bureaucratic fiat" in such a supply
> ---------------------------------------------
>
> [Reply]:  The bureaucratic fiat comes in if the
> consumers of financial services don't pay the full
> costs of supplying financial services, i.e. zero
> interest loans.
> -
>
> since the bank would be responsible for ensuring that
> the allocations are made on market principles
> ---------------------------------------------
>
> [Reply]:  The allocations are not on market principles
> if the consumers of financial services are not paying
> the full costs of those financial services.
> -
>
> (which include the development and spreading of
> productive (and the associated consuming) capacity for
> the purposes of implementing Say's Theorem).  The
> criteria for the lending should be i) can it pay for
> itself; and ii) does it further the development and
> spreading of productive capacity.
> ---------------------------------------------
>
> [Reply]:  But in a market economy this is
> entrepreneurial risk.  You want to strip the
> competitive entrepreneur from the equation, and
> substitute for him a board of bureaucrats who will
> make that determination before the money is lent.
> This was the Soviet method. Or don't you remember?
> -
>
> That is not an interference with market mechanisms but
> rather an implementation of them.  You are under the
> illusion that the present allocations really do serve
> the purposes of a genuine free market.  They do not --
> and the global crisis is proving that in a big way
>
> 3.  Fifty false assumptions of your economics or
> neoclassical economics
>
> Kindly view the fifty false assumptions as assumptions
> of the economics which you espouse or, if you like,
> those of mainstream neoclassical economics.  I do not
> mind which.
> ---------------------------------------------
>
> [Reply]:  They are neither the economics that I
> espouse or correct interpretations of neoclassic
> economics, for that matter.
> -
>
> But, instead of indulging yourself in a generalised
> allegation of flawed understanding, kindly say
> specifically which ones are wrong and why (if you
> can).
> ---------------------------------------------
>
> [Reply]:  I'm not going down the entire list, but for
> the moment I'll concentrate on just one:
>
> "It is a matter of small importance that the banking
> system creates money out of nothing sufficient for the
> repayment of the principal of a loan but not of the
> interest."
>
> It is simply not true that the banking system creates
> money out of nothing sufficient for the repayment of
> the principal of a loan but not of the interest.
> Fractional reserve banking disburses loans PLUS
> salaries, wages, dividends and ordinary business
> expenses to the more general community sufficient to
> pay principal PLUS interest back to the banks.  It's a
> question of simple mathematics and monetary flows.
> The market economy is a cooperative commonwealth in
> reciprocal trade.
> -
>
>
> Thankyou.
>
> Rodney Shakespeare.
>
>
> PS  With reference to your previous email. I have not
> proposed a default premium insurance for homes.  It is
> not necessary if there are no 125% loans but, say, 80%
> ones; proper valuations and declarations of income;
> and no inflationary money supply.  In those
> circumstances, sufficient collateral is the home
> itself.
>
>
> 
> ____________________________________________________________________________________
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