Money. Doing it Right this Time.

innonimatu said:

And they are absolutely correct. In terms of power among people, it is a zero-sum game. And money is just a tool and a scorekeeper, a means to that goal: power over others. We value it for its buying power, it buys products and services provided by other people. What matters is the share of the total buying power, not the name or type of the currency used.

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Indeed, power over others always has been and always will be a zero sum game. How could it be otherwise?

I've been thinking over the criticism of rich people making money from money and not doing anything to earn it except charging usury. Recall above where I said that there is essentially no "hoarding" in modern economics. That is, there is no substantial amount of financial wealth that is held separate from the economy. When people have money in excess of what they want for current use, they make it available to others through investing it or putting it in savings that earn interest.

(Now this is assuming that the amount of money that the old wealth holders consume in a given year is less than the income that is generated from the loaning and investing of their accumulated wealth. The phrase "living on your principle" refers to what happens when a person or group has consumption spending that exceeds their income, and so are constantly reducing their savings. Any person or group that does that will eventually cease to be wealthy.)

But what happens then?

In theory, a person who starts with a pile of money can make money forever while doing no actual work just by letting others use their money, and getting a return on it. And that is why you see the criticism that money accumulates at the top. But what else is involved there? One criticism, as Narz was bringing up, and I didn't really give him an answer for, is that it is lent out to poorer folk who desperately need the money. And some of that does happen, which sometimes leads those borrowers deeper and deeper into a hole of debt. This, of course, would lead to the Marxist critique of the rich getting ever richer doing no work and just sucking labor dry.

But that's not the whole story. Not all money is lent to the poor at usurious interest rates. In fact, the main place to loan money to is to businesses. And businesses use it to create new real wealth. And that is why when you look at lists of who the richest people in the country are you see more names of "new money" than you do of "old money". And the reason is that the "old money" is being lent to the "new money" and the new money is making a higher profit on it than the old.

So in absolute terms the old money can go on making money forever without any actual work. But in practice the share of the total wealth that old wealth controls falls over time as new wealth overtakes and surpasses it. Now that can be helped along, and high estate taxes help to achieve that. But in the long run a family may remain rich for generation after generation without any actual work taking place, but will fade from prominence because newer fortunes, fortunes that they in part made possible by the loaning of their old money, will eclipse the old.

And this helps explain why people with "old money" are so commonly people who are opposed both to estate taxes, and want to zero out all inflation. That is to protect not just the absolute position of wealth, but the relative position of wealth as well, by restricting the creation of new fortunes that will eclipse the old fortunes. A zero inflation policy will not just reduce the creation of new fortunes, but will raise the incomes of the old fortunes.

It is the creation of these new fortunes out of the savings of these old fortunes that justify the system. And that is why so many of the attacks on old money aren't really justified.

Actually, the Marxist critique assumes that the rich mostly lend to the rich, in the manner you describe. Usurious money-lenders were of more interest to Dickens than they ever were to Marx.

Good post Cutlass.

One thing about lending though, I disagree that most money is lent to people who "desperately need it."

I think it's far more complicated than that, and that overall the richer you are the more money you borrow, even as a percentage of income.

Theige said:

One thing about lending though, I disagree that most money is lent to people who "desperately need it."

I think it's far more complicated than that, and that overall the richer you are the more money you borrow, even as a percentage of income.

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Erm, Cutlass said that. You're not disagreeing with him.

I would argue that as long as the money is lent at higher interest than the economic growth rate (or if we include inflation, the combined growth and inflation rate) and there is no other redistribution mechanism, the increase in wealth concentration is inevitable. The argument, that some people are making even more money does not hold, as this increases the concentration of wealth as well.

So to avoid concentration of wealth, there either needs to be a redistribution mechanism or a limit to the interest rate than it cannot go higher than the growth rate. Now I guess that there is a limit to how much interest you can charge (let's assume it is an effective interest rate where risk has been factored out already) and the money supply and economic growth somewhat influence that limit. But I would guess that this limit is well above the growth rate and therefore concentration of wealth is an inevitable outcome in a free market. Is that so?

Uppi, I don't really know how to answer that. It seems a pretty technical question.

Hygro said:

Not of ZLB

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'Splain please? I mean, the Fed has cut interest rates essentially to nominal zero. So the real interest rate is a bit negative. And it's still not enough to revive the economy! So ... it stands to reason that if inflation were higher, the real interest rate would be even lower, and encourage more spending. For that matter, I think a credible promise of future inflation (sacrebleu!) would help.

Cutlass said:

Uppi, I don't really know how to answer that. It seems a pretty technical question.

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But I thought you were answering technical questions?

That one seemed pretty political to me. Which is as it should be with economics!

innonimatu said:

But I thought you were answering technical questions?

That one seemed pretty political to me. Which is as it should be with economics!

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Inno, I can do the fundamentals of money fairly well. Now to be fair, the fundamentals are pretty easy. Which is why I am doing this, because the fundamentals are easy, and yet it has become pretty common for people to get them wrong.

Integral is much better able to answer many of the technical question.

Now part of what uppi was asking is economic, and part of it was political. And they really are not the same thing. I don't really want to do more than graze, in this thread, more than the tiniest bit of politics. And without a bit of research, I don't feel like I have an answer for the technical side of uppi's question. But I'll think over his question some more and see if the answer comes to me.

As the confluence of politics and economics, you're right that they are related. But they are not the same. Politics is about making choices. Economics is about understanding the choices that are available to be made.

Ayatollah So said:

'Splain please? I mean, the Fed has cut interest rates essentially to nominal zero. So the real interest rate is a bit negative. And it's still not enough to revive the economy! So ... it stands to reason that if inflation were higher, the real interest rate would be even lower, and encourage more spending. For that matter, I think a credible promise of future inflation (sacrebleu!) would help.

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Oh I must have misread you the first time. I thought you meant interest rates couldn't go negative!

Cutlass said:

As the confluence of politics and economics, you're right that they are related. But they are not the same. Politics is about making choices. Economics is about understanding the choices that are available to be made.

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I dare day that distinction is misleading. But I'll respect your preference for sticking with the topic.

Cutlass said:

Uppi, I don't really know how to answer that. It seems a pretty technical question.

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As usual, I do know how to answer that.

But I would guess that this limit is well above the growth rate and therefore concentration of wealth is an inevitable outcome in a free market. Is that so?

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The question has "inevitable" in it, which is an absolute.
And it's a "complicated" question in the most quote complicated unquote sense of the word.

Therefore the answer is "No, it's not inevitable."

This is an example of using logic to completely replace actual thought.

You're welcome.

I stayed out of this because I wanted to see what would come up.

I find it interesting that those who are supposedly opposed to a cartel of private businesses meeting in secret and colluding with the government endorse one the Federal Reserve as some great humanitarian undertaking on the part of J.P. Morgan and the rest of the Jekyll Island Club. Same interest applies to those who supposedly abhor the unjust redistribution of wealth and, again, endorse the Federal Reserve (or rather, the system of fractional reserve banking.)

... what alternative to fractional reserve banking is there? It's only that or not having a modern economy at all, with badly allocated capital and no innovation. Which is definitely not preferable to the current system, even if it results in (imo) undesirable side effects like the accumulation of wealth discussed above, which can be fixed by other measures [but that's veering into politics too much again].

Not having fractional reserve banking would increase the accumulation of wealth.

It would prevent less wealthy people from usefully investing what money they do have and will prevent people from getting access to any loans. The small amount of loanable funds that do exist will have exhorbitant interest rates. Further, it will stifle economic growth as any business will essentially need to be run purely on equity due to lack of credit and terrible terms for it. The only possible outcome is economic stagnation and increasing concentration of wealth.

Ama, we endorse the Federal Reserve because it provides far greater stability to the economy. Yes, its origin and structure are weird. But that was necessary for political reasons. The greater stability the Fed provides means that there is more wealth in the society for everyone. Not to mention the devastating human toll of suffering that the Fed is a critical part of preventing.

As for ridiculous charge of redistributing wealth, most of the wealth that exists in the world only exists because financial system supports the creation of it. And that includes both central banks and fractional reserve banking. Eliminate those and you eliminate most of the world's wealth. Those fortunes you want to protect simply would not exist without banking.

And it is particularly to educate people past that foolishness that I started this thread.

Central banks and fractional reserve banking do no redistribute wealth at all. Much less unjustly. They make the creation of wealth possible. Gold, on the other hand, does unjustly redistribute wealth, because it causes periodic bouts of deflation.

amadeus said:

Same interest applies to those who supposedly abhor the unjust redistribution of wealth and, again, endorse the Federal Reserve (or rather, the system of fractional reserve banking.)

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Certainly not all of those! I do object to the private financial system as whole, and the central banks are the enablers of that system. One thing the defenders of the current financial system do get right: central banks are essential to it. Whereas they are not essential for the existence of money. Still, they could still have good uses in the context of a public financial system, where any money creation they enabled would not have its profits captured solely by those few private businesses with the "banking privilege" of charging rents (interest) interest on what they never owned.

Inno, if you want the private sector creating money instead of the government or banks, then you have money simply created through forgery. How is that better?

here's a technical question of the monetary technicians among you:

given that the demand for fiat money is generated by taxation, do increases and decreases in the rate of taxation have respectively a substantial deflationary and inflationary effect, or is any effect of this kind of negligible or even inextant magnitude?