Yes, interest is constantly being collected on the money supply. This interest doesn’t disappear. It goes to bankers. The bankers grow rich, but they eventually spend their money and the system keeps chugging. If the banks stopped spending their money and just wealthier and wealthier, then that would be an obvious way the system breaks down. In fact, if any large-enough group stops spending money, the system breaks down. (Money must always be flowing, or people can’t have paying jobs.)
That, really, is the central flaw.
Incidentally, the best way to deal with it is to have fiat money.
BUT… I guess if there was no more borrowing (to fuel growth), there really would be danger of money not flowing and languishing. I’m sure that’s what happened in history countless times. But it’s totally possible to deal with it, through strategic application of taxes, propaganda, consumer credit, and the like. As long as you have consumption, money can flow. And if you don’t have that, then do public works. Either way, capitalism has many potential downfalls in its natural state (as history bears witness), but nothing policy can’t fix.
Money (regardless of capitalist, communist, or what have you type of government) is portable wealth. The money itself is worthless (less than a dime to print a bill) but the numbers tell us what it is “worth.” But the “value” of the money depends on what is backing it. The U.S., and many other countries, back the money with just their word. We cannot exchange any government notes or currency for gold or silver with the U.S. Government (thanks FDR), we have to accept the government’s word on its value. Since there is no tangible backing to the money (be it gold, silver, goats, sheep, etc) its “value” is an abstract concept. How do I know I’m getting $20 “worth” of goods? The government tells us $20 is worth $20, but what is $20 worth? It depends on the government.
People and businesses determine if that government’s word has any “value.” Think trust. For example, I can exhange $1 of U.S. currency for a loaf of bread which reflects confidence in the word (trust) of that government. In Zimbabwe (as of August 2008) I could exchange $1.6 trillion (yes trillion) Zimbabwe dollars for a single (1) loaf of bread. The word of Zimbabwe’s government has very little value (no trust) which is reflected in what it costs to purchase an item. Bread is “cheaper” in the U.S. because we have faith that our dollar will buy the same amount of goods tomorrow as it did today.
Now I need an aspirin. I’ve got 2 Zimbabwe dollars, any one care to trade?
Well, we can’t all agree, can we? They’re wrong. IMHO, of course.
I’m curious, though, as to what it is “sustainability advocates” disagree with. Do they disagree that human beings are the most valuable resource they have? If so, they’re not just wrong, they’re wrong to an extent that suggests mental retardation. However, if what they disagree with is that we are at a point in in economic development where we have maxed out our available human resources and are overutilizing our natural and capital resources, well, there you might begin to put together an argument. And there are certainly localized examples where that argument would be very strong.
However, up to this point the world’s population has grown, and per capita wealth has also grown, so it’s apparently quite possible to have both, and I happen to believe that there is room for more people.
Theoretically, of course, a limit will eventually be reached. If the population of the Earth got big enough we’d be sitting on each other’s shoulders. As it stands, however, that’s not yet the case.
That said, I am hijacking a thread on monetary theory, so I should stop.
Well, it’s your word so I imagine it can mean whatever you want it to mean.
Again, if you want to make up your own definitions, it can mean whatever you want. I prefer the broader definition of capitalism. You buy a house, it’s your house. You start a company it’s your company.
The real world isn’t that simple though. There is a lot of stuff we would be better off with now instead of saving for years or decades. Homes, businesses, etc. These things create value for the economy as a whole. So since money is just a promise of value anyhow, why not enter into agreements where I will create the value now and in exchange for you giving me the capital now, I agree to pay you back over time with a bit extra to compensate you for the risk you are taking.
In other words, one thing I didn’t see at all in this video was that it’s desireable to pay a million dollars in debt (principle and interest) over time in order to build a $1.5 million business now.
Where the economy broke down is that these agreements became so complicated that no one could accurately assess their true risk. Turns out they were based on home loans to people who I wouldn’t lend anything to.
Doesn’t every successful business create value? Worker provides a service to her company, and company pays her. They’re both better off than they were before. Both parties make money. Value appears from nowhere.
It’s founded on a silly notion. When you put your money in the bank you still think you “have the money.” When the bank gives it to someone else they also think “they have the money.” So the money doubles. Of course, a better way to think of it is that no, you don’t still have the money, you gave it to someone else! The presumption that your money never goes anywhere and you can always expect to get it back from the bank opens up possibility of bank failures. So it’s surprising to me why we never ammended our concept of the bank more rationally. Probably, it’s bad marketing for the bank.
True, that’s the perception. But the bank isn’t actually giving the money to the borrower or doubling it – it’s trading it for a future income stream. That future income stream is only slightly larger than the amount loaned out, by the rate of interest. Thus the bank is creating value only through its profit, like any other business.
Bank runs can happen because banks are inherently set up so that deposits (their accounts payable) are generally callable in the short term, but their loan receipts (their receivables) are generally long-term. It’s not because of the creation of new money.
It’s not really silly. It’s based on the notion that all money is really a promise of payment and has no inherent value in and off itself. Me giving you a dollar is not any more tangible than you giving me a promise to give me $1.10 back in a year. Well, maybe it is, which is why your promise costs an extra $0.10 - to account for my risk.
While banks are litterally making money, they must also follow the rules of basic accounting to stay profitable. They don’t make a profit on the money they lend out. They only make a profit when you fulfill your obligation to pay them back.
