12/20/11

Ron Paul and Economic Theories (and other backwards thinking)

This is a guest post by James at the Winter Patriot Community. The original can be read here. This post grew out of a discussion in the comment thread at our last post, BS Labs.


^^^^^^^


Many moons ago scientists thought the heavens revolved around the earth. They had fashioned theories and equations to verify this. But every now and then a planet would be observed moving backwards. How was this possible?

Explanations were put forward and some involved very complicated maths to 'prove' how this was possible. Of course, only educated/trained and intelligent people could follow these explanations. So the average person of average intelligence and average education had no way of credibly arguing with these 'scientists'.

But a critical foundation that these complex calculations were based on was wrong.

There was one crucial piece of information, one crucial assumption that was backwards. And that was that the heavens, including the planets, revolved around the earth. They did not, of course. Now with this piece of missing information, the average person today can see that all these complex calculations and theories and all the disputations that occurred between the scientists were meaningless nonsense.

So it is with economists and their theories today. And similarly, we don't need to understand the complexities of their false arguments to understand how they are simply wrong. There is a fundamental equation in economics and understanding it is crucial to seeing the nonsense that is peddled as economic management today. It is simple and well known to economists yet seemingly few economists have any idea of the truth and therefore the power that rests in this simple equation. It is the economic equivalent of Einstein's E=MC2.

It is this. P=MV 

P= production i.e. GDP or the total value (denoted in dollars) of the wealth created by people in a country in a given year.

M= the size of the Money Supply (M3) we all have to buy that wealth that was created (GDP). (M3 is the amount of notes and coins [M1] together with the total credit balances in all the bank a/cs in the land [M2] plus some Bills of Exchange and a couple of other things I don't understand!)

V= the velocity of the Money Supply i.e. how fast people spend the money they get. In boom times the money supply (M) will turnover 1.1 times overall in a given year. In depressed times it will turn over 0.9 times. SO for our purposes we can say it turns over on average of 1.0 times which also means we can leave it out of our calculations without affecting the outcome.

So simplifying this down, Production and therefore employment) will rise (or shrink) to the level of Money (M) available to purchase said production.

So increasing Money Supply leads to increasing prosperity until the productive capacity of a nation is totally employed. Then if M is increased further the prices of Production and not the amount of P will increase to match the level of Money. i.e. we now have price inflation.

This is what happened in Weimar Republic in Germany in the 1920's. The private banks printed massive amounts of money (while blaming the government for it ever since) and lent it into the economy and massively inflating the price of any goods on sale. The purpose was to collapse the economy, destroy people's savings and buy up assets with foreign currency at fire sale prices. It worked.

On the other side of the Atlantic a few years later in the 1930's, the bankers reduced M (the Money Supply) to one third of its level of the 1920's and created the Great Depression with its price deflation. It also wrecked the economy and caused massive hardship.

So controlling the level of money (regardless of whether it is gold backed or not) is what determines a sound economy. Too much and you have inflation; too little and you have depression and deflation. Having too much and keeping it out of the productive economy and channelling it into speculation, as at present, will result in both inflation and depression at the same time.

It is a very simple and very understandable mechanism. Hence the mountain of economic jargon and nonsense to hide this simple truth that regulating the amount of money in the economy to make full use of the labour and resources available will result in a stable and prosperous nation. This is the last thing the banks want as it is nowhere near as profitable for them. Besides, what's the point (for them) of being rich if every one else is rich, too?

If the government also creates this money itself and therefore pays no interest to any outside banks, then the nation will have no national debt either. Imagine that; a government that had no debt and could never say it had no money to fund whatever projects there were people and resources available for!

This was the situation in the prosperous American Colonies-  

“When Benjamin Franklin was called before the British Parliament in 1757 and asked to account for the prosperity in the American colonies. He replied, "That is simple. In the colonies we issue our own money. It is called Colonial Scrip. We issue it in proper proportion to the demands of trade and industry to make the products pass easily from the producers to the consumers. In this manner, creating for ourselves our own paper money, we control its purchasing power, and we have no interest to pay to no one." 

It was the struggle for financial sovereignty that precipitated the American Revolution when the (Rothschild) Bank of England forced the colonists to give up their own currency. That war never ended.”

The above quote is from an excellent and wide ranging article by Nikki Alexander from the invaluable Information Clearing House. Reforming the Global Financial System-Flushing the Parasites 

This article has a list of further links to excellent writers on this subject. For further reading on how money is created, see my article of a couple of years ago- Warring World Part 4b Introduction to "The System" (cont) 

What every country needs is for its representative government to be the sole issuer of ALL monies with banks unable to create credit through checking a/cs and credit cards. They would be reduced to lending money from their own reserves just as building societies do now. They would become the financial intermediaries they have claimed to be all along.

Prosperous conditions can be easily achieved by matching the amount of money issued (at low or no interest) with the productive capacity of the population. This ensures full employment with no inflation. It's exceedingly simple. 

The govt can issue money by either spending it into the community (to pay for social security or infrastructure projects at no cost to anyone) or lending it into the community through low interest loans (the interest from which would be income for the government)

The end result from this simple move would be a peaceful and prosperous country with little to no taxation.

A currency is given worth by the people who do the producing. So a country's Money supply is backed by the country's GDP (the total value of a country's Production of goods and services in a given year). That is always the underlying reality whether or not you can exchange a dollar for a speck of gold or not. The point of having gold as the so called backer of the currency is to give control over that same currency to those who own the gold and we are back to square one with the "boom and bust business cycle" and its attendant instability.

In a society with a gold backed currency, the owners of the gold will limit how much money we can have and so also limit the wealth we can create for ourselves and keep us forever dependent on them.

After the Spanish started stealing gold from South America centuries ago, they experienced a booming domestic economy. It was simply because the extra gold was converted into extra money which allowed extra production to be produced and traded.

They could have experienced exactly the same thing by having a properly managed fiat currency. Fiat currencies are not backed by hot air as many would have us believe. They, like ALL currencies, are backed, in fact, by the amount of goods that can be bought with them - the country's GDP which is the productivity of the people. That we have inflation and deflation to adjust the price of goods and services to over time match the amount of the Money Supply is ample proof of the fact that a currency is backed by the nations GDP regardless of what it is said to be backed by. 

That is why the money supply belongs to the people as a whole and it is a theft of grand proportions on the part of bankers to have dispossessed us of it. 

Ron Paul with his 'gold backed currency' is playing directly into the hands of the bankers he says he is against. He should be avoided for that very reason regardless of what anybody thinks of his motivation and whatever else he might say.

If you can exchange your digital or paper currency for gold, it is still not much use to you if you can't exchange the gold for goods for whatever reason. So the gold, too, is given its value by the goods that are exchanged for it. This applies to every medium of exchange. That's is why you have it; to exchange it for goods and therefore it is the goods that give it its value. Goods that are created by productive people and who are willing to accept your gold for it.

Gold is attractive only because currencies are kept unstable by private bankers who have no interest in having a stable money supply. It is worth bearing in mind that these same bankers also control all commodity markets including the gold market and regularly run it up and down to suit their own purposes which always amount to taking wealth out of your pocket and putting it into theirs without providing anything of value in exchange. This is also known as stealing!

Ron Paul is currently popularising the idea of a gold backed currency together with a form of Laissez-faire economics i.e. little to no government planning. His chief intellectual source for all this is the Austrian School of Economics which was formed around economist Frederich Hayek's writings on economics and politics.

Hayek's book, "Road To Serfdom" is a compelling argument against big government. It describes the weakness of human beings in the face of weilding power over others and the corruption this brings to the human mind. No argument there from me, at all.

The flaw in Hayek's thinking, though, is that ejecting the govt and leaving the economy to a laissez- faire system is getting rid of the problem. It doesn't. The problem is the bankers that weild power over the government and not the government itself. The bankers have power over the markets as well. Because they literally own the market places (the NYSE, for instance) and the clearing houses, they can do what they like with the markets through the simple but fraudulent practice of short selling; selling what they do not own into a market and driving the price down. The gold market is far larger than all the gold mined in history.

The bankers are free to control commodity markets and the lending market, otherwise known as the Money Supply, whether under a so called government planned and controlled market or a laissez-faire one. Either way they are free to make the money supply and to vary the size of the money supply at will under whatever political and economic philosophy is in fashion. The effect of periodically shrinking the Money Supply is what causes the otherwise mysterious “Business Cycle” of boom and bust.

It is this mismatch of money supply quantity and the quantity of resources of a community or nation that is THE fundamental problem. Laissez- faire economics does NOTHING to alleviate this primary problem.

Regarding “hard currencies”, having productive resources such as physical labour, intellectual skills, raw materials, machinery and productive land all sitting around idle because the nation does not own enough gold to allow it to print enough money to facilitate the use of all these idle resources while people are without housing and food is just plain nuts! Worse, it is criminal. It is the kind of insanity that is the hallmark of evil.

This is exactly what happened in Australia during the Great Depression. The Bank of England withdrew the gold it had lent to the Australian government so the government had to shrink the money supply to match the amount of remaining gold it had. Massive human cost ensued. The bankers would do it again in a flash, I'm sure.

The Austrian School's explanation of the mysterious 'business cycle' comes closest, in my view, of all the economic 'schools' to the truth of the cause of this mysterious cycle of boom and bust. But it puts the blame for the varying size of the money supply at the feet of interest rates as if bankers' behaviour was completely determined by the interest rate of the day and not their own rapaciousness. The blame lies squarely with the bankers and their lending policy i.e. how much they are willing to lend regardless of what the interest rate is. It should be obvious but it apparently isn't. Amazing for such great intellects. No?!

So Ron Paul and the Austrian School of Economics would leave us to the predations of the bankers without any control over them.

Pitting the Austrians against the Keynesians is a classic Hegelian Dialectic ploy. I liken it to a game of tennis where the 'opponents' are actually co-operating in putting on a show and captivating the spectators attention when, as in this case, we should be looking outside the court. Perhaps at Douglas' Social Credit, for instance. But more on Keynes and Douglas in a moment.

I mentioned the equation P=MV earlier. The meaning and it's working appear simple and straight forward and they are. It is usually taught in first year economics. But what is not taught is that the banks manufacture M, the money, and that they increase and decrease the level of this money at will and so assume near total control of the economy (Production) as a result; increasing it and decreasing it as they please through their lending policies. This is the primary cause of the “business cycle”.

P=MV. If the Money Supply is reduced by calling in overdrafts and reducing lending, so is the Production also reduced and we have a recession/depression. If the banks increase the Money Supply by lending as much as they can and putting to work idle capacity, then the Production increases and we have a boom. There's no mystery to it once this fact is understood. The banks run the economy up and they run it down and profit both ways at our collective expense. All the convoluted theories are nonsense in the face of this fact.

Now that you have the missing piece of information, if you want to read some real nonsense from some highly paid idiots, have a gander at this!

The Keynesian model of government intervention and planning is seen widely as a failure because of the massive govt debt that has been built up. And this was the fatal flaw in his theory i.e. the way it was financed. But if the government deficit budgets were financed by govt owned central banks, then all would have been fine. Financing the mounting govt deficits from private banks played into their hands. Keynes' excuse was that if he didn't support private bank financing, then his theory would not have been adopted at all.

The adoption of his theory gave immediate relief to the general populace (evidenced by some decades of prosperity) only to create a bigger problem down the track (which we have now). Hence the real reason for his comment, “We are all dead in the end”. Keynes also became Lord Keynes which was a nice reward for not elucidating on the flaw in it to everybody.

There was a large and growing discontent with bankers and govts and the way they managed the economies at the time. The adoption of Keynes' theories may have been a successful attempt to derail such movements as C.H. Douglas' Social Credit movement. I'm sure Keynes borrowed heavily from it in forming his theories except Douglas' model would have cut out the banks and the debt. Douglas explained the problems with classical capitalism far clearer than Keynes subsequently did though they were speaking about the exact same problem.

Douglas was an engineer and it has struck me that all the best writing on economics over the years has been written by engineers. I think it is because they are schooled to take the cause and effect relationship very seriously and not be put off by vague or woolly explanations.

C.H. Douglas' writings 

Keynes claimed rightly that the economy was determined by the aggregate level of business and consumer demand and that this level of demand was chronically under funded for full employment. So it was the opportunity and even duty of the government to provide this funding through deficit budgets. This would have worked well if not for the fact that the deficits were funded by private banks at interest, as we've noted, which created the long term debt bomb that we are left with now. If governments around the world had financed their deficits from State owned banks, this problem would be non existent today and our economies would be in fine shape. Instead, now the economies around the world are being choked and smothered to pay the bankers their illegal and immoral interest.

Another problem with Keynes' theory is that he did not explain clearly WHY capitalist economies were chronically under funded. He had no excuse as this under funding was explained very simply and very clearly more than ten years before by Maj C.H. Douglas in his writings on his Social Credit movement.

As Maj. Douglas explained, given that we know that almost all money comes into being as loans and the vast bulk of these are for industry, we can see with a little thought that these loans cover the manufacturing costs (the outgoings) of production. But on top of these costs there needs to be a margin for bank interest on those loans and a margin for profit in the final sale price of manufactured goods (and services). These added margins are unfunded and the money to pay for these margins does not exist.

The money to cover the manufacturing costs (provided by the investment and business loans and operating overdrafts) has been spent into the community to cover wages, raw materials and plant costs (which break down to wages sooner of later) and so is available to pay for that component in the sale prices of the production. But the money needed to pay for the margin to cover bank interest and profit for the enterprise has not been spent into the community by the manufacturers and therefore is missing from the community. The community is too poor to buy all the production that it collectively manufactured.

So unless consumer credit is issued to the public, there is not enough money (M – Money Supply) to buy the full production (P – production or GDP) and this inevitably leads to goods being left on the shelves and to growing unemployment.

For an example using some figures. Let's suppose an economy starts the year without any money supply. Industry borrows (at interest) 100 billion dollars to finance their production programs. That money is spent paying for wages and for raw materials. Now industry has spent all its money and the community has a money supply of 100 billion dollars. The manufacturing sector now wants to sell all of its production and also to sell it at a profit.

So it's costs are the $100b loan plus $10b bank interest ($110b), plus it wants to make a profit of 20% so it puts a price of $132b on its total production. But the community only has the original $100b that it traded its labor and other resources for to pay for the output. So $32b worth of stock is going to stay on the shelves unsold. What do you think will happen next?

Yes, industry will lay off workers and scale back production and we have an economic recession unless the public can borrow enough money through consumer loans to pay for the remaining production on the shelves.

The other option (and the one Keynes opted for) was for governments to bring in a deficit budget i.e spend more into the community than it received in taxes and finance it through loans from the private banks (who create the new money out of thin air, of course). Because of the temporary nature of loans and the fact that they attract interest, this solution just postpones the problem till next year and then the situation requires an even bigger loan (because of accumulating compounded interest) to pay for the same manufactured output.

The problem with supplying the shortfall in the money supply with consumer credit is that it is secured against future wages that will be needed to purchase future production. It will accrue interest as well taking more money out of the community that is needed to buy future production. So we have a short term solution that creates a much worse long term situation. If, instead, the government provides for this shortfall with deficit budgets financed by private banks, we get the same problem. In practice we have a combination of both these very unsatisfactory arrangements of badly financed government debt and consumer debt.

(As an aside, this is why we need a constantly growing economy to just stand still.)

Maj. Douglas' solution was to distribute money to cover this shortfall of funds (the $32b in our example) free as a dividend to all citizens. This money would then swell Aggregate Demand to the level of GDP or Production and ensure a fully employed workforce and a prosperous nation with a minimum of downstream social costs and all very simply done. Other solutions could be equally as effective so long as the money was spent into the community by the government at no cost to itself such as through State bank funded infrastructure projects that would not have to be sold to the population and so not absorbing valuable money supply.

Because Keynes did not explain the mechanism, the problem, or the solution clearly and fully as Douglas did (though nowhere near as widely), it left the citizenry in the dark as to what was happening and thus we all became victims of the banks and to the competing nonsensical economic theories they have sponsored down through the decades to keep us all bamboozled as they continue to rob us blind.

The bankers have robbed us of much more than money, too. They have robbed us of happy, healthy and peaceful societies. They have robbed us of many family members from poor health and depression due to poverty and uncertainty and not to mention from their wars for profit.

Here's a site that explains very well in the form of a story (in text and audio) what has happened to us and how we have come to be dominated by bankers. The Earth Plus 5% 

I hope I have shown that prosperity and peace of mind for everyone is attainable with collective knowledge and political will. I hope I have shown that economics need not be a convoluted and 'dismal science'. I hope it is now possible for it to be seen as a simple, straightforward and even exciting discipline given the possibilities that lie before us for personal and cultural advancement.

I'll finish with a final quote from Nikki Alexander's excellent article linked above-

“Money and credit can and should be used to keep the economy flowing, facilitating the exchange of real goods and productive services that meet the needs of society ~ without fabricating debilitating and fictitious debt. This, in fact, was the intention of Article 1, Section 8 of the United States Constitution that authorized only Congress to coin money and regulate its value. The founders of our nation understood that a government does not need to borrow its money from a private corporation. It has the power to create its own money. We are that government and that power belongs to us.” “Our government has the constitutional authority to create money and issue credit without ever charging interest or creating debt. It can directly spend this money into circulation and extinguish excess currency to prevent inflation. Or it can charge a reasonable interest rate and use this revenue in lieu of taxes.”

32 comments:

james said...

Thanks APea. Questions are very welcome

A. Peasant said...

thanks James. it is my pleasure to cross post this for you.

Anonymous said...

Thanks for this. Information overload. I need to rethink some things, while remembering thats it's mostly out of my hands.
I've felt like I've been been a part of effecting change...and this makes met feel like it's been allfor naught. Always had a pin-prick of a thought in the back of my mind that things might not be exactly how I thought they were. Always hoped that RP would so and say what needed to be done to get into office, then effect positive change once there, the American Purple have a limited capacity to absorb knowledge.

Anonymous said...

If I think this needs to be cross posted...I'll need to do our in increments. I'd be interested in hearing Rockwell, Schiff, or Woods response to this.
I'd guess they'd be reluctant to allow "wise overlords" to determine monetary policy...but if it's all based on math...
-switters (and above)

buelahman said...

Excellent. Thanks to James.

I am one of the few that has not been able to get fully on board with RP. It has cost me friends and acquaintances who I thought were a bit more able to think thru what is being done via RP's campaign.

The very fact that he will not step away from the R Party tells me he is not really anti-establishment. But, as James describes, I have felt that even IF he believes all the Rothbard BS, he is NOT addressing the real problem.

The Fed, in and of itself, isn't the problem. The entire system of Central Banking/Usury/control of a nation's monetary source, added to unbridled "capitalism" (crony capitalism, at best, Fascism, at worse) is a huge part of the issue. Of course, having ass-kissing sycophants at every level (desperately TRYING to be "one of the Elite") helps the system perpetuate and grow.

Non-compliance is the ONLY answer. Guns won't do it.

Americans MUST stop feeding the system.

And good luck with that.

A. Peasant said...

hi buelahman,
agreed. in fact, if you consider that the bankers know they need a new currency, and will have to get rid of the fed anyway, RP is actually doing them a favor by controlling that piece of the opposition.

it's what comes *after* the fed that counts. ending the fed is great, but if RP then walks away (taking big credit for that chunk of the work), and has no power because he never gets elected (which he won't), wouldn't that be regrettable? since he will not be in a position to ensure that we get an actual useful currency (govt backed as James describes), and also since that is not what he even recommends (RP FAIL), i am finding it hard to resist the conclusion that he is doing the bankers a favor. and that is why he is allowed to continue on, tantalizing people, with the half-truth that we need to end the fed. yes we do. AND THEN we need to replace it with govt issued currency.

so RP is like the bankers' garbage man. he's just dealing with their trashed fed.

as depressing as this may be for people who really like RP, and he is definitely likeable and personable, it is better to ask these questions now than later.

BECAUSE we are not going to get a fucking redo of this banking problem. if the banks are allowed to start a new currency, their tanks will be full again and they will happily destroy what is left of humanity. it has to be understood now, before the collapse.

Edo said...

Hey AP, long time, no comment...

I stumbled upon this earlier today. Have a feeling this is either one big set up or one of the biggest stories of the year. Relevant to this post.

http://www.divinecosmos.com/start-here/davids-blog/995-lawsuit-end-tyranny

I listened to the 1.5 hour interview and thought it was very interesting, although I kept getting an inkling that this is so unbelievable!

Interested to hear your and others views...

james said...

hi Switters, Buelahman. The post deals with two issues, gold backed currency and laissez-faire economics. I probably should have made them the subjects of two separate posts.

There's a lot of info, for sure, and what i've written, once taken in, causes a lot of other things to be reviewed. It can be very disorienting for a while. But keep coming back to the facts and what you know to be true.

Then if a guy with a nobel prize for economics looks like an idiot, then so be it. If a guy offering hope is leading people off the right track, then so be it, too. It's not like it hasn't happened before.

The people running the system know they have to keep offering hope to keep those of us with heart in the game. Obama was the last one and RP (knowingly or not) by all the signs is the next. So someone like RP is a necessary part of the system.

All this says there is no hope from within the system and that is a very disheartening thing to face. It has a lot of implications, too, but that doesn't mean there is no hope. There is, but only after the first lesson of dealing with psychopaths is thoroughly learnt. And that is that the only way to deal with psychopaths is not to deal with them which is what Buelahman is saying by calling for non-compliance. The best ways are non-confrontational like throwing out the teevee for a start and by simply doing something else.

I'm not saying RP is a psychopath but he is dealing with them and their psychopathic system. he will be managed (as i'm trying to point out) and compromised. It's what they do and it is their system.

Anonymous said...

In my sixth decade I have come to be believe the Earth is the centre of the universe. I doubt the writer is doing anything more than relating 2nd hand science. Mathematics is elegant enough to wear either position but only one position allows the earth and its inhabitants a profound dignity and pride of place. I suspect some very high placed people secretly believe the same. I bet you thought it was only the economy that mattered. R. Olausen.

marknesop said...

Brilliant! Can it really be this simple? It also suggests why economists are regularly and almost universally wrong at economic forecasting; projecting out beyond the next couple of months is a fool's errand, based on all the factors that can effect pretty much every one of the variables except for the money supply.

Although I don't have a lot of time for Ron Paul - while I must acknowledge he is head and shoulders above the current Republican crop for intellect - I did think that gold standard thing of his made sense. It never occurred to me to look out one step further; what's gold going to be worth, and who's going to determine it?

james said...

hullo, R. Olausen. The story about the earth relative to the universe was an analogy and probably third or fourth hand, if it comes to that :) .

The only mathematics involved in my argument about economics is simple arithmetic.

I bet you thought it was only the economy that mattered"

How much would you like to bet on that proposition?

A. Peasant said...

hi Edo, glad to see you again. i will check out your link in the next day or so. sounds intriguing.

R. Olausen i'm not sure i follow but will leave you to James.

hi Mark, you have spotted the trap -- it's that last step about the gold. funny that they don't talk about that on the teevee. too busy gloating over Putin probably...

james said...

hi Mark,
A few years ago, someone did a large survey of economists' predictions and found they were no better than random chance. I tiny bit worse, in fact, irrc. It was published in one of the major newspapers, maybe even the NYT!

So the office boy with a dartboard could have done an equal job at it for a lot less pay. Hell, I would have done it for a lot less pay given that it would only take a few minutes to write up my predictions.

I imagine soothsayers (whom I liken economists to in my more frustrated moments) would have a better batting rate.

But you are exactly right, Mark. Their poor performance points directly to at least one fundamental variable not being taken into account or at least being totally unpredictable to them. Though the timing at least is unpredictable to everyone. Everyone except a small group of bankers, that is.

Meanwhile economists are looking at effects and interpreting them as causes with a little help in that direction over the years from such luminaries as Milton Friedman.

Anon said...

I like your comment: "Ron Paul is the garbage man for the bankers. His job is to get the fed out of the way so they can replace it and start fresh."

- Aangirfan

marknesop said...

Oddly enough, economists are relied upon by pretty much every developed culture for "expert testimony", and - much like Washington Post Opinion writers - nobody ever seems to remember all the times they've been wrong before.

Mathematics and, by extension, economics are beyond most people; figuring and correlating are tiresome and nowhere near as much fun as reading about what Lindsay Lohan is up to today. Consequently, most people are quite happy to leave economic forecasting to economists and are soft targets for manipulation, owing to their disinterest in getting involved themselves.

The simpler economics can be rendered for common understanding, the better. As soon as those fond of arguments revolving around economics start to expound on PPP and inflation, the average person's eyes glaze over and after a few more minutes, they begin to rock and such their thumb. A post that breaks it down so Everyman can see where things just don't add up, as this one does, is a real public service.

A. Peasant said...

thanks Aan.

Mark, i noticed that very similarity while reading your latest...

Oddly enough, economists are relied upon by pretty much every developed culture for "expert testimony", and - much like Washington Post Opinion writers - nobody ever seems to remember all the times they've been wrong before.

in fact i agree wholeheartedly with your entire comment. as James is my witness, my eyes glaze over immediately at any discussion of economics, and it is only by his herculean patience in explaining this to my poor brain that i ever came to understand this whole thing about the money being backed by the productivity of the people. and i have an mba, which just goes to show you that any smart person can become an idiot with enough formal education.

Anonymous said...

Hello Peasant
You are absolutely right, it is what comes after the fed that is important. There seems to be no mention of that and the strange el diablo sign RP keeps sporting is not too encouraging either.

Dublinmick

questioning said...

(hat tip) finally got a regular PC for the moment. Thank you again for all you do. this portion of the secret beyond the narrative is THE core of the Gordian Knot.

A. Peasant said...

hi dubs, good to see you around!

hi questioning, good to see you around too! all thanks to James for putting this together. he has taught me so much about economics.

A13 said...

Hi Pez, Merry Christmas :)
Big Cheers and a toast of Glu wine to you xxxx
A13

A. Peasant said...

hey A13, did you get past the cyclone all right??

A13 said...

Hi Pez, it hit east of here and wasn't that bad as the media were making it out to be..they really made a deal out of it this time, but it is always major paranoia around here at Christmas time as Darwin was destroyed in 1974 by a cyclone, so in the local collective psyche, it is a harnessable fear to be benefitted by the media, supermarkets and government.
Happy days to you :)
cheers A13

Socred said...

Hi:

I read your article and agree with most of what you wrote.

The biggest obstacle to my understanding of Social Credit was my belief in the "quantity theory of money". C.H. Douglas dismissed this theory when he said, "the velocity of circulation of money is a complete myth”. And the Alberta Social Credit published a critical article on the quantity theory of money in the Alberta Post War Reconstruction Committe's report when they said, "The fallacy in the theory lies in the incorrect assumption that money 'circulates', whereas it is issued against production, and withdrawn as purchasing power as the goods are bought for consumption."

http://social-credit.blogspot.com/2010/03/alberta-post-war-reconstruction.html

I have written a critical article on the quantity theory of money and how it relates to Social Credit at my blog:

http://social-credit.blogspot.com/2011/01/quantity-theory-of-money.html

Take care.

A. Peasant said...

hi Sacred,
thank you for your comment. i don't know where it went but i just saw it today in the queue. i will forward it to James who is the expert here on social credit. apologies for the delay!

AP.

A. Peasant said...

also, sorry i see it's Socred not Sacred.

james said...

Thanks for your comment, Socred. You said, "The biggest obstacle to my understanding of Social Credit was my belief in the "quantity theory of money". C.H. Douglas dismissed this theory when he said, "the velocity of circulation of money is a complete myth”.

I agree that currency can 'circulate' but not credit, strictly speaking. That credit is created and extinguished at each transaction, is another way of looking at it. But money, and credit in particular, is an abstract notion so it follows that the 'velocity' is an analogy when applied to credit or the Money Supply. Using the term 'velocity' has the disadvantage of reinforcing the 'commodity nature' of money in peoples minds which is erroneous, of course. But for general discussion, i believe it is still a useful way of explaining the nature of this relationship of money to production (or Q as you state it)

So I agree that the 'velocity' part is technically a myth but it is really down to semantics and does not invalidate the P(Q)=MV proposition as you suggest in your article at the link you provided (thanks).

I have some other differences on it to you. (a note for readers, Socred uses PQ [price X quantilty]- in place of my use of P [the value of Production]. They are effectively the same)

From your article-"The quantity theory of money can be simply expressed by the equation: MV=PQ, where M is the quantity of money in the economy, V is that money’s “velocity of circulation”, P is the average price level, and Q is real output. Proponents of the theorem generally argue that Q and V are constant, or at least not influenced by the quantity of money. This implies that any change in the quantity of money has a direct relationship with price levels."

That is not my argument in relation to Q, at least, except in the case where the productive capacity is already fully employed. After this point is reached, an increase in the money supply will lead to an increase in prices because there is no production expansion possible to absorb the extra money.

That is an important qualification because it is often the case that there is excess productive capacity available and is not being used because the Money Supply is kept deliberately short causing chronic under employment. And it is these very conditions that we all (except bankers, of course) want to avoid. An increase in money supply will not lead to increase in prices under those circumstances.

So this is a valid argument for Social Credit being distributed directly to consumers as Douglass advocated.

Getting back to Velocity, if V was the 'balancing item' to give validity to the equation P(Q)=MV then you would have a point if in practice V varied largely. But it doesn't. Which leaves the direct relationship between money supply and the level (quantity) of production quite evident.

Socred said...

Hi James:

My point was that the variable "V" in the equation MV=PQ is merely an instance of petitio principia (begging the question), and does not define anything "real" because money does not circulate.

Further, the quantity theory of money treats money as if it was a "stock", when it should be regarded as a "flow".

There is a great comment about this by Geoffrey Dobbs in his introdution to C.H. Douglas' book "The Monopoly of Credit":

"However much it is sophisticated, the argument is essentially the simple one that, if inflation is due to too much of a homogenous quantitative entity called 'money', to add more 'money' will make it worse. But 'money' is not a homogeneous entity, it is a loan, which is travelling either outward, creating debt, or inward, cancelling it."

I agree that increases in the quantity of money can increase production, but I disagree that when potential production has been maximized that further increases will necessarily cause inflation.

I will give you an example. An important policy in Social Credit is the price rebate. Pretend the National Credit Authority makes a mistake, and erroneously calculates the size of the rebate to be 100%. This means that if a company charges $100 for article X, then the National Credit Authority will rebate the consumer $100. Effectively, the price of article X is $0 to the consumer.

Now you may argue that this will lead to the retailer charging more and more for article X - let's say $200. But this does not matter, because the consumer will be rebated $200, and the article still costs him $0.

I would not recommend that this be the size of the rebate, but I use this extreme example to make a point.

Money is a flow, and you can actually reduce prices and increase the money supply if you introduce money as a "reverse flow", or a price rebate given to consumers at the point of retail.

Not only will production not be handcuffed by the quantity of money in a Social Credit society, but prices will actually fall, which is exactly what should happen as efficiencies in production are realized. The rate at which they fall will depend on the ratio of consumption/(potential production).

james said...

Socred said-
My point was that the variable "V" in the equation MV=PQ is merely an instance of petitio principia (begging the question), and does not define anything "real" because money does not circulate.

This is restating your point from your previous comment, Socred, to which I've already offered an answer. In any case, the velocity of money is not part of my overall argument nor the subject of my article. Early on in my article I said,
“V= the velocity of the Money Supply i.e. how fast people spend the money they get. In boom times the money supply (M) will turnover 1.1 times overall in a given year. In depressed times it will turn over 0.9 times. SO for our purposes we can say it turns over on average of 1.0 times which also means we can leave it out of our calculations without affecting the outcome.

So simplifying this down, Production and therefore employment) will rise (or shrink) to the level of Money (M) available to purchase said production.”

So I'm saying the P=M (or as you would say, PQ=M) because the GDP of a nation is roughly equal to the Money Supply. I've left Velocity out of it.


Further, the quantity theory of money treats money as if it was a "stock", when it should be regarded as a "flow".

You have stated this previously, too. And I have already answered it, too.

There is a great comment about this by Geoffrey Dobbs in his introdution to C.H. Douglas' book "The Monopoly of Credit":

"However much it is sophisticated, the argument is essentially the simple one that, if inflation is due to too much of a homogenous quantitative entity called 'money', to add more 'money' will make it worse. But 'money' is not a homogeneous entity, it is a loan, which is travelling either outward, creating debt, or inward, cancelling it."


This quote is made up of two statements with no connection between them (except perhaps being contradictory about the nature of money) and therefore they fail to make an argument.

The rest of your comment might be true and relevant if we had a Douglas Social Credit system in place. But we haven't. In any case, this is not what my article is about. My article is about (apart from the foolishness of gold backed currencies) the necessity for governments to issue into the economy monies with no attendant interest. One way to do this would be Douglas' Social Dividend. But there are other ways too. All would allow the full production to be purchased and so have a fully functioning economy and prosperity for all.

This rules out laissez-faire economics, such as Ron Paul is advocating, as a sensible economic strategy. On this I think you and I, together with Douglas and Keynes, are agreed.

Jim said...

Hi James:

I think you and I can agree that classical economics, or the "Austrian" variety is complete nonsense. Their models assume equilibrium and are static. Further, they have a very poor understanding of money and how it's created.


In your article, you are using the quantity theory of money in your analysis. My point is that this theory is a "complete myth". It is merely an instance of begging the question.

Your equation P=MV does not separate prices from the quantity of goods sold. You claim that an increase in money will increase Q, but not P until the economy is at a state of full employment. This is the argument that Keynes made. The history of the last 70 years proves him wrong. Inflation exists even when the economy is not at full employment. This is because economists do not fully understand the cause of "cost push" inflation.

If capital is replacing labour in production, then overhead charges (B costs) are increasing relative to income (A costs). Price equal A (income) + B (overhead charges). Any attempt to increase or stabalize income (A) must be met with rising prices (A+B) if B is continuously increasing relative to A. In other words, the primary cause of inflation is the attempt to increase income as labour is becoming a decreasing factor in production.

Keynesianism is inflationary. This is because the mechanism by which Keynes suggested new money be introduced is through production, which means that it all has an associated cost attached to it. The Social Credit mechanisms distribute that money directly to the consumer, so it does not have a cost attached to it, and therefore is not inflationary.

The quantity theory of money implicitly assumes that money is a stock, when in reality, money is a flow. Credit is either flowing from the bank creating costs, or flowing back to the bank cancelling them. This is true at all times, not just in a Social Credit society.

Take care.

james said...

Hi Jim,

The points you are continually raising are by and large of a semantic or nit-picking nature. I have addressed them before and yet you restate them. It seems to me that you are trying to muddy the water for other readers and, as such, are behaving like a troll or shill.

The purpose of my article was to simplify much economic jargon and verbal 'sleight of hand' and to point out the fundamental relationship between the amount of the money supply and the amount of production taking place in an economy and that that is the key to all economic management in spite of all the talk from economists and politicians.


Furthermore, my original post was specifically addressing Ron Paul's economic platform, and the lack of specifics about who issues the money supply. Perhaps, before we go any further, you can state your position on what you agree with in my article and whether you agree that economists and politicians use a lot of economic jargon to confuse the public.

Please state what is your position on Ron Paul, as this together with the above items would be very pertinent to other people following this thread.

A. Peasant said...

Jim,

you may or may not be aware that you have entered into a conversation taking place over several posts:

http://winterpatriot.com/node/671

http://twelfthbough.blogspot.com/2011/12/bs-labs.html

the comment threads are full of questions and answers, some of which may be of interest to you.

i am closing this thread. either James or i may do another post on the topic and then we can resume the conversation.

Anonymous said...

Another country without debt and a real national bank was Germany in the years 1933-1945. In 4 years they eliminated the debt from WW1 and at the same time they achieved to re-construct the destroyed land. The rest is well known.Or not?

legal mumbo jumbo

Disclaimer: The posting of stories, commentaries, reports, documents and links (embedded or otherwise) on this site does not in any way, shape or form, implied or otherwise, necessarily express or suggest endorsement or support of any of such posted material or parts therein.

Fair Use: This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of environmental, political, human rights, economic, democracy, scientific, and social justice issues, etc. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner.