Re: money [was SOCIAL CREDIT] Ludwig Mises, Adam Smith, and the method o

william_b_ryan@lycos.com wrote on "Social Credit":
> 
> -->I see a note about opposition to credit expansion.
...
>The Mises wing of the "Austrians" oppose any--repeat-
>-any credit expansion whatsoever.  They favor "free 
>banking" only because competitive banks are able to 
>collectively expand credit less that a centralized 
>system
...

My two cents about money, money supply, inflation, and the economy:

        1.  Central or "free" -- the bank serves only one
                critical function in an economy (a slight
                exaggeration, but not by much)

        2.  That function is wholly described in Roger Ward
                Babson astoundingly fine book on _Banking,
                Bond and Stocks: The Elements of Successful
                Investing_, 1919

                Do visit two citations to this book in the
                CITS DEBT WATCH:

http://groups.google.com/groups?q=%22roger+ward+babson%22+1919&ie=ISO-8859-1&hl=en

        3.  The one critical function of banking is to assure
                that the income from loans exceeds the cost
                of loans.

                Babson notes that the only thorough way to assure
                this is a banking process where bankers have
                extensive knowledge of the risks attendant to
                each loan.

                The banker sets a risk premium accordingly.

                The bankers who fail to do so, are put out of
                business during economic hardships.

                The bankers who loaned according to careful
                practices stay in business.

        4.  As for the money supply, as we know from the
                very basic principal of macroeconomics:

                PY=MV
                  (where P stands for aggregate price;
                  Y for national output; M for money supply;
                  and V for velocity of money)

                The relationship between M (commonly M2),
                and inflation is hotly debated.

                Indeed, if the treasury expands the supply
                of money via the purchase of goods and 
                services that no debt secures, then, they
                are truly printing money.  And, most often
                the result is inflation -- a nasty punishment
                of all "fixed income" folk, who, now, continuously
                pay the "hidden tax" imposed by the "printing
                of money" that lacks backing -- either as federal
                debt, or as a "call upon" future tax income.

                My point is -- unless hoarding occurs, the
                velocity of money can increase as fast as
                modern banking can get money to exchange hands.

                So, a fixed money supply has only a secondary
                effect on an economy's ability to grow, as, that
                growth can simply have a 1:1 correspondence with
                the increased velocity.

                But I do see a tension.  It takes time and
                deliberation for a banker to meet the risk
                assessment process described in #2, above.

                So, money on deposit could be slowed down,
                awaiting some decision.

                I counter my own concern by saying, the banks
                will hire as many such "loan officers" as 
                their lending activities pay for their salaries.  So,
                if the economy really needs "more money" --
                that is, the demand is such that the difference
                between the loan income and the cost of money
                to the bank is sufficiently positive to pay
                both the loan officers' salaries, and provide
                the requisite dividends, stock asset growth as
                demanded by shareholds, there will be that many
                more loan officers and the velocity will be
                increased accordingly.

In summary, it is my view that over 90% of outstanding loans
would not pass the risk/security test that Babson describes
in his 1919 book.  I.e., we are facing the possibility of
huge defaults.  Does FDIC save the day?  Well, if you are
a federal government with a $44 trillion debt, and if an
economic downturn assesses that the U.S. Federal Government
is a bad risk -- they have no money except via taxation.
(there is less than $1 of reserve against every $100 of FDIC
insured funds)

And, if we have a President who doesn't have a clue about
all this, and he actually just signed a bill to yet increase
the U.S. Federal debt by another $330 billion per year, and I'd
say "our goose is cooked."

There is only one, non-hyperinflationary avenue out of such
a mess.  The President has the power, by executive order,
to convert all "T" bills to 30 year bonds.

In doing so, he could:

        1.  Reduce the probability of default on government
                borrowings (debt)

        2.  Make a call on the next generation to pay for
                his (and Reagan's) mistakes in dramatically
                ballooning the federal debt

Regards,

Curtiss

P.S.  As I make the transition from microeconomist to
macroeconomist, I have essentially had to "go back to
school."  So, I welcome, either on list, or by private
e-mail any and all criticism about the "facts" stated
above.
-- 


           W. Curtiss Priest, Director, CITS
   Research Affiliate, Comparative Media Studies, MIT
      Center for Information, Technology & Society
         466 Pleasant St., Melrose, MA  02176
   781-662-4044  BMSLIB@MIT.EDU http://Cybertrails.org