Money and value
- Thread starter littlebabyjesus
- Start date
littlebabyjesus
one of Maxwell's demons
Ok, I get that too. You may be finally breaking through here, ld. That makes sense.
littlebabyjesus
one of Maxwell's demons
no
I never had that much confidence, tbf. I was genuine when I asked what was wrong with that picture.
love detective
there's no love too small
good - time for a break then (it may be a problem in the way i've articulated it, but i've been 'saying' the same thing in pretty much every discussion/thread we have had on this)
TruXta
tired
Fiat, consensus, call it whatever you like, it's still nothing mysterious, unless you think human values as such are voodoo.
littlebabyjesus
one of Maxwell's demons
It does matter. And I think it is a fucking difficult thing to think about properly. I find quantum mechanics easier than a lot of this stuff. Relativity? Piece of piss! Love detective has in fact - finally, I'm sure he would say
- cleared some things up for me. But I'm going to leave it alone for now, I think.
ItWillNeverWork
Messy Crimbobs, fellow humans.
love detective
there's no love too small
sometimes you need to take a good few steps backwards, to establish firm foundations, before you can go forwards - i've mentioned a number of times in our various discussions that your logical reasoning about a lot of things in relation to this is generally pretty sound, but the starting premises of a lot of it left a lot to be desired - which in turn results in you coming up with some fairly daft conclusions (at times you do come across as some kind of metaphysical austrian economist - as you place too much emphasis on your abstracted reasoning/logic alone - without ever venturing into the real world to test/validate your hypothesis) - it's worth taking the time to get the foundations right if you're serious about understanding this stuff properly - it may be a bit of a bind to step backwards to do this, but it's worth it in the long run
and, imo, one of the best ways of establishing a solid foundation from which to build from is to read all three volumes of capital! it gives a superb framework in which to think about all this stuff within
littlebabyjesus
one of Maxwell's demons
That is good stuff. Ta. Very thought-provoking. I very much like his line that 'Money is a promise. And it is a promise we keep to those we value and break to those we do not.'
littlebabyjesus
one of Maxwell's demons
Ok, I can't leave this alone it seems. Another question for someone to answer (sorry if this sounds stupid):
Since commercial banks can only lend money on the basis of their deposits, how exactly did the credit crunch happen?
If the rules say you can only lend 80% the value of your deposits, say, that means that however much you've loaned out, you ought in theory to be able to cover it with your deposits (assuming there isn't a run where every depositor wants their money back). The loans were made on the basis of gross overvaluations of assets, but that only matters if the debtor defaults.
Was the crunch caused by mass defaults on assets worth far less than the loan value? Or was the money the banks were lending out in reality not backed by deposits but rather really and truly 'created out of thin air'?
Since commercial banks can only lend money on the basis of their deposits, how exactly did the credit crunch happen?
If the rules say you can only lend 80% the value of your deposits, say, that means that however much you've loaned out, you ought in theory to be able to cover it with your deposits (assuming there isn't a run where every depositor wants their money back). The loans were made on the basis of gross overvaluations of assets, but that only matters if the debtor defaults.
Was the crunch caused by mass defaults on assets worth far less than the loan value? Or was the money the banks were lending out in reality not backed by deposits but rather really and truly 'created out of thin air'?
All cultures see usury as magical when it is first introduced, including Western culture in the C16th and C17th.
And they are right to do so. Usury, which is the essence of capitalism, is the bestowal of life on what is lifeless.
newbie
undisambiguated
if a commercial bank can lend $100 (and get paid back $105) while only holding assets below $10 how is it not creating money?
www.bankofengland.co.uk/publications/fsr/2009/fsrfull0906.pdf
www.bankofengland.co.uk/publications/fsr/2009/fsrfull0906.pdf
Attachments
In short, the former. In long, neither, exactly.
Subprime mortgages were bundled together and the collection of them sold on as a single asset (like a single corporate bond that is actually a whole load of small loans, but you "don't need to know that"
). This process is called securitisation.Some startlingly poor understanding of statistics led some morons to declare that these bundles were ultra-safe because diversification would mean that they wouldn't all go at once. This was mistake/intentional fraud 1. As a single securitised asset they were rated as AAA, as if they were loan paper issued by Berkshire Hathaway or General Motors (if GM are still AAA).
Companies have assets backing their liabilities. Financial institutions in particular have to have assets backing their liabilities. AAA loans are good for this because they are supposed to be cast-iron, offering a tiny fraction above government bonds for a tiny risk. So these AAA securitised loans were bought -- NOT as speculation but for the exact opposite reason, for stability.
When the market went south, the error was revealed -- loads of defaults happened at once and the securitised loans failed. This wasn't in itself a problem. Junk bonds fail all the time. The problem was the mismatch on the expectation of risk and, crucially, the complete surprise that low-risk was failing. This made big companies shaky and that had a snowball effect -- THEIR loan paper couldn't be trusted either and companies with those bonds were also in trouble.
The upshot of all that uncertainty was that credit spreads widened. That means buyers demanded higher yields for the same bonds, I.e. They wanted to pay lower prices.
This meant that the value of bonds was falling all over the place, so companies' assets fell and their apparent security was now in question. In turn, that made banks more reluctant to lend money to them.
So a double whammy happened -- banks' own assets were falling in value and also they couldn't trust the security of other companies. They couldn't afford to lend (that solvency %) and they didn't want to lend. Hence credit crunch.
love detective
there's no love too small
I don't know how many times I can say it, or how many different ways I can say it, but commercial banks cannot create money out of thin air
I know it might seem like an attractive rhetorical critique in the era of the soundbite, but it's a baseless & inaccurate. Your far better to understand how the wider system works as there's plenty in it to critique that's just as biting and hard hitting, and is actually true, as opposed to this 'out of thin air' stuff.
Think about it for a minute, if banks could create money out of thin air - why would there be a banking crisis at all? The first big tangible collapse in the UK as a result of the crisis was Northern Rock going under. The direct cause of this was not because of bad debts, but because they were unable to fund their ongoing operations in the money markets , i.e. they weren't able to borrow enough money from the markets to continue (compounded by a run on the bank with its customers withdrawing money from it). If commercial banks could just create money out of 'thin air' why didn't they just do this to survive? Why did it matter that both individual customers were taking their deposits away from it and the domestic & international money markets were refusing to lend to it? Why did it have to rely on things external to it if it could just create money out of thin air? The answer is of course that they can't do that. As previously said, the banks are not the independent driver/variable in all of this
If you want to borrow money from a bank, the bank can provide that money in three ways:-
i) it can use existing money coming into it from repaid loans, interest on existing loans, or customer deposits to fund the loan
ii) it can sell existing assets to convert them into cash to fund the loan (this general manner also covers new central bank base money coming into the system, as that's the way it enters the system) - but it must sell them at a level that doesn't cause it undue losses
iii) it can borrow from the domestic or international money markets, and then lend that money on
There's no 4th option where they can create money out of thin air - all three things above depend on someone else, somewhere else, doing something, that then allows a bank to lend
Kabbes has covered the point about the crisis - but in short, it's because value generation didn't match up with (fictitious) capital circulation and because of that, the latter had to be destroyed to reestablish value relations. lending in itself doesn't tell you much about the system, what's important is whether the money that starts circulating as a result of that loan ultimately takes part in value production somewhere else - if it does then things can hobble on, if not then crisis will intervene.
This is why I thought your initial hypothesis in the OP was daft & pointless - you were looking at the wrong driver (interest rates) to explain the wrong thing (inflation). You need to go deeper and actually think about, and understand, money and value - before looking at the effects of those things and their relationship with each other
love detective
there's no love too small
Historically lots of things have been seen as magical or supernatural - doesn't mean they were or are
I've kicked your arse on this point many times on MATB - but once more:-
the essence of capitalism is the accumulation of capital through the appropriation of surplus value (via exploitation of labour) in the sphere of production and it's subsequent realisation in the sphere of circulation
capital, and capitalism, can exist (hypothetically) without lending, it can't exist without surplus value appropriation. lending may help speed up & deepen the process of surplus value appropriation but it's not a proxy or a substitute for it. If it was impossible to extract surplus labour, then no amount of lending would enable capital to valorize itself, and capital along with capitalism itself would be no more. lending at interest is not the essence of capitalism
your thoughts on this are infantile posturing to be honest
love detective
there's no love too small
because money is not created, it is just circulated - look up fractional reserve lending on wikipedia to get a basic handle on it
If i buy something from you for £10, you can then buy something from someone else for £10 and that chain could continue for ages - £10 has effected the purchase & sale of say £100 of sales & purchases - i doubt anyone sees this process a creating money.
fractional reserve lending is pretty much the same principal as this, except that it's not direct purchases & sales between two parties, but instead they are mediated by the banking system lending & borrowing the money - which in turn creates a build up of assets & liabilities within the system - all on the back of a small amount of central bank money - if one person then repays the £10 loan, that can allow the whole chain to also be repaid without any problem
I'll add that many features of the economy have chaotic features, such as amplifying feedback. As such, attempting to isolate any couple of variables and think you can explore their relationship in isolation is always going to lead you to paradox and confusion.
It's a mistake that politicians are very fond of making.
It's a mistake that politicians are very fond of making.
love detective
there's no love too small
Less so if those attempts are made within a structured approach to doing so where you have a proper framework of understanding to work within - and you then work through the whole permuations of variables, continually holding some constant to see the impact on others, then moving on and doing likewise with the rest, then build all that up into some kind of properly constructed model (i.e. a bit like marx tried to do - although overall didn't really get there). Not saying it's possible to do, but the more it is done within this kind of framework, the more useful the results will be
hence my continued pointing out of the lack of a foundational basis/framework in which lbj thinks about these things
littlebabyjesus
one of Maxwell's demons
They can if they are being fraudulent, which is why I asked that - if they lend on the basis of deposits that in reality don't exist. There are a great many people who should know better who think this is what happened - the link TruXta gave for instance, talks about it. But in reality, it appears that it is actually something else - the overvaluation of assets and misjudgement of risk.
love detective
there's no love too small
you can't lend what you haven't already got yourself - i went over the three main areas of where a bank can get money to lend (fraudulent is just a legal concept, it's not relevant here)
if something doesn't exist you can't lend it, simple as that - if it does exist (whether or not it actually will lead to an underlying production of value or not) you can circulate it further
you are conflating the existence or future production of value with the existence/circulation of money
if something doesn't exist you can't lend it, simple as that - if it does exist (whether or not it actually will lead to an underlying production of value or not) you can circulate it further
you are conflating the existence or future production of value with the existence/circulation of money
love detective
there's no love too small
if anyone is interested on debate around dwyer's assertion that usury is the essence of capitalism - there was a reasonably short discussion about it here on MATB (dwyer is poortom there and i am oisleep)
it pretty much starts from top of page 2 (although it doesn't reallty get going until the end of page 2) and goes on to page 4
it pretty much starts from top of page 2 (although it doesn't reallty get going until the end of page 2) and goes on to page 4
littlebabyjesus
one of Maxwell's demons
Really?
How can that be true? What is there to stop a bank from loaning more money than it has on deposit? I know that would be against the rules - hence fraudulent - but what is to stop them running false books and trying to get away with it?
love detective
there's no love too small
it's nothing to do with it being against the rules, it's physically & logically impossible it's nothing to do with legality - lending by commercial banks is the circulation of money within the system, if it isn't circulating you can't in turn take part in that circulation - this is why everytthing went tits up when money stopped circulating in the system at the end of 2008
if i want to borrow money from a bank to buy a house say, the bank has to find that money and lend it to me so i can buy the house - it's can't make it up out of thin air - if it could make it up out of thin air then you have to ask yourself why was there a bank crisis in the first place if banks can just make money out of thin air. if they could just make money out of thin air they wouldn't have to rely upon anyway else (money markets, customers, govt bail outs) they would just make money out of thin air and they would be fine - but they can't, so they don't and they aren't
if i want to borrow money from a bank to buy a house say, the bank has to find that money and lend it to me so i can buy the house - it's can't make it up out of thin air - if it could make it up out of thin air then you have to ask yourself why was there a bank crisis in the first place if banks can just make money out of thin air. if they could just make money out of thin air they wouldn't have to rely upon anyway else (money markets, customers, govt bail outs) they would just make money out of thin air and they would be fine - but they can't, so they don't and they aren't
ATOMIC SUPLEX
Member Since: 1985 Post Count: 3
Tee hee.
love detective
there's no love too small
anyway - i've been dragged far too much into spending time on here on this the last few days - i've made my case as clear as I can and i'll leave you all to it now
my days of spending all day every day on message boards trying to convince people i'm right are thankfully over
my days of spending all day every day on message boards trying to convince people i'm right are thankfully over
If anything is magical, usury is. I suppose you could argue that nothing is magical. But that is not a very useful position when discussing cultures which agree on the existence of magic.
The essence of capitalism has changed over the last thirty years, as the "economy" has become de-materialized and financialized. Capitalism in its twenty-first century form could not exist without lending. Today's economy is based around financial practices that would universally have been regarded as usury in the past.
You know that isn't true, and I know that you know it. So why say it?
littlebabyjesus
one of Maxwell's demons
I think ld's own analysis would contend that this bit is true - without demand for loans, money doesn't do anything. Money only properly exists in a sense when it is handed over - taking ld's point about QE: if you create money for which there is no demand, it just sits there doing nothing and not affecting the economy at all. And the size of the money supply is dictated by the balance between borrowing and paying back loans - paying back loans taking money out of circulation, borrowing putting money into circulation. It's central to the whole process of money production, and given that money represents debt, it's hard to imagine it any other way.
Mmmm... a tactic very familiar from our discussions over the road.
love detective
there's no love too small
i have weak will power but this is definitely my last post on the matter
If you look at what I said, I said:-
capital, and capitalism, can exist (hypothetically) without lending, it can't exist without surplus value appropriation
If you want to understand what capitalism is, you have to understand what capital is - and it is unpaid/appropriated labour. That is the foundational basis of capitalism. Lending of money , particularly in 21st century, may well be necessary but it's not sufficient. lending money doesn't directly lead to unpaid labour being appropriated in and off itself, and turned into capital. it may do, but it may not - this is my reason for saying that lending of money is not the essence of capitalism. Capital can exist (logically and practically - although in practice it would be a very different scale) without the lending of money, it can't exist (logically or practically) without the appropriation of value.
There are lots of things where something is necessary for something else to happen, but it doesn't make it the essence of that thing - if you want to get to the core of what capitalism is, you need to go right to the core of what it is and build up from there. The financialisation of capital in the last 30 years may well give an impression that capitalism is now changed in essence and it is just about the sphere of circulation and the circulation of value rather than the sphere of production and the production of value - but the financial crisis has shown that this was nothing more than that, an impression, the system moved too far away from the thing that anchors it, i.e. value production - and crisis then did what crisis does - it irrationaly rationalised and irrational system. no amount of money circulating can magic value out of thin air, it has to be produced for capital to sustain itself - it can perhaps hobble on for a while without that happening, but it's own contradictions will eventually put a block on that
dwyer said:
The whole point of LBJ starting this thread was to get feedback on a hypothesis he thought was true - within a number of posts from me, he got what he was looking for, i.e. an understanding of where and how his theory was incorrect and he graciously admitted and accepted his initial assertion had no legs - so i'm hardly running away - the objective of the thread has been achieved
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