Austrian critique of "Credit Money"

[FreedomPhilosophy]

anyone please?

 

https://www.youtube.com/watch?v=HIHCAi1MBBA

[Magnus]

A few problems --

 

First, there's the deception of using self-serving definitions.  What this video characterizes as "stability" period is what Austrians characterize as a "malinvestment" period.  No one disputes the existence of booms.  The point of economics is to understand the mechanisms in booms, and in busts, and trace the causative factors. 

 

Thus, second, the video ignores the fact that correlation is not causation.  The periods of contracting economies are also the times when people return to hard money, because of its safety.  In most boom times, credit gets over-extended, largely because it is artificially under-priced, and is thus over-used.  There is no evidence (or logical argumentation) presented in the video that the use of hard money causes economic decline, as opposed to being a safety measure that people rely on in reaction to the decline. 

 

Third, credit exists in a commodity money system.  That whole section on using someone's promise to pay as credit elsewhere is a straw man.  The use of a commodity money system merely refers to the fact that it relies on some currency as the ultimate backing of notes and other forms of credit, not to the elimination of credit entirely. 

[andkon]

The idea that from 1450 has been decay is nonsense. People in the West where capitalism emerged stopped starving. This is History 101, even socialists have to grudingly admit it: they may say that they can manage the capital better. The idea that Dark and pre-Renaissance Ages had "stability" is true with an asterisk: people were stably poor and starving.

 

Credit money has no opportunity cost... all they did was split the opportunity cost and risk cost between two parties and pretend they did something. Look, money confuses people. Just picture barter without money... or that money stands for real stuff. Instead of gold or credit or whatever, imagine goats. So you get lent ten goats, with an interest of one extra goat (they reproduce --  you get to keep any extra goats on top of that) due in three years. The goat-bank then has ten goat notes and expects an extra goat note to be made. But whatever money or credit is lent out: there MUST BE something of value to cover them. If you have ten goat notes but five goats die, ten goat notes are redeemable for only five goats now (2 notes for 1 goat, instead of 1 note for 1 goat). Simply making up credit or notes without anything backing them means inflation. There is no free lunch!

[Coogeebay24]

This video makes a mistake in the statement that the majority have to "rent their money from a wealthy minority"...in reality, all non-bank actors in the economy "rent" the banking sector's ability to create money (from nothing) from the banking sector.

 

When an individual receives a loan from a bank, the individual is not borrowing any money from the depositors (under the theory of fractional reserve banking, if the reserve ratio is 10%, 10% of the money borrowed would be borrowed from the depositor, with the other 90% being created out of thin air), however there are a number of ways around this requirement.

 

Banks can borrow or lend excess reserves to one another on the inter bank market...or, they can call up Aunt Janet at the Fed, and borrow the necessary reserves from the Fed. 

 

However, through the magic of double entry bookkeeping, often deposits and borrowing reserves are not necessary. 

 

Example:

 

Bob goes into his local bank to borrow $1,000. The bank grants him the loan, crediting his account with $1,000.

 

From the bank's perspective:

Assets: (Loan) +$1000

Liabilities: (Deposits) +$1000

 

Thus the loan can be granted purely through the creation of new money without actually lending any reserves. 

 

The video is correct in stating that the majority are forced to "rent" their money from a wealthy minority, it just so happens that the wealthy minority it is renting from is the banking sector, which has been granted the ability to create money by the state.

 

Additionally, the "opportunity cost" the video points out on govt debt is nothing more than a handout to the banking sector from the taxpayers. All money that currently exists is credit money, any remnant of commodity money was ditched in 1971 with the downfall of the Breton Woods agreement. 

[QueechoFeecho]

The video makes the mistake of equating cost with price.

[AustinJames]

Even accepting all the assertions are valid (though I don't), the conclusion is flawed. "Help spread the word... so that governments can correct this flaw." Who has been in charge of regulating money and lending for the last 200 years?  Does the creator of this video really believe the problem is that governments are simply naive and unaware of these practices? That if we let our senators know, they'll spring into action against their best interest?  Of course, we cannot solve a problem created by government with more government.  These predatory practices would not be possible without the coercive mechanism of state power.  They will not be eradicated before the state is abolished.  What this video is implying is, "the real problem with our economy is that stupid people become involved in voluntary interactions with predatory individuals."  It's insulting.  Also, to say violence is caused by economic disparity is completely unfounded.  I don't make much money, but that fact has not driven me to a life of crime and violence.

[Sal9000]

Bob goes into his local bank to borrow $1,000. The bank grants him the loan, crediting his account with $1,000.

 

From the bank's perspective:

Assets: (Loan) +$1000

Liabilities: (Deposits) +$1000

 

There are interesting ramifications. All financial transactions are zero sum. When you have a system where money is created via credit, every liabiliy is an asset for another agent. Lets say you have 10$ in your pocket. This money was created via credit, thus somebody else must have a liability of 10$. Wealth cannot be created out of nothing, there has to be liability that cancel it out. In the end, all transactions sum up to 0.

[Coogeebay24]

Exactly! That is one of the reasons that the national debt will never be paid off...doing so would bring the money supply significantly down and cause a severe depression. Not that it should not be paid off, but to do so would require either a re imposition of the gold standard or a transition to an alternative currency.

 

As it stands now, all fiat (credit) money is equal to the total liabilities of the global banking sector. As pointed out above, because of double entry book keeping, each liability must be matched with an asset or equity.

 

Ergo:

 

Money Supply [banking Sector Liablitiles] (think of this as M2 or M3)= Banking Sector Assets [Loans] + Banking Sector Equity [Excess Capital Reserved against Loan Losses]

 

If this subject is of interest, there is an Australian economics professor named Steve Keen that has some brilliant work on the subject. You can look him up on YouTube, or he runs a blog called DebtDeflation. 

[J. D. Stembal]

Exactly! That is one of the reasons that the national debt will never be paid off...doing so would bring the money supply significantly down and cause a severe depression. Not that it should not be paid off, but to do so would require either a re imposition of the gold standard or a transition to an alternative currency.

 

As it stands now, all fiat (credit) money is equal to the total liabilities of the global banking sector. As pointed out above, because of double entry book keeping, each liability must be matched with an asset or equity.

 

Ergo:

 

Money Supply [banking Sector Liablitiles] (think of this as M2 or M3)= Banking Sector Assets [Loans] + Banking Sector Equity [Excess Capital Reserved against Loan Losses]

 

If this subject is of interest, there is an Australian economics professor named Steve Keen that has some brilliant work on the subject. You can look him up on YouTube, or he runs a blog called DebtDeflation. 

 

This is why the United States will have to default on its debt, and the dollar will ultimately be revalued. When the Fed starts jacking up rates, one of the worst economic downturns will start to snowball out of control. They will then change course to hyper-inflate the currency, and we will all be holding Zimbabwe-like million or billion dollar bills, trying to by food with it.