This is my commentary on the analysis of monetary inflation and income development by Dr. Harald Wozniewski, as presented on kiwifo.de, especially on page “60 Jahre Währungsreform – 60 Jahre Geldmengenwachstum“.

Our task is first to determine the real inflation rate (not by means of a shopping basket, which is hedonically corrected etc.). This is simple: If the inflation rate grows only as much as the GDP, its speed of circulation stays the same, so also the “difficulty of aquiring money”, so also the prices. Because, circulation speed is the ratio of GDP to money: Circulation speed of money = GDP / (M1 + cash). If this speed decreases, there is more money, and this means price inflation. This price inflation can however be hidden by the fact 

However, all this money is created by monetization: banks have securities in their books, and emit their own securities based on that, some of which (plus public bonds) are accepted by the central bank. So other banks can borrow them, place them at the central bank, and get cash money delivered in return. So higher monetization is only an indicator of credit expansion (potentially made possible by wealth accumulation as goods, like real estate that banks can use as securities). But still, by allowing this increase of monetization, teh central bank allows the same amount of inflation. Which, minus the GDP growth, means the same devaluation of wages, which are paid in this money.

We see: Economic exclusion because of money scarcity does not happen because there’s too little money in the system (the opposite is the case). Instead, because this money is not paid as wages.

Measuring the GDP increase year by year, after deducting shopping-basket based inflation, measures efficiency gains, and in one sense this is indeed the growth of the economy: more wealth because of more efficient tech. These efficiency gains normally have to be forwarded to the workers by wage increases that are the same as GDP growth (to keep mass purchasing power). But what GDP change does not account for is, what proportion of this total wealth is available for purchase from a worker’s income. This proportion steadily decreases because the monetary amount is more inflated than the GDP. In total, the “right of one EUR to a proportion of total GDP” has decreased by 74.3% from 1970 to 2012 [source, “Tabelle 2”.U53]. Of course, the “right of 1% of total money amount to a proportion of total GDP” has not decreased, but to keep their income at the same proportion of the money amount, the income of workers would have to increase by the same amount as monetary inflation. Which it did not.

This does not mean that workers are now, in absolute terms, worse off than in the 70’s: theres (1) profiting wealth accumulation because a house etc. can be used for decades, and (2) profiting from the increase of total wealth through advancement of technology. That’s why German workers don’t complain as much as they should. But in relative terms, they are much worse off: the entitlement from their monetary income to a proportion of the yearly produced total wealth (“GDP”) in 2012 was only 25.7% of what it was in 1970.

This does however not necessarily mean that prices are four times higher than they should be if worker’s would fare as well as in 1970 (or that workers would have to earn 4 times as much). It just means that, as they have less right to total wealth with their income, someone else has more right. But, as can be seen from the decrease of monetary circulation speed by 74.3% as well, they do not use that right, they just have it stored as money. Prices do not increase by monetary inflation automatically, but only if the circulation speed of the money decreases less than it is inflated. If those who have the additional money would (could) use it as often as in the 1970’s, that would of course lead to a fourfold price increase. But this is not even possible except as a one-time effect: their right to this money does not replenish as continually earned wages do (it only replenishes by interest), so the two cannot be compared easily.

So it is not justified from these findings of monetary inflation to say that workers don’t earn their fair share (that may be found nonetheless from other arguments!). Instead, if anything, then the monetary inflation amount that is beyond real wage increase rate (which means 10%, as since the mid 90’s there were no real wage increases) is a sum of money that is year by year distributed to “others” (banks, companies, privateers) while it should be distributed to the workers. This is for example 200 billion EUR from 20011 to 2012 [source, “Tabelle 2”.M52-M53]. Distributed to 68.4 million adults in Germany (data form 2011-01), this would mean an added income of 2923 EUR yearly. Instead, it accumulates “somewhere else”.

So what we have here is a phenomenon of wealth accumulation in money that was not there in earlier years. But since money is only a small part of a nation’s accumulated wealth, it is by no means sufficient to look at monetary wealth accumulation alone to determine a problem with wealth accumulation in Germany. Instead, one has to look at total assets.

So, in my conclusions, the arguments by Dr. Harald Wozniewski are internally misguided. Still, lots of interesting figures to find there from which you may draw your own conclusions.

Hummingbird weathering the snow

First interview on this site – feels quite special 😉

This interview is with Gayane and Karine Akullian, two sisters from Barcelona, Spain, currently working on their latest book "Lucha" ("Struggle"). I like it a lot for being this fresh, out-of-the-box approach to the Spanish economic crisis: they focus on the personal, mental dimension of the problem and solution, while most everybody else tries to fix it at systems level (and fails, so far).

You can take a detailed look at the Akullian sisters' project at their Indiegogo crowdfunding campaign for "Struggle", and if you think their idea deserves some support they'd of course be happy if you send them some bucks. (This way, you can effectively pre-order their book as well!)

When I found out about this book and the authors' insights into the Spanish crisis' social dimension, I recognized the opportunity to get valuable input for setting up an alternative economy portal in Spain. (A project for which I actively seek collaborators for right now, myself providing the software development. The proposal is not online yet, but compare my earlier articles about the quite similar LRIS idea, on time banking currency, on Bitcoin, and experimental thoughts on creating undestructible economy and solving unemployment.)

So here are the interview questions I gave them – and I'm really grateful for their answers, which unveil surprising cultural facts, informing the design of alternative economy software for Spain.

Gayane and Karine – would you tell us a bit about your upcoming book  "Struggle"? How did you collect all the real-life content you will integrate in the storyline? What inspired you personally to explore the "psychologic dimension" of the Spanish crisis and the mental ways of coping with it?

Well, "STRUGGLE" pretends to be a psychological approach to the financial crisis Spain is living in. Spanish population is facing tough financial conditions and individuals find different ways to overcome the situation: some decide to struggle and think of a solution while others just give up, blame everyone except from themselves and reach extreme actions. This way, "STRUGGLE" will tell the traces of the crisis from its beginning up to now on 4 lives and how they manage to psychologically cope with it.

Working at a place where daily contact with hundreds of different people is a must, we’ve had the privilege to be front-line witnesses of the financial crisis consequences on Spanish population. Experiences, complaints, advices….anything we've been listening to as part of our routine for quite a long time immensely helped us, so we thought it could be useful to others as well. There are many people struggling to overcome this financially critical situation and others who just want to know a little bit more the insides of Spanish crisis. By writing down everything we’ve learned we have the intention to provide the information these people could be looking for.

By facing difficulties ourselves we came to realize that psychics and emotions are two of the most potential drivers on our lives and this is no different: in this case too, both are motors for us to move forward or stagnate where we are. You may think, what’s there so difficult to understand? Of course the sentence itself is easy, but to actually feel it is way more difficult and serious as it can change the course of events. That's the reason why we've decided to give a psychological approach to the issue.

What is your own mental approach to master the challenges that this crisis set before you? Or more specifically, what's the next step you want to learn on that way?

Only death has no remedy: I wouldn’t say we managed to be immune to the worldwide financial crisis, but it’s true we greatly eased our ways. We understood that if you’re falling into a deep and dark hole, you can stop the downfall holding on to something and then it’ll be in your hands to decide if going back up or keep going down. If you’ve already fallen to the bottom your only and obvious way will be going up. As we see it, nothing of this will be possible without the correct psychological approach.

From the impressions you have from talking with Spanish people about the crisis: Which people are generally open in their minds to try radical and new ideas for the economy and for making ends meet? Like cooperatives, consumption groups, emigrating? Which people are not, and what kind of thoughts, attitudes and circumstances hold them back?

I believe any person is open to radical changes and ideas depending on the seriousness of his or her situation. I can’t say Spain is any different from other countries around the globe: be it they have nothing to lose or a lot to invest, anyone who understands the value of a penny will be open to radical ideas, but there’s no average profile for people making the ends meet nor common ways to do so. It’s easier to say that if they are not against, then they are in favor of trying something new.

Maybe those who are against are a huge point to Spanish economic crisis; Spanish people are way too comfortable and this lifestyle stagnates Spanish economy compared to other countries. On the whole, I’d lie if I said Spanish population is characterized by the entrepreneur vibe.  The amount of young people, even up to their forties, whose only aspiration in life is to have a 1000€ per month salary working in a responsibility-free job or those that don’t recognize as work anything but what’s related to their careers or interests is alarming. What’s even more alarming is the amount of people in their late twenties that have yet to discover what a job is. This young comfortable generation is slowing down Spanish economic recovery as they are, in a great percentage, against radical ideas or changes no matter how harsh their financial situation could be. I myself can list acquaintances or friends that, having finished their careers and even majors, are offered work abroad in countries like the States or United Kingdom but reject those offers because it means a great effort to them to leave behind their lifestyles.

53% youth unemployment is a sad number in Spain. How do the young ones affected by unemployment cope with it, mentally and practically? They will use several approaches of course, but maybe you see a major approach / group attitude too?

Nowadays’ youth, used to the society our parents and grandparents built for us, is looking for the “perfect job” with the “perfect conditions” that “perfectly” meet its profession, which is obviously an almost non-existent situation. Used to the pre-crisis ways, youth finds it difficult to take on nowadays situation and in fact, many don’t even realize the seriousness of it. As I see it, many young people, employed and unemployed, have a distorted view of what this crisis really means due to the influence of media. This makes them take the wrong ways that in the long run cause them pessimistic perspectives in life. Some decide to stay home and live from their parents and unemployment benefits while others decide to take the streets and shout out their opinions and pleas. I believe that if even a small percentage of this youth decided to take another way, to open their minds to wider and more ambitious perspectives, to give up their conformist and comfortable lives for some time, to venture and look for ideas, the Spanish crisis would have a turning point.

What's the state of e-commerce / Internet shops in the Spanish culture? That is, how common is it to buy and sell there (for the young ones, for the older ones)? What are the issues that keep this from being more common (like trust issues maybe, or preferring to buy locally and from a real person)?

E-commerce full integration in Spain is just a matter of time. Buyers and sellers are realizing the lower costs that e-commerce is generating and therefore the great amount of money they are able to save without losing the comfort in their lives. The fact that Spanish people are rather traditional and at some point quite distrustful slows down fast e-commerce integration, but it doesn’t keep it from facing a remarkable presence in Spanish commercial interactions. Most of youth is getting used day by day to sell or buy what they need and want using e-commerce, while older people are still reluctant to do so.

Let's assume a "big new webshop portal" pops up in Spain where you can buy and offer goods for basic needs, all without Euro currency. Instead people would pay with a worktime-based currency, so that everybody can participate by investing time. But learning to use the site and new currency would need an effort, maybe somewhat more difficult than learning to use eBay and PayPal. What part of the Spanish population would use such a platform in the current economic situation?

Well, that’s a difficult question. It’s a great idea, so it would easily find followers, those who are not afraid of new ideas. Still, being this traditional, Spanish people usually find it difficult to change ways they already are used to, even if it would be beneficial for them. As an easy example would be Facebook; the integration of the huge social network in Spain took a much longer time compared to other countries as people here were already used to different sites with social interactions. While it’s true that if the idea is good then it will generate a users’ base for sure, it’s also a fact that Spanish people are used to take things slow and cool.

What regions in Spain would you consider the most promising ones for such an "alternative economy marketplace" on the Internet to gather a large user base in the population? And, do you think it would rather work in cities or in the countryside, or both?

With no doubt, northern regions, as well as Catalonia and Madrid, are the ones that have what it takes to be immersed in an alternative economy marketplace as we’re talking about the economic motors of Spain. In regard to the second question, it would rather work in cities as the countryside has a low percentage of youth and Internet users in general.

What is the Spanish culture about mutual credit between friends, family members or long-term business partners? Esp., how do young people deal with this? For example, can it be o.k. to owe a sum of money / worktime etc. to a friend, or do Spaniards try hard to avoid formalizing / quantifying such things and rather just want it to be considered a favor for a friend?
(Note: The question's background is that debt between mutually trusting people is a requirement for some alternative currency systems, which are based on "IOU" notes ("I owe you"). Also I know I'm generalizing a lot here … there is of course not an average mindset or culture but a lot of diversity.)

You’re right; it’s difficult to make a generalization on an average mindset regarding this issue. The tendency is rather a taboo and people are very discrete about it. As far as I’ve seen, Spanish people are reluctant to lend money even if it’s to family or friends but when they do, they never take it as a favor and the tendency is rather to constantly remind that there’s a debt between the parties. But, as I said before, Spanish people are very discrete about everything that has to do with money and even more if it’s related to lending money so it’s really hard to say an average mindset.

My heartfelt thanks for this interview, you two! Wish you the best of success and a good time for finishing "Struggle".

Hummingbird image licenced CC-BY-SA 2.0, based on image by Darcys which was published on Flickr under CC-BY-SA 2.0.
Flower image licenced CC-BY, based on image by Nanagyei which was published on Flickr under CC-BY.

I found an interesting quote. I put it here, translated from German by myself:

So, capitalism never works out, because it constantly produces more than can be bought. That it can be maintained that long and produces a relative wealth for a small part of the human population is just because of perusing global differences and because of employing robbery and fraud. But even this wealth has its price and can only be seen as a relative wealth; because, one has to take into account the physical and mental degeneration and dissatisfaction of the wealthy citizens, in contrast to the often happy people of these plundered countries, even though they are often called “poor people”. [source]

Now what does this mean, it always produces more than people can buy? It works like this: the capitalists are those who, for any reason whatsoever, were able to accumulate some money. Now if they would use up that money for consumption, we would not have any problem, but: they do not want to lose that money again, they want it to make more money instead, to live from the interests (they are capitalists after all). So they invest it into companies (or states, which get it from companies by taxes), as this is the only way to “make gain”. Now if companies would spend all that money on their employees which again would spend it all on consumption, there would be no problem again. But the largest part of the money is spent for production technology, which then is used to produce goods for which there are no buyers. Because the employees did not get much …
In short: capitalism dies from deflation in the consumer class. Because too much money went into creating production facilties as a way to make more gain, neglecting that by cutting employee wages, they will (on large scale) lack the ability to consume. Making the production facilities run idle.

And shorter: capitalism dies because investing in production facilities is a bubble.

Addition: if we define consumption as an “irrevocable assignment of money to material goods”, then creating production facilities is of course production, too. But, if people cannot afford the goods, it is a form of consumption that does not increase the wealth in society, a useless assignement of money. Races around the moon would be just as useless.

Of course one could also argue that, if there is more supply than demand, then the prices will fall. Which would solve the problem if the capitalists would do that by waiving a part of their gain; but they always try to do it first by cutting employee wages. Which then reinforces the whole problem (on society scale).

After all, this leads to the following insight: an economy is healthy only the price sum of all consumer products produced and the sum of all employee wages is the same! Which is an objetive indicator for how much work time is worth: as much as needed to buy everything that is produced. The problem is, it seems that this condition will leave no gain at all to be made by capital investment! If somebody saved up capital, he or she might invest it as a tool (“lever”: allows to do move bigger things), but can not expect to make gain with the capital, but by using his / her own work time. The hourly wages of course can differ, and can make up the lack of capital interest (at least partially).

So as a solution, we would need this (and only this) element of a controlled economy: nobody is allowed to increase production capabilities (like founding another company, or optimizing current capabilities) if the wage sum of the whole society does not allow the society members to buy all the expected new products. This will make capitalists increase the wages of their employees to get allowed to found new enterprises. And that way, the employees get a fair share of the capitalists’ income (where fair means, enough to buy what gets produced).

Lately, I was engaged in a major discussion (thanks, uncle 😉 ) about the inner workings of the money and economic system. It was not really clear where the money to pay interest comes from … so now I invested some hours and found out about it. Here is a collection of various results.

Modern Money Mechanics

There is a great document titled “Modern Money Mechanics“, issued by the U.S. Federal Reserve Bank. It shows in good clarity the system of fiat money / fractional reserve banking. Here are some important insights from that, and based on that:

  • ”Assuming a constant rate of use, if the volume of money grows more rapidly than the rate at which the output of real goods and services increases, prices will rise. This will happen because there will be more money than there will be goods and services to spend it on at prevailing prices.” (p. 3) This states that it is necessary to increase the money base (M1) in the same rate as the economic output rises, to keep prices stable. (Note that economic output is not the same as GDP, as the GDP already may include price changes that as the effect of teh above mechanism; GDP cleared from inflation would be the way to measure economic output.)
  • “Changes in the quantity of money may originate with actions of the Federal Reserve System (the central bank), depository institutions (principally commercial banks), or the public.” (p. 3)
  • It was a small step from printing notes to making book entries crediting deposits of borrowers, which the borrowers in turn could “spend” by writing checks, thereby “printing” their own money.” (p. 3) And if individuals would act just as banks do, they would issue way more checks than they own deposits on their bank, trusting that only a limited number of checks would be converted to cash at any given time, while the rest would be used as means of payment much like currency.
  • In the fiat money system, banks could create money infinitely; this is limited just by the necessity that money must be trusted by the population or they would not use it. That is, it must maintain scarcity in relation to its usefulness (which is a verbalization for “value”, used in “Modern Money Mechanics”).
  • In a fractional reserve fiat money system that requires 10% minimum deposit at the reserve bank, every piece of money you deposit on your account is worth ninefold as much to the bank!!! Because it is allowed to, and will, create the ninefold amount of loans from that, keeping your money as the reserve 10%. So if you deposit 1000 EUR, it’s worth 9000 to the bank to work with.
  • Why do banks want people to never withdraw large amounts of currency, or carry large amounts of currency in their pockets, and rather pay with credit cards etc.? Because currency counts as reserve money, so has much higher value to the bank than to the customer. See: “A bank can always obtain reserve balances by sending currency to its Reserve Bank and can obtain currency by drawing on its reserve balance.” (p. 5).
  • “When deposits, which are fractional reserve money, are exchanged for currency, which is 100 percent reserve money, the banking system experiences a net reserve drain. Under the assumed 10 percent reserve requirement, a given amount of bank reserves can support deposits ten times as great, but when drawn upon to meet currency demand, the exchange is one to one.” (p. 18)
  • Now if deposits of their customers are of such a much higher value to the banks than to the customers (ninefold, in Europe), why do customers still get a crappy interest rate, even much lower than the onefold interest rate on loans people get from this deposited money times? Truly banks are the champs of capitalism. And, they even don’t tell customers what they do with their money … making loans from the the ninefold amount of it!
  • The reserve bank’s base rate of interest is the rate it charges other banks if these lend reserves. Yes really. Banks not only are allowed to create money by multiplying reserves, they are also allowed to lend the reserves to do this. Normally the base rate is the limiting factor to this, but in tough times, this rate can be 0%. (As done by the EZB during the 2008-2010 economy crisis.) A 0% base rate effectively allows the creation of unlimited money …
  • Central bank money is not money, according to “Modern Money Mechanics”. It is virtually destroyed until re-issued by the central bank. See the definition of M1 in “Modern Money Mechanics”. This means that central bank money makes noone any richer as long as it is owned by the central bank.
  • The increase of deposit money by means of the reserve multiplier in a fractional reserve banking system is the only way how deposit money increases; and deposit money is the same as “book money” (German “Buchgeld”), so this  is the way that Buchgeld increases. (And not some strange, often quoted re-lending of loans).
  • In the Eurozone, the fractional reserve is 2%, that is the resever multiplier is 50! That is, each currency euro is worth 50 euro for the bank …
  • Currency is central bank money. It is (logically) only created once when introdcing a currency, by handing everybody a free “start package”, or converting from previous currency.
  • Money as deposit money (that is, 97% of M1 in the U.S.) loses its trustworthiness if a good part of it was created with faulty securities, that is, no value that does back it. As this is the case currently, these subprime credits do not only endanger the borrowers themselves but also all people’s money because money itself is endangered. This danger becomes apparent in bank foreclosures; and takes effect if there are more foreclosures than the foreclosure insurance does protect people from. And if / as the whole bank system is full of faulty credits, the full deposit money system is endangered.

Is all money debt?

One way where the additional money to pay interest rates could come from would be, from new debt. This would be clearly the case if all money would be debt (where debt means, a liability with a non-zero interest rate). Let’s see:

In the U.S., at least all deposit money (that is, book money) is issued in exchange for debt:

Federal Reserve Governor Marriner Eccles testified before the House Committee on Banking and Currency, September 30, 1941. Congressman Wright Patman asked Eccles how the fed got the money to purchase two billion dollars worth of government bonds in 1933. Eccles answered, “We created it.” Patman asked, “Out of what?” Eccles replied, “Out of the right to issue credit money.” Patman queried, “And there is nothing behind it, is there, except our government’s credit?” Eccles responded, “That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.” [source; a more reliable source would be great]

In Europe, currency is not debt but an asset: because the mean fractional reserve of central bank money is stored in the central bank accounts, and banks get paid interest for that  [source] rather than the other way round. While they pay interest if they lend money from the central bank [source]. (The first kind of interest increases the money base (money creation), the second decreases it (money destruction); while the loan capital flow has the opposite effect.)

So, in both the U.S. and Europe, all deposit money is created from debt [source]. Central bank deposit money can be converted to currency 1:1. And sometimes central bank money is lended out for 0% interest. Still, this does not mean that customers could acquire new money that is not debt, as they can acquire newly created (deposit) money only through normal banks, which always charge an interest. So in effect, there have to be additional debts for successful payback of all interests. Successful repayment of all debts increases the money supply (M1), so necessarily increases the debt, as debt is needed as the counterpart to issue new deposit money.

However: the amount of new money (so, the amount of new debt), after being cleared from the debt destroyed in depressions and great depressions, seems to be a representation of the increased efficiency of economy [source: “On fractional reserve banking”, section “World destruction”]. This produces the paradox situation that increased economic efficiency (which is a good thing)  leads to a larger and larger debt load through interest (which is a bad thing). It is bad, because this debt load has to be managed. Over time, an economy becomes more and more unstable and crisis prone this way. What could be done against this problem?

Means against the debt trap

Note that this section contains mostly my own proposals.

  1. Inflation. Inflation (as measured by rising prices) is a devaluation of debt. Inflation as such is actually a number not saying much. If the price of an average small car between one year and the next stays constant, but the new model includes technical improvements (as they always do), this is actually deflation (because the same amount of money can buy more now)! In this sense, to get stable prices, we need inflation rates that are equivalent to the efficiency gain rates / technological improvement rates of the economy. This whole thing is not mentioned by people comparing the purchasing power of money from before 50 years or so with the current one. So, if the inflation rate would be exactly as high as the rate at which the money supply increases through new debt, the net worth of all debts would be unchanged and remain manageable. Currently however, interest rates (the rate at which debt increases) are normally higher than inflation rates, which means aggregation of debt until it becomes unmanageable. But when always letting the inflation rate be as high as the interest rate; or in other words, the debt would stay manageable. This keeps the economy stable, but might have disadvantages in that it discourages research to improve efficiency, as higher inflation will shorten the benefits gained through efficiency increases (though there are always benefits in relation to competitors, but not in respect to the rest of economy, that is, to purchasing power of earned money).
  2. Good crashes. Crashes large and small will and need to come whenever there is a disparity between expectation of interest and producable interest by technological advancement or current gain ratio. That is, crashes do cure greed. There are many small crashes like losing money on the stock market; but if small crashes are saved up by government means like bail outs etc., they aggregate to larger and larger crashes, ranging from economic crisis to state bankrupty to world bankruptcy. Which would mean just the devaluation of all currencies because they got untrustworthy, that is the need to replace them with others. So, people: Don’t save up the crashes. If you do, it is like saving the blows earned for greed, until they all break lose in a fury that is nothing less than a beating to death. Instead, undergo the small crashes as they come, and learn from them. They will come until you have learned to not expect more interest than there is technological gain in efficiency. We should see them as necessary and good things, and develop ways to let them happen in less panic prone ways (smaller crashes, but more often; or better liquidation procedures even for large banks, states etc.; or “continuous crashing” procedures). Because, what is a crash if not the destruction of too high expectations of interest by investors, when it becomes apparent that these expectations were too high. See: “Even so, if we were to act rationally, interest would still compound at a steady and slower rate, it would still be cumulative though, if inflation can not in the end destroy enough value something else has to, a crash.” [source]
  3. Limiting interest rates. On average, all interest expectations that exceed the gain in technology and organizational efficiency are too high. So another idea against economic unstability would be to prohibit interest rates that exceed the gain of efficiency in a company or organization or even a state (that takes loans). In the latter case, citizen investors would have a motivation to strive for efficient usage of their invested money! The only thing that produces value is gain in technological efficiency, by technological aggregation of knowledge and experience (for efficient procedures) and aggregation of infrastructure (for efficient execution of processes). Both would have to be factored in to calculate the maximum allowable interest rate (as everythig else leads to a crash in time). Note that GDP increase is not the same as efficiency gain, as the technological improvements (causing deflation) are registered nowhere. Interest rates might be somewhat to the limit of this efficiency gain (or rather, to the limit of half that value, to allow the company itself to earn also from that gain). Being near to that limit motivates to keep up efficiency development, and even to improve that speed if possible; but it does not beat people along in enormous, unbearble stress like in the current economy, where one has to pay a 9% interest rate on average even though the overall efficiency gain is perhaps 3% (rough estimate). (Note that a 3% increase seems small, but can produce uninterrupted exponential results, so after 20 years: (1+0.03)^20=19.24.)
  4. Free banking. Another solution would be free banking. Where a bank would be simply: an institution emitting a resource of sufficient scarcity and trustability to have value, in exchange for deposits of other resources that have value. The emitted resource would be the money of that bank. For example, one kind of money might be gold standard based and extremely trustable, another might be fractional reserve based and less trustable but better investable. Fiat money as such is not much of a problem resp. would work well if banks are trustable, self-supporting institutions (not the faible, weak, breakable things they are now). Then, banks would be the required trustable third parties for trustable value exchange and storage, and earn for this service, and not from speculative lending.
  5. Adjusting the reserve multiplier. Fiat money is monetary value in exchange for binding value by means of rights to things [source] or rights to currency [source]. So a bank simply brings such other forms of value into a more liquid form, which would be ok to do. What is not ok, and makes the economy unstable, is that banks accept faulty securities, for example the hopes of companies to make money. And they do so simply because they want to lend out all their money, as this is their way to earn money. So as a solution, the reserve multiplier would have to be lowered until banks do no longer grant risky loans because they have just enough money to grant secure loans.
  6. Less liquidity. “Die Steuerung der Geldschöpfung obliegt heutzutage fast ausschließlich den Geschäftsbanken, da die Zentralbanken im Sinne einer ausreichenden Geldversorgung der Realwirtschaft (die fast ausschließlich von den Geschäftsbanken gewährt wird) den Geschäftsbanken jederzeit ausreichend Zentralbank- und Bargeld zur Verfügung stellen.” [source]. Which means nothing else than that central banks produce all money that banks want. Money is only still a non-scarce resource (i.e. a valuable thing) because it can be obtained from banks only when paying an added interest. Now both creditors and debitors are greedy, ready to take a loan with an attached interest in the hope that the credit can be paid back: this way, greed can jump in as motivation, using excess liquidity for granting risky loans in the hope to earn still more than currently. And this speculation of banks and bank customers is what then leads to crashes. With less liquidity, economy might develop slower, but more constantly: without crashes that would destroy too fast development anyway. So the central banks should lower liquidity!
  7. Keynesian politics to control also the boom. Limiting the speculative granting of risky credits, which takes place in economic booms, is an important factor in economic politics: “The problem for the world economy is that everybody remembered Keynes’s lesson about the need for countercyclical policies only when the crisis erupted, after demanding to be left alone – with no symmetric policy intervention – during the preceding boom. But managing the boom is more important, because it addresses what causes crises in the first place.” [source]
  8. Demanding better securities. Another bad thing is that it seems that high interest rates are necessary in market economy, to secure the bank against the risk of credit defaults. In market economy there is no central resource planning, so that every participant needs to do resource planning on his / her own, which is necessarily speculative: one tries to do something that will create gain, but cannot know whether this does work or not as customers can only buy after the product is there. This speculative investing is risky, potenially resulting in a small crash; and this leads banks to use high interest rates to still earn money. These high interest rates in tun make investing by loans still more risky, and create still more stress on the economy. There are simply not enough secure loans to grant in a market economy, as market economy is inherently speculative; or, if banks would only grant secure loans, they would earn just a little bit, which lures them to grant sub prime loans as well. So the problem of economic instability might be, at least in part, the inherently speculative nature of the market economy.
    Stopping to grant risky loans also would increase unemployment; because many people currently are employed in companies based on risky loans, hoping to make net gain in the future. In this sense, if we want to keep market economy, we need to keep a good part of risk.
  9. Planned economy. If speculative risk (and therefore, st least small crashes) is such an integral part of market economy, I want to propose a planned economy where people can freely form cooperatives to order the development or production of something. Governance is possible by electronic means like web portals. There would be no risk (of overproduction, or producing things that nobody wants) because everything is built and developed to order, from food to cars to tools etc.. Another good side effect would be that customers can again get the quality they want.

All stress in this economy is credit-induced through interest rates, and because the banks and companies are stock companies, induced by our own greed for money through stocks. We are our own slave masters! (Poor workers are pure slaves, and rich rentiers are pure slave masters, but the average citizen is both.) We do stress ourselves for no reason, and this even does lead to a crash afterwards, in addition to all the workplace stress!!!

Result

The thesis that the existence of interest itself does lead to a crash by a chain letter system is too simplistic. Instead, too high interest rates do, but simply by being unrealistic expectations.

I found what really brings the world forward: perseverance resp. aggregation. This can be aggregation of knowledge, of tools etc.. Everything large or powerful is something aggregated that has been developed in many years. The whole technological culture of humanity is actually something that was aggregated over thousands of years.

Aggregation is actually much more important then ingenuity; or even, ingenuity is in many cases the result of unhindered intellectual aggregation, in the sense of being something acquired by people who have the desire and possibilities to always learn something new in a certain area.

So for a society it is much more important to create infrastructure etc. taht fosters unhindered aggregation (which includes collaboration, synergy etc.), than to invest in supporting the “highly gifted” people. The same applies to personal life: there are only very few occasions where an ingenious idea or even a decision makes a big difference; the most part is work, and work is only fruitful if teh results can aggregate to something good for one personally.

A paid day job makes me feel like a bee: they take away what I have been working for, and give me a cheap surrogate. They take the honey and give me money …

I mean, really: the most rewarding thing of work is to experience the personal, immediate benefit effectuated by the work done. Such as simplifying a task with a self-made tool. Or feeling the personal success, reward and gratitude after having saved someones life. But if they give us money, that totally annulls this effect, because money is an indirection step. Even worse, earned money does not keep its identity, but aggregates with previously earned money to a lump that we then expend without knowing what kind of work is in it …

The most obvious drawback of this alienation by being paid money is ones motivation to work, and ones motivation to reach good results. Paid work is often even work for people I do not know (such as the users of the products I might develop or produce), which means I cannot derive motivation from my later personal gain from the product, and hence will not have the motivation to get the product as good as possible. Instead, I might just have the motivation to get as much money as possible, while minimizing my effort for the product. This is a de-coupling effect between the real thing and its representation in money; such a de-coupling step is possible wherever an indirection is introduced.

Worst, this indirection step was institutionalized: it’s called capitalism.

Within each economic system, there’s an inherent maximum potential of wealth, due to the maximum efficiency of the system. This efficiency increases by economic growth, because this normally means more output while the input of manpower stays the same.

If everybody had the same low aggressiveness in collecting that wealth, it would be equally easy for everybody to collect the same amount of wealth.

But there are some very aggressive people and organizations, and some very low aggressive (by character or disposition). Which means, the former will leave very little wealth over for all the others, esp. for the latter. In market economy terms, they “succeeded in competition”, but this only means they deprived the weaker or friendlier people of what they could gain by their working. Because for these, it means they get far less paid for work of the same efficiency than the aggressive ones, they have “failed to compete” … they suffer, because much of the wealth is used up in the luxury items of the aggressive and greedy.

In essence, the problem is that wealth is expendable goods. Wealth is what mankind can gain from nature by using their time for working. But wealth deteriorates; a luxury house needs maintenance etc..

The best way to measure who is having too much on the expense of others is to calculate the “time equivalent” of the construction and maintenance effort necessary for somebody’s personal property. If this is higher than a certain legitimate threshold (like, say, three fulltime employee equivalents of time), this can be said to be unjust.

Also, market economy is such a dumb, short-sighted thing. Instead of investing into the far future by very hight quality products that will contribute to the wealth of the following generations also, it’s all about consumables. Which is the least efficient way to maintain wealth.