[GJM] Shakespeare's theory

[Peter Hogwood]

Rodney, some brief replies below [Reply]:

"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."
------------------------------------------------------

[Reply]  In your example, $100 thousand is borrowed,
and $300 thousand is repaid over thirty years, a
difference of $200 thousand over principal.  But the
$300 thousand is not in terms of the value of dollars
when the loan was entered, but paid over thirty years
with ever cheapening dollars due to inflation.  So in
real terms the ratio is not anything like three to one
over principal.  Also, that would have to be at an
interest rate significantly higher than the rate
prevailing over the last serveral years.  Moreover,
during that thirty years the borrower gets to live in
the house at a significant savings over the rent he
would have paid if he had merely rented the house. 
So, again in real terms, the situation is not nearly
so dire as you present.  In the course of two or three
generations the availability of the long term mortgage
has enabled nearly three quarters of the population in
the Western democracies to transform from renters and
employee tenants to owners of their own homes.  A
magnificent achievement, I should say, that you
disparage through your crank theory.
-

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

[Reply]  I said nothing about right or left wing, but
that it was the Soviet system of finance that you wish
to emulate, in your sublime ignorance.
-

"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."
------------------------------------------------------

[Reply]  Then please explain why that has to be the
case.  Please explain why salaries, wages, dividends
plus ordinary business expenses being paid by the
banks to the more general community are not sufficient
for the more general community to pay interest back to
the banks for the financial services they are
receiving.

Peter Hogwood 


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

> 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 
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