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THE CREDIT CRUNCH

 
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Leonie Humphreys



Joined: 23 Sep 2008
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Location: West Dorset, UK

PostPosted: Mon Sep 29, 2008 2:59 pm    Post subject: THE CREDIT CRUNCH Reply with quote

'If money isn't loosened up, this sucker [the US economy] is going to go down.' George W Bush
The President pleading with Congress in September 2008 for the passing of a $700bn bail-out funded by the taxpayer.
(The Observer, 5.10.08 - Voice of the times)


Whilst everyone seems to understand the likely effects of this current credit crunch (unemployment, falling house prices & other sales, recession etc) its causes are less easy to grasp. Has the US President grasped the causes of the problem and will his solution work?

The 'credit crunch' seems rapidly to be turning into a 'meltdown' but is this just another 'bust' in the capitalist cycle or is there something more fundamental afoot? Has capitalism reached the point of no return as communism did?

Comments and observations welcome!

For those that wish to understand more Frederick Soddy provides insight into the deeper causes of the problem of debt based money. The Money Reform Party website ( www.moneyreformparty.org.uk click on ‘money’) explains the reasons behind the current credit crunch in simple terms and a paper 'The Credit Crunch Explained' is posted below. They also have a DVD available ‘Money as Debt’ which explains the debt based money system very clearly.



FREDERICK SODDY ON MONEY
(EXTRACTS FROM ‘BEYOND GROWTH’ BY HERMAN DALY, 1996)


For Soddy the basic economic question was, How does man live? And the answer was, By sunshine.

… Pre-nineteenth-century man lived on energy revenue (sunlight captured by plants, the ‘original capitalists’). Present day man augments this revenue by consuming energy capital (coal, the ‘stored sunlight of Paleozoic summers’). While man can use fuel-fed machinery to lighten labour, he can feed his internal fires only with new sunshine, or rather the energy of new sunshine as transformed through the good offices of the plant.

The rules that man must obey in living on sunshine, … are the first and second laws of thermodynamics. [First Law: energy can neither be created nor destroyed. Second Law: Less useful energy is obtained from a reaction than is put in (some energy is always ‘wasted’).] This, in a nutshell, is ‘the bearing of physical science upon state stewardship’. Wealth is for Soddy ‘the humanly useful forms of matter and energy’.


THE MAJOR CONFUSION: WEALTH VERSUS DEBT

The fundamental error of economics is the confusion of wealth, a magnitude with an irreducible physical dimension, with debt, a purely mathematical or imaginary quantity. The positive physical quantity, two pigs, represents wealth and can be seen and touched. But minus two pigs, debt, is an imaginary magnitude with no physical dimension:

‘Debts are subject to the laws of mathematics rather than physics. Unlike wealth, which is subject to the laws of thermodynamics, debts do not rot with old age and are not consumed in the process of living. On the contrary, they grow at so much per cent per annum, by the well-known mathematical laws of simple and compound interest… For sufficient reason, the process of compound interest is physically impossible, though the process of compound decrement is physically common enough. Because the former leads with the passage of time ever more and more rapidly to infinity, which, like minus one, is not a physical but a mathematical quantity, whereas the latter leads always more slowly towards zero, which is, as we have seen, the lower limit of physical quantities.’ [Soddy 1926].

The ruling passion of our age is to convert wealth into debt in order to derive a permanent future income from it – to convert wealth that perishes into debt that endures, debt that does not rot, costs nothing to maintain, and brings in perennial interest.

…. The present surplus accumulation can never be changed into future revenue in any physical sense, but only exchanged for it under social conventions. Although it may comfort the lender to think that his wealth still exists somewhere in the form of ‘capital’, it has been or is being used up by the borrower in either consumption or investment, and no more than food or fuel can it be used again later. Rather it has become debt, an indent on the future revenues to be generated by future sunshine. ‘Capital’, says Soddy, ‘merely means unearned income divided by the rate of interest and multiplied by 100'.

Although debt can follow the law of compound interest, the real energy revenue from future sunshine, the real future income against which the debt is lien, cannot grow at compound interest for long. When converted into debt, however, real wealth ‘discards its corruptible body to take on an incorruptible’. In so doing, it appears ‘to afford a means of dodging Nature’, of evading the second law of thermodynamics, the law of random, ravage rust and rot. The idea that people can live off the interest of their mutual indebtedness is just another perpetual motion scheme - a vulgar delusion on a grand scale.

…. The positive feedback of compound interest must be offset by counteracting forces of debt repudiation, such as inflation, bankruptcy, or confiscator taxation, all of which breed violence. Conventional wisdom considers the latter processes pathological, but accepts compound interest as normal. Logic demands, however, that we either constrain compound interest in some way, or accept as normal and necessary one or more of the counteracting mechanisms of debt repudiation. As Soddy put it, ‘You cannot permanently pit an absurd human convention, such as the spontaneous increment of debt [compound interest], against the natural law of the spontaneous decrement of wealth [entropy].

‘Because formally ownership of land – which, with the sunshine that falls on it, provides a revenue of wealth – secured, in the form of rent, a share in the annual harvest without labour or service, upon which a cultured and leisured class could permanently establish itself, the age seems to have conceived the preposterous notion that money, which can buy land, must therefore itself have the same revenue-producing power.’

…. If wealth cannot grow at compound interest for long, then debt should not either. If wealth cannot be created ex nihilo then how can we allow money (debt) to be created ex nihilo (and just as easily destroyed)? Worse, how can we tolerate the fact that money is both created ex nihilo and lent at compound interest, while at the same time serving as a unit of measure for wealth which is incapable of either of those ‘conjuror’s tricks’?

Soddy concluded that the flaw in the system must lie in ‘conjuror’s tricks’ of bankers who:

‘have been allowed to regard themselves as the owners of the virtual wealth which the community does not possess, and to lend it and charge interest upon the loan as though it really existed and they possessed it. The wealth so acquired by the impecunious borrower is not given up by the lenders, who receive interest on the loan but give up nothing, but is given up by the whole community, who suffer in consequence the loss through a general reduction in the purchasing power of money.’ [Soddy 1926].

…… ‘In the abstract, it is absurd and monstrous for society to pay the commercial banking system ‘interest’ for multiplying several fold the quantity of medium of exchange when (a) a public agency could do it at negligible cost, (b) there is no sense in having it done at all, since the effect is simply to raise the price level, and (c) important evils result, notably the frightful instability of the whole economic system.’ [Knight].


Last edited by Leonie Humphreys on Thu Apr 23, 2009 8:56 am; edited 10 times in total
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Leonie Humphreys



Joined: 23 Sep 2008
Posts: 218
Location: West Dorset, UK

PostPosted: Wed Oct 01, 2008 2:12 pm    Post subject: What could be done about the credit crunch? Reply with quote

Soddy explains the fundamental problem of debt based money and the Money Reform Party explain the predicament we are in at the moment (see Credit Crunch Explained), but:

Do you agree with them?

Is the government making the right decisions?

The Money Reform Party suggest what may be considered a radical solution: 'banks will not be permitted to lend out money that they do not have. Money will be defined as legal tender and will be created solely by a public agency.' but is this understood and if so could it be implemented without causing further shocks to the system?

The situation is urgent - responses welcome!


Last edited by Leonie Humphreys on Wed Oct 08, 2008 11:14 am; edited 1 time in total
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Leonie Humphreys



Joined: 23 Sep 2008
Posts: 218
Location: West Dorset, UK

PostPosted: Wed Oct 08, 2008 11:12 am    Post subject: The Credit Crunch Explained, Anne Belsey Reply with quote

The Credit Crunch Explained
by Anne Belsey (Money Reform Party), October 2008


Please see the attachment here for the Money Reform Party's explanation of the Credit Crunch. This is described in fairly simple terms that is accessible to anyone.



The Credit Crunch Explained.doc
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Haydon Bradshaw



Joined: 11 Jul 2007
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Location: Bath Somerset England

PostPosted: Mon Oct 13, 2008 3:20 pm    Post subject: Reply with quote

It strikes me that the extracts from Frederick Soddy and Anne Belsey are excellent means for opening people's eyes if they are newish to the subject.

Had lunch with Anne nine days ago at the Bromsgrove Money Reform weekend - she is very clear.
Amongst the flying accusations, and the pouring of money into faulty systems, the only medicine for the credit crunch called for is the cry for more regulation. More regulation will tighten further the frozen markets, might encourage the expected protectionism, and is useless without correcting the causal of it all.
Reform is needed, yet it is clear that politicians dont know what to do.
The following came to mind early Friday morning:



Rescue House Re-possessions – up 48% since January

• Value the threatened house, and its rebuilding cost – the building cost without land.
• Write off the land value share of the mortgage; the land title going to the Bank of England, permanently, who writes credit for that amount to the mortgage bank.
Repayments already paid are credited to buying the building, not the land;
If any of the land element has also been repaid, return it to him or her.
• The title to the building is held by the householder - it remains marketable.
• Occupiers of the house pay land rent to the Bank of England, forever, funding relief of tax on earnings, and small companies: on vulnerable production at the margin of economic viability.

We observe the crazy situation that has arisen since governments and the Bank of England have gradually allowed banks to write credit, to lend it to the government and charge them interest for the privilege. National Debt. The government used to issue all money, spending it into the economy on capital projects that benefit all - the ‘profit’ or seigniorage, is a form of national revenue.
In 1960 they issued 40% of the money supply, it is now down to 3% - the rest being private bank created credit / debt, written and issued at up to nine times the bank’s capital reserves, ‘backing’ that has proved to be toxic. This leveraged issue returns to banks as a deposits, to lend out again.

This rescue package targets the prime cause of financial reserve meltdown – subprime mortgages. And surgically - only the cancerous, loose credit / speculation puffed land price element of the mortgage get cash. Not crude shotgun nationalisation, or bailing out irresponsible or corrupt banking.

The approach could lead on to a gentle tax cum monetary reform; that re-motivates the country by taking tax off earnings; drawing revenue from unearned land rent - at market rents / values / productive capacities of sites; and by recovering money seignorage, for public benefit.

The land value element in a house price has been puffed to more than 50% recently, but let us take it at 50%, to work a simple example. Take a 20 year repayment mortgage of £200,000.
The annual cost @ 5% interest is calculated at £17,436. (BBC’s mortgage calculator)

House element: Mortgage cost for £100,000 of bricks and mortar. pa. £8,218
Land element: Rent to the Bank of England @ 20 ‘years purchase’ pa. £5,000
Total Continuing building mortgage cost, plus rent, p.a. £13,218
Reduction in mortgagee’s outlay p.a. 24%
Result:
Dissolved toxic debt, relieved householders, relieved bank, relieved tax on the poor; raised
market value of the subprime asset category; restoring liquidity to frozen financial markets.
As inflated land values drop, Bank of England rent assessments will drop, but run for ever.

Money Reform: www. prosperityuk.com eg Huber / Robertson reform
Tax Reform: www.henrygeorgefoundation.org
Economic Education www.schooleconomicscience.org see the economics forum

Email me for a pdf version on one A4 page that is easier to read and digest
Posted suggestions for improvement warmly welcomed.
haydon.bradshaw@zen.co.uk

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Richard Glover



Joined: 29 Sep 2008
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Location: Ealing, London, UK

PostPosted: Fri Oct 24, 2008 7:25 am    Post subject: Cross-fertilisation Reply with quote

Although there is some appeal in looking at economics through the eyes of a physicst, I do feel uneasy about taking a concept from one domain and simply implanting in another. It may lead to unintended consequences.

1) There is no doubt about the importance of sunshine; that, together with our abundant store of other natural resources is what is available to us. However, if we shoe-horn "wealth" into a thermodynamic entity, we may be missing some of the fine aspects of human life. It will affect our concept of what wealth is, which has knock-on effects on our understanding of capital, rent etc.

2) So when we state that wealth "a magnitude with an irreducible physical dimension" and use that to distinguish it from debt we have already assumed something about wealth. Another view would be that the same physical material can have vastly different values depending on the slightest of touches of an artist or craftsman.

3) We then state that debt is an imaginary (mathematical) quantity, usually associated with a negative sign. This is so, but then what is credit but the same and usually associated with a positive sign.

4) We could argue about knowledge being or not being wealth; this is certainly not physical. Perhaps this one is best left for another topic.

5) Soddy's concept of wealth as being ‘the humanly useful forms of matter and energy’ would include all natural (unmodified) resources. We may need to keep a clear distinction between natural wealth and man-made wealth. Value also has to be brought into the equation in some way.


Can anyone take this further?
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Haydon Bradshaw



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PostPosted: Fri Oct 24, 2008 1:55 pm    Post subject: Reply with quote

Valuation by society generally is evidently a central property of wealth. Leon McLaren noted in Nature of Society that mud pies are neither valued nor wealth, regardless of the work expended, and the labourer's valuation of their own work and their pies. Evidently wealth also needs to have been produced by man for use or consumption. It is not enough just to value it - sunsets, land, slaves, another mans wife.

John Locke notes that some find it difficult to justify having property in any thing.
Within families it may be possible to claim nothing, but extended society has fallen from that free state, so, to unite the ideal with the practical, as William Temple put it, the institution of property is needed, with the resulting giving, lending, trading and stealing.
In this, Locke notes that the only justification of property is that a man originally made it from nature's materials. This rules out sunsets, land, slaves and other men's wives etc

We may see that mankind can enjoy the beauties of Nature, and the use of wealth without property in it, but that where family love and restraint falls short, the institution of property is important to ensure justice; that wealth usually is, but may not be property; that property, like wealth, is made and valued?

All types of money are mediums for exchanging wealth.
I have never been happy with the idea that money is a store of value since value is in the eye of the beholder, not the bank note. So in Zimbabwe it becomes valueless - hardly a store.

Of the three main forms of money, only commodity money is real wealth, materials that may also be used or consumed - gold, corn, cattle, salt etc. Token money eg Bills of Exchange and gold standard promissory notes are only tokens for, claims backed by real wealth.
Today's credit /debt instrument money has no relationship with real wealth now. It has been made, even electronically I suppose, and people have a property in it, but it cannot be consumed or used to make other goods - its only use is as a medium for exchanging real consumable wealth.

Is this right?

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Richard Glover



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PostPosted: Sat Oct 25, 2008 8:28 pm    Post subject: he nature of wealth and money Reply with quote

To state that wealth has to be valued generally by society, that it has to be made from natural resources, is a particular definition; not everyone agrees with this.

Henry George was very careful to analyse value first, and then considered wealth. He determined that wealth was sourced in production, rather than through obligation between 2 parties; its value was only determined in exchange, and not determined in use. This very much accords with your posting. It does however exclude the sunshine and services, and some feel unhappy with this exclusion.

The advantage of the definition is that land and money are not wealth. The disadvantage is that people generally need to be re-educated to take on HG's definition.

Commodity money is a complex issue with multiple values involved. Gold could have use as raw material, or as money; in the later case it is usually formed in order to become legal tender.

Now the question that is bubbling away waiting to be clearly asked relates to the availability of stable currency being a community resource. 2 identical nations A, B in all respects except only A has a stable currency, then A would be the most attractive nation to live in; if there could be an economic rent across national boundaries, A would command a higher rent. This would also be true if A enjoyed a better measure of sunshine, or if A's land were more fertile, or if A had a better road system.

If the presence of stable currency, better weather, better fertility, better roads all yield a higher rent, then natural resources (sunshine, fertility) are economically similar to "capital" infrastructure (roads), AND also to the stable currency.

Hence land = money!
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Leonie Humphreys



Joined: 23 Sep 2008
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PostPosted: Mon Nov 10, 2008 3:03 pm    Post subject: Reply with quote

Haydon,

Thank you for your ideas.

House repossessions remedy (see above): I have studied your proposal about rescuing house repossessions and am intrigued. I have copied your idea below:

• ‘Value the threatened house, and its rebuilding cost – the building cost without land.
• Write off the land value share of the mortgage; the land title going to the Bank of England, permanently, who writes credit for that amount to the mortgage bank.
• Repayments already paid are credited to buying the building, not the land;
If any of the land element has also been repaid, return it to him or her.
• The title to the building is held by the householder - it remains marketable.
• Occupiers of the house pay land rent to the Bank of England, forever, funding relief of tax on earnings, and small companies: on vulnerable production at the margin of economic viability.’

Your example showed a reduction in the mortgagee’s costs by around 24%. (I don’t think I have quite grasped how this reduction came about – could you elaborate on the amount of rent that you suggest should be paid to the Bank of England in your example above?) As a remedial response to the current emergency it could work if it is understood or more to the point acceptable at the political level. Could the valuation of land and buildings separately be undertaken easily? The main question I have concerns the fact that your proposal would mean that the Bank of England would be in possession of land which may become a considerable amount over time if this so-called ‘meltdown’ goes on, which seems very likely. Maybe a suggestion further would be appropriate – that this land should be the responsibility of local councils that could over time as you suggest collect rent? How this could be achieved I don’t know, but perhaps the Bank of England/government could fund the local councils so they would hold the title to the land? This would decentralise any income flows to where the property/land actually is, so that use of any income flows would also be localised. Might that work?!

Alan Greenspan has suggested that ‘We should seek ways to re-establish a more sustainable subprime mortgage market.' (See under topic: Congress Oversight Committee). Also pointed out by the Oversight Committee is: '[The] amount of unregulated financial transactions is more than the GDP of every nation on earth, combined.' Your suggestion in principle may be of interest to the new President in the US!

National Debt: Your comments on the borrowing of money by the government from the private banks paying them interest, are particularly poignant today as presumably the government is borrowing from the same or similar institutions they are lending to in order to bail them out of the situation they have got themselves into, is this correct?! This situation may turn out to have been not simply due to an initial economic downturn, but to outright corruption, which remains to be seen.

Value: Your comments and those of others on value are fairly new to me and maybe to others, I wonder if you have a summary to explain its importance?

Leonie
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Kevin Burns



Joined: 03 Jul 2007
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Location: Lewes, England

PostPosted: Sat Jan 17, 2009 10:32 am    Post subject: Reply with quote

Leonie

I haven't come across Soddy before, but I responded before reading this to Richard's post on inflation.

I'm not personally convinced that Georgist ideas on land have the same relevance today as they did in his time - when land owners ruled the world and squeezed tenant farmers till the pips squeaked. And I suppose I'm agnostic as to whether he was right anyway.

But I think this question of money supply is very germane at the moment. Why should our Western culture with its leader, Ben Bernanke, not be about to follow that of Kublai Khan, Weimar Germany and Zimbabwe? If money has no relation to actual wealth, then its notional value disappears, and we are left with some paper that we can burn to produce electricity or heat, or perhaps could be recycled as Andrex.
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Leonie Humphreys



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PostPosted: Sun Jan 25, 2009 11:42 am    Post subject: Land and Money Reply with quote

Kevin,

My understanding of the Land issue (derived from the work of Henry George) for the modern situation is that because the 'rent' or 'surplus' 'land value' is driven into the hands of owners of land and natural resources due to outright private ownership, there is never a chance of real social equity. This is because it tends to create what Obama called (in his inauguration speech) a 'leisured' class as these owners receive 'unearned' income. Those 'makers of things' as Obama put it receive a lower 'earned' wage than they might if this source of 'rent' was used for public revenue rather than taxing employment. Hence we see an imbalance in income distribution or the distribution of wealth. More studies are required to prove if this is indeed the case in my view. (See also topic 'Opportunity out of Crisis' on this Forum for more on Obama's speech).

As for money I think Soddy has got it right, and would like to see the ideas of the Money Reform Party put into practice! It is frightening as you indicate what could happen if something a bit more radical than bailing out banks by the current method is not undertaken by our government(s).

Leonie
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Kevin Burns



Joined: 03 Jul 2007
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PostPosted: Sun Jan 25, 2009 7:35 pm    Post subject: Reply with quote

Quote:
More studies are required to prove if this is indeed the case in my view.


Well, absolutely. It is one thing to say that here is an injustice, another to claim it is THE source of economic injustice, without righting which there can never be equity. The first claim can be debated and explored rationally; the second seems to me so large and untestable as to be in a different realm. I wonder whether you are distinguishing between the two.

I wonder whether the current crisis is really solvable by any method. Maybe the house of cards has to come down in order to teach people why it got into such a mess. This year to Dec 08, Bernanke almost doubled the amount of dollars in the world, buying up toxic securities with money created out of nowhere. That, to me, signals that the dollar is now worth half of what it was a year ago, although the reality hasn't sunk in. Can this be anything other than postponing the inevitable pain? Can we believe he (and therefore we) will get away with it?
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Leonie Humphreys



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PostPosted: Mon Feb 23, 2009 2:29 pm    Post subject: Who really wants to work towards equity and sustainability? Reply with quote

Kevin,

Under capitalism as it was put forward by Smith and has developed over the years the 'economic rent' has never been collected for public revenue in a full enough way to really test the theory put forward by Henry George and developed by others - that it could at least help to lead towards equity and sustainability. In my understanding the theory is sound though for some places. Again time and place are also relevant.

Furthermore, as you point out there are surely other ways to work towards equity and sustainability - the theory of capitalism is not the only way to run an economy (and now global economy).

I understand what you are saying about collapse but I differ in this respect - if we don't really want 'justice, equity and sustainability' we probably will let it collapse and then do what we can to pick up the pieces - but still without bothering too much about justice, equity and sustainability!

So - we are grown ups and we have to decide - in order to be selfish we have to be unselfish at some point! What I mean is if enough of us humans do decide that we do want to work towards equity and sustainability to prevent collapse (which will surely be worse for everyone), then we can test these theories out - either the capitalist model reformed by George's ideas for example and coupled with monetary reform, or some other system. It seems to me that we have something in operation that could be reformed without waiting for collapse.

We should not underestimate though the power of those that do not want equity and sustainability - indeed there are those that specifically want power over others and wealth for themselves at any cost to the whole of humanity and nature ..... we may have to fight for it!
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