OK.

Money is one form of (a subcategory of) credit.

So yes, repaying loans may destroy credit not normally used for
transactions of goods and services. In that case it does not destroy
money.

Of course credit-money and credit-other are fungible (though not,
perhaps, in the very short run).

This bears on our inflation discussion last week. The massive
destruction of credit in 'the markets' may have no consequence
whatsoever for cpi inflation.

Dirk

On Mon, 23 Nov 2009 08:02:27 -0500
 Michael Hudson <michael.hudson@... <mailto:michael.hudson%40earthlink.net> > wrote:
> Dear Dirk,
>    Is it better to say, technically speaking, "Repaying loans
>destroys
> credit" rather than money?
>    Do we want to preserve a distinction between money and credit? If
>so,
> what is it?
>    Michael
>
>
> On 11/23/09 4:41 AM, "D.J.Bezemer" <d.j.bezemer@... <mailto:d.j.bezemer%40rug.nl> > wrote:
>
>> Emile,
>>
>> Thanks for sharing - interesting chap Gary North. But Geoffrey I am
>> puzzled how you can agree?
>>
>> First, "it did not occur to him that the banks immediately lend out
>> the paid off loans. That is how they stay in business."
>>
>> As a general statement that is not true, is it? We now see the
>>savings
>> rate (e.g. in the US) rising because everyone is paying off their
>> loans (households as well as businesses). Banks are far from
>> "immediately lending out the paid off loans". The credit stock
>> outstanding simply shrinks.
>>
>> Whether or banks do lend out the paid off loans depends on their
>> balance sheets.
>>
>> Gesell was right: repaying loans destroys money. In normal
>>conditions,
>> banks immediately recreate the money. But this cannot be taken for
>> granted today.
>>
>>
>> Second, about "Whenever you see any variation of the broken flow of
>> funds argument, you are in the presence of crackpottery."
>>
>> Also not true. As Geoffrey writes:
>>
>> " When a worker saves what he earns instead of spending he finances
>> any loan his employer may have, and his earnings are not returned to
>> the economomy. So 'Say's Law' - the real one, not the silly stuff
>>you
>> read in textbooks - breaks down."
>>
>>
>> That is, savings need to be invested (as opposed to being held as a
>> financial asset) in order to maintain the circular flow of funds.
>> Say's Law (that spending furnishes the wherewithal for the
>>counterpart
>> purchasing) breaks down if spending (on wages) is not used for
>> purchasing output (but is 'put under the mattress' or used for
>> purchasing a financial asset). No crackpottery there. Financial
>> markets DO interfere with the flow of funds.
>>
>> Note: it may be objected that purchasing a financial asset for some
>> amount means the seller receives that amount, plowing it back into
>>the
>> real economy, so that the net money withdrawal from the (real
>>economy)
>> flow of funds is nil. However, with expanding financial markets this
>> is not so. The seller may buy newly created or more expensive
>> financial assets, which absorbs the proceeds from the first
>> transaction. As a matter of fact, US financial markets have tripled
>> between 1984 and 2006, relative to the size of the US economy.
>>
>> Other comments:
>> Like most fundamentalist Austrian economists, North is biased by his
>> anti-fiat money stance. He refuses to see that fiat money is not
>>evil,
>> but is a tool that can be used wisely or foolishy.
>>
>> I do fully agree with the deconstruction of the A+B theorem and the
>> importance of following the money. This is something Austrian
>> economists are good at. I disagree on fractional reserves - they are
>> irrelevant as Randall Wray has explained.
>>
>> Any thoughts?
>>
>> Dirk
>>
>>
>> On Sat, 21 Nov 2009 15:32:44 -0000
>>   "Geoffrey Gardiner" <geoffrey.gardiner@... <mailto:geoffrey.gardiner%40btinternet.com> > wrote:
>>> Yes, a good summary.
>>>
>>> Douglas missed the real 'gap'. When a worker saves what he earns
>>> instead of spending he finances any loan his employer may have, and
>>> his earnings are not returned to the economomy. So 'Say's Law' - the
>>> real one, not the silly stuff you read in textbooks - breaks down.
>>>As
>>> Keynes said 'One man's saving is another man' unemployment,' he
>>> should have seen this point. The bad effect of the saving can be
>>> negatived by other credit creation, but it makes the economy more
>>> dependent on debt to keep it going.
>>>
>>> Gesell refused to see that inflation achieved his purpose.
>>>
>>> Geoffrey
>>>
>>>
>>>
>>>  ----- Original Message -----
>>>  From: Emile de Leeuw
>>>  To: gang8@yahoogroups.com <mailto:gang8%40yahoogroups.com>
>>>  Sent: Tuesday, July 14, 2009 7:51 AM
>>>  Subject: Re: [gang8] Gary North
>>>
>>>
>>>    
>>>  For me an interesting read any comments?
>>>
>>>
>>>
>>>  Emile
>>>
>>>
>>>
>>>
>>>  Keynes, Crackpots, and Deflation
>>>  by Gary North
>>>  by Gary North
>>>  Recently by Gary North: How To Create a New World Reserve Currency
>>>
>>>
>>>
>>>
>>>  John Maynard Keynes changed his economic views every few years. His
>>> 1936 book, The General Theory of Employment, Interest, and Money,
>>>was
>>> his last book. He spent the war years in the British Treasury. He
>>> died in 1946. So, he did not change his mind again.
>>>
>>>  Keynes' final book was a defense of government spending. This is
>>> why the book was hailed as a masterpiece. It backed up what all
>>> Western governments were already doing: spending money on welfare
>>> projects and running massive deficits.
>>>
>>>  Keynes believed that there could be permanent depression and price
>>> deflation. He said that prices do not always clear markets by
>>> balancing supply and demand. The General Theory is a convoluted,
>>> deliberately incomprehensible book devoted to disproving the
>>> fundamental premise of all economics, namely, that the search for
>>> profit motivates buyers and sellers to exchange scarce resources. If
>>> the price isn't right, the seller of resources (buyer of money)
>>> suffers a loss. He cannot easily find buyers of his goods. In
>>> contrast, the buyer of resources (seller of money) has lots of
>>>people
>>> bidding against each other in order to get his money.
>>>
>>>  Money is the most marketable commodity, said Ludwig von Mises in
>>> 1912 in The Theory of Money and Credit. Because of this, sellers of
>>> goods and services will eventually deal at some price. They cannot
>>> use all of their output. They need money to survive in a
>>> division-of-labor economy. They buy money by selling products. The
>>> markets will clear. The depression will end.
>>>
>>>  Keynes argued that this is not true. He said that there can be an
>>> economy in which falling prices do not clear the market. The economy
>>> can be in an equilibrium with unemployed resources.
>>>
>>>  In attempting to prove this point, opposed to the logic of
>>> economics after Adam Smith ("supply and demand"), he resorted to
>>> arguments proposed by a pair of crackpots. One was an engineer, C.
>>>H.
>>> Douglas. Douglas founded the Social Credit movement in the 1920's.
>>> The other was Silvio Gesell, an obscure merchant, journalist, and
>>> farmer who had briefly served as the People's Representative for
>>> Finances for the one-week Bavarian Soviet Republic in 1919.
>>>
>>>  Both men had a theory of exchange that required the state to inject
>>> fiat money into the economy in order to balance supply and demand.
>>> For them, money was not an outgrowth of voluntary exchange. It was
>>> and is a ministry of the state.
>>>
>>>  C. H. DOUGLAS
>>>
>>>         
>>>        $22      $20
>>>            
>>>  Answering Major Douglas's crackpottery is easy. I did it in 1993 in
>>> my book, Salvation Through Inflation. He was convinced that markets
>>> needed fiat money produced by the government in order to clear. He
>>> argued that when businesses repay loans after production, this
>>> destroys money. Then consumers cannot afford to buy the output. This
>>> was a distinction between finance creditand Real Credit. (Note:
>>> whenever you see the word Real capitalized, followed by a noun –
>>>also
>>> capitalized – be on the alert: a crackpot theory is close at hand.)
>>>
>>>  It did not occur to him that the banks immediately lend out the
>>> paid off loans. That is how they stay in business.
>>>
>>>  This error is found in most underconsumption theories. There is
>>> always a money bleed-off factor. Old money goes there to die, like
>>> the elephant burial grounds. The consumers cannot afford to buy.
>>>
>>>  Every variation of this theory is nuts, with one exception: when
>>> bank depositors withdraw currency and do not spend it, thereby not
>>> allowing sellers to deposit the spent currency in their banks. When
>>> there is a run on a bank in a fractional reserve system, there is
>>> money heaven. The inverted pyramid of fiat money shrinks, just as it
>>> expanded before. But this has nothing to do with paying off loans.
>>>
>>>  Douglas offered another theory – conceptually different – which he
>>> imagined was irrefutable. He called it the A + B theorem. I devoted
>>> an appendix to the A + B theorem in my book. He argued that there is
>>> a break in the flow of payments. A factory pays Group A wages and
>>> dividends. It pays Group B for raw materials, to cover bank fees,
>>>and
>>> other "external" expenses. His theorem assumed that payments to
>>>Group
>>> B do not constitute purchasing power for the output of the factory.
>>> The money ceases to provide consumer demand. So, the state must
>>> intervene and create money. This is another variation of his broken
>>> flow of funds argument.
>>>
>>>  Whenever you see any variation of the broken flow of funds
>>> argument, you are in the presence of crackpottery. It does not
>>>matter
>>> how many equations or graphs the author provides. He is an economic
>>> crackpot.
>>>
>>>  The supreme error in Social Credit is the error in all scenarios of
>>> price deflation, other than one that relies on the extinguishing of
>>> money due to a reversal of fractional reserves. They all fail to
>>> follow the money. They speak of saving as if it were a system for
>>> hiding paper currency under a mattress. They refuse to answer this
>>> crucial question: What does the bank do with the money that a
>>> consumer deposits instead of spending? Put another way: What
>>> analytical or conceptual difference does it make whether a saver
>>> deposits a dollar his bank, which the bank will lend, or whether he
>>> spends it, enabling the seller to deposit the dollar in his bank,
>>> which his bank will lend?
>>>
>>>  Keynes wrote this about Major Douglas.
>>>
>>>
>>>
>>>    Since the war there has been a spate of heretical theories of
>>> under-consumption, of which those of Major Douglas are the most
>>> famous. The strength of Major Douglas's advocacy has, of course,
>>> largely depended on orthodoxy having no valid reply to much of his
>>> destructive criticism.
>>>           
>>>          $30      $25
>>>            
>>>  When he wrote of "orthodoxy," he meant classical economics: price
>>> as the way to clear a market. Anyone with even a smattering of
>>> classical economics can refute the utterly nonsensical theories of
>>>C.
>>> H. Douglas. Nobody bothered. My book, published in 1993, was the
>>> first book-length refutation, as far as I can tell. The only reason
>>> why I wrote it was to answer a Social Credit promoter who said that
>>>I
>>> was intellectually incapable of refuting him or Douglas. It took me
>>> maybe three weeks to write that book in my spare time. Maybe it took
>>> a month.
>>>
>>>  Keynes continued. He grew incoherent, as you will see.
>>>
>>>
>>>
>>>    On the other hand, the detail of his diagnosis, in particular the
>>> so-called A + B theorem, includes much mere mystification. If Major
>>> Douglas had limited his B-items to the financial provisions made by
>>> entrepreneurs to which no current expenditure on replacements and
>>> renewals corresponds, he would be nearer the truth. But even in that
>>> case it is necessary to allow for the possibility of these
>>>provisions
>>> being offset by new investment in other directions as well as by
>>> increased expenditure on consumption. Major Douglas is entitled to
>>> claim, as against some of his orthodox adversaries, that he at least
>>> has not been wholly oblivious of the outstanding problem of our
>>> economic system. (General Theory, pp. 370–71)
>>>  Keynes was incoherent. This was deliberate. Why do I say Keynes was
>>> deliberately incoherent? Because when he chose to write clearly, he
>>> was a master of prose. Read The Economic Consequences of the Peace
>>> (1919) orEssays in Biography. When he could not sustain an argument,
>>> he adopted the strategy of incoherence. Most of The General Theory
>>>is
>>> incoherent.
>>>
>>>  There is not one argument in Douglas' writings – and I have read
>>> all of his books – that is an accurate description of how the market
>>> works, banking works, or entrepreneurs work. To the degree that
>>> Keynes accepted any idea in Social Credit, he suffered from the same
>>> intellectually crippling handicap.
>>>
>>>
>>>
>>>  SILVIO GESELL
>>>
>>>  Keynes devoted a long section of Chapter 23 to Gesell. This might
>>> seem strange, except for the fact that Keynes' theory depends on the
>>> same conceptual error as Gesell's: the inability of the rate of
>>> interest to allocate the supply and demand of capital.
>>>
>>>  He began by admitting that he had long thought of Gesell as a
>>> monetary crank. Keynes' initial instincts were correct.
>>>
>>>
>>>
>>>    It is convenient to mention at this point the strange, unduly
>>> neglected prophet Silvio Gesell (1862–1930), whose work contains
>>> flashes of deep insight and who only just failed to reach down to
>>>the
>>> essence of the matter. In the post-war years his devotees bombarded
>>> me with copies of his works; yet, owing to certain palpable defects
>>> in the argument, I entirely failed to discover their merit. As is
>>> often the case with imperfectly analysed intuitions, their
>>> significance only became apparent after I had reached my own
>>> conclusions in my own way. Meanwhile, like other academic
>>>economists,
>>> I treated his profoundly original strivings as being no better than
>>> those of a crank. Since few of the readers of this book are likely
>>>to
>>> be well acquainted with the significance of Gesell, I will give to
>>> him what would be otherwise a disproportionate space (p. 353).
>>>  He said that Gesell's main book "as a whole may be described as the
>>> establishment of an anti-Marxian socialism, a reaction against
>>> laissez-faire built on theoretical foundations totally unlike those
>>> of Marx in being based on a repudiation instead of on an acceptance
>>> of the classical hypotheses, and on an unfettering of competition
>>> instead of its abolition. I believe that the future will learn more
>>> from the spirit of Gesell than from that of Marx" (page 355). This
>>>is
>>> an astounding statement. It is rarely quoted by Keynes' disciples,
>>> whose name is legion. His disciples still think Gesell was a crank.
>>>
>>>         
>>>            
>>>            
>>>  Keynes then praised Gesell's theory at the place where it coincides
>>> with his own. I will not bore you with the details. They are found
>>>on
>>> pages 355–56. Gesell attacked the idea that a free market interest
>>> rate allocates capital rationally – in short, the heart of Keynes'
>>> economics.
>>>
>>>  Then he praised Gesell at the point of Gesell's crackpottery:
>>> stamped money. This was money that had to be spent by consumers
>>>fast.
>>> Why? Because the government would reduce to zero value dated pieces
>>> of paper money. Holders of money would have to stand in line at the
>>> Post Office each month to get their money stamped in order to
>>>restore
>>> it to face value. They would have to pay a fee for this service.
>>> Conclusion? Spend it fast!
>>>
>>>  This was the proposal of a failed Communist finance minister and
>>> his acolyte, John Maynard Keynes, the most important economist of
>>>the
>>> 20th century. The only rival to Keynes in academia today on the
>>>money
>>> question is Irving Fisher, and he held the same screwball view, as
>>> Keynes pointed out.
>>>
>>>
>>>
>>>    The incompleteness of his theory is doubtless the explanation of
>>> his work having suffered neglect at the hands of the academic world.
>>> Nevertheless he had carried his theory far enough to lead him to a
>>> practical recommendation, which may carry with it the essence of
>>>what
>>> is needed, though it is not feasible in the form in which he
>>>proposed
>>> it. He argues that the growth of real capital is held back by the
>>> money-rate of interest, and that if this brake were removed the
>>> growth of real capital would be, in the modern world, so rapid that
>>>a
>>> zero money-rate of interest would probably be justified, not indeed
>>> forthwith, but within a comparatively short period of time. Thus the
>>> prime necessity is to reduce the money-rate of interest, and this,
>>>he
>>> pointed out, can be effected by causing money to incur
>>>carrying-costs
>>> just like other stocks of barren goods. This led him to the famous
>>> prescription of "stamped" money, with which his name is chiefly
>>> associated and which has received the blessing of Professor Irving
>>> Fisher. According to this proposal currency notes (though it would
>>> clearly need to apply as well to some forms at least of bank-money)
>>> would only retain their value by being stamped each month, like an
>>> insurance card, with stamps purchased at a post office. The cost of
>>> the stamps could, of course, be fixed at any appropriate figure (pp.
>>> 356–57).
>>>    The idea behind stamped money is sound. It is, indeed, possible
>>> that means might be found to apply it in practice on a modest scale
>>> (p. 357).
>>>
>>>  Here is the fusion of three great monetary cranks: Keynes, Irving
>>> Fisher, and Gesell. All three of them attacked the idea of the gold
>>> standard. All three of them believed that the economy needs fiat
>>> money to operate efficiently. All three believed that experts should
>>> decide what rate of monetary inflation is appropriate.
>>>
>>>  Then there was the fourth great monetary crank: Milton Friedman,
>>> who was Fisher's disciple. He proposed this solution: central bank
>>> expansion of the money supply by 3% to 5% per annum. At least it
>>>made
>>> better sense than stamped money. (To those who gasp in horror at my
>>> assertion that Friedman was a monetary crank, I recommend that they
>>> read Murray Rothbard's analysis of Friedman's monetary theory. The
>>> section on "Money and the Business Cycle" is the relevant section.
>>>It
>>> is short and to the point.)
>>>
>>>  I define a monetary crank as someone who proposes a system of
>>> causation for money different from causation for other market
>>> phenomena. Ludwig von Mises subsumed monetary theory under the same
>>> logic that governs all market processes: Theory of Money and Credit.
>>> In contrast, a monetary crank tells us that private property,
>>> entrepreneurship, and the forces of supply and demand explain
>>> causation in the overall economy, but then insists that money is
>>> different, that government-created and government-planned money is
>>> required to balance supply and demand for all other goods and
>>> services. He abandons his theory of economic causation when he gets
>>> to money. Fisher and Friedman were monetary cranks.
>>>
>>>       
>>>  MONETARY CRANKS PROMOTE FIAT MONEY
>>>
>>>  None of the four believed that a free market money system would
>>> allow prices, including the interest rate, to allocate capital,
>>>apart
>>> from government creation of money to assure the clearing of markets.
>>> They saw money as a government function. They did not trust the free
>>> market to provide a market-clearing monetary system under a legal
>>> system that prohibits fraud but does not allow government-created
>>> money.
>>>
>>>  None of them accepted the international gold standard. Keynes hated
>>> it. It kept government and central banks from inflating. This kept
>>> governments from creating policies that would match supply and
>>> demand.
>>>
>>>
>>>
>>>    I have pointed out in the preceding chapter that, under the
>>> system of domestic laissez-faire and an international gold standard
>>> such as was orthodox in the latter half of the nineteenth century,
>>> there was no means open to a government whereby to mitigate economic
>>> distress at home except through the competitive struggle for
>>>markets.
>>> For all measures helpful to a state of chronic or intermittent
>>> under-employment were ruled out, except measures to improve the
>>> balance of trade on income account (p. 382).
>>>  What was Keynes after? A fascist state: the fusion of private
>>> ownership and socialism.
>>>
>>>
>>>
>>>    It is not the ownership of the instruments of production which it
>>> is important for the State to assume. If the State is able to
>>> determine the aggregate amount of resources devoted to augmenting
>>>the
>>> instruments and the basic rate of reward to those who own them, it
>>> will have accomplished all that is necessary. Moreover, the
>>>necessary
>>> measures of socialisation can be introduced gradually and without a
>>> break in the general traditions of society (p. 378).
>>>  This is why, in his preface to the German edition (1936), he wrote
>>> that "the theory of aggregated production, which is the point of the
>>> following book, nevertheless can be much easier adapted to the
>>> conditions of a totalitarian state [eines totalen Staates] than the
>>> theory of production and distribution of a given production put
>>>forth
>>> under conditions of free competition and a large degree of
>>> laissez-faire."
>>>
>>>  Keynes refused to accept the free market explanation of the Great
>>> Depression, that it had been created by central banks that had
>>> inflated, then ceased to inflate: the boom-bust cycle based on
>>> fractional reserve banking. He rejected the idea that governments
>>>had
>>> created price floors to protect special interests, and therefore
>>>that
>>> did not allow the clearing of markets. He blamed the free market for
>>> not balancing supply and demand through price competition. He
>>> rejected Mises, Hayek, and Robbins (p. 192), never bothering to
>>> mention Robbins' The Great Depression (1934), which is as clear as
>>> The General Theory is muddled. It was published by his own
>>>publisher,
>>> Macmillan. He completely ignored Chester Phillips' book, Bank Credit
>>> (1931), published by the American branch of Macmillan.
>>>
>>>  To defend his theory, he relied on two deflationists whose theory
>>> rested on the inability of the free market to create money as part
>>>of
>>> the market-clearing process. He argued that deflation was
>>>inescapable
>>> without government intervention: the managed economy.
>>>
>>>  CONCLUSION
>>>
>>>  Keynesians are deflationists, meaning "the free market will produce
>>> permanent depression and deflation apart from government spending
>>>and
>>> central bank inflation." They believe that, without government
>>> spending, huge deficits, and central bank inflation, the economy
>>>will
>>> go into a deflationary spiral and not recover. They invoke the
>>> paradox of thrift and the liquidity trap as reasons. Both rely on
>>>the
>>> same idea: "money saved in a bank is not simultaneously money lent
>>>by
>>> the bank to increase production or consumption." It is a fallacious
>>> idea. It is "currency under the mattress" economics. It is "break in
>>> the flow of funds" economics. It is crackpottery.
>>>
>>>  These Keynesian arguments rely ultimately on the monetary theories
>>> of C. H. Douglas and Silvio Gesell. These two crackpots provided the
>>> conceptual framework for Keynesian economics. Keynes' disciples,
>>> deservedly embarrassed by this inconvenient fact, have done their
>>> best to conceal it for 70 years.
>>>
>>>  Whenever you hear about the need for a government stimulus-spending
>>> bill, think "crackpot economics." Whenever you hear that deficits
>>> don't matter, think "crackpot economics." Whenever you hear about
>>>the
>>> need for quantitative easing, think "crackpot economics."
>>>
>>>  If you want to be inoculated against Keynes and the crackpots, read
>>> Henry Hazlitt's line-by-line refutation of The General Theory: The
>>> Failure of the 'New Economics' (1959). Then read Murray Rothbard's
>>> What Has Government Done to Our Money? (1964).
>>>
>>>  July 14, 2009
>>>
>>>  Gary North [send him mail] is the author of Mises on Money. Visit
>>> http://www.garynorth.com. He is also the author of a free 20-volume
>>> series, An Economic Commentary on the Bible.
>>>
>>>  Copyright © 2009 Gary North
>>>
>>>     
>>>
>>>
>>>
>>>
>>>  
>>
>>
>>
>> ------------------------------------
>>
>> The gang8 list is devoted to Creditary Economics.
>> To unsubscribe, email: gang8-unsubscribe@yahoogroups.com <mailto:gang8-unsubscribe%40yahoogroups.com>
>>
>> Yahoo! Groups Links
>>
>>
>>
>
>

 
   

Chris,

Just last week I was speaking to someone from Routledge. They are
extremely keen to publish books on credit, but it has to be between
now and say eighteen months from now (he said). I am working on a book
for Princeton Unuiversity Press myself so couldn't promise him much,
though was interested to learn what they offer and will see what they
make of my book proposal. Just canning the market.

I think Palgrave McMillan would be equally keen plus no doubt people
who published with them like Geoffrey and Richard Werner could
recommend you (if the book is up to scratch...).

So what I am saying is, concentrate, send Routledge (or another) your
book proposal nd let us all have the benefit of your work.

If you get in touch with me, I will connect you with the Routledge
chap I spoke to - he is waiting for news from me so will pay
attention.

Try now.


Best,

Dirk

On Mon, 23 Nov 2009 08:58:35 -0500
   Michael Hudson <michael.hudson@...> wrote:
> Dear Chris,
>    As matters were scheduled, both Cornelia and I were to join you
>at
> Birkbeck a week ago Saturday. But I was just coming the ³wrong² way
>back
> from China to New York, eastward, and couldn¹t go yet further to
>London, so
> that left Cornelia; and she had a bad cold and couldn¹t speak,
>although she
> had tried to get back by Friday. (We¹ll never take United Airlines
>again; it
> was late taking off from Beijing as a result of icing, and the seats
>were so
> uncomfortable, even in business class, that neither of us could
>sleep. I
> caught a ten-day cold, and she¹s just now getting better.)
>    I wish you could send your draft or post it on the Gang8 site.
> Michael
>
>
> On 11/23/09 6:58 AM, "Ercouncil@..." <Ercouncil@...> wrote:
>
>>
>>
>>
>>
>>
>> .
>>
>> My Book
>>
>> Bloody good question, Dirk.
>>
>> There's about 70,000 words of it sitting inside this computer.
>>Here's the
>> situation:
>>
>> CONTENTS
>>
>> Foreword by
>> xxxxxxx............................................................page
>>i
>> Preface
>> (maybe)................................................................page
>>xx
>>
Acknowledgements.............................................................p
>> age xx
>>
>> Chapter 1 :  Before 5000
>>BC..............................................page
>> 1
>>    (8,900 words)
>> Chapter 2 :  5000 BC  to  1500
>>BC..................................... page 31
>>    (6800 words)
>> Chapter 3 :  1500 BC  to  100
>>AD........................................page
>> 54
>>    (11,700 words)
>> Chapter 4 :  100 AD   to  1600
>>AD........................................page
>> 88
>>    (12,400 words)
>> Chapter 5 :  1600 AD  to  1800
>>AD.......................................page
>> 133
>>    (11,400 words)
>> Chapter 6 :  1800 AD  to  1914
>>AD.......................................page
>> 175
>>    (approx 10,000 words almost complete)
>> Chapter 7 :  After  1914
>> AD.................................................page 208
>>    (outline notes only, say 10,000 words)
>>
>> Summary of main
>> points........................................................page
>>xx
>> Appendices/author¹s
>> note......................................................page xx
>> Bibliography and
>> Sources......................................................page xx
>>
Index.........................................................................
>> ...........page xx
>>
>> Currently I am planning a change to the breakpoint between Chapter
>>One and
>> Chapter Two, and I want to modify Chapters Two and Three after what
>>I learnt
>> in the Study Day at Birkbeck College London where I also lectured a
>>week ago
>> on Saturday.
>>
>> I probably need another 1500 words to sort out on Chapter 6 - how
>>much time do
>> I spend on Karl Marx and Alfred Marshall, in fact? - and I have
>>reams of notes
>> to try and condense into Chapter 7. If a genuine publisher came
>>along and said
>> "just finish it sunshine" it's probably a couple of months work,
>>tops. I write
>> quickly.
>>
>> But as Geoffrey and Gunnar know better than anyone, my own life has
>>been
>> fraught with mishaps since the day John Mills, my colleague on the
>>Executive
>> Committee of the Economic Research Council here in London, told me
>>it would be
>> a good idea to turn what was then a two hour lecture (13,000 words)
>>into a
>> book.
>>
>> Gunnar, Arno and Geoffrey were also at that Lecture which was
>>chaired at
>> London's School of Economic Science by Joe Hyde, yet another founder
>>member of
>> Gang of Eight. That was on 1 December 1998, two months after this
>>Gang was
>> founded, and. of course at the start of the golden economic era of a
>>fool's
>> paradise which came crashing down in Summer 2007.
>>
>> For long periods my book had languished undisturbed on this
>>computer, though I
>> occasionally pulled out a chapter and strengthened the English. But
>>who wanted
>> some obtuse economics  book arguing that 85% of conventional
>>economics is
>> bollocks, when everything was fine and dandy in the world at large?
>>All that
>> has now changed and a window of opportunity may have arisen.
>>
>> Chris M
>>
>>
>>
>>
>>
>
>

OK.

Money is one form of (a subcategory of) credit.

So yes, repaying loans may destroy credit not normally used for
transactions of goods and services. In that case it does not destroy
money.

Of course credit-money and credit-other are fungible (though not,
perhaps, in the very short run).

This bears on our inflation discussion last week. The massive
destruction of credit in 'the markets' may have no consequence
whatsoever for cpi inflation.

Dirk


On Mon, 23 Nov 2009 08:02:27 -0500
   Michael Hudson <michael.hudson@...> wrote:
> Dear Dirk,
>    Is it better to say, technically speaking, "Repaying loans
>destroys
> credit" rather than money?
>    Do we want to preserve a distinction between money and credit? If
>so,
> what is it?
>    Michael
>
>
> On 11/23/09 4:41 AM, "D.J.Bezemer" <d.j.bezemer@...> wrote:
>
>> Emile,
>>
>> Thanks for sharing - interesting chap Gary North. But Geoffrey I am
>> puzzled how you can agree?
>>
>> First, "it did not occur to him that the banks immediately lend out
>> the paid off loans. That is how they stay in business."
>>
>> As a general statement that is not true, is it? We now see the
>>savings
>> rate (e.g. in the US) rising because everyone is paying off their
>> loans (households as well as businesses). Banks are far from
>> "immediately lending out the paid off loans". The credit stock
>> outstanding simply shrinks.
>>
>> Whether or banks do lend out the paid off loans depends on their
>> balance sheets.
>>
>> Gesell was right: repaying loans destroys money. In normal
>>conditions,
>> banks immediately recreate the money. But this cannot be taken for
>> granted today.
>>
>>
>> Second, about "Whenever you see any variation of the broken flow of
>> funds argument, you are in the presence of crackpottery."
>>
>> Also not true. As Geoffrey writes:
>>
>> " When a worker saves what he earns instead of spending he finances
>> any loan his employer may have, and his earnings are not returned to
>> the economomy. So 'Say's Law' - the real one, not the silly stuff
>>you
>> read in textbooks - breaks down."
>>
>>
>> That is, savings need to be invested (as opposed to being held as a
>> financial asset) in order to maintain the circular flow of funds.
>> Say's Law (that spending furnishes the wherewithal for the
>>counterpart
>> purchasing) breaks down if spending (on wages) is not used for
>> purchasing output (but is 'put under the mattress' or used for
>> purchasing a financial asset). No crackpottery there. Financial
>> markets DO interfere with the flow of funds.
>>
>> Note: it may be objected that purchasing a financial asset for some
>> amount means the seller receives that amount, plowing it back into
>>the
>> real economy, so that the net money withdrawal from the (real
>>economy)
>> flow of funds is nil. However, with expanding financial markets this
>> is not so. The seller may buy newly created or more expensive
>> financial assets, which absorbs the proceeds from the first
>> transaction. As a matter of fact, US financial markets have tripled
>> between 1984 and 2006, relative to the size of the US economy.
>>
>> Other comments:
>> Like most fundamentalist Austrian economists, North is biased by his
>> anti-fiat money stance. He refuses to see that fiat money is not
>>evil,
>> but is a tool that can be used wisely or foolishy.
>>
>> I do fully agree with the deconstruction of the A+B theorem and the
>> importance of following the money. This is something Austrian
>> economists are good at. I disagree on fractional reserves - they are
>> irrelevant as Randall Wray has explained.
>>
>> Any thoughts?
>>
>> Dirk
>>
>>
>> On Sat, 21 Nov 2009 15:32:44 -0000
>>   "Geoffrey Gardiner" <geoffrey.gardiner@...> wrote:
>>> Yes, a good summary.
>>>
>>> Douglas missed the real 'gap'. When a worker saves what he earns
>>> instead of spending he finances any loan his employer may have, and
>>> his earnings are not returned to the economomy. So 'Say's Law' - the
>>> real one, not the silly stuff you read in textbooks - breaks down.
>>>As
>>> Keynes said 'One man's saving is another man' unemployment,' he
>>> should have seen this point. The bad effect of the saving can be
>>> negatived by other credit creation, but it makes the economy more
>>> dependent on debt to keep it going.
>>>
>>> Gesell refused to see that inflation achieved his purpose.
>>>
>>> Geoffrey
>>>
>>>
>>>
>>>  ----- Original Message -----
>>>  From: Emile de Leeuw
>>>  To: gang8@yahoogroups.com
>>>  Sent: Tuesday, July 14, 2009 7:51 AM
>>>  Subject: Re: [gang8] Gary North
>>>
>>>
>>>
>>>  For me an interesting read any comments?
>>>
>>>
>>>
>>>  Emile
>>>
>>>
>>>
>>>
>>>  Keynes, Crackpots, and Deflation
>>>  by Gary North
>>>  by Gary North
>>>  Recently by Gary North: How To Create a New World Reserve Currency
>>>
>>>
>>>
>>>
>>>  John Maynard Keynes changed his economic views every few years. His
>>> 1936 book, The General Theory of Employment, Interest, and Money,
>>>was
>>> his last book. He spent the war years in the British Treasury. He
>>> died in 1946. So, he did not change his mind again.
>>>
>>>  Keynes' final book was a defense of government spending. This is
>>> why the book was hailed as a masterpiece. It backed up what all
>>> Western governments were already doing: spending money on welfare
>>> projects and running massive deficits.
>>>
>>>  Keynes believed that there could be permanent depression and price
>>> deflation. He said that prices do not always clear markets by
>>> balancing supply and demand. The General Theory is a convoluted,
>>> deliberately incomprehensible book devoted to disproving the
>>> fundamental premise of all economics, namely, that the search for
>>> profit motivates buyers and sellers to exchange scarce resources. If
>>> the price isn't right, the seller of resources (buyer of money)
>>> suffers a loss. He cannot easily find buyers of his goods. In
>>> contrast, the buyer of resources (seller of money) has lots of
>>>people
>>> bidding against each other in order to get his money.
>>>
>>>  Money is the most marketable commodity, said Ludwig von Mises in
>>> 1912 in The Theory of Money and Credit. Because of this, sellers of
>>> goods and services will eventually deal at some price. They cannot
>>> use all of their output. They need money to survive in a
>>> division-of-labor economy. They buy money by selling products. The
>>> markets will clear. The depression will end.
>>>
>>>  Keynes argued that this is not true. He said that there can be an
>>> economy in which falling prices do not clear the market. The economy
>>> can be in an equilibrium with unemployed resources.
>>>
>>>  In attempting to prove this point, opposed to the logic of
>>> economics after Adam Smith ("supply and demand"), he resorted to
>>> arguments proposed by a pair of crackpots. One was an engineer, C.
>>>H.
>>> Douglas. Douglas founded the Social Credit movement in the 1920's.
>>> The other was Silvio Gesell, an obscure merchant, journalist, and
>>> farmer who had briefly served as the People's Representative for
>>> Finances for the one-week Bavarian Soviet Republic in 1919.
>>>
>>>  Both men had a theory of exchange that required the state to inject
>>> fiat money into the economy in order to balance supply and demand.
>>> For them, money was not an outgrowth of voluntary exchange. It was
>>> and is a ministry of the state.
>>>
>>>  C. H. DOUGLAS
>>>
>>>
>>>        $22      $20
>>>
>>>  Answering Major Douglas's crackpottery is easy. I did it in 1993 in
>>> my book, Salvation Through Inflation. He was convinced that markets
>>> needed fiat money produced by the government in order to clear. He
>>> argued that when businesses repay loans after production, this
>>> destroys money. Then consumers cannot afford to buy the output. This
>>> was a distinction between finance creditand Real Credit. (Note:
>>> whenever you see the word Real capitalized, followed by a noun ­
>>>also
>>> capitalized ­ be on the alert: a crackpot theory is close at hand.)
>>>
>>>  It did not occur to him that the banks immediately lend out the
>>> paid off loans. That is how they stay in business.
>>>
>>>  This error is found in most underconsumption theories. There is
>>> always a money bleed-off factor. Old money goes there to die, like
>>> the elephant burial grounds. The consumers cannot afford to buy.
>>>
>>>  Every variation of this theory is nuts, with one exception: when
>>> bank depositors withdraw currency and do not spend it, thereby not
>>> allowing sellers to deposit the spent currency in their banks. When
>>> there is a run on a bank in a fractional reserve system, there is
>>> money heaven. The inverted pyramid of fiat money shrinks, just as it
>>> expanded before. But this has nothing to do with paying off loans.
>>>
>>>  Douglas offered another theory ­ conceptually different ­ which he
>>> imagined was irrefutable. He called it the A + B theorem. I devoted
>>> an appendix to the A + B theorem in my book. He argued that there is
>>> a break in the flow of payments. A factory pays Group A wages and
>>> dividends. It pays Group B for raw materials, to cover bank fees,
>>>and
>>> other "external" expenses. His theorem assumed that payments to
>>>Group
>>> B do not constitute purchasing power for the output of the factory.
>>> The money ceases to provide consumer demand. So, the state must
>>> intervene and create money. This is another variation of his broken
>>> flow of funds argument.
>>>
>>>  Whenever you see any variation of the broken flow of funds
>>> argument, you are in the presence of crackpottery. It does not
>>>matter
>>> how many equations or graphs the author provides. He is an economic
>>> crackpot.
>>>
>>>  The supreme error in Social Credit is the error in all scenarios of
>>> price deflation, other than one that relies on the extinguishing of
>>> money due to a reversal of fractional reserves. They all fail to
>>> follow the money. They speak of saving as if it were a system for
>>> hiding paper currency under a mattress. They refuse to answer this
>>> crucial question: What does the bank do with the money that a
>>> consumer deposits instead of spending? Put another way: What
>>> analytical or conceptual difference does it make whether a saver
>>> deposits a dollar his bank, which the bank will lend, or whether he
>>> spends it, enabling the seller to deposit the dollar in his bank,
>>> which his bank will lend?
>>>
>>>  Keynes wrote this about Major Douglas.
>>>
>>>
>>>
>>>    Since the war there has been a spate of heretical theories of
>>> under-consumption, of which those of Major Douglas are the most
>>> famous. The strength of Major Douglas's advocacy has, of course,
>>> largely depended on orthodoxy having no valid reply to much of his
>>> destructive criticism.
>>>
>>>          $30      $25
>>>
>>>  When he wrote of "orthodoxy," he meant classical economics: price
>>> as the way to clear a market. Anyone with even a smattering of
>>> classical economics can refute the utterly nonsensical theories of
>>>C.
>>> H. Douglas. Nobody bothered. My book, published in 1993, was the
>>> first book-length refutation, as far as I can tell. The only reason
>>> why I wrote it was to answer a Social Credit promoter who said that
>>>I
>>> was intellectually incapable of refuting him or Douglas. It took me
>>> maybe three weeks to write that book in my spare time. Maybe it took
>>> a month.
>>>
>>>  Keynes continued. He grew incoherent, as you will see.
>>>
>>>
>>>
>>>    On the other hand, the detail of his diagnosis, in particular the
>>> so-called A + B theorem, includes much mere mystification. If Major
>>> Douglas had limited his B-items to the financial provisions made by
>>> entrepreneurs to which no current expenditure on replacements and
>>> renewals corresponds, he would be nearer the truth. But even in that
>>> case it is necessary to allow for the possibility of these
>>>provisions
>>> being offset by new investment in other directions as well as by
>>> increased expenditure on consumption. Major Douglas is entitled to
>>> claim, as against some of his orthodox adversaries, that he at least
>>> has not been wholly oblivious of the outstanding problem of our
>>> economic system. (General Theory, pp. 370­71)
>>>  Keynes was incoherent. This was deliberate. Why do I say Keynes was
>>> deliberately incoherent? Because when he chose to write clearly, he
>>> was a master of prose. Read The Economic Consequences of the Peace
>>> (1919) orEssays in Biography. When he could not sustain an argument,
>>> he adopted the strategy of incoherence. Most of The General Theory
>>>is
>>> incoherent.
>>>
>>>  There is not one argument in Douglas' writings ­ and I have read
>>> all of his books ­ that is an accurate description of how the market
>>> works, banking works, or entrepreneurs work. To the degree that
>>> Keynes accepted any idea in Social Credit, he suffered from the same
>>> intellectually crippling handicap.
>>>
>>>
>>>
>>>  SILVIO GESELL
>>>
>>>  Keynes devoted a long section of Chapter 23 to Gesell. This might
>>> seem strange, except for the fact that Keynes' theory depends on the
>>> same conceptual error as Gesell's: the inability of the rate of
>>> interest to allocate the supply and demand of capital.
>>>
>>>  He began by admitting that he had long thought of Gesell as a
>>> monetary crank. Keynes' initial instincts were correct.
>>>
>>>
>>>
>>>    It is convenient to mention at this point the strange, unduly
>>> neglected prophet Silvio Gesell (1862­1930), whose work contains
>>> flashes of deep insight and who only just failed to reach down to
>>>the
>>> essence of the matter. In the post-war years his devotees bombarded
>>> me with copies of his works; yet, owing to certain palpable defects
>>> in the argument, I entirely failed to discover their merit. As is
>>> often the case with imperfectly analysed intuitions, their
>>> significance only became apparent after I had reached my own
>>> conclusions in my own way. Meanwhile, like other academic
>>>economists,
>>> I treated his profoundly original strivings as being no better than
>>> those of a crank. Since few of the readers of this book are likely
>>>to
>>> be well acquainted with the significance of Gesell, I will give to
>>> him what would be otherwise a disproportionate space (p. 353).
>>>  He said that Gesell's main book "as a whole may be described as the
>>> establishment of an anti-Marxian socialism, a reaction against
>>> laissez-faire built on theoretical foundations totally unlike those
>>> of Marx in being based on a repudiation instead of on an acceptance
>>> of the classical hypotheses, and on an unfettering of competition
>>> instead of its abolition. I believe that the future will learn more
>>> from the spirit of Gesell than from that of Marx" (page 355). This
>>>is
>>> an astounding statement. It is rarely quoted by Keynes' disciples,
>>> whose name is legion. His disciples still think Gesell was a crank.
>>>
>>>
>>>
>>>
>>>  Keynes then praised Gesell's theory at the place where it coincides
>>> with his own. I will not bore you with the details. They are found
>>>on
>>> pages 355­56. Gesell attacked the idea that a free market interest
>>> rate allocates capital rationally ­ in short, the heart of Keynes'
>>> economics.
>>>
>>>  Then he praised Gesell at the point of Gesell's crackpottery:
>>> stamped money. This was money that had to be spent by consumers
>>>fast.
>>> Why? Because the government would reduce to zero value dated pieces
>>> of paper money. Holders of money would have to stand in line at the
>>> Post Office each month to get their money stamped in order to
>>>restore
>>> it to face value. They would have to pay a fee for this service.
>>> Conclusion? Spend it fast!
>>>
>>>  This was the proposal of a failed Communist finance minister and
>>> his acolyte, John Maynard Keynes, the most important economist of
>>>the
>>> 20th century. The only rival to Keynes in academia today on the
>>>money
>>> question is Irving Fisher, and he held the same screwball view, as
>>> Keynes pointed out.
>>>
>>>
>>>
>>>    The incompleteness of his theory is doubtless the explanation of
>>> his work having suffered neglect at the hands of the academic world.
>>> Nevertheless he had carried his theory far enough to lead him to a
>>> practical recommendation, which may carry with it the essence of
>>>what
>>> is needed, though it is not feasible in the form in which he
>>>proposed
>>> it. He argues that the growth of real capital is held back by the
>>> money-rate of interest, and that if this brake were removed the
>>> growth of real capital would be, in the modern world, so rapid that
>>>a
>>> zero money-rate of interest would probably be justified, not indeed
>>> forthwith, but within a comparatively short period of time. Thus the
>>> prime necessity is to reduce the money-rate of interest, and this,
>>>he
>>> pointed out, can be effected by causing money to incur
>>>carrying-costs
>>> just like other stocks of barren goods. This led him to the famous
>>> prescription of "stamped" money, with which his name is chiefly
>>> associated and which has received the blessing of Professor Irving
>>> Fisher. According to this proposal currency notes (though it would
>>> clearly need to apply as well to some forms at least of bank-money)
>>> would only retain their value by being stamped each month, like an
>>> insurance card, with stamps purchased at a post office. The cost of
>>> the stamps could, of course, be fixed at any appropriate figure (pp.
>>> 356­57).
>>>    The idea behind stamped money is sound. It is, indeed, possible
>>> that means might be found to apply it in practice on a modest scale
>>> (p. 357).
>>>
>>>  Here is the fusion of three great monetary cranks: Keynes, Irving
>>> Fisher, and Gesell. All three of them attacked the idea of the gold
>>> standard. All three of them believed that the economy needs fiat
>>> money to operate efficiently. All three believed that experts should
>>> decide what rate of monetary inflation is appropriate.
>>>
>>>  Then there was the fourth great monetary crank: Milton Friedman,
>>> who was Fisher's disciple. He proposed this solution: central bank
>>> expansion of the money supply by 3% to 5% per annum. At least it
>>>made
>>> better sense than stamped money. (To those who gasp in horror at my
>>> assertion that Friedman was a monetary crank, I recommend that they
>>> read Murray Rothbard's analysis of Friedman's monetary theory. The
>>> section on "Money and the Business Cycle" is the relevant section.
>>>It
>>> is short and to the point.)
>>>
>>>  I define a monetary crank as someone who proposes a system of
>>> causation for money different from causation for other market
>>> phenomena. Ludwig von Mises subsumed monetary theory under the same
>>> logic that governs all market processes: Theory of Money and Credit.
>>> In contrast, a monetary crank tells us that private property,
>>> entrepreneurship, and the forces of supply and demand explain
>>> causation in the overall economy, but then insists that money is
>>> different, that government-created and government-planned money is
>>> required to balance supply and demand for all other goods and
>>> services. He abandons his theory of economic causation when he gets
>>> to money. Fisher and Friedman were monetary cranks.
>>>
>>>
>>>  MONETARY CRANKS PROMOTE FIAT MONEY
>>>
>>>  None of the four believed that a free market money system would
>>> allow prices, including the interest rate, to allocate capital,
>>>apart
>>> from government creation of money to assure the clearing of markets.
>>> They saw money as a government function. They did not trust the free
>>> market to provide a market-clearing monetary system under a legal
>>> system that prohibits fraud but does not allow government-created
>>> money.
>>>
>>>  None of them accepted the international gold standard. Keynes hated
>>> it. It kept government and central banks from inflating. This kept
>>> governments from creating policies that would match supply and
>>> demand.
>>>
>>>
>>>
>>>    I have pointed out in the preceding chapter that, under the
>>> system of domestic laissez-faire and an international gold standard
>>> such as was orthodox in the latter half of the nineteenth century,
>>> there was no means open to a government whereby to mitigate economic
>>> distress at home except through the competitive struggle for
>>>markets.
>>> For all measures helpful to a state of chronic or intermittent
>>> under-employment were ruled out, except measures to improve the
>>> balance of trade on income account (p. 382).
>>>  What was Keynes after? A fascist state: the fusion of private
>>> ownership and socialism.
>>>
>>>
>>>
>>>    It is not the ownership of the instruments of production which it
>>> is important for the State to assume. If the State is able to
>>> determine the aggregate amount of resources devoted to augmenting
>>>the
>>> instruments and the basic rate of reward to those who own them, it
>>> will have accomplished all that is necessary. Moreover, the
>>>necessary
>>> measures of socialisation can be introduced gradually and without a
>>> break in the general traditions of society (p. 378).
>>>  This is why, in his preface to the German edition (1936), he wrote
>>> that "the theory of aggregated production, which is the point of the
>>> following book, nevertheless can be much easier adapted to the
>>> conditions of a totalitarian state [eines totalen Staates] than the
>>> theory of production and distribution of a given production put
>>>forth
>>> under conditions of free competition and a large degree of
>>> laissez-faire."
>>>
>>>  Keynes refused to accept the free market explanation of the Great
>>> Depression, that it had been created by central banks that had
>>> inflated, then ceased to inflate: the boom-bust cycle based on
>>> fractional reserve banking. He rejected the idea that governments
>>>had
>>> created price floors to protect special interests, and therefore
>>>that
>>> did not allow the clearing of markets. He blamed the free market for
>>> not balancing supply and demand through price competition. He
>>> rejected Mises, Hayek, and Robbins (p. 192), never bothering to
>>> mention Robbins' The Great Depression (1934), which is as clear as
>>> The General Theory is muddled. It was published by his own
>>>publisher,
>>> Macmillan. He completely ignored Chester Phillips' book, Bank Credit
>>> (1931), published by the American branch of Macmillan.
>>>
>>>  To defend his theory, he relied on two deflationists whose theory
>>> rested on the inability of the free market to create money as part
>>>of
>>> the market-clearing process. He argued that deflation was
>>>inescapable
>>> without government intervention: the managed economy.
>>>
>>>  CONCLUSION
>>>
>>>  Keynesians are deflationists, meaning "the free market will produce
>>> permanent depression and deflation apart from government spending
>>>and
>>> central bank inflation." They believe that, without government
>>> spending, huge deficits, and central bank inflation, the economy
>>>will
>>> go into a deflationary spiral and not recover. They invoke the
>>> paradox of thrift and the liquidity trap as reasons. Both rely on
>>>the
>>> same idea: "money saved in a bank is not simultaneously money lent
>>>by
>>> the bank to increase production or consumption." It is a fallacious
>>> idea. It is "currency under the mattress" economics. It is "break in
>>> the flow of funds" economics. It is crackpottery.
>>>
>>>  These Keynesian arguments rely ultimately on the monetary theories
>>> of C. H. Douglas and Silvio Gesell. These two crackpots provided the
>>> conceptual framework for Keynesian economics. Keynes' disciples,
>>> deservedly embarrassed by this inconvenient fact, have done their
>>> best to conceal it for 70 years.
>>>
>>>  Whenever you hear about the need for a government stimulus-spending
>>> bill, think "crackpot economics." Whenever you hear that deficits
>>> don't matter, think "crackpot economics." Whenever you hear about
>>>the
>>> need for quantitative easing, think "crackpot economics."
>>>
>>>  If you want to be inoculated against Keynes and the crackpots, read
>>> Henry Hazlitt's line-by-line refutation of The General Theory: The
>>> Failure of the 'New Economics' (1959). Then read Murray Rothbard's
>>> What Has Government Done to Our Money? (1964).
>>>
>>>  July 14, 2009
>>>
>>>  Gary North [send him mail] is the author of Mises on Money. Visit
>>> http://www.garynorth.com. He is also the author of a free 20-volume
>>> series, An Economic Commentary on the Bible.
>>>
>>>  Copyright © 2009 Gary North
>>>
>>>
>>>
>>>
>>>
>>>
>>>
>>
>>
>>
>> ------------------------------------
>>
>> The gang8 list is devoted to Creditary Economics.
>> To unsubscribe, email: gang8-unsubscribe@yahoogroups.com
>>
>> Yahoo! Groups Links
>>
>>
>>
>
>

Chris

As Comrade Stalin allegedly said: "Trust....but Validate".

You are forgetting that I am advocating that this bilateral trade credit must be
supported a framework of trust, where I propose provisions made by both seller
and buyer into a 'Pool' in common ownership in the hands of a 'custodian'.

A service-provider-formerly-known-as-a-bank then manages the process by setting
'guarantee limits' handling defaults, maintaining the accounting records and so
on.

This model is not dissimilar to the Swiss WIR credit clearing/accounting system,
except that the WIR's discipline (which accounts for the fact that it's been
around for 75 years) is provided by a charge over the business assets/property.

This presentation

http://www.slideshare.net/ChrisJCook/link-alt-finance-19-11-09

last week got a really good reception, and sets out reasonably clearly not only
the "Guarantee Society" concept referres to above, but also our 'unitisation'
approach to long term financing of productive assets through 'Capital
Partnership' - aka Peer to Peer Investment.

Best Regards

Chris Cook

--- In gang8@yahoogroups.com, Ercouncil@... wrote:
>
> ,.
>
>
> This follows on from the "but bank credit is the ultimate source of
> liquidity" string.
>
>
> Chris:
> I'm familiar with your ideas for dis-intermediation, as Geoffrey  labelled
> it in his 1993 book - and where it is feasible it is a good idea.  Always
> cut out the middleman if you can. What else but that is this Internet  doing?
>
> On the direct level, what you are advocating is actually little different
> from Trade Credit, a creditary technique which my book shows to have  been
> around since no later than 8900 BC,. That's exactly the same point Geoffrey
> makes on p222 of his book. I even remember the page number by heart,  almost
> exactly 16 years on.
>
> Looking beyond simple one-on-one Trade Credit in a semi-closed community, a
>  nasty obstacle looms. No matter how you attempt to structure
> debtor-creditor relationships in a commercial world, ultimately you are  going
to run up
> against the brick wall of default risk. Think  sub-prime loans. Think
> Lehman Brothers. Think Northern Rock. Think Bear Stearns.  Think BCCI. Think
> Credit-Anstalt. And if you really want me to show off,  think the House of
> Buonsignori in Sienna. That went down the tubes in 1295,  probably the
earliest
> true bank collapse on record.  .
>
> You can't run away from default risk by inventing a cosy system in  which
> nice chaps only trade with other nice chaps or, as you prefer to call  them,
> "peers". Sadly Paradise has been neither Lost nor Found, but merely
> postponed.
>
> Chris Meakin
> London
>

 
 
   

.
 
My Book

Bloody good question, Dirk.
 
There's about 70,000 words of it sitting inside this computer. Here's the situation:
 

CONTENTS

Foreword by xxxxxxx............................................................page i
Preface (maybe)................................................................page xx
Acknowledgements.............................................................page xx
 
Chapter 1 :  Before 5000 BC..............................................page 1
   (8,900 words)
Chapter 2 :  5000 BC  to  1500 BC..................................... page 31
   (6800 words)
Chapter 3 :  1500 BC  to  100 AD........................................page 54
   (11,700 words)
Chapter 4 :  100 AD   to  1600 AD........................................page 88
   (12,400 words)
Chapter 5 :  1600 AD  to  1800 AD.......................................page 133
   (11,400 words)
Chapter 6 :  1800 AD  to  1914 AD.......................................page 175
   (approx 10,000 words almost complete)
Chapter 7 :  After  1914 AD.................................................page 208
   (outline notes only, say 10,000 words)
   
Summary of main points........................................................page xx Appendices/author’s note......................................................page xx
Bibliography and Sources......................................................page xx
Index....................................................................................page xx
 
Currently I am planning a change to the breakpoint between Chapter One and Chapter Two, and I want to modify Chapters Two and Three after what I learnt in the Study Day at Birkbeck College London where I also lectured a week ago on Saturday.

I probably need another 1500 words to sort out on Chapter 6 - how much time do I spend on Karl Marx and Alfred Marshall, in fact? - and I have reams of notes to try and condense into Chapter 7. If a genuine publisher came along and said "just finish it sunshine" it's probably a couple of months work, tops. I write quickly.
 
But as Geoffrey and Gunnar know better than anyone, my own life has been fraught with mishaps since the day John Mills, my colleague on the Executive Committee of the Economic Research Council here in London, told me it would be a good idea to turn what was then a two hour lecture (13,000 words) into a book.
 
Gunnar, Arno and Geoffrey were also at that Lecture which was chaired at London's School of Economic Science by Joe Hyde, yet another founder member of Gang of Eight. That was on 1 December 1998, two months after this Gang was founded, and. of course at the start of the golden economic era of a fool's paradise which came crashing down in Summer 2007.
 
For long periods my book had languished undisturbed on this computer, though I occasionally pulled out a chapter and strengthened the English. But who wanted some obtuse economics  book arguing that 85% of conventional economics is bollocks, when everything was fine and dandy in the world at large? All that has now changed and a window of opportunity may have arisen.
 
Chris M
 

   

Dear Dirk,
     Is it better to say, technically speaking, "Repaying loans destroys
credit" rather than money?
     Do we want to preserve a distinction between money and credit? If so,
what is it?
     Michael


On 11/23/09 4:41 AM, "D.J.Bezemer" <d.j.bezemer@...> wrote:

> Emile,
>
> Thanks for sharing - interesting chap Gary North. But Geoffrey I am
> puzzled how you can agree?
>
> First, "it did not occur to him that the banks immediately lend out
> the paid off loans. That is how they stay in business."
>
> As a general statement that is not true, is it? We now see the savings
> rate (e.g. in the US) rising because everyone is paying off their
> loans (households as well as businesses). Banks are far from
> "immediately lending out the paid off loans". The credit stock
> outstanding simply shrinks.
>
> Whether or banks do lend out the paid off loans depends on their
> balance sheets.
>
> Gesell was right: repaying loans destroys money. In normal conditions,
> banks immediately recreate the money. But this cannot be taken for
> granted today.
>
>
> Second, about "Whenever you see any variation of the broken flow of
> funds argument, you are in the presence of crackpottery."
>
> Also not true. As Geoffrey writes:
>
> " When a worker saves what he earns instead of spending he finances
> any loan his employer may have, and his earnings are not returned to
> the economomy. So 'Say's Law' - the real one, not the silly stuff you
> read in textbooks - breaks down."
>
>
> That is, savings need to be invested (as opposed to being held as a
> financial asset) in order to maintain the circular flow of funds.
> Say's Law (that spending furnishes the wherewithal for the counterpart
> purchasing) breaks down if spending (on wages) is not used for
> purchasing output (but is 'put under the mattress' or used for
> purchasing a financial asset). No crackpottery there. Financial
> markets DO interfere with the flow of funds.
>
> Note: it may be objected that purchasing a financial asset for some
> amount means the seller receives that amount, plowing it back into the
> real economy, so that the net money withdrawal from the (real economy)
> flow of funds is nil. However, with expanding financial markets this
> is not so. The seller may buy newly created or more expensive
> financial assets, which absorbs the proceeds from the first
> transaction. As a matter of fact, US financial markets have tripled
> between 1984 and 2006, relative to the size of the US economy.
>
> Other comments:
> Like most fundamentalist Austrian economists, North is biased by his
> anti-fiat money stance. He refuses to see that fiat money is not evil,
> but is a tool that can be used wisely or foolishy.
>
> I do fully agree with the deconstruction of the A+B theorem and the
> importance of following the money. This is something Austrian
> economists are good at. I disagree on fractional reserves - they are
> irrelevant as Randall Wray has explained.
>
> Any thoughts?
>
> Dirk
>
>
> On Sat, 21 Nov 2009 15:32:44 -0000
>   "Geoffrey Gardiner" <geoffrey.gardiner@...> wrote:
>> Yes, a good summary.
>>
>> Douglas missed the real 'gap'. When a worker saves what he earns
>> instead of spending he finances any loan his employer may have, and
>> his earnings are not returned to the economomy. So 'Say's Law' - the
>> real one, not the silly stuff you read in textbooks - breaks down. As
>> Keynes said 'One man's saving is another man' unemployment,' he
>> should have seen this point. The bad effect of the saving can be
>> negatived by other credit creation, but it makes the economy more
>> dependent on debt to keep it going.
>>
>> Gesell refused to see that inflation achieved his purpose.
>>
>> Geoffrey
>>
>>
>>
>>  ----- Original Message -----
>>  From: Emile de Leeuw
>>  To: gang8@yahoogroups.com
>>  Sent: Tuesday, July 14, 2009 7:51 AM
>>  Subject: Re: [gang8] Gary North
>>
>>
>>
>>  For me an interesting read any comments?
>>
>>
>>
>>  Emile
>>
>>
>>
>>
>>  Keynes, Crackpots, and Deflation
>>  by Gary North
>>  by Gary North
>>  Recently by Gary North: How To Create a New World Reserve Currency
>>
>>
>>
>>
>>  John Maynard Keynes changed his economic views every few years. His
>> 1936 book, The General Theory of Employment, Interest, and Money, was
>> his last book. He spent the war years in the British Treasury. He
>> died in 1946. So, he did not change his mind again.
>>
>>  Keynes' final book was a defense of government spending. This is
>> why the book was hailed as a masterpiece. It backed up what all
>> Western governments were already doing: spending money on welfare
>> projects and running massive deficits.
>>
>>  Keynes believed that there could be permanent depression and price
>> deflation. He said that prices do not always clear markets by
>> balancing supply and demand. The General Theory is a convoluted,
>> deliberately incomprehensible book devoted to disproving the
>> fundamental premise of all economics, namely, that the search for
>> profit motivates buyers and sellers to exchange scarce resources. If
>> the price isn't right, the seller of resources (buyer of money)
>> suffers a loss. He cannot easily find buyers of his goods. In
>> contrast, the buyer of resources (seller of money) has lots of people
>> bidding against each other in order to get his money.
>>
>>  Money is the most marketable commodity, said Ludwig von Mises in
>> 1912 in The Theory of Money and Credit. Because of this, sellers of
>> goods and services will eventually deal at some price. They cannot
>> use all of their output. They need money to survive in a
>> division-of-labor economy. They buy money by selling products. The
>> markets will clear. The depression will end.
>>
>>  Keynes argued that this is not true. He said that there can be an
>> economy in which falling prices do not clear the market. The economy
>> can be in an equilibrium with unemployed resources.
>>
>>  In attempting to prove this point, opposed to the logic of
>> economics after Adam Smith ("supply and demand"), he resorted to
>> arguments proposed by a pair of crackpots. One was an engineer, C. H.
>> Douglas. Douglas founded the Social Credit movement in the 1920's.
>> The other was Silvio Gesell, an obscure merchant, journalist, and
>> farmer who had briefly served as the People's Representative for
>> Finances for the one-week Bavarian Soviet Republic in 1919.
>>
>>  Both men had a theory of exchange that required the state to inject
>> fiat money into the economy in order to balance supply and demand.
>> For them, money was not an outgrowth of voluntary exchange. It was
>> and is a ministry of the state.
>>
>>  C. H. DOUGLAS
>>
>>
>>        $22      $20
>>
>>  Answering Major Douglas's crackpottery is easy. I did it in 1993 in
>> my book, Salvation Through Inflation. He was convinced that markets
>> needed fiat money produced by the government in order to clear. He
>> argued that when businesses repay loans after production, this
>> destroys money. Then consumers cannot afford to buy the output. This
>> was a distinction between finance creditand Real Credit. (Note:
>> whenever you see the word Real capitalized, followed by a noun ­ also
>> capitalized ­ be on the alert: a crackpot theory is close at hand.)
>>
>>  It did not occur to him that the banks immediately lend out the
>> paid off loans. That is how they stay in business.
>>
>>  This error is found in most underconsumption theories. There is
>> always a money bleed-off factor. Old money goes there to die, like
>> the elephant burial grounds. The consumers cannot afford to buy.
>>
>>  Every variation of this theory is nuts, with one exception: when
>> bank depositors withdraw currency and do not spend it, thereby not
>> allowing sellers to deposit the spent currency in their banks. When
>> there is a run on a bank in a fractional reserve system, there is
>> money heaven. The inverted pyramid of fiat money shrinks, just as it
>> expanded before. But this has nothing to do with paying off loans.
>>
>>  Douglas offered another theory ­ conceptually different ­ which he
>> imagined was irrefutable. He called it the A + B theorem. I devoted
>> an appendix to the A + B theorem in my book. He argued that there is
>> a break in the flow of payments. A factory pays Group A wages and
>> dividends. It pays Group B for raw materials, to cover bank fees, and
>> other "external" expenses. His theorem assumed that payments to Group
>> B do not constitute purchasing power for the output of the factory.
>> The money ceases to provide consumer demand. So, the state must
>> intervene and create money. This is another variation of his broken
>> flow of funds argument.
>>
>>  Whenever you see any variation of the broken flow of funds
>> argument, you are in the presence of crackpottery. It does not matter
>> how many equations or graphs the author provides. He is an economic
>> crackpot.
>>
>>  The supreme error in Social Credit is the error in all scenarios of
>> price deflation, other than one that relies on the extinguishing of
>> money due to a reversal of fractional reserves. They all fail to
>> follow the money. They speak of saving as if it were a system for
>> hiding paper currency under a mattress. They refuse to answer this
>> crucial question: What does the bank do with the money that a
>> consumer deposits instead of spending? Put another way: What
>> analytical or conceptual difference does it make whether a saver
>> deposits a dollar his bank, which the bank will lend, or whether he
>> spends it, enabling the seller to deposit the dollar in his bank,
>> which his bank will lend?
>>
>>  Keynes wrote this about Major Douglas.
>>
>>
>>
>>    Since the war there has been a spate of heretical theories of
>> under-consumption, of which those of Major Douglas are the most
>> famous. The strength of Major Douglas's advocacy has, of course,
>> largely depended on orthodoxy having no valid reply to much of his
>> destructive criticism.
>>
>>          $30      $25
>>
>>  When he wrote of "orthodoxy," he meant classical economics: price
>> as the way to clear a market. Anyone with even a smattering of
>> classical economics can refute the utterly nonsensical theories of C.
>> H. Douglas. Nobody bothered. My book, published in 1993, was the
>> first book-length refutation, as far as I can tell. The only reason
>> why I wrote it was to answer a Social Credit promoter who said that I
>> was intellectually incapable of refuting him or Douglas. It took me
>> maybe three weeks to write that book in my spare time. Maybe it took
>> a month.
>>
>>  Keynes continued. He grew incoherent, as you will see.
>>
>>
>>
>>    On the other hand, the detail of his diagnosis, in particular the
>> so-called A + B theorem, includes much mere mystification. If Major
>> Douglas had limited his B-items to the financial provisions made by
>> entrepreneurs to which no current expenditure on replacements and
>> renewals corresponds, he would be nearer the truth. But even in that
>> case it is necessary to allow for the possibility of these provisions
>> being offset by new investment in other directions as well as by
>> increased expenditure on consumption. Major Douglas is entitled to
>> claim, as against some of his orthodox adversaries, that he at least
>> has not been wholly oblivious of the outstanding problem of our
>> economic system. (General Theory, pp. 370­71)
>>  Keynes was incoherent. This was deliberate. Why do I say Keynes was
>> deliberately incoherent? Because when he chose to write clearly, he
>> was a master of prose. Read The Economic Consequences of the Peace
>> (1919) orEssays in Biography. When he could not sustain an argument,
>> he adopted the strategy of incoherence. Most of The General Theory is
>> incoherent.
>>
>>  There is not one argument in Douglas' writings ­ and I have read
>> all of his books ­ that is an accurate description of how the market
>> works, banking works, or entrepreneurs work. To the degree that
>> Keynes accepted any idea in Social Credit, he suffered from the same
>> intellectually crippling handicap.
>>
>>
>>
>>  SILVIO GESELL
>>
>>  Keynes devoted a long section of Chapter 23 to Gesell. This might
>> seem strange, except for the fact that Keynes' theory depends on the
>> same conceptual error as Gesell's: the inability of the rate of
>> interest to allocate the supply and demand of capital.
>>
>>  He began by admitting that he had long thought of Gesell as a
>> monetary crank. Keynes' initial instincts were correct.
>>
>>
>>
>>    It is convenient to mention at this point the strange, unduly
>> neglected prophet Silvio Gesell (1862­1930), whose work contains
>> flashes of deep insight and who only just failed to reach down to the
>> essence of the matter. In the post-war years his devotees bombarded
>> me with copies of his works; yet, owing to certain palpable defects
>> in the argument, I entirely failed to discover their merit. As is
>> often the case with imperfectly analysed intuitions, their
>> significance only became apparent after I had reached my own
>> conclusions in my own way. Meanwhile, like other academic economists,
>> I treated his profoundly original strivings as being no better than
>> those of a crank. Since few of the readers of this book are likely to
>> be well acquainted with the significance of Gesell, I will give to
>> him what would be otherwise a disproportionate space (p. 353).
>>  He said that Gesell's main book "as a whole may be described as the
>> establishment of an anti-Marxian socialism, a reaction against
>> laissez-faire built on theoretical foundations totally unlike those
>> of Marx in being based on a repudiation instead of on an acceptance
>> of the classical hypotheses, and on an unfettering of competition
>> instead of its abolition. I believe that the future will learn more
>> from the spirit of Gesell than from that of Marx" (page 355). This is
>> an astounding statement. It is rarely quoted by Keynes' disciples,
>> whose name is legion. His disciples still think Gesell was a crank.
>>
>>
>>
>>
>>  Keynes then praised Gesell's theory at the place where it coincides
>> with his own. I will not bore you with the details. They are found on
>> pages 355­56. Gesell attacked the idea that a free market interest
>> rate allocates capital rationally ­ in short, the heart of Keynes'
>> economics.
>>
>>  Then he praised Gesell at the point of Gesell's crackpottery:
>> stamped money. This was money that had to be spent by consumers fast.
>> Why? Because the government would reduce to zero value dated pieces
>> of paper money. Holders of money would have to stand in line at the
>> Post Office each month to get their money stamped in order to restore
>> it to face value. They would have to pay a fee for this service.
>> Conclusion? Spend it fast!
>>
>>  This was the proposal of a failed Communist finance minister and
>> his acolyte, John Maynard Keynes, the most important economist of the
>> 20th century. The only rival to Keynes in academia today on the money
>> question is Irving Fisher, and he held the same screwball view, as
>> Keynes pointed out.
>>
>>
>>
>>    The incompleteness of his theory is doubtless the explanation of
>> his work having suffered neglect at the hands of the academic world.
>> Nevertheless he had carried his theory far enough to lead him to a
>> practical recommendation, which may carry with it the essence of what
>> is needed, though it is not feasible in the form in which he proposed
>> it. He argues that the growth of real capital is held back by the
>> money-rate of interest, and that if this brake were removed the
>> growth of real capital would be, in the modern world, so rapid that a
>> zero money-rate of interest would probably be justified, not indeed
>> forthwith, but within a comparatively short period of time. Thus the
>> prime necessity is to reduce the money-rate of interest, and this, he
>> pointed out, can be effected by causing money to incur carrying-costs
>> just like other stocks of barren goods. This led him to the famous
>> prescription of "stamped" money, with which his name is chiefly
>> associated and which has received the blessing of Professor Irving
>> Fisher. According to this proposal currency notes (though it would
>> clearly need to apply as well to some forms at least of bank-money)
>> would only retain their value by being stamped each month, like an
>> insurance card, with stamps purchased at a post office. The cost of
>> the stamps could, of course, be fixed at any appropriate figure (pp.
>> 356­57).
>>    The idea behind stamped money is sound. It is, indeed, possible
>> that means might be found to apply it in practice on a modest scale
>> (p. 357).
>>
>>  Here is the fusion of three great monetary cranks: Keynes, Irving
>> Fisher, and Gesell. All three of them attacked the idea of the gold
>> standard. All three of them believed that the economy needs fiat
>> money to operate efficiently. All three believed that experts should
>> decide what rate of monetary inflation is appropriate.
>>
>>  Then there was the fourth great monetary crank: Milton Friedman,
>> who was Fisher's disciple. He proposed this solution: central bank
>> expansion of the money supply by 3% to 5% per annum. At least it made
>> better sense than stamped money. (To those who gasp in horror at my
>> assertion that Friedman was a monetary crank, I recommend that they
>> read Murray Rothbard's analysis of Friedman's monetary theory. The
>> section on "Money and the Business Cycle" is the relevant section. It
>> is short and to the point.)
>>
>>  I define a monetary crank as someone who proposes a system of
>> causation for money different from causation for other market
>> phenomena. Ludwig von Mises subsumed monetary theory under the same
>> logic that governs all market processes: Theory of Money and Credit.
>> In contrast, a monetary crank tells us that private property,
>> entrepreneurship, and the forces of supply and demand explain
>> causation in the overall economy, but then insists that money is
>> different, that government-created and government-planned money is
>> required to balance supply and demand for all other goods and
>> services. He abandons his theory of economic causation when he gets
>> to money. Fisher and Friedman were monetary cranks.
>>
>>
>>  MONETARY CRANKS PROMOTE FIAT MONEY
>>
>>  None of the four believed that a free market money system would
>> allow prices, including the interest rate, to allocate capital, apart
>> from government creation of money to assure the clearing of markets.
>> They saw money as a government function. They did not trust the free
>> market to provide a market-clearing monetary system under a legal
>> system that prohibits fraud but does not allow government-created
>> money.
>>
>>  None of them accepted the international gold standard. Keynes hated
>> it. It kept government and central banks from inflating. This kept
>> governments from creating policies that would match supply and
>> demand.
>>
>>
>>
>>    I have pointed out in the preceding chapter that, under the
>> system of domestic laissez-faire and an international gold standard
>> such as was orthodox in the latter half of the nineteenth century,
>> there was no means open to a government whereby to mitigate economic
>> distress at home except through the competitive struggle for markets.
>> For all measures helpful to a state of chronic or intermittent
>> under-employment were ruled out, except measures to improve the
>> balance of trade on income account (p. 382).
>>  What was Keynes after? A fascist state: the fusion of private
>> ownership and socialism.
>>
>>
>>
>>    It is not the ownership of the instruments of production which it
>> is important for the State to assume. If the State is able to
>> determine the aggregate amount of resources devoted to augmenting the
>> instruments and the basic rate of reward to those who own them, it
>> will have accomplished all that is necessary. Moreover, the necessary
>> measures of socialisation can be introduced gradually and without a
>> break in the general traditions of society (p. 378).
>>  This is why, in his preface to the German edition (1936), he wrote
>> that "the theory of aggregated production, which is the point of the
>> following book, nevertheless can be much easier adapted to the
>> conditions of a totalitarian state [eines totalen Staates] than the
>> theory of production and distribution of a given production put forth
>> under conditions of free competition and a large degree of
>> laissez-faire."
>>
>>  Keynes refused to accept the free market explanation of the Great
>> Depression, that it had been created by central banks that had
>> inflated, then ceased to inflate: the boom-bust cycle based on
>> fractional reserve banking. He rejected the idea that governments had
>> created price floors to protect special interests, and therefore that
>> did not allow the clearing of markets. He blamed the free market for
>> not balancing supply and demand through price competition. He
>> rejected Mises, Hayek, and Robbins (p. 192), never bothering to
>> mention Robbins' The Great Depression (1934), which is as clear as
>> The General Theory is muddled. It was published by his own publisher,
>> Macmillan. He completely ignored Chester Phillips' book, Bank Credit
>> (1931), published by the American branch of Macmillan.
>>
>>  To defend his theory, he relied on two deflationists whose theory
>> rested on the inability of the free market to create money as part of
>> the market-clearing process. He argued that deflation was inescapable
>> without government intervention: the managed economy.
>>
>>  CONCLUSION
>>
>>  Keynesians are deflationists, meaning "the free market will produce
>> permanent depression and deflation apart from government spending and
>> central bank inflation." They believe that, without government
>> spending, huge deficits, and central bank inflation, the economy will
>> go into a deflationary spiral and not recover. They invoke the
>> paradox of thrift and the liquidity trap as reasons. Both rely on the
>> same idea: "money saved in a bank is not simultaneously money lent by
>> the bank to increase production or consumption." It is a fallacious
>> idea. It is "currency under the mattress" economics. It is "break in
>> the flow of funds" economics. It is crackpottery.
>>
>>  These Keynesian arguments rely ultimately on the monetary theories
>> of C. H. Douglas and Silvio Gesell. These two crackpots provided the
>> conceptual framework for Keynesian economics. Keynes' disciples,
>> deservedly embarrassed by this inconvenient fact, have done their
>> best to conceal it for 70 years.
>>
>>  Whenever you hear about the need for a government stimulus-spending
>> bill, think "crackpot economics." Whenever you hear that deficits
>> don't matter, think "crackpot economics." Whenever you hear about the
>> need for quantitative easing, think "crackpot economics."
>>
>>  If you want to be inoculated against Keynes and the crackpots, read
>> Henry Hazlitt's line-by-line refutation of The General Theory: The
>> Failure of the 'New Economics' (1959). Then read Murray Rothbard's
>> What Has Government Done to Our Money? (1964).
>>
>>  July 14, 2009
>>
>>  Gary North [send him mail] is the author of Mises on Money. Visit
>> http://www.garynorth.com. He is also the author of a free 20-volume
>> series, An Economic Commentary on the Bible.
>>
>>  Copyright © 2009 Gary North
>>
>>
>>
>>
>>
>>
>>
>
>
>
> ------------------------------------
>
> The gang8 list is devoted to Creditary Economics.
> To unsubscribe, email: gang8-unsubscribe@yahoogroups.com
>
> Yahoo! Groups Links
>
>
>

.....a window of opportunity may have arisen. It has indeed, Chris, so
finish the book.

I now remember I had learnt before you were working on it. Good luck!

Dirk







On Mon, 23 Nov 2009 06:58:11 EST
   Ercouncil@... wrote:
> .
>
> My Book
>
> Bloody good question, Dirk.
>
> There's about 70,000 words of it sitting inside this computer.
>Here's the
> situation:
>
>
> CONTENTS
>
>Foreword by
> xxxxxxx............................................................page
> i
> Preface
> (maybe)................................................................page
> xx
> Acknowledgements............................................................
> .page  xx
>
> Chapter 1 :  Before 5000
> BC..............................................page  1
> (8,900 words)
> Chapter 2 :  5000  BC  to  1500
>BC.....................................
> page  31
> (6800 words)
> Chapter 3 :  1500  BC  to  100
> AD........................................page  54
> (11,700 words)
> Chapter 4 :  100 AD   to  1600
> AD........................................page  88
> (12,400 words)
> Chapter 5 :  1600  AD  to  1800
> AD.......................................page  133
> (11,400 words)
> Chapter 6 :  1800  AD  to  1914
> AD.......................................page  175
> (approx 10,000 words almost complete)
> Chapter 7  :  After  1914
> AD.................................................page  208
> (outline notes only, say 10,000  words)
>
> Summary of main
> points........................................................page
>xx  Appendices/author’s
> note......................................................page  xx
> Bibliography and
> Sources......................................................page
> xx
> Index.......................................................................
> .............page  xx
>
>
> Currently I am planning a change to the breakpoint between Chapter
>One  and
> Chapter Two, and I want to modify Chapters Two and Three after what
>I
> learnt in the Study Day at Birkbeck College London where I also
>lectured a  week
> ago on Saturday.
>
> I probably need another 1500 words to sort out on Chapter 6 -  how
>much
> time do I spend on Karl Marx and Alfred Marshall, in fact? - and I
>have  reams
> of notes to try and condense into Chapter 7. If a genuine publisher
>came
> along and said "just finish it sunshine" it's probably a couple of
> months
> work, tops. I write quickly.
>
> But as Geoffrey and Gunnar know better than anyone, my own life has
>been
> fraught with mishaps since the day John Mills, my colleague on the
>Executive
> Committee of the Economic Research Council here in London, told me
>it would
> be a good idea to turn what was then a two hour lecture (13,000
>words)
> into a  book.
>
> Gunnar, Arno and Geoffrey were also at that Lecture which was
>chaired  at
> London's School of Economic Science by Joe Hyde, yet another
> founder member
> of Gang of Eight. That was on 1 December 1998, two months after
> this Gang
> was founded, and. of course at the start of the golden economic era
>of  a
> fool's paradise which came crashing down in Summer 2007.
>
>For long periods my book had languished undisturbed on this computer,
>
> though I occasionally pulled out a chapter and strengthened the
> English. But
> who wanted some obtuse economics  book arguing  that 85% of
>conventional
> economics is bollocks, when everything was fine and  dandy in the
>world at large?
> All that has now changed and a window of  opportunity may have
>arisen.
>
> Chris M
>
>

Hi Chris M.,

You write about " my book ".

I have missed this so far. Where can it be obtained?

best,

Dirk

On Sun, 22 Nov 2009 19:27:54 EST
   Ercouncil@... wrote:
> ,.
>
>
> This follows on from the "but bank credit is the ultimate source of
>
> liquidity" string.
>
>
> Chris:
> I'm familiar with your ideas for dis-intermediation, as Geoffrey
> labelled
> it in his 1993 book - and where it is feasible it is a good idea.
> Always
> cut out the middleman if you can. What else but that is this
>Internet  doing?
>
> On the direct level, what you are advocating is actually little
>different
> from Trade Credit, a creditary technique which my book shows to have
> been
> around since no later than 8900 BC,. That's exactly the same point
>Geoffrey
> makes on p222 of his book. I even remember the page number by heart,
> almost
> exactly 16 years on.
>
> Looking beyond simple one-on-one Trade Credit in a semi-closed
>community, a
> nasty obstacle looms. No matter how you attempt to structure
> debtor-creditor relationships in a commercial world, ultimately you
>are  going to run up
> against the brick wall of default risk. Think  sub-prime loans.
>Think
> Lehman Brothers. Think Northern Rock. Think Bear Stearns.  Think
>BCCI. Think
> Credit-Anstalt. And if you really want me to show off,  think the
>House of
> Buonsignori in Sienna. That went down the tubes in 1295,  probably
>the earliest
> true bank collapse on record.  .
>
> You can't run away from default risk by inventing a cosy system in
> which
> nice chaps only trade with other nice chaps or, as you prefer to
>call  them,
> "peers". Sadly Paradise has been neither Lost nor Found, but merely
>
> postponed.
>
> Chris Meakin
> London

Yet another illustration of the ' Different Moneys' principle!

Dirk

On Mon, 23 Nov 2009 09:28:36 -0000
   "Geoffrey Gardiner" <geoffrey.gardiner@...> wrote:
> This should be in an appendix in every textbook!
>
> Geoff
>  ----- Original Message -----
>  From: Ercouncil@...
>  To: gang8@yahoogroups.com
>  Sent: Sunday, November 22, 2009 10:19 PM
>  Subject: Re: [gang8] looking for a list of state-owned central
>banks
>
>
>
>
>  .
>
>  Hi Gang:
>
>  Perhaps the classic central bank that is not state owned is
>Hongkong and Shanghai Banking Corporation in Hong Kong. I should
>know. I was its Director of Public Affairs.
>
>  We issued the main currency, although Standard Chartered and Bank
>of China were allowed to play bit parts as well. I had the
>interesting job of launching a new issue of the currency in 1985, for
>fascinating reasons, see below. We ran the HK Government's bank
>accounts. We ran the Hong Kong dollar in world markets - not
>difficult. It was simply managed to stay in direct link with the US
>dollar, the US being our greatest single trading partner. The
>seignorage from the domestic currency issue went straight into the
>Forex management kitty, no mucking about.
>
>  Interesting question : when after 1997 will the HK$ be linked to
>the remnimbi instead?
>
>  Not in a hurry, I expect. Let's go back to that 1985 new issue of
>currency. Two notes in the old series were causing us a lot of
>problems. Some idiot had designed the $50 in a predominantly blue
>colour, a total no-no. Blue is a hopelessly unlucky colour with the
>Chinese, the colour of death. So our circulation of $10 bills was
>getting expensively and quickly wrecked as they were overused in its
>place.
>
>  The top note issued in  Hong Kong was the $1,000 bill - a very high
>denomination. We were printing them by the truckload and they were
>promptly disappearing out of circulation. The Bank was just a tad
>concerned : what the hell was happening to them all?
>
>  So a new issue solved two problems, and my PR excuse (so as not to
>frighten anyone) was that we wanted a new series proudly showing
>Norman Foster's brand new HQ building, opened in 1985, instead of its
>1935-built predecessor. No-one could possibly object to that, could
>they?
>
>  The new $50 bill was predominantly purple, which was much more
>acceptable. The new $1,000 bill was predominantly gold, as before,
>but a markedly different design.
>  So whoever was holding all those disappearing old design $1,000
>bills was expected to come rushing into the Bank to exchange them
>before they were invalidated. They did, very rapidly. And guess what
>?  They were all traders from across the border in Shenzhen, the
>Chinese communist shadow of Hong Kong.
>
>  I quickly pieced together the jigsaw puzzle that there were three
>types of currency in use around the Shenzhen commercial community in
>those days.
>   ::
>  1. The domestic remnimbi, generally regarded as useless for any
>serious commercial transactions;
>  2. Chinese Government 'Foreign Exchange Certificates', only
>slightly better.
>  3. Bloody great bundles of HSBC $1,000 bills carried around in the
>back pockets of all Shenzhen traders. The currency of choice.
>
>  The Chinese have very long memories, and I wonder how long before
>the ghosts of pre-1997 commerce eventually disappear from the
>collective memory?  I note that my old bank is still making huge
>profits out of China, 'Capitalism with Chinese characteristics' or
>not. The commercial characteristics, loyalties indeed, of the Chinese
>have changed very little since the days of Confucius and I doubt they
>will be in any hurry to change them quite yet. .
>
>  Chris Meakin
>  London
>  .
>
>
>

Emile,

Thanks for sharing - interesting chap Gary North. But Geoffrey I am
puzzled how you can agree?

First, "it did not occur to him that the banks immediately lend out
the paid off loans. That is how they stay in business."

As a general statement that is not true, is it? We now see the savings
rate (e.g. in the US) rising because everyone is paying off their
loans (households as well as businesses). Banks are far from
"immediately lending out the paid off loans". The credit stock
outstanding simply shrinks.

Whether or banks do lend out the paid off loans depends on their
balance sheets.

Gesell was right: repaying loans destroys money. In normal conditions,
banks immediately recreate the money. But this cannot be taken for
granted today.


Second, about "Whenever you see any variation of the broken flow of
funds argument, you are in the presence of crackpottery."

Also not true. As Geoffrey writes:

" When a worker saves what he earns instead of spending he finances
any loan his employer may have, and his earnings are not returned to
the economomy. So 'Say's Law' - the real one, not the silly stuff you
read in textbooks - breaks down."


That is, savings need to be invested (as opposed to being held as a
financial asset) in order to maintain the circular flow of funds.
Say's Law (that spending furnishes the wherewithal for the counterpart
purchasing) breaks down if spending (on wages) is not used for
purchasing output (but is 'put under the mattress' or used for
purchasing a financial asset). No crackpottery there. Financial
markets DO interfere with the flow of funds.

Note: it may be objected that purchasing a financial asset for some
amount means the seller receives that amount, plowing it back into the
real economy, so that the net money withdrawal from the (real economy)
flow of funds is nil. However, with expanding financial markets this
is not so. The seller may buy newly created or more expensive
financial assets, which absorbs the proceeds from the first
transaction. As a matter of fact, US financial markets have tripled
between 1984 and 2006, relative to the size of the US economy.

Other comments:
Like most fundamentalist Austrian economists, North is biased by his
anti-fiat money stance. He refuses to see that fiat money is not evil,
but is a tool that can be used wisely or foolishy.

I do fully agree with the deconstruction of the A+B theorem and the
importance of following the money. This is something Austrian
economists are good at. I disagree on fractional reserves - they are
irrelevant as Randall Wray has explained.

Any thoughts?

Dirk


On Sat, 21 Nov 2009 15:32:44 -0000
   "Geoffrey Gardiner" <geoffrey.gardiner@...> wrote:
> Yes, a good summary.
>
> Douglas missed the real 'gap'. When a worker saves what he earns
>instead of spending he finances any loan his employer may have, and
>his earnings are not returned to the economomy. So 'Say's Law' - the
>real one, not the silly stuff you read in textbooks - breaks down. As
>Keynes said 'One man's saving is another man' unemployment,' he
>should have seen this point. The bad effect of the saving can be
>negatived by other credit creation, but it makes the economy more
>dependent on debt to keep it going.
>
> Gesell refused to see that inflation achieved his purpose.
>
> Geoffrey
>
>
>
>  ----- Original Message -----
>  From: Emile de Leeuw
>  To: gang8@yahoogroups.com
>  Sent: Tuesday, July 14, 2009 7:51 AM
>  Subject: Re: [gang8] Gary North
>
>
>
>  For me an interesting read any comments?
>
>
>
>  Emile
>
>
>
>
>  Keynes, Crackpots, and Deflation
>  by Gary North
>  by Gary North
>  Recently by Gary North: How To Create a New World Reserve Currency
>
>
>
>
>  John Maynard Keynes changed his economic views every few years. His
>1936 book, The General Theory of Employment, Interest, and Money, was
>his last book. He spent the war years in the British Treasury. He
>died in 1946. So, he did not change his mind again.
>
>  Keynes' final book was a defense of government spending. This is
>why the book was hailed as a masterpiece. It backed up what all
>Western governments were already doing: spending money on welfare
>projects and running massive deficits.
>
>  Keynes believed that there could be permanent depression and price
>deflation. He said that prices do not always clear markets by
>balancing supply and demand. The General Theory is a convoluted,
>deliberately incomprehensible book devoted to disproving the
>fundamental premise of all economics, namely, that the search for
>profit motivates buyers and sellers to exchange scarce resources. If
>the price isn't right, the seller of resources (buyer of money)
>suffers a loss. He cannot easily find buyers of his goods. In
>contrast, the buyer of resources (seller of money) has lots of people
>bidding against each other in order to get his money.
>
>  Money is the most marketable commodity, said Ludwig von Mises in
>1912 in The Theory of Money and Credit. Because of this, sellers of
>goods and services will eventually deal at some price. They cannot
>use all of their output. They need money to survive in a
>division-of-labor economy. They buy money by selling products. The
>markets will clear. The depression will end.
>
>  Keynes argued that this is not true. He said that there can be an
>economy in which falling prices do not clear the market. The economy
>can be in an equilibrium with unemployed resources.
>
>  In attempting to prove this point, opposed to the logic of
>economics after Adam Smith ("supply and demand"), he resorted to
>arguments proposed by a pair of crackpots. One was an engineer, C. H.
>Douglas. Douglas founded the Social Credit movement in the 1920's.
>The other was Silvio Gesell, an obscure merchant, journalist, and
>farmer who had briefly served as the People's Representative for
>Finances for the one-week Bavarian Soviet Republic in 1919.
>
>  Both men had a theory of exchange that required the state to inject
>fiat money into the economy in order to balance supply and demand.
>For them, money was not an outgrowth of voluntary exchange. It was
>and is a ministry of the state.
>
>  C. H. DOUGLAS
>
>
>        $22      $20
>
>  Answering Major Douglas's crackpottery is easy. I did it in 1993 in
>my book, Salvation Through Inflation. He was convinced that markets
>needed fiat money produced by the government in order to clear. He
>argued that when businesses repay loans after production, this
>destroys money. Then consumers cannot afford to buy the output. This
>was a distinction between finance creditand Real Credit. (Note:
>whenever you see the word Real capitalized, followed by a noun – also
>capitalized – be on the alert: a crackpot theory is close at hand.)
>
>  It did not occur to him that the banks immediately lend out the
>paid off loans. That is how they stay in business.
>
>  This error is found in most underconsumption theories. There is
>always a money bleed-off factor. Old money goes there to die, like
>the elephant burial grounds. The consumers cannot afford to buy.
>
>  Every variation of this theory is nuts, with one exception: when
>bank depositors withdraw currency and do not spend it, thereby not
>allowing sellers to deposit the spent currency in their banks. When
>there is a run on a bank in a fractional reserve system, there is
>money heaven. The inverted pyramid of fiat money shrinks, just as it
>expanded before. But this has nothing to do with paying off loans.
>
>  Douglas offered another theory – conceptually different – which he
>imagined was irrefutable. He called it the A + B theorem. I devoted
>an appendix to the A + B theorem in my book. He argued that there is
>a break in the flow of payments. A factory pays Group A wages and
>dividends. It pays Group B for raw materials, to cover bank fees, and
>other "external" expenses. His theorem assumed that payments to Group
>B do not constitute purchasing power for the output of the factory.
>The money ceases to provide consumer demand. So, the state must
>intervene and create money. This is another variation of his broken
>flow of funds argument.
>
>  Whenever you see any variation of the broken flow of funds
>argument, you are in the presence of crackpottery. It does not matter
>how many equations or graphs the author provides. He is an economic
>crackpot.
>
>  The supreme error in Social Credit is the error in all scenarios of
>price deflation, other than one that relies on the extinguishing of
>money due to a reversal of fractional reserves. They all fail to
>follow the money. They speak of saving as if it were a system for
>hiding paper currency under a mattress. They refuse to answer this
>crucial question: What does the bank do with the money that a
>consumer deposits instead of spending? Put another way: What
>analytical or conceptual difference does it make whether a saver
>deposits a dollar his bank, which the bank will lend, or whether he
>spends it, enabling the seller to deposit the dollar in his bank,
>which his bank will lend?
>
>  Keynes wrote this about Major Douglas.
>
>
>
>    Since the war there has been a spate of heretical theories of
>under-consumption, of which those of Major Douglas are the most
>famous. The strength of Major Douglas's advocacy has, of course,
>largely depended on orthodoxy having no valid reply to much of his
>destructive criticism.
>
>          $30      $25
>
>  When he wrote of "orthodoxy," he meant classical economics: price
>as the way to clear a market. Anyone with even a smattering of
>classical economics can refute the utterly nonsensical theories of C.
>H. Douglas. Nobody bothered. My book, published in 1993, was the
>first book-length refutation, as far as I can tell. The only reason
>why I wrote it was to answer a Social Credit promoter who said that I
>was intellectually incapable of refuting him or Douglas. It took me
>maybe three weeks to write that book in my spare time. Maybe it took
>a month.
>
>  Keynes continued. He grew incoherent, as you will see.
>
>
>
>    On the other hand, the detail of his diagnosis, in particular the
>so-called A + B theorem, includes much mere mystification. If Major
>Douglas had limited his B-items to the financial provisions made by
>entrepreneurs to which no current expenditure on replacements and
>renewals corresponds, he would be nearer the truth. But even in that
>case it is necessary to allow for the possibility of these provisions
>being offset by new investment in other directions as well as by
>increased expenditure on consumption. Major Douglas is entitled to
>claim, as against some of his orthodox adversaries, that he at least
>has not been wholly oblivious of the outstanding problem of our
>economic system. (General Theory, pp. 370–71)
>  Keynes was incoherent. This was deliberate. Why do I say Keynes was
>deliberately incoherent? Because when he chose to write clearly, he
>was a master of prose. Read The Economic Consequences of the Peace
>(1919) orEssays in Biography. When he could not sustain an argument,
>he adopted the strategy of incoherence. Most of The General Theory is
>incoherent.
>
>  There is not one argument in Douglas' writings – and I have read
>all of his books – that is an accurate description of how the market
>works, banking works, or entrepreneurs work. To the degree that
>Keynes accepted any idea in Social Credit, he suffered from the same
>intellectually crippling handicap.
>
>
>
>  SILVIO GESELL
>
>  Keynes devoted a long section of Chapter 23 to Gesell. This might
>seem strange, except for the fact that Keynes' theory depends on the
>same conceptual error as Gesell's: the inability of the rate of
>interest to allocate the supply and demand of capital.
>
>  He began by admitting that he had long thought of Gesell as a
>monetary crank. Keynes' initial instincts were correct.
>
>
>
>    It is convenient to mention at this point the strange, unduly
>neglected prophet Silvio Gesell (1862–1930), whose work contains
>flashes of deep insight and who only just failed to reach down to the
>essence of the matter. In the post-war years his devotees bombarded
>me with copies of his works; yet, owing to certain palpable defects
>in the argument, I entirely failed to discover their merit. As is
>often the case with imperfectly analysed intuitions, their
>significance only became apparent after I had reached my own
>conclusions in my own way. Meanwhile, like other academic economists,
>I treated his profoundly original strivings as being no better than
>those of a crank. Since few of the readers of this book are likely to
>be well acquainted with the significance of Gesell, I will give to
>him what would be otherwise a disproportionate space (p. 353).
>  He said that Gesell's main book "as a whole may be described as the
>establishment of an anti-Marxian socialism, a reaction against
>laissez-faire built on theoretical foundations totally unlike those
>of Marx in being based on a repudiation instead of on an acceptance
>of the classical hypotheses, and on an unfettering of competition
>instead of its abolition. I believe that the future will learn more
>from the spirit of Gesell than from that of Marx" (page 355). This is
>an astounding statement. It is rarely quoted by Keynes' disciples,
>whose name is legion. His disciples still think Gesell was a crank.
>
>
>
>
>  Keynes then praised Gesell's theory at the place where it coincides
>with his own. I will not bore you with the details. They are found on
>pages 355–56. Gesell attacked the idea that a free market interest
>rate allocates capital rationally – in short, the heart of Keynes'
>economics.
>
>  Then he praised Gesell at the point of Gesell's crackpottery:
>stamped money. This was money that had to be spent by consumers fast.
>Why? Because the government would reduce to zero value dated pieces
>of paper money. Holders of money would have to stand in line at the
>Post Office each month to get their money stamped in order to restore
>it to face value. They would have to pay a fee for this service.
>Conclusion? Spend it fast!
>
>  This was the proposal of a failed Communist finance minister and
>his acolyte, John Maynard Keynes, the most important economist of the
>20th century. The only rival to Keynes in academia today on the money
>question is Irving Fisher, and he held the same screwball view, as
>Keynes pointed out.
>
>
>
>    The incompleteness of his theory is doubtless the explanation of
>his work having suffered neglect at the hands of the academic world.
>Nevertheless he had carried his theory far enough to lead him to a
>practical recommendation, which may carry with it the essence of what
>is needed, though it is not feasible in the form in which he proposed
>it. He argues that the growth of real capital is held back by the
>money-rate of interest, and that if this brake were removed the
>growth of real capital would be, in the modern world, so rapid that a
>zero money-rate of interest would probably be justified, not indeed
>forthwith, but within a comparatively short period of time. Thus the
>prime necessity is to reduce the money-rate of interest, and this, he
>pointed out, can be effected by causing money to incur carrying-costs
>just like other stocks of barren goods. This led him to the famous
>prescription of "stamped" money, with which his name is chiefly
>associated and which has received the blessing of Professor Irving
>Fisher. According to this proposal currency notes (though it would
>clearly need to apply as well to some forms at least of bank-money)
>would only retain their value by being stamped each month, like an
>insurance card, with stamps purchased at a post office. The cost of
>the stamps could, of course, be fixed at any appropriate figure (pp.
>356–57).
>    The idea behind stamped money is sound. It is, indeed, possible
>that means might be found to apply it in practice on a modest scale
>(p. 357).
>
>  Here is the fusion of three great monetary cranks: Keynes, Irving
>Fisher, and Gesell. All three of them attacked the idea of the gold
>standard. All three of them believed that the economy needs fiat
>money to operate efficiently. All three believed that experts should
>decide what rate of monetary inflation is appropriate.
>
>  Then there was the fourth great monetary crank: Milton Friedman,
>who was Fisher's disciple. He proposed this solution: central bank
>expansion of the money supply by 3% to 5% per annum. At least it made
>better sense than stamped money. (To those who gasp in horror at my
>assertion that Friedman was a monetary crank, I recommend that they
>read Murray Rothbard's analysis of Friedman's monetary theory. The
>section on "Money and the Business Cycle" is the relevant section. It
>is short and to the point.)
>
>  I define a monetary crank as someone who proposes a system of
>causation for money different from causation for other market
>phenomena. Ludwig von Mises subsumed monetary theory under the same
>logic that governs all market processes: Theory of Money and Credit.
>In contrast, a monetary crank tells us that private property,
>entrepreneurship, and the forces of supply and demand explain
>causation in the overall economy, but then insists that money is
>different, that government-created and government-planned money is
>required to balance supply and demand for all other goods and
>services. He abandons his theory of economic causation when he gets
>to money. Fisher and Friedman were monetary cranks.
>
>
>  MONETARY CRANKS PROMOTE FIAT MONEY
>
>  None of the four believed that a free market money system would
>allow prices, including the interest rate, to allocate capital, apart
>from government creation of money to assure the clearing of markets.
>They saw money as a government function. They did not trust the free
>market to provide a market-clearing monetary system under a legal
>system that prohibits fraud but does not allow government-created
>money.
>
>  None of them accepted the international gold standard. Keynes hated
>it. It kept government and central banks from inflating. This kept
>governments from creating policies that would match supply and
>demand.
>
>
>
>    I have pointed out in the preceding chapter that, under the
>system of domestic laissez-faire and an international gold standard
>such as was orthodox in the latter half of the nineteenth century,
>there was no means open to a government whereby to mitigate economic
>distress at home except through the competitive struggle for markets.
>For all measures helpful to a state of chronic or intermittent
>under-employment were ruled out, except measures to improve the
>balance of trade on income account (p. 382).
>  What was Keynes after? A fascist state: the fusion of private
>ownership and socialism.
>
>
>
>    It is not the ownership of the instruments of production which it
>is important for the State to assume. If the State is able to
>determine the aggregate amount of resources devoted to augmenting the
>instruments and the basic rate of reward to those who own them, it
>will have accomplished all that is necessary. Moreover, the necessary
>measures of socialisation can be introduced gradually and without a
>break in the general traditions of society (p. 378).
>  This is why, in his preface to the German edition (1936), he wrote
>that "the theory of aggregated production, which is the point of the
>following book, nevertheless can be much easier adapted to the
>conditions of a totalitarian state [eines totalen Staates] than the
>theory of production and distribution of a given production put forth
>under conditions of free competition and a large degree of
>laissez-faire."
>
>  Keynes refused to accept the free market explanation of the Great
>Depression, that it had been created by central banks that had
>inflated, then ceased to inflate: the boom-bust cycle based on
>fractional reserve banking. He rejected the idea that governments had
>created price floors to protect special interests, and therefore that
>did not allow the clearing of markets. He blamed the free market for
>not balancing supply and demand through price competition. He
>rejected Mises, Hayek, and Robbins (p. 192), never bothering to
>mention Robbins' The Great Depression (1934), which is as clear as
>The General Theory is muddled. It was published by his own publisher,
>Macmillan. He completely ignored Chester Phillips' book, Bank Credit
>(1931), published by the American branch of Macmillan.
>
>  To defend his theory, he relied on two deflationists whose theory
>rested on the inability of the free market to create money as part of
>the market-clearing process. He argued that deflation was inescapable
>without government intervention: the managed economy.
>
>  CONCLUSION
>
>  Keynesians are deflationists, meaning "the free market will produce
>permanent depression and deflation apart from government spending and
>central bank inflation." They believe that, without government
>spending, huge deficits, and central bank inflation, the economy will
>go into a deflationary spiral and not recover. They invoke the
>paradox of thrift and the liquidity trap as reasons. Both rely on the
>same idea: "money saved in a bank is not simultaneously money lent by
>the bank to increase production or consumption." It is a fallacious
>idea. It is "currency under the mattress" economics. It is "break in
>the flow of funds" economics. It is crackpottery.
>
>  These Keynesian arguments rely ultimately on the monetary theories
>of C. H. Douglas and Silvio Gesell. These two crackpots provided the
>conceptual framework for Keynesian economics. Keynes' disciples,
>deservedly embarrassed by this inconvenient fact, have done their
>best to conceal it for 70 years.
>
>  Whenever you hear about the need for a government stimulus-spending
>bill, think "crackpot economics." Whenever you hear that deficits
>don't matter, think "crackpot economics." Whenever you hear about the
>need for quantitative easing, think "crackpot economics."
>
>  If you want to be inoculated against Keynes and the crackpots, read
>Henry Hazlitt's line-by-line refutation of The General Theory: The
>Failure of the 'New Economics' (1959). Then read Murray Rothbard's
>What Has Government Done to Our Money? (1964).
>
>  July 14, 2009
>
>  Gary North [send him mail] is the author of Mises on Money. Visit
>http://www.garynorth.com. He is also the author of a free 20-volume
>series, An Economic Commentary on the Bible.
>
>  Copyright © 2009 Gary North
>
>
>
>
>
>
>

----- Original Message -----

From: Ercouncil@...

To: gang8@yahoogroups.com

Sent: Sunday, November 22, 2009 10:19 PM

Subject: Re: [gang8] looking for a list of state-owned central banks

 

.

Hi Gang:

 

Perhaps the classic central bank that is not state owned is Hongkong and Shanghai Banking Corporation in Hong Kong. I should know. I was its Director of Public Affairs.

We issued the main currency, although Standard Chartered and Bank of China were allowed to play bit parts as well. I had the interesting job of launching a new issue of the currency in 1985, for fascinating reasons, see below. We ran the HK Government's bank accounts. We ran the Hong Kong dollar in world markets - not difficult. It was simply managed to stay in direct link with the US dollar, the US being our greatest single trading partner. The seignorage from the domestic currency issue went straight into the Forex management kitty, no mucking about.

Interesting question : when after 1997 will the HK$ be linked to the remnimbi instead?

 

Not in a hurry, I expect. Let's go back to that 1985 new issue of currency. Two notes in the old series were causing us a lot of problems. Some idiot had designed the $50 in a predominantly blue colour, a total no-no. Blue is a hopelessly unlucky colour with the Chinese, the colour of death. So our circulation of $10 bills was getting expensively and quickly wrecked as they were overused in its place.

 

The top note issued in  Hong Kong was the $1,000 bill - a very high denomination. We were printing them by the truckload and they were promptly disappearing out of circulation. The Bank was just a tad concerned : what the hell was happening to them all?

 

So a new issue solved two problems, and my PR excuse (so as not to frighten anyone) was that we wanted a new series proudly showing Norman Foster's brand new HQ building, opened in 1985, instead of its 1935-built predecessor. No-one could possibly object to that, could they?

The new $50 bill was predominantly purple, which was much more acceptable. The new $1,000 bill was predominantly gold, as before, but a markedly different design.

So whoever was holding all those disappearing old design $1,000 bills was expected to come rushing into the Bank to exchange them before they were invalidated. They did, very rapidly. And guess what ?  They were all traders from across the border in Shenzhen, the Chinese communist shadow of Hong Kong.

 

I quickly pieced together the jigsaw puzzle that there were three types of currency in use around the Shenzhen commercial community in those days.

 ::

1. The domestic remnimbi, generally regarded as useless for any serious commercial transactions;

2. Chinese Government 'Foreign Exchange Certificates', only slightly better.

3. Bloody great bundles of HSBC $1,000 bills carried around in the back pockets of all Shenzhen traders. The currency of choice.

 

The Chinese have very long memories, and I wonder how long before the ghosts of pre-1997 commerce eventually disappear from the collective memory?  I note that my old bank is still making huge profits out of China, 'Capitalism with Chinese characteristics' or not. The commercial characteristics, loyalties indeed, of the Chinese have changed very little since the days of Confucius and I doubt they will be in any hurry to change them quite yet. .

 

Chris Meakin

London

.

 

----- Original Message -----

From: Tom Bacco

To: gang8@yahoogroups.com

Sent: Friday, October 09, 2009 2:24 PM

Subject: [gang8] looking for a list of state-owned central banks

 

Hi there. I am a long-time lurker of this list.
I wonder if anyone here can address me to a list of state-owned central
banks.

Ideally, even the date of establishment of such banks would a greatly
appreciated info.

I suspect that there is some correlation between state-ownership of
central banks and macro-economic performance in the medium to long term.
This because central bank ownership determines some central aspect of
fiat money and "public debt".

Many thanks in advance.

http://webabuser.blogspot.com
http://capitalismpulse.blogspot.com

----- Original Message -----

From: Emile de Leeuw

To: gang8@yahoogroups.com

Sent: Tuesday, July 14, 2009 7:51 AM

Subject: Re: [gang8] Gary North

 

For me an interesting read any comments?

Emile

Keynes, Crackpots, and Deflation

by Gary North
by Gary North 
Recently by Gary North: How To Create a New World Reserve Currency

John Maynard Keynes changed his economic views every few years. His 1936 book, The General Theory of Employment, Interest, and Money, was his last book. He spent the war years in the British Treasury. He died in 1946. So, he did not change his mind again.

Keynes' final book was a defense of government spending. This is why the book was hailed as a masterpiece. It backed up what all Western governments were already doing: spending money on welfare projects and running massive deficits.

Keynes believed that there could be permanent depression and price deflation. He said that prices do not always clear markets by balancing supply and demand. The General Theory is a convoluted, deliberately incomprehensible book devoted to disproving the fundamental premise of all economics, namely, that the search for profit motivates buyers and sellers to exchange scarce resources. If the price isn't right, the seller of resources (buyer of money) suffers a loss. He cannot easily find buyers of his goods. In contrast, the buyer of resources (seller of money) has lots of people bidding against each other in order to get his money.

Money is the most marketable commodity, said Ludwig von Mises in 1912 in The Theory of Money and Credit. Because of this, sellers of goods and services will eventually deal at some price. They cannot use all of their output. They need money to survive in a division-of-labor economy. They buy money by selling products. The markets will clear. The depression will end.

Keynes argued that this is not true. He said that there can be an economy in which falling prices do not clear the market. The economy can be in an equilibrium with unemployed resources.

In attempting to prove this point, opposed to the logic of economics after Adam Smith ("supply and demand"), he resorted to arguments proposed by a pair of crackpots. One was an engineer, C. H. Douglas. Douglas founded the Social Credit movement in the 1920's. The other was Silvio Gesell, an obscure merchant, journalist, and farmer who had briefly served as the People's Representative for Finances for the one-week Bavarian Soviet Republic in 1919.

Both men had a theory of exchange that required the state to inject fiat money into the economy in order to balance supply and demand. For them, money was not an outgrowth of voluntary exchange. It was and is a ministry of the state.

C. H. DOUGLAS

$22      $20

Answering Major Douglas's crackpottery is easy. I did it in 1993 in my book, Salvation Through Inflation. He was convinced that markets needed fiat money produced by the government in order to clear. He argued that when businesses repay loans after production, this destroys money. Then consumers cannot afford to buy the output. This was a distinction between finance creditand Real Credit. (Note: whenever you see the word Real capitalized, followed by a noun – also capitalized – be on the alert: a crackpot theory is close at hand.)

It did not occur to him that the banks immediately lend out the paid off loans. That is how they stay in business.

This error is found in most underconsumption theories. There is always a money bleed-off factor. Old money goes there to die, like the elephant burial grounds. The consumers cannot afford to buy.

Every variation of this theory is nuts, with one exception: when bank depositors withdraw currency and do not spend it, thereby not allowing sellers to deposit the spent currency in their banks. When there is a run on a bank in a fractional reserve system, there is money heaven. The inverted pyramid of fiat money shrinks, just as it expanded before. But this has nothing to do with paying off loans.

Douglas offered another theory – conceptually different – which he imagined was irrefutable. He called it the A + B theorem. I devoted an appendix to the A + B theorem in my book. He argued that there is a break in the flow of payments. A factory pays Group A wages and dividends. It pays Group B for raw materials, to cover bank fees, and other "external" expenses. His theorem assumed that payments to Group B do not constitute purchasing power for the output of the factory. The money ceases to provide consumer demand. So, the state must intervene and create money. This is another variation of his broken flow of funds argument.

Whenever you see any variation of the broken flow of funds argument, you are in the presence of crackpottery. It does not matter how many equations or graphs the author provides. He is an economic crackpot.

The supreme error in Social Credit is the error in all scenarios of price deflation, other than one that relies on the extinguishing of money due to a reversal of fractional reserves. They all fail to follow the money. They speak of saving as if it were a system for hiding paper currency under a mattress. They refuse to answer this crucial question: What does the bank do with the money that a consumer deposits instead of spending? Put another way: What analytical or conceptual difference does it make whether a saver deposits a dollar his bank, which the bank will lend, or whether he spends it, enabling the seller to deposit the dollar in his bank, which his bank will lend?

Keynes wrote this about Major Douglas.

Since the war there has been a spate of heretical theories of under-consumption, of which those of Major Douglas are the most famous. The strength of Major Douglas's advocacy has, of course, largely depended on orthodoxy having no valid reply to much of his destructive criticism.

	$30      $25

When he wrote of "orthodoxy," he meant classical economics: price as the way to clear a market. Anyone with even a smattering of classical economics can refute the utterly nonsensical theories of C. H. Douglas. Nobody bothered. My book, published in 1993, was the first book-length refutation, as far as I can tell. The only reason why I wrote it was to answer a Social Credit promoter who said that I was intellectually incapable of refuting him or Douglas. It took me maybe three weeks to write that book in my spare time. Maybe it took a month.

Keynes continued. He grew incoherent, as you will see.

On the other hand, the detail of his diagnosis, in particular the so-called A + B theorem, includes much mere mystification. If Major Douglas had limited his B-items to the financial provisions made by entrepreneurs to which no current expenditure on replacements and renewals corresponds, he would be nearer the truth. But even in that case it is necessary to allow for the possibility of these provisions being offset by new investment in other directions as well as by increased expenditure on consumption. Major Douglas is entitled to claim, as against some of his orthodox adversaries, that he at least has not been wholly oblivious of the outstanding problem of our economic system. (General Theory, pp. 370–71)

Keynes was incoherent. This was deliberate. Why do I say Keynes was deliberately incoherent? Because when he chose to write clearly, he was a master of prose. Read The Economic Consequences of the Peace (1919) orEssays in Biography. When he could not sustain an argument, he adopted the strategy of incoherence. Most of The General Theory is incoherent.

There is not one argument in Douglas' writings – and I have read all of his books – that is an accurate description of how the market works, banking works, or entrepreneurs work. To the degree that Keynes accepted any idea in Social Credit, he suffered from the same intellectually crippling handicap.

SILVIO GESELL

Keynes devoted a long section of Chapter 23 to Gesell. This might seem strange, except for the fact that Keynes' theory depends on the same conceptual error as Gesell's: the inability of the rate of interest to allocate the supply and demand of capital.

He began by admitting that he had long thought of Gesell as a monetary crank. Keynes' initial instincts were correct.

It is convenient to mention at this point the strange, unduly neglected prophet Silvio Gesell (1862–1930), whose work contains flashes of deep insight and who only just failed to reach down to the essence of the matter. In the post-war years his devotees bombarded me with copies of his works; yet, owing to certain palpable defects in the argument, I entirely failed to discover their merit. As is often the case with imperfectly analysed intuitions, their significance only became apparent after I had reached my own conclusions in my own way. Meanwhile, like other academic economists, I treated his profoundly original strivings as being no better than those of a crank. Since few of the readers of this book are likely to be well acquainted with the significance of Gesell, I will give to him what would be otherwise a disproportionate space (p. 353).

He said that Gesell's main book "as a whole may be described as the establishment of an anti-Marxian socialism, a reaction against laissez-faire built on theoretical foundations totally unlike those of Marx in being based on a repudiation instead of on an acceptance of the classical hypotheses, and on an unfettering of competition instead of its abolition. I believe that the future will learn more from the spirit of Gesell than from that of Marx" (page 355). This is an astounding statement. It is rarely quoted by Keynes' disciples, whose name is legion. His disciples still think Gesell was a crank.

Keynes then praised Gesell's theory at the place where it coincides with his own. I will not bore you with the details. They are found on pages 355–56. Gesell attacked the idea that a free market interest rate allocates capital rationally – in short, the heart of Keynes' economics.

Then he praised Gesell at the point of Gesell's crackpottery: stamped money. This was money that had to be spent by consumers fast. Why? Because the government would reduce to zero value dated pieces of paper money. Holders of money would have to stand in line at the Post Office each month to get their money stamped in order to restore it to face value. They would have to pay a fee for this service. Conclusion? Spend it fast!

This was the proposal of a failed Communist finance minister and his acolyte, John Maynard Keynes, the most important economist of the 20th century. The only rival to Keynes in academia today on the money question is Irving Fisher, and he held the same screwball view, as Keynes pointed out.

The incompleteness of his theory is doubtless the explanation of his work having suffered neglect at the hands of the academic world. Nevertheless he had carried his theory far enough to lead him to a practical recommendation, which may carry with it the essence of what is needed, though it is not feasible in the form in which he proposed it. He argues that the growth of real capital is held back by the money-rate of interest, and that if this brake were removed the growth of real capital would be, in the modern world, so rapid that a zero money-rate of interest would probably be justified, not indeed forthwith, but within a comparatively short period of time. Thus the prime necessity is to reduce the money-rate of interest, and this, he pointed out, can be effected by causing money to incur carrying-costs just like other stocks of barren goods. This led him to the famous prescription of "stamped" money, with which his name is chiefly associated and which has received the blessing of Professor Irving Fisher. According to this proposal currency notes (though it would clearly need to apply as well to some forms at least of bank-money) would only retain their value by being stamped each month, like an insurance card, with stamps purchased at a post office. The cost of the stamps could, of course, be fixed at any appropriate figure (pp. 356–57).

The idea behind stamped money is sound. It is, indeed, possible that means might be found to apply it in practice on a modest scale (p. 357).

Here is the fusion of three great monetary cranks: Keynes, Irving Fisher, and Gesell. All three of them attacked the idea of the gold standard. All three of them believed that the economy needs fiat money to operate efficiently. All three believed that experts should decide what rate of monetary inflation is appropriate.

Then there was the fourth great monetary crank: Milton Friedman, who was Fisher's disciple. He proposed this solution: central bank expansion of the money supply by 3% to 5% per annum. At least it made better sense than stamped money. (To those who gasp in horror at my assertion that Friedman was a monetary crank, I recommend that they read Murray Rothbard's analysis of Friedman's monetary theory. The section on "Money and the Business Cycle" is the relevant section. It is short and to the point.)

I define a monetary crank as someone who proposes a system of causation for money different from causation for other market phenomena. Ludwig von Mises subsumed monetary theory under the same logic that governs all market processes: Theory of Money and Credit. In contrast, a monetary crank tells us that private property, entrepreneurship, and the forces of supply and demand explain causation in the overall economy, but then insists that money is different, that government-created and government-planned money is required to balance supply and demand for all other goods and services. He abandons his theory of economic causation when he gets to money. Fisher and Friedman were monetary cranks.

MONETARY CRANKS PROMOTE FIAT MONEY

None of the four believed that a free market money system would allow prices, including the interest rate, to allocate capital, apart from government creation of money to assure the clearing of markets. They saw money as a government function. They did not trust the free market to provide a market-clearing monetary system under a legal system that prohibits fraud but does not allow government-created money.

None of them accepted the international gold standard. Keynes hated it. It kept government and central banks from inflating. This kept governments from creating policies that would match supply and demand.

I have pointed out in the preceding chapter that, under the system of domestic laissez-faire and an international gold standard such as was orthodox in the latter half of the nineteenth century, there was no means open to a government whereby to mitigate economic distress at home except through the competitive struggle for markets. For all measures helpful to a state of chronic or intermittent under-employment were ruled out, except measures to improve the balance of trade on income account (p. 382).

What was Keynes after? A fascist state: the fusion of private ownership and socialism.

It is not the ownership of the instruments of production which it is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary. Moreover, the necessary measures of socialisation can be introduced gradually and without a break in the general traditions of society (p. 378).

This is why, in his preface to the German edition (1936), he wrote that "the theory of aggregated production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire."

Keynes refused to accept the free market explanation of the Great Depression, that it had been created by central banks that had inflated, then ceased to inflate: the boom-bust cycle based on fractional reserve banking. He rejected the idea that governments had created price floors to protect special interests, and therefore that did not allow the clearing of markets. He blamed the free market for not balancing supply and demand through price competition. He rejected Mises, Hayek, and Robbins (p. 192), never bothering to mention Robbins' The Great Depression (1934), which is as clear as The General Theory is muddled. It was published by his own publisher, Macmillan. He completely ignored Chester Phillips' book, Bank Credit (1931), published by the American branch of Macmillan.

To defend his theory, he relied on two deflationists whose theory rested on the inability of the free market to create money as part of the market-clearing process. He argued that deflation was inescapable without government intervention: the managed economy.

CONCLUSION

Keynesians are deflationists, meaning "the free market will produce permanent depression and deflation apart from government spending and central bank inflation." They believe that, without government spending, huge deficits, and central bank inflation, the economy will go into a deflationary spiral and not recover. They invoke the paradox of thrift and the liquidity trap as reasons. Both rely on the same idea: "money saved in a bank is not simultaneously money lent by the bank to increase production or consumption." It is a fallacious idea. It is "currency under the mattress" economics. It is "break in the flow of funds" economics. It is crackpottery.

These Keynesian arguments rely ultimately on the monetary theories of C. H. Douglas and Silvio Gesell. These two crackpots provided the conceptual framework for Keynesian economics. Keynes' disciples, deservedly embarrassed by this inconvenient fact, have done their best to conceal it for 70 years.

Whenever you hear about the need for a government stimulus-spending bill, think "crackpot economics." Whenever you hear that deficits don't matter, think "crackpot economics." Whenever you hear about the need for quantitative easing, think "crackpot economics."

If you want to be inoculated against Keynes and the crackpots, read Henry Hazlitt's line-by-line refutation of The General Theory: The Failure of the 'New Economics' (1959). Then read Murray Rothbard's What Has Government Done to Our Money? (1964).

July 14, 2009

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2009 Gary North

 

This is from a Democratic representative calling  for Gaithner's
resignation. It sums up what's wrong with the Obama administration. (Note
the last sentenc.)

Damian Paletta, ³Q&A: Oregon Democrat DeFazio Calls for Geithner¹s
Resignation,² Wall Street Journal, NOVEMBER 19, 2009, 3:34 PM ET
            Is this going to pose problems for Democrats going into the
midterm elections?
Rep. DeFazio: ³There was a very interesting slide shown to the caucus on
Monday night, and I don¹t know who the guy was, some economist. He had
polling data. And he said the American peopleŒs opinion of what we¹ve done
so far for economic recovery, 90% think its been way too much Wall Street
and that¹s pretty overwhelming, and only 10% felt it was oriented toward
helping real folks with real jobs in the real economy. That is a very
troubling number, especially for a Democratic administration and a
Democratic Congress. I just think that pretty drastic steps are necessary to
change direction of the policy. We¹ve been fighting with the President¹s
economic team for monthsŠThey don¹t believe in infrastructure. They don¹t
seem to believe in investment. They want a borrowed money, consumer driven
recoveryŠthat ain¹t happening.²

Michael




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

The gang8 list is devoted to Creditary Economics.
To unsubscribe, email: gang8-unsubscribe@yahoogroups.com

Yahoo! Groups Links

<*> To visit your group on the web, go to:
    http://groups.yahoo.com/group/gang8/

<*> Your email settings:
    Individual Email | Traditional

<*> To change settings online go to:
    http://groups.yahoo.com/group/gang8/join
    (Yahoo! ID required)

<*> To change settings via email:
    gang8-digest@yahoogroups.com 
    gang8-fullfeatured@yahoogroups.com

<*> To unsubscribe from this group, send an email to:
    gang8-unsubscribe@yahoogroups.com

<*> Your use of Yahoo! Groups is subject to:
    http://docs.yahoo.com/info/terms/

Geoffrey,

Of course you may. In fact, we count on it!

1. credit into asset price markets ultimately also causes cpi
inflation. Agred, we disucssed this before. But the 'ultimately' may
be in the very long term - witness the long asset price boom with low
inlation - and so for the short run this principle is not helpful in
forming expectations.


2. Importing hid the true inlationary pressure in the domestic
economy. The positive trade balance is thus adding inflationary
pressure.

3. Low interest rate send credit abroad, leading to lower inflationary
pressures - Tooke's Law, one of Geoffrey's favourites.

4. "The British government has created liquidity, but not the sort
which finances consumer expenditure." ... " But the institutions have
also bought enough equities to cause one of the quickest rises in
prices since 1975." Will not this asset price inflation translate into
cpi inflation? But when?

So what is the bottom line? Or is it impossible to give one? And what
about the ' credit destruction' argument?

Dirk






On Fri, 20 Nov 2009 10:05:54 -0000
   "Geoffrey Gardiner" <geoffrey.gardiner@...> wrote:
> 091120 Gardiner
>
> May I comment?
>
> When credit is created to purchase an existing asset (perhaps
>assisting asset price inflation) the seller of the asset has three
>choices. I. is to retain the cash on deposit, thus making the seller
>the counterparty to the loan. 2. Buy another asset ,which means the
>seller of that asset has three choices. 3. Spend on consumption. That
>will cause consumer price inflation if there are supply constraints.
>
> Thus lending for asset purchase can lead to general inflation (as
>well as asset price inflation) if there are supply constraints.
>
> The British c.p.i. figures were an average of import prices and home
>production prices. The former were deflating and the latter
>inflating. For instance between 2004 and early 2009 building costs
>went up 65 percent according to the NHBC. The government ignored this
>effect. It has now gone into reverse. On the largest house building
>development in Europe building almost ceased, and I was told the
>workers' pay rate halved in a month
>
> The British government has created liquidity, but not the sort which
>finances consumer expenditure. Over-remedying a foolish omission, it
>has caused the banks to have huge balances at the Bank of England,
>£88bn in the case of Barclays and £60bn in the case of Lloyds at the
>half year. But banks do not lend money created by the Bank of
>England, they lend money created by themselves. Indeed if in the
>aggregate the banks made new lendings equal to all their cash at the
>Bank of England, those balances at the Bank would not alter because
>of the additional lending at all. The contraint on bank lending is
>currently their core tier one adequacy ratio, as it always has been,
>and the lack of good borrowers. The government's misunderstanding of
>the bookkeeping arises because the government does not realise that
>'money' is not homogeneous. It is not a 'thing' but a relationship,
>of debtor and creditor, and who is the creditor determines the
>category of money.
>
> QE has caused the investment institutions to replace holdings of
>gilts with cash. Being investment institutions they are not going to
>rush out and buy consumer items with the cash. It will be held as a
>investment while waiting for an expected fall in gilts as the
>government borrowing rises. (This expectation may not be fulfilled.)
>But the institutions have also bought enough equities to cause one of
>the quickest rises in prices since 1975. If the institutions are
>right, then the Bank of England will face enormous losses.
>
> In Britain the big problem has been the excess of saving over real
>investment, £100bn in 2007, to which was added another £50bn from
>foreign sources. Inevitably the only way to prevent a recession was
>to cause a debt-fuelled boom. When the  equally inevitable crash
>came, the governments of the world could only think of one cure, and
>that was to revive the debt-fuelled boom. But to make matters worse,
>it insisted on the banks increasing their core tier one ratios, a
>pro-cyclical move. Better to have let the banks operate with no
>reserve or even be technically insolvent. That may sound crazy, but
>it has been done before. It is thought possible that Britain fought
>the Great War with every London bank insolvent. In the early 1970s
>many institutions were allowed to value their gilt holdings at cost,
>even though the price had collapsed. We need a return to banking
>secrecy. Insolvent banks can continue happily for ever so long as
>there is not a run and the level of insolvency is marginal. (Did not
>Soviet banks function for decades with no assets at all?)
>
> Another factor affecting the British economy has been the effect of
>now having lower interest rates than rival countries. It seems that
>Henry Thornton (1803?) and Thomas Tooke (1832?) were right. High
>interest rates draw in lending from abroad and prices may rise. Low
>interest rates do the opposite. I think it is impossible to state
>accurately how much has gone away, but £500bn is a popular figure. An
>accurate figure is impossible because of the effect of the odd
>definition for a 'UK Bank' used by the statisticians.
>
> Geoffrey Gardiner
>
>
>  ----- Original Message -----
>  From: Dirk Bezemer
>  To: Warren Mosler
>  Cc: fmarengo@... ; wynnegodley@... ; dbp@...
>; zezza@... ; SHAIKH@... ; mosler@... ;
>wrayr@... ; hannsgen@... ; gang8@yahoogroups.com
>  Sent: Thursday, November 19, 2009 11:29 AM
>  Subject: [gang8] Re:
>
>
>
>  Warren, and others
>
>  Here is a question - a test case of how useful creditary (or
>  soft-currency) economics in real time actually is...
>
>  The question: are we going to have cpi inflation or deflation over
>the
>  coming few years?
>
>  The simple dynamics as I see them:
>
>  a. During a debt deflation such as we have (had?) now you normally
>have
>  (near-)deflation since output is shrinking faster than liquidity
>chasing
>  it. So far so normal.
>  b. Two trends complicate this simple rule:
>
>  1. Asset markets sever the link between the money/ goods ratio as
>the
>  basis for inflation. During the boom (say, since 2000 especially)
>  unprecedented amounts of liquidity were created but cpi inflation
>  remained stable and low (believing the official data for the
>moment)
>  because so much credit went into asset markets. Because those
>markets
>  were booming you could rely on their attracting credit and you
>could
>  rely on continued low inflation. THe 'Great Moderation' (due to
>  immoderate credit creation!).
>  2. Liquidity now contracts as debt is destroyed in the debt
>deflation.
>  But government also created vast amounts of liquidity during the
>  rescues. The recent asset rally cum shrinking real economy suggest
>this
>  went into asset markets. This confirms that asset markets are still
>  unhinged - moving indepenently from the real economy, largely. It
>is
>  still safer to put your money in the asset market than to make real
>  sector investments.
>
>  But how long will this last? Two uncertainties cloud the answer to
>this
>  question.
>
>  The balance of gvt borrowing creating liquidity and debt deflation
>  destroying it is uncertain. And whatever that balance, the second
>  uncertainty is whether it will flow into asset markets or into
>goods and
>  services markets, pushing up inflation - potentially fats and
>furious,
>  given the amounts of liquidity with uncertain destination. One ting
>is
>  certain: the RISK of inflation purely for reasons of liquidity
>flows
>  chnaging course is large.
>
>  Beyond that there are also other and longer term reasons for
>permanently
>  higher inflation pressures in most OECD economies - foremost,
>sharply
>  reduced ability to rely on cheap Asian imports to keep cpi-relevant
>  prices low.
>
>  Any thoughts?
>
>  Dirk
>
>
>

This is from a Democratic representative calling  for Gaithner's
resignation. It sums up what's wrong with the Obama administration. (Note
the last sentenc.)

Damian Paletta, ³Q&A: Oregon Democrat DeFazio Calls for Geithner¹s
Resignation,² Wall Street Journal, NOVEMBER 19, 2009, 3:34 PM ET
             Is this going to pose problems for Democrats going into the
midterm elections?
Rep. DeFazio: ³There was a very interesting slide shown to the caucus on
Monday night, and I don¹t know who the guy was, some economist. He had
polling data. And he said the American peopleŒs opinion of what we¹ve done
so far for economic recovery, 90% think its been way too much Wall Street
and that¹s pretty overwhelming, and only 10% felt it was oriented toward
helping real folks with real jobs in the real economy. That is a very
troubling number, especially for a Democratic administration and a
Democratic Congress. I just think that pretty drastic steps are necessary to
change direction of the policy. We¹ve been fighting with the President¹s
economic team for monthsŠThey don¹t believe in infrastructure. They don¹t
seem to believe in investment. They want a borrowed money, consumer driven
recoveryŠthat ain¹t happening.²

Michael

Hi there. I am a long-time lurker of this list.
I wonder if anyone here can address me to a list of state-owned central
banks.

Ideally, even the date of establishment of such banks would a greatly
appreciated info.

I suspect that there is some correlation between state-ownership of
central banks and macro-economic performance in the medium to long term.
This because central bank ownership determines some central aspect of
fiat money and "public debt".

Many thanks in advance.

http://webabuser.blogspot.com
http://capitalismpulse.blogspot.com

There are now 4 "external" emails -

According to gang8 list rules, they should be deleted
But since I have a feeble character, I will allow them - for now .....
;-)

I ask the "lurkers" to please use the gang8Plus list
http://finance.groups.yahoo.com/group/gang8plus/

or use write the gang8 members personally.

Arno

----- Original Message -----

From: Dirk Bezemer

To: Warren Mosler

Cc: fmarengo@... ; wynnegodley@... ; dbp@... ; zezza@... ; SHAIKH@... ; mosler@... ; wrayr@... ; hannsgen@... ; gang8@yahoogroups.com

Sent: Thursday, November 19, 2009 11:29 AM

Subject: [gang8] Re:

 

Warren, and others

Here is a question - a test case of how useful creditary (or
soft-currency) economics in real time actually is...

The question: are we going to have cpi inflation or deflation over the
coming few years?

The simple dynamics as I see them:

a. During a debt deflation such as we have (had?) now you normally have
(near-)deflation since output is shrinking faster than liquidity chasing
it. So far so normal.
b. Two trends complicate this simple rule:

1. Asset markets sever the link between the money/ goods ratio as the
basis for inflation. During the boom (say, since 2000 especially)
unprecedented amounts of liquidity were created but cpi inflation
remained stable and low (believing the official data for the moment)
because so much credit went into asset markets. Because those markets
were booming you could rely on their attracting credit and you could
rely on continued low inflation. THe 'Great Moderation' (due to
immoderate credit creation!).
2. Liquidity now contracts as debt is destroyed in the debt deflation.
But government also created vast amounts of liquidity during the
rescues. The recent asset rally cum shrinking real economy suggest this
went into asset markets. This confirms that asset markets are still
unhinged - moving indepenently from the real economy, largely. It is
still safer to put your money in the asset market than to make real
sector investments.

But how long will this last? Two uncertainties cloud the answer to this
question.

The balance of gvt borrowing creating liquidity and debt deflation
destroying it is uncertain. And whatever that balance, the second
uncertainty is whether it will flow into asset markets or into goods and
services markets, pushing up inflation - potentially fats and furious,
given the amounts of liquidity with uncertain destination. One ting is
certain: the RISK of inflation purely for reasons of liquidity flows
chnaging course is large.

Beyond that there are also other and longer term reasons for permanently
higher inflation pressures in most OECD economies - foremost, sharply
reduced ability to rely on cheap Asian imports to keep cpi-relevant
prices low.

Any thoughts?

Dirk

 
 
   

OK, so what is the bottom line? asset price deflation plus cpi inflation
due to more expensive imports?

Dirk

Michael Hudson wrote:
> I was just asked this on a Chinese interview. Here’s what I wrote:
> 1. What lies ahead: inflation or debt-induced deflation?
>
> MH:            Domestically, the outlook is for debt deflation of commodity
> prices and wages. Shrinking domestic markets will undercut demand and lead
> to falling property prices as well. But dollar depreciation will raise the
> price of imports, and it looks like labor may be taxed at whatever rate is
> needed to keep creditors from having to absorb losses on their bad loans.
>
>             The government’s solution to debt defaults has not been to roll
> back bad debts to reflect the economy’s ability to pay. It is giving public
> money to the banks to make them whole, leaving debtors to fend for
> themselves. Banks have avoided renegotiating bad debts, preferring to keep
> adding penalties and lobbying that they need even higher penalty fees,
> higher interest rates from their customers and a rollback of anti-usury and
> consumer fraud laws that still exist.
>
>             A debt-ridden economy is bound to shrink. Extraction of debt
> service by the banks eats into the circular flow of earning and spending
> (“Say’s Law” that production creates its own demand as employers pay wages
> to workers who buy what they are hired to produce). For most people, paying
> debts absorbs consumer income, making it unavailable for spending on goods
> and services. This leads to shrinking markets, slower investment and rising
> unemployment – all of which accelerate the downturn in property prices.
> Today (2009) about a quarter of U.S. real estate has fallen into negative
> equity. Property owners owe more on their mortgages than the market price of
> their property. So they walk away, leaving the banks to foreclose on
> properties sinking in price. This depresses the market further in a downward
> spiral. So asset-price inflation gives way to debt deflation and collapsing
> asset prices.
>
> Michael
>
> On 11/19/09 6:29 AM, "Dirk Bezemer" <d.j.bezemer@... <mailto:d.j.bezemer%40rug.nl> > wrote:
>
>   
>>  
>>  
>>  
>>    
>>
>> Warren, and others
>>
>> Here is a question -  a test case of how useful creditary (or
>> soft-currency) economics in real time actually is...
>>
>> The question: are we going to have cpi  inflation or deflation over the
>> coming few years?
>>
>> The simple dynamics as I see them:
>>
>> a. During a debt deflation such as we have (had?) now you normally have
>> (near-)deflation since output is shrinking faster than liquidity chasing
>> it. So far so normal.
>> b. Two trends complicate this simple rule:
>>
>> 1. Asset markets sever the link between the money/ goods ratio as the
>> basis for inflation. During the boom (say, since 2000 especially)
>> unprecedented amounts of liquidity were created but cpi inflation
>> remained stable and low (believing the official data for the moment)
>> because so much credit went into asset markets. Because those markets
>> were booming you could rely on their attracting credit and you could
>> rely on continued low inflation. THe 'Great Moderation' (due to
>> immoderate credit creation!).
>> 2. Liquidity now contracts as debt is destroyed in the debt deflation.
>> But government also created vast amounts of liquidity during the
>> rescues. The recent asset rally cum shrinking real economy suggest this
>> went into asset markets. This confirms that asset  markets are still
>> unhinged - moving indepenently from the real economy, largely. It is
>> still safer to put your money in the asset market than to make real
>> sector investments.
>>
>> But how long will this last? Two uncertainties cloud the answer to this
>> question.
>>
>> The balance of gvt borrowing creating liquidity and debt deflation
>> destroying it is uncertain. And whatever that balance, the second
>> uncertainty is whether it will flow into asset markets or into goods and
>> services markets, pushing up inflation - potentially fats and furious,
>> given the amounts of liquidity with uncertain destination. One ting is
>> certain: the RISK of inflation purely for reasons of liquidity flows
>> chnaging course is large.
>>
>> Beyond that there are also other and longer term reasons for permanently
>> higher inflation pressures in most OECD economies - foremost, sharply
>> reduced ability to rely on cheap Asian imports to keep cpi-relevant
>> prices low.
>>
>> Any thoughts?
>>
>> Dirk
>>  
>>    
>>
>>
>>     
>
>
>
>   

 
   

OK, so what is the bottom line? asset price deflation plus cpi inflation
due to more expensive imports?

Dirk

  Michael Hudson wrote:
> I was just asked this on a Chinese interview. Here¹s what I wrote:
> 1. What lies ahead: inflation or debt-induced deflation?
>
> MH:            Domestically, the outlook is for debt deflation of commodity
> prices and wages. Shrinking domestic markets will undercut demand and lead
> to falling property prices as well. But dollar depreciation will raise the
> price of imports, and it looks like labor may be taxed at whatever rate is
> needed to keep creditors from having to absorb losses on their bad loans.
>
>             The government¹s solution to debt defaults has not been to roll
> back bad debts to reflect the economy¹s ability to pay. It is giving public
> money to the banks to make them whole, leaving debtors to fend for
> themselves. Banks have avoided renegotiating bad debts, preferring to keep
> adding penalties and lobbying that they need even higher penalty fees,
> higher interest rates from their customers and a rollback of anti-usury and
> consumer fraud laws that still exist.
>
>             A debt-ridden economy is bound to shrink. Extraction of debt
> service by the banks eats into the circular flow of earning and spending
> (³Say¹s Law² that production creates its own demand as employers pay wages
> to workers who buy what they are hired to produce). For most people, paying
> debts absorbs consumer income, making it unavailable for spending on goods
> and services. This leads to shrinking markets, slower investment and rising
> unemployment ­ all of which accelerate the downturn in property prices.
> Today (2009) about a quarter of U.S. real estate has fallen into negative
> equity. Property owners owe more on their mortgages than the market price of
> their property. So they walk away, leaving the banks to foreclose on
> properties sinking in price. This depresses the market further in a downward
> spiral. So asset-price inflation gives way to debt deflation and collapsing
> asset prices.
>
> Michael
>
> On 11/19/09 6:29 AM, "Dirk Bezemer" <d.j.bezemer@...> wrote:
>
>
>>
>>
>>
>>
>>
>> Warren, and others
>>
>> Here is a question -  a test case of how useful creditary (or
>> soft-currency) economics in real time actually is...
>>
>> The question: are we going to have cpi  inflation or deflation over the
>> coming few years?
>>
>> The simple dynamics as I see them:
>>
>> a. During a debt deflation such as we have (had?) now you normally have
>> (near-)deflation since output is shrinking faster than liquidity chasing
>> it. So far so normal.
>> b. Two trends complicate this simple rule:
>>
>> 1. Asset markets sever the link between the money/ goods ratio as the
>> basis for inflation. During the boom (say, since 2000 especially)
>> unprecedented amounts of liquidity were created but cpi inflation
>> remained stable and low (believing the official data for the moment)
>> because so much credit went into asset markets. Because those markets
>> were booming you could rely on their attracting credit and you could
>> rely on continued low inflation. THe 'Great Moderation' (due to
>> immoderate credit creation!).
>> 2. Liquidity now contracts as debt is destroyed in the debt deflation.
>> But government also created vast amounts of liquidity during the
>> rescues. The recent asset rally cum shrinking real economy suggest this
>> went into asset markets. This confirms that asset  markets are still
>> unhinged - moving indepenently from the real economy, largely. It is
>> still safer to put your money in the asset market than to make real
>> sector investments.
>>
>> But how long will this last? Two uncertainties cloud the answer to this
>> question.
>>
>> The balance of gvt borrowing creating liquidity and debt deflation
>> destroying it is uncertain. And whatever that balance, the second
>> uncertainty is whether it will flow into asset markets or into goods and
>> services markets, pushing up inflation - potentially fats and furious,
>> given the amounts of liquidity with uncertain destination. One ting is
>> certain: the RISK of inflation purely for reasons of liquidity flows
>> chnaging course is large.
>>
>> Beyond that there are also other and longer term reasons for permanently
>> higher inflation pressures in most OECD economies - foremost, sharply
>> reduced ability to rely on cheap Asian imports to keep cpi-relevant
>> prices low.
>>
>> Any thoughts?
>>
>> Dirk
>>
>>
>>
>>
>>
>
>
>
>

 
 
   

Warren, and others

Here is a question -  a test case of how useful creditary (or
soft-currency) economics in real time actually is...

The question: are we going to have cpi  inflation or deflation over the
coming few years?

The simple dynamics as I see them:

a. During a debt deflation such as we have (had?) now you normally have
(near-)deflation since output is shrinking faster than liquidity chasing
it. So far so normal.
b. Two trends complicate this simple rule:

1. Asset markets sever the link between the money/ goods ratio as the
basis for inflation. During the boom (say, since 2000 especially)
unprecedented amounts of liquidity were created but cpi inflation
remained stable and low (believing the official data for the moment)
because so much credit went into asset markets. Because those markets
were booming you could rely on their attracting credit and you could
rely on continued low inflation. THe 'Great Moderation' (due to
immoderate credit creation!).
2. Liquidity now contracts as debt is destroyed in the debt deflation.
But government also created vast amounts of liquidity during the
rescues. The recent asset rally cum shrinking real economy suggest this
went into asset markets. This confirms that asset  markets are still
unhinged - moving indepenently from the real economy, largely. It is
still safer to put your money in the asset market than to make real
sector investments.

But how long will this last? Two uncertainties cloud the answer to this
question.

The balance of gvt borrowing creating liquidity and debt deflation
destroying it is uncertain. And whatever that balance, the second
uncertainty is whether it will flow into asset markets or into goods and
services markets, pushing up inflation - potentially fats and furious,
given the amounts of liquidity with uncertain destination. One ting is
certain: the RISK of inflation purely for reasons of liquidity flows
chnaging course is large.

Beyond that there are also other and longer term reasons for permanently
higher inflation pressures in most OECD economies - foremost, sharply
reduced ability to rely on cheap Asian imports to keep cpi-relevant
prices low.

Any thoughts?

Dirk