Just went through a long.. but very interesting video one of my friends sent me! Really learned quite a bit about it…
http://video.google.com/videoplay?docid=-9050474362583451279
But I kind of think it is a little exagerrated by some environmentalist + monarchy/communist people. Though it is true that the money supply will keep increasing because of the interest payments… which has been the case for the past many years…. but this does not necessary translate to consumerism and more trees being cut etc….
The economy can very well produce the same amount of goods. The increase in money supply will just produce inflationary pressures as more money is chasing the same amount of goods. System can still be stable… its just that money will lose its value over time … and like what the video said… it will have the same effect as imposing a tax on those with money….
And surely, that cannot be a bad thing right? Rich people with loads of dollars being taxed more… to create a more equal economy? Hmmm…
Actually, I kinda agree with the video on the consumerism part. Problem is not the interest alone, but the fundamentals on how money supply is created. Currently, it is fueled by money debt and supported by the reserve ratio. This results in consumerism and depleting of resources at a faster rate than necessary.
Money is created when someone loans from the bank to buy house, car,etc. This extra money in the market fuels consumerism. Therefore, the proposed solution of creating money by matching value add makes much more sense.
Hmm… okay… maybe it fuels consumerism, ‘cos if loans are no longer that easily available, how can we buy house, car, etc.. on debt? And yes it will result in a depletion of resources at a faster rate.
But, that is an indirect cause.
Fiat money + reserve ratio by making loans more easily available actually unleashes a lot of capital to the business communities. These capital is important to the productivity of the world which generates a lot of modern day conveniences.
A lot of farmers in India use primitive agricultural methods as they cannot afford machinery to plough the fields. It is through this debt-based money creation mechanism that allows them to have access to micro-loans… that enable them to buy machinery and create higher productivity. Without such a mechanism, they will be force to slowly plough and sow to create value … and save the value …. till it is substantial enough to buy machinery, etc……
Likewise, for those tree choppers. Why the world’s trees are being cut at such an alarming rate is because we are becoming more efficient at cutting them and consuming them… and yes … it is largely based on this debt driven economy.
Without this debt driven economy, loans will be roughly equivalent to deposits… which as illustrated.. can shrink by over a 100% (based on the videos 1112 dollars ballooning to over a 100000). This results in capital being really scarce…..
Oh.. yah… the solution did not mention about whether banks will still be able to lend money based on interest rates… But with capital being scarce, banks will either:
a. lend money by favouritism, relationship
b. lend money to the highest bidder (interest rate)
(a) is a tragedy. (b) is more sensible… and interest rates will go up, crowding out both consumerism (in terms of cars, houses, etc…) and investments.
So.. after talking so long, what is the difference in using a reserve ratio requirement and a 100% value based lending? Actually, consumerism is not fueled by either of this, since both will require lending in interest. It is fueled by mainly … interest rates.
LOW INTEREST RATES IS THE MAIN CAUSE OF CONSUMERISM. It is the root of all evils.
By fixing loans to a 100% value system, there is no advantage other than totally eliminating monetary policies. By doing that:
a. capital will drastically shrink immediately
b. capital can no longer be controlled by simple monetary policy. It can only be pumped into the economy by the government through fiscal policy, i.e. pumping in tonnes of infrastructure project (that is super prone to corruption)
To halt consumerism, it is far better to just raise interest rates.
Unfortunately, that will kill many businesses as quite a lot of businesses are earning record profits due to over-gearing and financial engineering (by using cheap loans to finance their profits over equity) This might cause another meltdown of our economy…..
So.. ta da.. we are stuck!
I think alot of the arguments against value-based system like capital shrinking, favouritism and corruption are a result of a lack of understanding of how this new system might work. Too many assumptions are made based on boxing our thinking on current fiscal policies. We need to think out of the box.
So who really understands how it could be revamped? I don’t think anyone knows yet… perhaps we’re just waiting for the new nobel prize winner in economics to give us a solution. He may still be schooling today.
At the end of the day, the video doesn’t give concrete solutions. They don’t have the solution. What it is saying is that the fundamentals behind using debt money to inject money supply is flawed and unsustainable. I can imagine that fiscal policies will be fundamentally different 100 years down the road.