The debt is simply the broad money supply. A surplus on someone's accounting books, profit, makes no difference unless it causes a loan repayment that works its way back to the central bank and causes some of those trillions to be deleted from the system.

[snip]

As for the amount of money vs global GDP, since when does an anarchist care about aggregate government statistics? It's like being enthralled by the World Weather Report despite not planning to do any travelling. Its relevance is minuscule at worst.

Finance Part I: Understanding the Parasite

Modern finance leads inevitably to decimation of the middle class and eventual systemic collapse. Understanding how and why is critical to securing a future in a dangerous era. This post is the first in a four part series designed to open your eyes and show you the dark machinery behind the glossy curtain of propaganda. Let’s take a moment to look past the lies. You may not like what you find.  


To understand finance we must first understand the process of money creation. Economic textbooks cover this topic in great depth. They spoon-feed inquiring minds false conceptions of money multipliers and reserve requirements. This "official" version of money creation is clean, comforting, and concise. It is also  grossly and provably false.

Banks create money by making loans, but this process is not in any way constrained by reserves, deposits or a money multiplier. Banks do not need deposits to make loans. The idea that banks somehow lend out grandma’s savings is propaganda. Instead banks simply create money via accounting wizardry. When a bank approves a loan they simultaneously create a deposit in the borrower’s bank account and voilà new money is created. Banks do not function by lending out deposits. Instead the act of lending creates more deposits. This is the reverse of the sequence taught in almost all economic textbooks.  Banks create deposits at will.

Economic texts often state that banks are constrained by reserve requirements. This is another lie. There does exist a number called reserve requirements. However, if a bank needs more reserves these reserves are simply supplied to meet this demand. Depending on the country this is done either directly by the central bank or via interbank lending at interest rates that are suppressed by the central bank. The theory of the money multiplier is false. In reality there is a reserve multiplier. Central bank reserves are increased by a percentage of the amount money banks choose to create.


So what does limit money creation by the banking system? Primarily the banks themselves do. Individual banks have to find someone to lend to who is capable of paying them back or at least someone who has valuable assets they can seize if the loan is not paid.

The Banking Tragedy of the Commons

Modern banks are not limited by reserves. Instead, they decide how much to lend based on the profitable lending opportunities available to them. As banks have no real restraint on the printing of new money, they are prone to print excessively. Left to their own devices banks will steal too much in a banking tragedy of the commons. Banks function by harvesting the wealth and productivity of society. The wealth of individual families is the main course. Banks looking to maximize profits risk creating too much new money. This can trigger a cycle of hyperinflation where the increased supply of dollars drops the values of the currency to such an extent that people spend them as quickly as possible. This supply-velocity feedback cycle left unchecked severely undermines the value of fiat currency. The logical conclusion of such excess is abandonment of the fiat currency for an alternative like gold or perhaps someday cryptocurrency. Hyperinflation is thus banking Armageddon. It represents the destruction of their food supply and must be avoided at all cost. Banks rely on a central bank to prevent this outcome.

If a bank ever finds it needs more reserves it simply gets them from another bank. This rate of interbank lending is set by the central bank. In the US this is interbank rate is called the federal funds rate. The FED sets a target for this rate and creates or destroys money via open market operations to make sure the actual interbank rate is what they want.  It is the spread between the interbank rate and the rate a bank can loan money for that limits lending. Central banks thus raise and lower the interbank rate to maximize bank profits. If banks start to siphon too much wealth from society inflation rises. The central bank will then raise the cost of reserves to slow the rate of over-harvesting.

The newly created money travels through the system helping the early acquirers first. The purchasing power of money falls in response to an increase in the quantity of money. In the real world a hypothetical increases in the money supply by 100% does not as neoclassical economics assumes simply lead to an equal across-the-board increase of 100% in prices. The banks do not descend overnight and double everyone’s cash balance.


This results in redistribution from the late receivers to the early receivers of the new money. This occurs both during the inflation process as new money finishes working its way through the system and leads to permanent shifts in income and wealth that continue even after the money has reached a new equilibrium. The simplest example of this is fixed income groups who receive no new money in this process.

Finance Part I: Understanding the Parasite
Finance Part II: The Parasitic Cycle
Finance Part III: Divide, Conquer, Enslave
Finance Part IV: The Rise of Cryptocurrency (Coming Soon)

References:
McLeay M, Radia A, Thomas R. Money creation in the modern economy. Bank of England Monetary Analysis Directorate Quarterly Bulletin 2014 Q1
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf
Rothbard MN. The Foundations of Modern Austrian Economics, Edwin Dolan, ed. (Kansas City: Sheed Andrews and McMeel, 1976), pp. 160-184
http://mises.org/rothbard/money.pdf

Yet real world debts are paid off every day, and even loans that go into default must somehow be satisfied. Therefore, there must be an average loan repayment time, like I said in the first place. Sure, all it takes is one outstanding loan and mean repayment time becomes indefinite, but that's not the same as infinite. And a mean is just one type of average statistic.

Sadly the links above are a summary. That's why we are so screwed. The problem is sufficiently complex and subtle that society as a whole and most individuals will never understand it.  

Essentially society is trapped in a cycle of ever increasing economic inefficiency. Our collective lack of understanding of the fundamental cause will result in attempted "fixes" that will worsen the underlying problem. The end result is economic collapse. The world will not end but we are facing something that is likely to exceed the Great Depression.

To understand why, and why society cannot avoid it (although individuals can) you have to understand the linked works. It's not an easy read.

Can we just blame the Gov and talk about basic libertarian solutions?

I am quite flabbergast that Eric S. Raymond (self-professed to have 150 - 170IQ, the creator of the "open source" movement) could get the logic so wrong on the coming Knowledge Age.

In his critique of Jeremy Rifkin's book, The Zero Marginal Cost Society, he misses the key generative model of open source, which is that the source is always changing. The enslavement of knowledge by capital is due to the transactional cost of the propagation of creations. As we lower that friction, knowledge takes over.

And he apparently fails to comprehend capital can't buy knowledge because thought isn't fungible, and this becomes more evident as the diversity of innovation becomes more fine-grained.

The claim that the material input costs will be significant relative to the marginal cost of distributing more copies of intellectual property is wrong because the only costs in material production that can't be reduced asymptotically to 0 at economy-of-scale and automation are the knowledge inputs. Thus knowledge is infinitely more valuable than material production at the asymptote. The only reason that capital has been able to enslave the knowledge portion of the cost in the material cost is due to inability of fine-grain, autonomous knowledge to control the creative outputs of material production. The 3D printer changes this because the printer will be in every person's home. The commodity value relative to knowledge value of raw material inputs will fall asymptotically to 0.

What Eric misses is that many types of intellectual creations and creative processes can be incrementally fluid and shared, including music, video production, medical processes, etc.. People can take the designs of others and refine them. This is precisely open source. It is not that we won't possibly use fungible money (micro payments perhaps) to pay each other for creations, but that money won't be in control of the startup costs. Individuals will choose what they want to work spontaneously. This destroys the power of stored capital to enslave knowledge.

We will still use this money to buy those non-creative things that drop near to 0 in price, such as raw materials and food.

This is what I was trying to explain to Eric a long time ago, but it just flew right over his (and his readers') cuckoo head(s) so he banned me.

Note this doesn't mean I am agreeing with Rifkin's Marxist conclusions about the end of private property rights.


Vertical integration enslaves knowledge and will fall away. Capital will increasingly become knowledge instead of stored fungible claims on labor.


Supercooperative doesn't have to mean Communism. It can mean more finely-grained, autonomy of work. Eric is conflating here, even though Rifkin was also apparently erroneously introducing Marxism. They both got it wrong.


Wrong! The commons means knowledge takes control. For example, physics assures us that energy is neither created nor destroyed, so it is only the lack of knowledge production that makes energy finite or scarce. And I am not referring to perpetual motion machines, rather to more efficiency and automation of extraction of energy through greater innovation due to faster propagation of knowledge.


Correct. Rifkin doesn't understand fine-grained, autonomy is the key element of the commons.


He makes it clear that he didn't even consider that the lower transactional propagation cost of digital distribution of editable creations increases the frequency, granularity, and autonomy of those maintenance edits. He apparently doesn't remember that Metcalfe's or Reed's Law says that as the number of those editing nodes increases, then the value of the knowledge network increases squared.


Ah he was so close to getting the point, then he screwed it up on the last sentence. Yes Eric, but what capital are they accumulating? Stored capital or knowledge capital. He just hasn't quite had the epiphany yet on how the relative value of stored capital can plummet.